[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2009 Edition]
[From the U.S. Government Printing Office]



[[Page i]]

          

          12


          Parts 220 to 299

                         Revised as of January 1, 2009


          Banks and Banking
          



________________________

          Containing a codification of documents of general 
          applicability and future effect

          As of January 1, 2009
          With Ancillaries
                    Published by
                    Office of the Federal Register
                    National Archives and Records
                    Administration
                    A Special Edition of the Federal Register

[[Page ii]]

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                            Table of Contents



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

  Title 12:
          Chapter II--Federal Reserve System (Continued)             3
  Finding Aids:
      Table of CFR Titles and Chapters........................    1037
      Alphabetical List of Agencies Appearing in the CFR......    1057
      List of CFR Sections Affected...........................    1067

[[Page iv]]





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

                     Cite this Code: CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  12 CFR 220.1 refers 
                       to title 12, part 220, 
                       section 1.

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

[[Page v]]



                               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

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, January 1, 2009), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

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 
placed as close as possible to the applicable recordkeeping or reporting 
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, 1986, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, or 1973-1985, published in seven separate volumes. For 
the period beginning January 1, 1986, a ``List of CFR Sections 
Affected'' is published at the end of each CFR volume.

INCORPORATION BY REFERENCE

    What is incorporation by reference? Incorporation by reference was 
established by statute and allows Federal agencies to meet the 
requirement to publish regulations in the Federal Register by referring 
to materials already published elsewhere. For an incorporation to be 
valid, the Director of the Federal Register must approve it. The legal 
effect of incorporation by reference is that the material is treated as 
if it were published in full in the Federal Register (5 U.S.C. 552(a)). 
This material, like any other properly issued regulation, has the force 
of law.
    What is a proper incorporation by reference? The Director of the 
Federal Register will approve an incorporation by reference only when 
the requirements of 1 CFR part 51 are met. Some of the elements on which 
approval is based are:
    (a) The incorporation will substantially reduce the volume of 
material published in the Federal Register.
    (b) The matter incorporated is in fact available to the extent 
necessary to afford fairness and uniformity in the administrative 
process.
    (c) The incorporating document is drafted and submitted for 
publication in accordance with 1 CFR part 51.
    What if the material incorporated by reference cannot be found? If 
you have any problem locating or obtaining a copy of material listed in 
the Finding Aids of this volume as an approved incorporation by 
reference, please contact the agency that issued the regulation 
containing that incorporation. If, after contacting the agency, you find 
the material is not available, please notify the Director of the Federal 
Register, National Archives and Records Administration, Washington DC 
20408, or call 202-741-6010.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I). A list of CFR titles, chapters, 
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also included in this volume.
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that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.



[[Page vii]]



REPUBLICATION OF MATERIAL

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in the Code of Federal Regulations.

INQUIRIES

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    Raymond A. Mosley,
    Director,
    Office of the Federal Register.
    January 1, 2009.







[[Page ix]]



                               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, 2009.

    For this volume, Jonn Lilyea was Chief Editor. The Code of Federal 
Regulations publication program is under the direction of Michael L. 
White, assisted by Ann Worley.


[[Page 1]]



                       TITLE 12--BANKS AND BANKING




                  (This book contains parts 220 to 299)

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

chapter ii--Federal Reserve System (Continued)..............         220

[[Page 3]]



                   CHAPTER II--FEDERAL RESERVE SYSTEM




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

     SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Part                                                                Page
220             Credit by brokers and dealers (Regulation T)           5
221             Credit by banks and persons other than 
                    brokers or dealers for the purpose of 
                    purchasing or carrying margin stock 
                    (Regulation U)..........................          34
222             Fair credit reporting (regulation V)........          55
223             Transactions between member banks and their 
                    affiliates (Regulation W)...............          85
224             Borrowers of securities credit (Regulation 
                    X)......................................         110
225             Bank holding companies and change in bank 
                    control (Regulation Y)..................         112
226             Truth in lending (Regulation Z).............         350
227             Unfair or deceptive acts or practices 
                    (Regulation AA).........................         621
228             Community reinvestment (Regulation BB)......         624
229             Availability of funds and collection of 
                    checks (Regulation CC)..................         645
230             Truth in savings (Regulation DD)............         779
231             Netting eligibility for financial 
                    institution (Regulation EE).............         818
232             Obtaining and using medical information in 
                    connection with credit (Regulation FF)..         819
233             Prohibition on funding of unlawful internet 
                    gambling (Regulation GG) (Eff. 1-19-09).         824
250             Miscellaneous interpretations...............         834
261             Rules regarding availability of information.         863
261a            Rules regarding access to personal 
                    information under the Privacy Act of 
                    1974....................................         880
261b            Rules regarding public observation of 
                    meetings................................         886
262             Rules of procedure..........................         891
263             Rules of practice for hearings..............         899
264             Employee responsibilities and conduct.......         945
264a            Post-employment restrictions for senior 
                    examiners...............................         945
264b            Rules regarding foreign gifts and 
                    decorations.............................         947
265             Rules regarding delegation of authority.....         949

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266             Limitations on activities of former members 
                    and employees of the Board..............         968
267             Rules of organization and procedure of the 
                    Consumer Advisory Council...............         970
268             Rules regarding equal opportunity...........         972
269             Policy on labor relations for the Federal 
                    Reserve banks...........................        1006
269a            Definitions.................................        1011
269b            Charges of unfair labor practices...........        1012
               SUBCHAPTER B--FEDERAL OPEN MARKET COMMITTEE
270             Open market operations of Federal Reserve 
                    banks...................................        1022
271             Rules regarding availability of information.        1023
272             Rules of procedure..........................        1030
281             Statements of policy........................        1032
       SUBCHAPTER C--FEDERAL RESERVE SYSTEM LABOR RELATIONS PANEL
290-299         [Reserved]

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. 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.

[[Page 5]]



      SUBCHAPTER A_BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM



PART 220_CREDIT BY BROKERS AND DEALERS (REGULATION T)--Table of Contents




Sec.
220.1 Authority, purpose, and scope.
220.2 Definitions.
220.3 General provisions.
220.4 Margin account.
220.5 Special memorandum account.
220.6 Good faith account.
220.7 Broker-dealer credit account.
220.8 Cash account.
220.9 Clearance of securities, options, and futures.
220.10 Borrowing and lending securities.
220.11 Requirements for the list of marginable OTC stocks and the list 
          of foreign margin stocks.
220.12 Supplement: margin requirements.

                             Interpretations

220.101 Transactions of customers who are brokers or dealers.
220.102 [Reserved]
220.103 Borrowing of securities.
220.104 [Reserved]
220.105 Ninety-day rule in special cash account.
220.106-220.107 [Reserved]
220.108 International Bank Securities.
220.109 [Reserved]
220.110 Assistance by Federal credit union to its members.
220.111 Arranging for extensions of credit to be made by a bank.
220.112 [Reserved]
220.113 Necessity for prompt payment and delivery in special cash 
          accounts.
220.114-220.116 [Reserved]
220.117 Exception to 90-day rule in special cash account.
220.118 Time of payment for mutual fund shares purchased in a special 
          cash account.
220.119 Applicability of margin requirements to credit extended to 
          corporation in connection with retirement of stock.
220.120 [Reserved]
220.121 Applicability of margin requirements to joint account between 
          two creditors.
220.122 ``Deep in the money put and call options'' as extensions of 
          credit.
220.123 Partial delayed issue contracts covering nonconvertible bonds.
220.124 Installment sale of tax-shelter programs as ``arranging'' for 
          credit.
220.125-220.126 [Reserved]
220.127 Independent broker/dealers arranging credit in connection with 
          the sale of insurance premium funding programs.
220.128 Treatment of simultaneous long and short positions in the same 
          margin account when put or call options or combinations 
          thereof on such stock are also outstanding in the account.
220.129-220.130 [Reserved]
220.131 Application of the arranging section to broker-dealer activities 
          under SEC Rule 144A.
220.132 Credit to brokers and dealers.

    Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.

    Editorial Note: A copy of each form referred to in this part is 
filed as a part of the original document. Copies are available upon 
request to the Board of Governors of the Federal Reserve System or any 
Federal Reserve Bank.



Sec. 220.1  Authority, purpose, and scope.

    (a) Authority and purpose. Regulation T (this part) is issued by the 
Board of Governors of the Federal Reserve System (the Board) pursuant to 
the Securities Exchange Act of 1934 (the Act) (15 U.S.C.78a et seq.). 
Its principal purpose is to regulate extensions of credit by brokers and 
dealers; it also covers related transactions within the Board's 
authority under the Act. It imposes, among other obligations, initial 
margin requirements and payment rules on certain securities 
transactions.
    (b) Scope. (1) This part provides a margin account and four special 
purpose accounts in which to record all financial relations between a 
customer and a creditor. Any transaction not specifically permitted in a 
special purpose account shall be recorded in a margin account.
    (2) This part does not preclude any exchange, national securities 
association, or creditor from imposing additional requirements or taking 
action for its own protection.
    (3) This part does not apply to:
    (i) Financial relations between a customer and a creditor to the 
extent that they comply with a portfolio margining system under rules 
approved or amended by the SEC;
    (ii) Credit extended by a creditor based on a good faith 
determination that the borrower is an exempted borrower;

[[Page 6]]

    (iii) Financial relations between a customer and a broker or dealer 
registered only under section 15C of the Act; and
    (iv) Financial relations between a foreign branch of a creditor and 
a foreign person involving foreign securities.

[Reg. T, 63 FR 2820, Jan. 16, 1998]



Sec. 220.2  Definitions.

    The terms used in this part have the meanings given them in section 
3(a) of the Act or as defined in this section as follows:
    Affiliated corporation means a corporation of which all the common 
stock is owned directly or indirectly by the firm or general partners 
and employees of the firm, or by the corporation or holders of the 
controlling stock and employees of the corporation, and the affiliation 
has been approved by the creditor's examining authority.
    Cash equivalent means securities issued or guaranteed by the United 
States or its agencies, negotiable bank certificates of deposit, bankers 
acceptances issued by banking institutions in the United States and 
payable in the United States, or money market mutual funds.
    Covered option transaction means any transaction involving options 
or warrants in which the customer's risk is limited and all elements of 
the transaction are subject to contemporaneous exercise if:
    (1) The amount at risk is held in the account in cash, cash 
equivalents, or via an escrow receipt; and
    (2) The transaction is eligible for the cash account by the rules of 
the registered national securities exchange authorized to trade the 
option or warrant or by the rules of the creditor's examining authority 
in the case of an unregistered option, provided that all such rules have 
been approved or amended by the SEC.
    Credit balance means the cash amount due the customer in a margin 
account after debiting amounts transferred to the special memorandum 
account.
    Creditor means any broker or dealer (as defined in sections 3(a)(4) 
and 3(a)(5) of the Act), any member of a national securities exchange, 
or any person associated with a broker or dealer (as defined in section 
3(a)(18) of the Act), except for business entities controlling or under 
common control with the creditor.
    Current market value of:
    (1) A security means:
    (i) Throughout the day of the purchase or sale of a security, the 
security's total cost of purchase or the net proceeds of its sale 
including any commissions charged; or
    (ii) At any other time, the closing sale price of the security on 
the preceding business day, as shown by any regularly published 
reporting or quotation service. If there is no closing sale price, the 
creditor may use any reasonable estimate of the market value of the 
security as of the close of business on the preceding business day.
    (2) Any other collateral means a value determined by any reasonable 
method.
    Customer excludes an exempted borrower and includes:
    (1) Any person or persons acting jointly:
    (i) To or for whom a creditor extends, arranges, or maintains any 
credit; or
    (ii) Who would be considered a customer of the creditor according to 
the ordinary usage of the trade;
    (2) Any partner in a firm who would be considered a customer of the 
firm absent the partnership relationship; and
    (3) Any joint venture in which a creditor participates and which 
would be considered a customer of the creditor if the creditor were not 
a participant.
    Debit balance means the cash amount owed to the creditor in a margin 
account after debiting amounts transferred to the special memorandum 
account.
    Delivery against payment, Payment against delivery, or a C.O.D. 
transaction refers to an arrangement under which a creditor and a 
customer agree that the creditor will deliver to, or accept from, the 
customer, or the customer's agent, a security against full payment of 
the purchase price.
    Equity means the total current market value of security positions 
held in the margin account plus any credit balance less the debit 
balance in the margin account.

[[Page 7]]

    Escrow agreement means any agreement issued in connection with a 
call or put option under which a bank or any person designated as a 
control location under paragraph (c) of SEC Rule 15c3-3 (17 CFR 
240.15c3-3(c)), holding the underlying asset or required cash or cash 
equivalents, is obligated to deliver to the creditor (in the case of a 
call option) or accept from the creditor (in the case of a put option) 
the underlying asset or required cash or cash equivalent against payment 
of the exercise price upon exercise of the call or put.
    Examining authority means:
    (1) The national securities exchange or national securities 
association of which a creditor is a member; or
    (2) If a member of more than one self-regulatory organization, the 
organization designated by the SEC as the examining authority for the 
creditor.
    Exempted borrower means a member of a national securities exchange 
or a registered broker or dealer, a substantial portion of whose 
business consists of transactions with persons other than brokers or 
dealers, and includes a borrower who:
    (1) Maintains at least 1000 active accounts on an annual basis for 
persons other than brokers, dealers, and persons associated with a 
broker or dealer;
    (2) Earns at least $10 million in gross revenues on an annual basis 
from transactions with persons other than brokers, dealers, and persons 
associated with a broker or dealer; or
    (3) Earns at least 10 percent of its gross revenues on an annual 
basis from transactions with persons other than brokers, dealers, and 
persons associated with a broker or dealer.
    Exempted securities mutual fund means any security issued by an 
investment company registered under section 8 of the Investment Company 
Act of 1940 (15 U.S.C. 80a-8), provided the company has at least 95 
percent of its assets continuously invested in exempted securities (as 
defined in section 3(a)(12) of the Act).
    Foreign margin stock means a foreign security that is an equity 
security that:
    (1) Appears on the Board's periodically published List of Foreign 
Margin Stocks; or
    (2) Is deemed to have a ``ready market'' under SEC Rule 15c3-1 (17 
CFR 240.15c3-1) or a ``no-action'' position issued thereunder.
    Foreign person means a person other than a United States person as 
defined in section 7(f) of the Act.
    Foreign security means a security issued in a jurisdiction other 
than the United States.
    Good faith with respect to:
    (1) Margin means the amount of margin which a creditor would require 
in exercising sound credit judgment;
    (2) Making a determination or accepting a statement concerning a 
borrower means that the creditor is alert to the circumstances 
surrounding the credit, and if in possession of information that would 
cause a prudent person not to make the determination or accept the 
notice or certification without inquiry, investigates and is satisfied 
that it is correct.
    Margin call means a demand by a creditor to a customer for a deposit 
of additional cash or securities to eliminate or reduce a margin 
deficiency as required under this part.
    Margin deficiency means the amount by which the required margin 
exceeds the equity in the margin account.
    Margin equity security means a margin security that is an equity 
security (as defined in section 3(a)(11) of the Act).
    Margin excess means the amount by which the equity in the margin 
account exceeds the required margin. When the margin excess is 
represented by securities, the current value of the securities is 
subject to the percentages set forth in Sec. 220.12 (the Supplement).
    Margin security means:
    (1) Any security registered or having unlisted trading privileges on 
a national securities exchange;
    (2) After January 1, 1999, any security listed on the Nasdaq Stock 
Market;
    (3) Any non-equity security;
    (4) Any security issued by either an open-end investment company or 
unit investment trust which is registered under section 8 of the 
Investment Company Act of 1940 (15 U.S.C. 80a-8);
    (5) Any foreign margin stock;
    (6) Any debt security convertible into a margin security;

[[Page 8]]

    (7) Until January 1, 1999, any OTC margin stock; or
    (8) Until January 1, 1999, any OTC security designated as qualified 
for trading in the national market system under a designation plan 
approved by the Securities and Exchange Commission (NMS security).
    Money market mutual fund means any security issued by an investment 
company registered under section 8 of the Investment Company Act of 1940 
(15 U.S.C. 80a-8) that is considered a money market fund under SEC Rule 
2a-7 (17 CFR 270.2a-7).
    Non-equity security means a security that is not an equity security 
(as defined in section 3(a)(11) of the Act).
    Nonexempted security means any security other than an exempted 
security (as defined in section 3(a)(12) of the Act).
    OTC margin stock means any equity security traded over the counter 
that the Board has determined has the degree of national investor 
interest, the depth and breadth of market, the availability of 
information respecting the security and its issuer, and the character 
and permanence of the issuer to warrant being treated like an equity 
security treaded on a national securities exchange. An OTC stock is not 
considered to be an OTC margin stock unless it appears on the Board's 
periodically published list of OTC margin stocks.
    Payment period means the number of business days in the standard 
securities settlement cycle in the United States, as defined in 
paragraph (a) of SEC Rule 15c6-1 (17 CFR 240.15c6-1(a)), plus two 
business days.
    Purpose credit means credit for the purpose of:
    (1) Buying, carrying, or trading in securities; or
    (2) Buying or carrying any part of an investment contract security 
which shall be deemed credit for the purpose of buying or carrying the 
entire security.
    Short call or short put means a call option or a put option that is 
issued, endorsed, or guaranteed in or for an account.
    (1) A short call that is not cash-settled obligates the customer to 
sell the underlying asset at the exercise price upon receipt of a valid 
exercise notice or as otherwise required by the option contract.
    (2) A short put that is not cash-settled obligates the customer to 
purchase the underlying asset at the exercise price upon receipt of a 
valid exercise notice or as otherwise required by the option contract.
    (3) A short call or a short put that is cash-settled obligates the 
customer to pay the holder of an in the money long put or long call who 
has, or has been deemed to have, exercised the option the cash 
difference between the exercise price and the current assigned value of 
the option as established by the option contract.
    Underlying asset means:
    (1) The security or other asset that will be delivered upon exercise 
of an option; or
    (2) In the case of a cash-settled option, the securities or other 
assets which comprise the index or other measure from which the option's 
value is derived.

[Reg. T, 63 FR 2821, Jan. 16, 1998]



Sec. 220.3  General provisions.

    (a) Records. The creditor shall maintain a record for each account 
showing the full details of all transactions.
    (b) Separation of accounts--(1) In general. The requirements of one 
account may not be met by considering items in any other account. If 
withdrawals of cash or securities are permitted under this part, written 
entries shall be made when cash or securities are used for purposes of 
meeting requirements in another account.
    (2) Exceptions. Notwithstanding paragraph (b)(1) of this section:
    (i) For purposes of calculating the required margin for a security 
in a margin account, assets held in the good faith account pursuant to 
Sec. 220.6(e)(1)(i) or (ii) may serve in lieu of margin;
    (ii) Transfers may be effected between the margin account and the 
special memorandum account pursuant to Sec. Sec. 220.4 and 220.5.
    (c) Maintenance of credit. Except as prohibited by this part, any 
credit initially extended in compliance with this part may be maintained 
regardless of:

[[Page 9]]

    (1) Reductions in the customer's equity resulting from changes in 
market prices;
    (2) Any security in an account ceasing to be margin or exempted; or
    (3) Any change in the margin requirements prescribed under this 
part.
    (d) Guarantee of accounts. No guarantee of a customer's account 
shall be given any effect for purposes of this part.
    (e) Receipt of funds or securities. (1) A creditor, acting in good 
faith, may accept as immediate payment:
    (i) Cash or any check, draft, or order payable on presentation; or
    (ii) Any security with sight draft attached.
    (2) A creditor may treat a security, check or draft as received upon 
written notification from another creditor that the specified security, 
check, or draft has been sent.
    (3) Upon notification that a check, draft, or order has been 
dishonored or when securities have not been received within a reasonable 
time, the creditor shall take the action required by this part when 
payment or securities are not received on time.
    (4) To temporarily finance a customer's receipt of securities 
pursuant to an employee benefit plan registered on SEC Form S-8 or the 
withholding taxes for an employee stock award plan, a creditor may 
accept, in lieu of the securities, a properly executed exercise notice, 
where applicable, and instructions to the issuer to deliver the stock to 
the creditor. Prior to acceptance, the creditor must verify that the 
issuer will deliver the securities promptly and the customer must 
designate the account into which the securities are to be deposited.
    (f) Exchange of securities. (1) To enable a customer to participate 
in an offer to exchange securities which is made to all holders of an 
issue of securities, a creditor may submit for exchange any securities 
held in a margin account, without regard to the other provisions of this 
part, provided the consideration received is deposited into the account.
    (2) If a nonmargin, nonexempted security is acquired in exchange for 
a margin security, its retention, withdrawal, or sale within 60 days 
following its acquisition shall be treated as if the security is a 
margin security.
    (g) Arranging for loans by others. A creditor may arrange for the 
extension or maintenance of credit to or for any customer by any person, 
provided the creditor does not willfully arrange credit that violates 
parts 221 or 224 of this chapter.
    (h) Innocent mistakes. If any failure to comply with this part 
results from a mistake made in good faith in executing a transaction or 
calculating the amount of margin, the creditor shall not be deemed in 
violation of this part if, promptly after the discovery of the mistake, 
the creditor takes appropriate corrective action.
    (i) Foreign currency. (1) Freely convertible foreign currency may be 
treated at its U.S. dollar equivalent, provided the currency is marked-
to-market daily.
    (2) A creditor may extend credit denominated in any freely 
convertible foreign currency.
    (j) Exempted borrowers. (1) A member of a national securities 
exchange or a registered broker or dealer that has been in existence for 
less than one year may meet the definition of exempted borrower based on 
a six-month period.
    (2) Once a member of a national securities exchange or registered 
broker or dealer ceases to qualify as an exempted borrower, it shall 
notify its lender of this fact before obtaining additional credit. Any 
new extensions of credit to such a borrower, including rollovers, 
renewals, and additional draws on existing lines of credit, are subject 
to the provisions of this part.

[Reg. T, 63 FR 2822, Jan. 16, 1998]



Sec. 220.4  Margin account.

    (a) Margin transactions. (1) All transactions not specifically 
authorized for inclusion in another account shall be recorded in the 
margin account.
    (2) A creditor may establish separate margin accounts for the same 
person to:
    (i) Clear transactions for other creditors where the transactions 
are introduced to the clearing creditor by separate creditors; or
    (ii) Clear transactions through other creditors if the transactions 
are cleared by separate creditors; or

[[Page 10]]

    (iii) Provide one or more accounts over which the creditor or a 
third party investment adviser has investment discretion.
    (b) Required margin--(1) Applicability. The required margin for each 
long or short position in securities is set forth in Sec. 220.12 (the 
Supplement) and is subject to the following exceptions and special 
provisions.
    (2) Short sale against the box. A short sale ``against the box'' 
shall be treated as a long sale for the purpose of computing the equity 
and the required margin.
    (3) When-issued securities. The required margin on a net long or net 
short commitment in a when-issued security is the margin that would be 
required if the security were an issued margin security, plus any 
unrealized loss on the commitment or less any unrealized gain.
    (4) Stock used as cover. (i) When a short position held in the 
account serves in lieu of the required margin for a short put, the 
amount prescribed by paragraph (b)(1) of this section as the amount to 
be added to the required margin in respect of short sales shall be 
increased by any unrealized loss on the position.
    (ii) When a security held in the account serves in lieu of the 
required margin for a short call, the security shall be valued at no 
greater than the exercise price of the short call.
    (5) Accounts of partners. If a partner of the creditor has a margin 
account with the creditor, the creditor shall disregard the partner's 
financial relations with the firm (as shown in the partner's capital and 
ordinary drawing accounts) in calculating the margin or equity of the 
partner's margin account.
    (6) Contribution to joint venture. If a margin account is the 
account of a joint venture in which the creditor participates, any 
interest of the creditor in the joint account in excess of the interest 
which the creditor would have on the basis of its right to share in the 
profits shall be treated as an extension of credit to the joint account 
and shall be margined as such.
    (7) Transfer of accounts. (i) A margin account that is transferred 
from one creditor to another may be treated as if it had been maintained 
by the transferee from the date of its origin, if the transferee 
accepts, in good faith, a signed statement of the transferor (or, if 
that is not practicable, of the customer), that any margin call issued 
under this part has been satisfied.
    (ii) A margin account that is transferred from one customer to 
another as part of a transaction, not undertaken to avoid the 
requirements of this part, may be treated as if it had been maintained 
for the transferee from the date of its origin, if the creditor accepts 
in good faith and keeps with the transferee account a signed statement 
of the transferor describing the circumstances for the transfer.
    (8) Sound credit judgment. In exercising sound credit judgment to 
determine the margin required in good faith pursuant to Sec. 220.12 
(the Supplement), the creditor shall make its determination for a 
specified security position without regard to the customer's other 
assets or securities positions held in connection with unrelated 
transactions.
    (c) When additional margin is required--(1) Computing deficiency. 
All transactions on the same day shall be combined to determine whether 
additional margin is required by the creditor. For the purpose of 
computing equity in an account, security positions are established or 
eliminated and a credit or debit created on the trade date of a security 
transaction. Additional margin is required on any day when the day's 
transactions create or increase a margin deficiency in the account and 
shall be for the amount of the margin deficiency so created or 
increased.
    (2) Satisfaction of deficiency. The additional required margin may 
be satisfied by a transfer from the special memorandum account or by a 
deposit of cash, margin securities, exempted securities, or any 
combination thereof.
    (3) Time limits. (i) A margin call shall be satisfied within one 
payment period after the margin deficiency was created or increased.
    (ii) The payment period may be extended for one or more limited 
periods upon application by the creditor to its examining authority 
unless the examining authority believes that the creditor is not acting 
in good faith or that

[[Page 11]]

the creditor has not sufficiently determined that exceptional 
circumstances warrant such action. Applications shall be filed and acted 
upon prior to the end of the payment period or the expiration of any 
subsequent extension.
    (4) Satisfaction restriction. Any transaction, position, or deposit 
that is used to satisfy one requirement under this part shall be 
unavailable to satisfy any other requirement.
    (d) Liquidation in lieu of deposit. If any margin call is not met in 
full within the required time, the creditor shall liquidate securities 
sufficient to meet the margin call or to eliminate any margin deficiency 
existing on the day such liquidation is required, whichever is less. If 
the margin deficiency created or increased is $1000 or less, no action 
need be taken by the creditor.
    (e) Withdrawals of cash or securities. (1) Cash or securities may be 
withdrawn from an account, except if:
    (i) Additional cash or securities are required to be deposited into 
the account for a transaction on the same or a previous day; or
    (ii) The withdrawal, together with other transactions, deposits, and 
withdrawals on the same day, would create or increase a margin 
deficiency.
    (2) Margin excess may be withdrawn or may be transferred to the 
special memorandum account (Sec. 220.5) by making a single entry to 
that account which will represent a debit to the margin account and a 
credit to the special memorandum account.
    (3) If a creditor does not receive a distribution of cash or 
securities which is payable with respect to any security in a margin 
account on the day it is payable and withdrawal would not be permitted 
under this paragraph (e), a withdrawal transaction shall be deemed to 
have occurred on the day the distribution is payable.
    (f) Interest, service charges, etc. (1) Without regard to the other 
provisions of this section, the creditor, in its usual practice, may 
debit the following items to a margin account if they are considered in 
calculating the balance of such account:
    (i) Interest charged on credit maintained in the margin account;
    (ii) Premiums on securities borrowed in connection with short sales 
or to effect delivery;
    (iii) Dividends, interest, or other distributions due on borrowed 
securities;
    (iv) Communication or shipping charges with respect to transactions 
in the margin account; and
    (v) Any other service charges which the creditor may impose.
    (2) A creditor may permit interest, dividends, or other 
distributions credited to a margin account to be withdrawn from the 
account if:
    (i) The withdrawal does not create or increase a margin deficiency 
in the account; or
    (ii) The current market value of any securities withdrawn does not 
exceed 10 percent of the current market value of the security with 
respect to which they were distributed.

[Reg. T, 63 FR 2823, Jan. 16, 1998]



Sec. 220.5  Special memorandum account.

    (a) A special memorandum account (SMA) may be maintained in 
conjunction with a margin account. A single entry amount may be used to 
represent both a credit to the SMA and a debit to the margin account. A 
transfer between the two accounts may be effected by an increase or 
reduction in the entry. When computing the equity in a margin account, 
the single entry amount shall be considered as a debit in the margin 
account. A payment to the customer or on the customer's behalf or a 
transfer to any of the customer's other accounts from the SMA reduces 
the single entry amount.
    (b) The SMA may contain the following entries:
    (1) Dividend and interest payments;
    (2) Cash not required by this part, including cash deposited to meet 
a maintenance margin call or to meet any requirement of a self-
regulatory organization that is not imposed by this part;
    (3) Proceeds of a sale of securities or cash no longer required on 
any expired or liquidated security position that may be withdrawn under 
Sec. 220.4(e); and
    (4) Margin excess transferred from the margin account under Sec. 
220.4(e)(2).

[Reg. T, 63 FR 2824, Jan. 16, 1998]

[[Page 12]]



Sec. 220.6  Good faith account.

    In a good faith account, a creditor may effect or finance customer 
transactions in accordance with the following provisions:
    (a) Securities entitled to good faith margin--(1) Permissible 
transactions. A creditor may effect and finance transactions involving 
the buying, carrying, or trading of any security entitled to ``good 
faith'' margin as set forth in Sec. 220.12 (the Supplement).
    (2) Required margin. The required margin is set forth in Sec. 
220.12 (the Supplement).
    (3) Satisfaction of margin. Required margin may be satisfied by a 
transfer from the special memorandum account or by a deposit of cash, 
securities entitled to ``good faith'' margin as set forth in Sec. 
220.12 (the Supplement), any other asset that is not a security, or any 
combination thereof. An asset that is not a security shall have a margin 
value determined by the creditor in good faith.
    (b) Arbitrage. A creditor may effect and finance for any customer 
bona fide arbitrage transactions. For the purpose of this section, the 
term ``bona fide arbitrage'' means:
    (1) A purchase or sale of a security in one market together with an 
offsetting sale or purchase of the same security in a different market 
at as nearly the same time as practicable for the purpose of taking 
advantage of a difference in prices in the two markets; or
    (2) A purchase of a security which is, without restriction other 
than the payment of money, exchangeable or convertible within 90 
calendar days of the purchase into a second security together with an 
offsetting sale of the second security at or about the same time, for 
the purpose of taking advantage of a concurrent disparity in the prices 
of the two securities.
    (c) ``Prime broker'' transactions. A creditor may effect 
transactions for a customer as part of a ``prime broker'' arrangement in 
conformity with SEC guidelines.
    (d) Credit to ESOPs. A creditor may extend and maintain credit to 
employee stock ownership plans without regard to the other provisions of 
this part.
    (e) Nonpurpose credit. (1) A creditor may:
    (i) Effect and carry transactions in commodities;
    (ii) Effect and carry transactions in foreign exchange;
    (iii) Extend and maintain secured or unsecured nonpurpose credit, 
subject to the requirements of paragraph (e)(2) of this section.
    (2) Every extension of credit, except as provided in paragraphs 
(e)(1)(i) and (e)(1)(ii) of this section, shall be deemed to be purpose 
credit unless, prior to extending the credit, the creditor accepts in 
good faith from the customer a written statement that it is not purpose 
credit. The statement shall conform to the requirements established by 
the Board.

[Reg. T, 63 FR 2824, Jan. 16, 1998]



Sec. 220.7  Broker-dealer credit account.

    (a) Requirements. In a broker-dealer credit account, a creditor may 
effect or finance transactions in accordance with the following 
provisions.
    (b) Purchase or sale of security against full payment. A creditor 
may purchase any security from or sell any security to another creditor 
or person regulated by a foreign securities authority under a good faith 
agreement to promptly deliver the security against full payment of the 
purchase price.
    (c) Joint back office. A creditor may effect or finance transactions 
of any of its owners if the creditor is a clearing and servicing broker 
or dealer owned jointly or individually by other creditors.
    (d) Capital contribution. A creditor may extend and maintain credit 
to any partner or stockholder of the creditor for the purpose of making 
a capital contribution to, or purchasing stock of, the creditor, 
affiliated corporation or another creditor.
    (e) Emergency and subordinated credit. A creditor may extend and 
maintain, with the approval of the appropriate examining authority:
    (1) Credit to meet the emergency needs of any creditor; or
    (2) Subordinated credit to another creditor for capital purposes, if 
the other creditor:
    (i) Is an affiliated corporation or would not be considered a 
customer of

[[Page 13]]

the lender apart from the subordinated loan; or
    (ii) Will not use the proceeds of the loan to increase the amount of 
dealing in securities for the account of the creditor, its firm or 
corporation or an affiliated corporation.
    (f) Omnibus credit (1) A creditor may effect and finance 
transactions for a broker or dealer who is registered with the SEC under 
section 15 of the Act and who gives the creditor written notice that:
    (i) All securities will be for the account of customers of the 
broker or dealer; and
    (ii) Any short sales effected will be short sales made on behalf of 
the customers of the broker or dealer other than partners.
    (2) The written notice required by paragraph (f)(1) of this section 
shall conform to any SEC rule on the hypothecation of customers' 
securities by brokers or dealers.
    (g) Special purpose credit. A creditor may extend the following 
types of credit with good faith margin:
    (1) Credit to finance the purchase or sale of securities for prompt 
delivery, if the credit is to be repaid upon completion of the 
transaction.
    (2) Credit to finance securities in transit or surrendered for 
transfer, if the credit is to be repaid upon completion of the 
transaction.
    (3) Credit to enable a broker or dealer to pay for securities, if 
the credit is to be repaid on the same day it is extended.
    (4) Credit to an exempted borrower.
    (5) Credit to a member of a national securities exchange or 
registered broker or dealer to finance its activities as a market maker 
or specialist.
    (6) Credit to a member of a national securities exchange or 
registered broker or dealer to finance its activities as an underwriter.

[Reg. T, 63 FR 2824, Jan. 16, 1998]



Sec. 220.8  Cash account.

    (a) Permissible transactions. In a cash account, a creditor, may:
    (1) Buy for or sell to any customer any security or other asset if:
    (i) There are sufficient funds in the account; or
    (ii) The creditor accepts in good faith the customer's agreement 
that the customer will promptly make full cash payment for the security 
or asset before selling it and does not contemplate selling it prior to 
making such payment;
    (2) Buy from or sell for any customer any security or other asset 
if:
    (i) The security is held in the account; or
    (ii) The creditor accepts in good faith the customer's statement 
that the security is owned by the customer or the customer's principal, 
and that it will be promptly deposited in the account;
    (3) Issue, endorse, or guarantee, or sell an option for any customer 
as part of a covered option transaction; and
    (4) Use an escrow agreement in lieu of the cash, cash equivalents or 
underlying asset position if:
    (i) In the case of a short call or a short put, the creditor is 
advised by the customer that the required securities, assets or cash are 
held by a person authorized to issue an escrow agreement and the 
creditor independently verifies that the appropriate escrow agreement 
will be delivered by the person promptly; or
    (ii) In the case of a call issued, endorsed, guaranteed, or sold on 
the same day the underlying asset is purchased in the account and the 
underlying asset is to be delivered to a person authorized to issue an 
escrow agreement, the creditor verifies that the appropriate escrow 
agreement will be delivered by the person promptly.
    (b) Time periods for payment; cancellation or liquidation--(1) Full 
cash payment. A creditor shall obtain full cash payment for customer 
purchases:
    (i) Within one payment period of the date:
    (A) Any nonexempted security was purchased;
    (B) Any when-issued security was made available by the issuer for 
delivery to purchasers;
    (C) Any ``when distributed'' security was distributed under a 
published plan;
    (D) A security owned by the customer has matured or has been 
redeemed and a new refunding security of the same issuer has been 
purchased by the customer, provided:

[[Page 14]]

    (1) The customer purchased the new security no more than 35 calendar 
days prior to the date of maturity or redemption of the old security;
    (2) The customer is entitled to the proceeds of the redemption; and
    (3) The delayed payment does not exceed 103 percent of the proceeds 
of the old security.
    (ii) In the case of the purchase of a foreign security, within one 
payment period of the trade date or within one day after the date on 
which settlement is required to occur by the rules of the foreign 
securities market, provided this period does not exceed the maximum time 
permitted by this part for delivery against payment transactions.
    (2) Delivery against payment. If a creditor purchases for or sells 
to a customer a security in a delivery against payment transaction, the 
creditor shall have up to 35 calendar days to obtain payment if delivery 
of the security is delayed due to the mechanics of the transaction and 
is not related to the customer's willingness or ability to pay.
    (3) Shipment of securities, extension. If any shipment of securities 
is incidental to consummation of a transaction, a creditor may extend 
the payment period by the number of days required for shipment, but not 
by more than one additional payment period.
    (4) Cancellation; liquidation; minimum amount. A creditor shall 
promptly cancel or otherwise liquidate a transaction or any part of a 
transaction for which the customer has not made full cash payment within 
the required time. A creditor may, at its option, disregard any sum due 
from the customer not exceeding $1000.
    (c) 90 day freeze. (1) If a nonexempted security in the account is 
sold or delivered to another broker or dealer without having been 
previously paid for in full by the customer, the privilege of delaying 
payment beyond the trade date shall be withdrawn for 90 calendar days 
following the date of sale of the security. Cancellation of the 
transaction other than to correct an error shall constitute a sale.
    (2) The 90 day freeze shall not apply if:
    (i) Within the period specified in paragraph (b)(1) of this section, 
full payment is received or any check or draft in payment has cleared 
and the proceeds from the sale are not withdrawn prior to such payment 
or check clearance; or
    (ii) The purchased security was delivered to another broker or 
dealer for deposit in a cash account which holds sufficient funds to pay 
for the security. The creditor may rely on a written statement accepted 
in good faith from the other broker or dealer that sufficient funds are 
held in the other cash account.
    (d) Extension of time periods; transfers. (1) Unless the creditor's 
examining authority believes that the creditor is not acting in good 
faith or that the creditor has not sufficiently determined that 
exceptional circumstances warrant such action, it may upon application 
by the creditor:
    (i) Extend any period specified in paragraph (b) of this section;
    (ii) Authorize transfer to another account of any transaction 
involving the purchase of a margin or exempted security; or
    (iii) Grant a waiver from the 90 day freeze.
    (2) Applications shall be filed and acted upon prior to the end of 
the payment period, or in the case of the purchase of a foreign security 
within the period specified in paragraph (b)(1)(ii) of this section, or 
the expiration of any subsequent extension.

[Reg. T, 63 FR 2825, Jan. 16, 1998]



Sec. 220.9  Clearance of securities, options, and futures.

    (a) Credit for clearance of securities. The provisions of this part 
shall not apply to the extension or maintenance of any credit that is 
not for more than one day if it is incidental to the clearance of 
transactions in securities directly between members of a national 
securities exchange or association or through any clearing agency 
registered with the SEC.
    (b) Deposit of securities with a clearing agency. The provisions of 
this part shall not apply to the deposit of securities with an option or 
futures clearing agency for the purpose of meeting the deposit 
requirements of the agency if:
    (1) The clearing agency:

[[Page 15]]

    (i) Issues, guarantees performance on, or clears transactions in, 
any security (including options on any security, certificate of deposit, 
securities index or foreign currency); or
    (ii) Guarantees performance of contracts for the purchase or sale of 
a commodity for future delivery or options on such contracts;
    (2) The clearing agency is registered with the Securities and 
Exchange Commission or is the clearing agency for a contract market 
regulated by the Commodity Futures Trading Commission; and
    (3) The deposit consists of any margin security and complies with 
the rules of the clearing agency that have been approved by the 
Securities and Exchange Commission or the Commodity Futures Trading 
Commission.

[Reg. T, 63 FR 2826, Jan. 16, 1998]



Sec. 220.10  Borrowing and lending securities.

    (a) Without regard to the other provisions of this part, a creditor 
may borrow or lend securities for the purpose of making delivery of the 
securities in the case of short sales, failure to receive securities 
required to be delivered, or other similar situations. If a creditor 
reasonably anticipates a short sale or fail transaction, such borrowing 
may be made up to one standard settlement cycle in advance of trade 
date.
    (b) A creditor may lend foreign securities to a foreign person (or 
borrow such securities for the purpose of relending them to a foreign 
person) for any purpose lawful in the country in which they are to be 
used.
    (c) A creditor that is an exempted borrower may lend securities 
without regard to the other provisions of this part and a creditor may 
borrow securities from an exempted borrower without regard to the other 
provisions of this part.

[Reg. T, 63 FR 2826, Jan. 16, 1998]



Sec. 220.11  Requirements for the list of marginable OTC stocks and the list 

of foreign margin stocks.

    (a) Requirements for inclusion on the list of marginable OTC stocks. 
Except as provided in paragraph (f) of this section, OTC margin stock 
shall meet the following requirements:
    (1) Four or more dealers stand willing to, and do in fact, make a 
market in such stock and regularly submit bona fide bids and offers to 
an automated quotations system for their own accounts;
    (2) The minimum average bid price of such stock, as determined by 
the Board, is at least $5 per share;
    (3) The stock is registered under section 12 of the Act, is issued 
by an insurance company subject to section 12(g)(2)(G) of the Act, is 
issued by a closed-end investment management company subject to 
registration pursuant to section 8 of the Investment Company Act of 1940 
(15 U.S.C. 80a-8), is an American Depository Receipt (ADR) of a foreign 
issuer whose securities are registered under section 12 of the Act, or 
is a stock of an issuer required to file reports under section 15(d) of 
the Act;
    (4) Daily quotations for both bid and asked prices for the stock are 
continously available to the general public;
    (5) The stock has been publicly traded for at least six months;
    (6) The issuer has at least $4 million of capital, surplus, and 
undivided profits;
    (7) There are 400,000 or more shares of such stock outstanding in 
addition to shares held beneficially by officers, directors or 
beneficial owners of more than 10 percent of the stock;
    (8) There are 1,200 or more holders of record, as defined in SEC 
Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not officers, 
directors or beneficial owners of 10 percent or more of the stock, or 
the average daily trading volume of such stock as determined by the 
Board, is at least 500 shares; and
    (9) The issuer or a predecessor in interest has been in existence 
for at least three years.
    (b) Requirements for continued inclusion on the list of marginable 
OTC stocks. Except as provided in paragraph (f) of this section, OTC 
margin stock shall meet the following requirements:
    (1) Three or more dealers stand willing to, and do in fact, make a 
market in such stock and regularly submit

[[Page 16]]

bona fide bids and offers to an automated quotations system for their 
own accounts;
    (2) The minimum average bid price of such stocks, as determined by 
the Board, is at least $2 per share;
    (3) The stock is registered as specified in paragraph (a)(3) of this 
section;
    (4) Daily quotations for both bid and asked prices for the stock are 
continuously available to the general public; ;
    (5) The issuer has at least $1 million of capital, surplus, and 
undivided profits;
    (6) There are 300,000 or more shares of such stock outstanding in 
addition to shares held beneficially by officers, directors, or 
beneficial owners of more than 10 percent of the stock; and
    (7) There continue to be 800 or more holders of record, as defined 
in SEC Rule 12g5-1 (17 CFR 240.12g5-1), of the stock who are not 
officers, directors, or beneficial owners of 10 percent or more of the 
stock, or the average daily trading volume of such stock, as determined 
by the Board, is at least 300 shares.
    (c) Requirements for inclusion on the list of foreign margin stocks. 
Except as provided in paragraph (f) of this section, a foreign security 
shall meet the following requirements before being placed on the List of 
Foreign Margin Stocks:
    (1) The security is an equity security that is listed for trading on 
or through the facilities of a foreign securities exchange or a 
recognized foreign securities market and has been trading on such 
exchange or market for at least six months;
    (2) Daily quotations for both bid and asked or last sale prices for 
the security provided by the foreign securities exchange or foreign 
securities market on which the security is traded are continuously 
available to creditors in the United States pursuant to an electronic 
quotation system;
    (3) The aggregate market value of shares, the ownership of which is 
unrestricted, is not less than $1 billion;
    (4) The average weekly trading volume of such security during the 
preceding six months is either at least 200,000 shares or $1 million; 
and
    (5) The issuer or a predecessor in interest has been in existence 
for at least five years.
    (d) Requirements for continued inclusion on the list of foreign 
margin stocks. Except as provided in paragraph (f) of this section, a 
foreign security shall meet the following requirements to remain on the 
List of Foreign Margin Stocks:
    (1) The security continues to meet the requirements specified in 
paragraphs (c) (1) and (2) of this section;
    (2) The aggregate market value of shares, the ownership of which is 
unrestricted, is not less than $500 million; and
    (3) The average weekly trading volume of such security during the 
preceding six months is either at least 100,000 shares or $500,000.
    (e) Removal from the list. The Board shall periodically remove from 
the lists any stock that:
    (1) Ceases to exist or of which the issuer ceases to exist; or
    (2) No longer substantially meets the provisions of paragraphs (b) 
or (d) of this section or the definition of OTC margin stock.
    (f) Discretionary authority of Board. Without regard to other 
paragraphs of this section, the Board may add to, or omit or remove from 
the list of marginable OTC stocks and the list of foreign margin stocks 
an equity security, if in the judgment of the Board, such action is 
necessary or appropriate in the public interest.
    (g) Unlawful representations. It shall be unlawful for any creditor 
to make, or cause to be made, any representation to the effect that the 
inclusion of a security on the list of marginable OTC stocks or the list 
of foreign margin stocks is evidence that the Board or the SEC has in 
any way passed upon the merits of, or given approval to, such security 
or any transactions therein. Any statement in an advertisement or other 
similar communication containing a reference to the Board in connection 
with the lists or stocks on those lists shall be an unlawful 
representation.

[Reg. T, 63 FR 2826, Jan. 16, 1998]

[[Page 17]]



Sec. 220.12  Supplement: margin requirements.

    The required margin for each security position held in a margin 
account shall be as follows:
    (a) Margin equity security, except for an exempted security, money 
market mutual fund or exempted securities mutual fund, warrant on a 
securities index or foreign currency or a long position in an option: 50 
percent of the current market value of the security or the percentage 
set by the regulatory authority where the trade occurs, whichever is 
greater.
    (b) Exempted security, non-equity security, money market mutual fund 
or exempted securities mutual fund: The margin required by the creditor 
in good faith or the percentage set by the regulatory authority where 
the trade occurs, whichever is greater.
    (c) Short sale of a nonexempted security, except for a non-equity 
security:
    (1) 150 percent of the current market value of the security; or
    (2) 100 percent of the current market value if a security 
exchangeable or convertible within 90 calendar days without restriction 
other than the payment of money into the security sold short is held in 
the account, provided that any long call to be used as margin in 
connection with a short sale of the underlying security is an American-
style option issued by a registered clearing corporation and listed or 
traded on a registered national securities exchange with an exercise 
price that does not exceed the price at which the underlying security 
was sold short.
    (d) Short sale of an exempted security or non-equity security: 100 
percent of the current market value of the security plus the margin 
required by the creditor in good faith.
    (e) Nonmargin, nonexempted equity security: 100 percent of the 
current market value.
    (f) Put or call on a security, certificate of deposit, securities 
index or foreign currency or a warrant on a securities index or foreign 
currency:
    (1) In the case of puts and calls issued by a registered clearing 
corporation and listed or traded on a registered national securities 
exchange or a registered securities association and registered warrants 
on a securities index or foreign currency, the amount, or other position 
specified by the rules of the registered national securities exchange or 
the registered securities association authorized to trade the option or 
warrant, provided that all such rules have been approved or amended by 
the SEC; or
    (2) In the case of all other puts and calls, the amount, or other 
position, specified by the maintenance rules of the creditor's examining 
authority.

[Reg. T, 63 FR 2827, Jan. 16, 1998]

                             Interpretations



Sec. 220.101  Transactions of customers who are brokers or dealers.

    The Board has recently considered certain questions regarding 
transactions of customers who are brokers or dealers.
    (a) The first question was whether delivery and payment under Sec. 
220.4(f)(3) must be exactly simultaneous (such as in sight draft 
shipments), or whether it is sufficient if the broker-dealer customer, 
``as promptly as practicable in accordance with the ordinary usage of 
the trade,'' mails or otherwise delivers to the creditor a check in 
settlement of the transaction, the check being accompanied by 
instructions for transfer or delivery of the security. The Board ruled 
that the latter method of setting the transaction is permissible.
    (b) The second question was, in effect, whether the limitations of 
Sec. 220.4(c)(8) apply to the account of a customer who is himself a 
broker or dealer. The answer is that the provision applies to any 
``special cash account,'' regardless of the type of customer.
    (c) The third question was, in effect, whether a purchase and a sale 
of an unissued security under Sec. 220.4(f)(3) may be offset against 
each other, or whether each must be settled separately by what would 
amount to delivery of the security to settle one transaction and its 
redelivery to settle the other. The answer is that it is permissible to 
offset the transactions against each other without physical delivery and 
redelivery of the security.

[11 FR 14155, Dec. 7, 1946]

[[Page 18]]



Sec. 220.102  [Reserved]



Sec. 220.103  Borrowing of securities.

    (a) The Board of Governors has been asked for a ruling as to whether 
Sec. 220.6(h), which deals with borrowing and lending of securities, 
applies to a borrower of securities if the lender is a private 
individual, as contrasted with a member of a national securities 
exchange or a broker or dealer.
    (b) Section 220.6(h) does not require that the lender of the 
securities in such a case be a member of a national securities exchange 
or a broker or dealer. Therefore, a borrowing of securities may be able 
to qualify under the provision even though the lender is a private 
individual, and this is true whether the security is registered on a 
national securities exchange or is unregistered. In borrowing securities 
from a private individual under Sec. 220.6(h), however, it becomes 
especially important to bear in mind two limitations that are contained 
in the section.
    (c) The first limitation is that the section applies only if the 
broker borrows the securities for the purpose specified in the 
provision, that is, ``for the purpose of making delivery of such 
securities in the case of short sales, failure to receive securities he 
is required to deliver, or other similar cases''. The present language 
of the provision does not require that the delivery for which the 
securities are borrowed must be on a transaction which the borrower has 
himself made, either as agent or as principal; he may borrow under the 
provision in order to relend to someone else for the latter person to 
make such a delivery. However, the borrowing must be related to an 
actual delivery of the type specified--a delivery in connection with a 
specific transaction that has already occurred or is in immediate 
prospect. The provision does not authorize a broker to borrow securities 
(or make the related deposit) merely in order that he or some other 
broker may have the securities ``on hand'' or may anticipate some need 
that may or may not arise in the future.
    (d) The ruling in the 1940 Federal Reserve Bulletin, at page 647, is 
an example of a borrowing which, on the facts as given, did not meet the 
requirement. There, the broker wished to borrow stocks with the 
understanding that he ``would offer to lend this stock in the `loan 
crowd' on a national securities exchange.'' There was no assurance that 
the stocks would be used for the purpose specified in Sec. 220.6(h); 
they might be, or they might merely be held idle while the person 
lending the stocks had the use of the funds deposited against them. The 
ruling held in effect that since the borrowing could not qualify under 
Sec. 220.6(h) it must comply with other applicable provisions of the 
regulation.
    (e) The second requirement is that the deposit of cash against the 
borrowed securities must be ``bona fide.'' This requirement naturally 
cannot be spelled out in detail, but it requires at least that the 
purpose of the broker in making the deposit should be to obtain the 
securities for the specified purpose, and that he should not use the 
arrangement as a means of accommodating a customer who is seeking to 
obtain more funds than he could get in a general account.
    (f) The Board recognizes that even with these requirements there is 
still some possibility that the provision may be misapplied. The Board 
is reluctant to impose additional burdens on legitimate transactions by 
tightening the provision. If there should be evidence of abuses 
developing under the provision, however, it would become necessary to 
consider making it more restricted.

[12 FR 5278, Aug. 2, 1947]



Sec. 220.104  [Reserved]



Sec. 220.105  Ninety-day rule in special cash account.

    (a) Section 220.4(c)(8) places a limitation on a special cash 
account if a security other than an exempted security has been purchased 
in the account and ``without having been previously paid for in full by 
the customer * * * has been * * * delivered out to any broker or 
dealer.'' The limitation is that during the succeeding 90 days the 
customer may not purchase a security in the account other than an 
exempted security unless funds sufficient for the purpose are held in 
the account. In other words, the privilege of delayed

[[Page 19]]

payment in such an account is withdrawn during the 90-day period.
    (b) The Board recently considered a question as to whether the 
following situation makes an account subject to the 90-day 
disqualification: A customer purchases registered security ABC in a 
special cash account. The broker executes the order in good faith as a 
bona fide cash transaction, expecting to obtain full cash payment 
promptly. The next day, the customer sells registered security XYZ in 
the account, promising to deposit it promptly in the account. The 
proceeds of the sale are equal to or greater than the cost of security 
ABC. After both sale and purchase have been made, the customer requests 
the broker to deliver security ABC to a different broker, to receive 
security XYZ from that broker at about the same time, and to settle with 
the other broker--such settlement to be made either by paying the cost 
of security XYZ to the other broker and receiving from him the cost of 
security ABC, or by merely settling any difference between these 
amounts.
    (c) The Board expressed the view that the account becomes subject to 
the 90-day disqualification in Sec. 220.4(c)(8). In the instant case, 
unlike that described at 1940 Federal Reserve Bulletin 772, the security 
sold is not held in the account and is not to be deposited in it 
unconditionally. It is to be obtained only against the delivery to the 
other broker of the security which had been purchased. Hence payment can 
not be said to have been made prior to such delivery; the purchased 
security has been delivered out to a broker without previously having 
been paid for in full, and the account becomes subject to the 90-day 
disqualification.

[13 FR 2368, May 1, 1948]



Sec. Sec. 220.106-220.107  [Reserved]



Sec. 220.108  International Bank Securities.

    (a) Section 2 of the Act of June 29, 1949 (Pub. L. 142--81st 
Congress), amended the Bretton Woods Agreements Act by adding a new 
section numbered 15 providing, in part, that--

    Any securities issued by International Bank for Reconstruction and 
Development (including any guaranty by the bank, whether or not limited 
in scope), and any securities guaranteed by the bank as to both 
principal and interest, shall be deemed to be exempted securities within 
the meaning of * * * paragraph (a)(12) of section 3 of the [Securities 
Exchange] Act of June 6, 1934, as amended (15 U.S.C. 78c). * * *.

    (b) In response to inquiries with respect to the applicability of 
the margin requirements of this part to securities issued or guaranteed 
by the International Bank for Reconstruction and Development, the Board 
has replied that, as a result of this enactment, securities issued by 
the Bank are now classified as exempted securities under Sec. 220.2(e). 
Such securities are now in the same category under this part as are 
United States Government, State and municipal bonds. Accordingly, the 
specific percentage limitations prescribed by this part with respect to 
maximum loan value and margin requirements are no longer applicable 
thereto.

[14 FR 5505, Sept. 7, 1949]



Sec. 220.109  [Reserved]



Sec. 220.110  Assistance by Federal credit union to its members.

    (a) An inquiry was presented recently concerning the application of 
this part or part 221 of this subchapter, to a plan proposed by a 
Federal credit union to aid its members in purchasing stock of a 
corporation whose subsidiary apparently was the employer of all the 
credit union's members.
    (b) From the information submitted, the plan appeared to contemplate 
that the Federal credit union would accept orders from its members for 
registered common stock of the parent corporation in multiples of 5 
shares; that whenever orders had been so received for a total of 100 
shares, the credit union, as agent for such members, would execute the 
orders through a brokerage firm with membership on a national securities 
exchange; that the brokerage firm would deliver certificates for the 
stock, registered in the names of the individual purchasers, to the 
credit union against payment by the credit union; that the credit union 
would prorate the total amount so paid, including the brokerage fee,

[[Page 20]]

among the individual purchasers according to the number of shares 
purchased by them; and that a savings in brokerage fee resulting from 
the 100-lot purchases would be passed on by the credit union to the 
individual purchasers of the stock. However, amounts of the stock less 
than 100 shares would be purchased by the credit union through the 
brokerage firm for any members willing to forego such savings.
    (c) It appeared further that the Federal credit union members for 
whom stock was so purchased would reimburse the credit union (1) by cash 
payment, (2) by the proceeds of withdrawn shares of the credit union, 
(3) by the proceeds of an installment loan from the credit union 
collateraled by the stock purchased, or by (4) by a combination of two 
or more of the above methods. To assist the collection of any such loan, 
the employer of the credit union members would provide payroll 
deductions. Apparently, sales by the credit union of any of the stock 
purchased by one of its members would occur only in satisfaction of a 
delinquent loan balance. In no case did it appear that the credit union 
would make a charge for arranging the execution of transactions in the 
stock for its members.
    (d) The Board was of the view that, from the facts as presented, it 
did not appear that the Federal credit union should be regarded as the 
type of institution to which part 221 of this subchapter, in its present 
form, applied.
    (e) With respect to this part, the question was whether the 
activities of the Federal credit union under the proposal, or otherwise, 
might be such as to bring it within the meaning of the terms ``broker'' 
or ``dealer'' as used in the part and the Securities Exchange Act of 
1934. The Board observed that this, of course, was a question of fact 
that necessarily depended upon the circumstances of the particular case, 
including the manner in which the arrangement in question might be 
carried out in practice.
    (f) On the basis of the information submitted, however, it did not 
appear to the Board that the Federal credit union should be regarded as 
being subject to this part as a ``broker or dealer who transacts a 
business in securities through the medium of'' a member firm solely 
because of its activities as contemplated by the proposal in question. 
The Board stated that the part rather clearly would not apply if there 
appeared to be nothing other than loans by the credit union to its 
members to finance purchases made directly by them of stock of the 
parent corporation of the employer of the member-borrowers. The 
additional fact that the credit union, as agent, would purchase such 
stock for its members (even though all such purchases might not be 
financed by credit union loans) was not viewed by the Board as 
sufficient to make the regulation applicable where, as from the facts 
presented, it did not appear that the credit union in any case was to 
make any charge or receive any compensation for assisting in such 
purchases or that the credit union otherwise was engaged in securities 
activities. However, the Board stated that matters of this kind must be 
examined closely for any variations that might suggest the 
inapplicability of the foregoing.

[18 FR 4592, Aug. 5, 1953]



Sec. 220.111  Arranging for extensions of credit to be made by a bank.

    (a) The Board has recently had occasion to express opinions 
regarding the requirements which apply when a person subject to this 
part (for convenience, called here simply a broker) arranges for a bank 
to extend credit.
    (b) The matter is treated generally in Sec. 220.7(a) and is also 
subject to the general rule of law that any person who aids or abets a 
violation of law by another is himself guilty of a violation. It may be 
stated as a general principle that any person who arranges for credit to 
be extended by someone else has a responsibility so to conduct his 
activities as not to be a participant in a violation of this part, which 
applies to brokers, or part 221 of this subchapter, which applies to 
banks.
    (c) More specifically, in arranging an extension of credit that may 
be subject to part 221 of this subchapter, a broker must act in good 
faith and, therefore, must question the accuracy of any non-purpose 
statement (i.e., a statement that the loan is not for the purpose of

[[Page 21]]

purchasing or carrying registered stocks) given in connection with the 
loan where the circumstances are such that the broker from any source 
knows or has reason to know that the statement is incomplete or 
otherwise inaccurate as to the true purpose of the credit. The 
requirement of ``good faith'' is of vital importance. While the 
application of the requirement will necessarily vary with the facts of 
the particular case, the broker, like the bank for whom the loan is 
arranged to be made, must be alert to the circumstances surrounding the 
loan. Thus, for example, if a broker or dealer is to deliver registered 
stocks to secure the loan or is to receive the proceeds of the loan, the 
broker arranging the loan and the bank making it would be put on notice 
that the loan would probably be subject to part 221 of this subchapter. 
In any such circumstances they could not in good faith accept or rely 
upon a statement to the contrary without obtaining a reliable and 
satisfactory explanation of the situation. The foregoing, of course, 
applies the principles contained in Sec. 221.101 of this subchapter.
    (d) In addition, when a broker is approached by another broker to 
arrange extensions of credit for customers of the approaching broker, 
the broker approached has a responsibility not to arrange any extension 
of credit which the approaching broker could not himself arrange. 
Accordingly, in such cases the statutes and regulations forbid the 
approached broker to arrange extensions of credit on unregistered 
securities for the purpose of purchasing or carrying either registered 
or unregistered securities. The approaching broker would also be 
violating the applicable requirements if he initiated or otherwise 
participated in any such forbidden transactions.
    (e) The expression of views, set forth in this section, to the 
effect that certain specific transactions are forbidden, of course, 
should not in any way be understood to indicate approval of any other 
transactions which are not mentioned.

[18 FR 5505, Sept. 15, 1953]



Sec. 220.112  [Reserved]



Sec. 220.113  Necessity for prompt payment and delivery in special cash 

accounts.

    (a) The Board of Governors recently received an inquiry concerning 
whether purchases of securities by certain municipal employees' 
retirement or pension systems on the basis of arrangements for delayed 
delivery and payment, might properly be effected by a creditor subject 
to this part in a special cash account under Sec. 220.4(c).
    (b) It appears that in a typical case the supervisors of the 
retirement system meet only once or twice each month, at which times 
decisions are made to purchase any securities wished to be acquired for 
the system. Although the securities are available for prompt delivery by 
the broker-dealer firm selected to effect the system's purchase, it is 
arranged in advance with the firm that the system will not accept 
delivery and pay for the securities before some date more than seven 
business days after the date on which the securities are purchased. 
Apparently, such an arrangement is occasioned by the monthly or 
semimonthly meetings of the system's supervisors. It was indicated that 
a retirement system of this kind may be supervised by officials who 
administer it as an incidental part of their regular duties, and that 
meetings requiring joint action by two or more supervisors may be 
necessary under the system's rules and procedures to authorize issuance 
of checks in payment for the securities purchased. It was indicated also 
that the purchases do not involve exempted securities, securities of the 
kind covered by Sec. 220.4(c)(3), or any shipment of securities as 
described in Sec. 220.4(c).
    (c) This part provides that a creditor subject thereto may not 
effect for a customer a purchase in a special cash account under Sec. 
220.4(c) unless the use of the account meets the limitations of Sec. 
220.4(a) and the purchase constitutes a ``bona fide cash transaction'' 
which complies with the eligibility requirements of Sec. 
220.4(c)(1)(i). One such requirement is that the purchase be made ``in 
reliance upon an agreement accepted by the creditor (broker-dealer) in 
good faith'' that the customer

[[Page 22]]

will ``promptly make full cash payment for the security, if funds 
sufficient for the purpose are not already in the account; and, subject 
to certain exceptions, Sec. 220.4(c)(2) provides that the creditor 
shall promptly cancel or liquidate the transaction if payment is not 
made by the customer within seven business days after the date of 
purchase. As indicated in the Board's interpretation at 1940 Federal 
Reserve Bulletin 1172, a necessary part of the customer's undertaking 
pursuant to Sec. 220.4(c)(1)(i) is that he ``should have the necessary 
means of payment readily available when he purchases a security in the 
special cash account. He should expect to pay for it immediately or in 
any event within the period (of not more than a very few days) that is 
as long as is usually required to carry through the ordinary securities 
transaction.''
    (d) The arrangements for delayed delivery and payment in the case 
presented to the Board and outlined above clearly would be inconsistent 
with the requirement of Sec. 220.4(c)(1)(i) that the purchase be made 
in reliance upon an agreement accepted by the creditor in good faith 
that the customer will ``promptly'' make full cash payment for the 
security. Accordingly, the Board said that transactions of the kind in 
question would not qualify as a ``bona fide cash transaction'' and, 
therefore, could not properly be effected in a special cash account, 
unless a contrary conclusion would be justified by the exception in 
Sec. 220.4(c)(5).
    (e) Section 220.4(c)(5) provides that if the creditor, ``acting in 
good faith in accordance with'' Sec. 220.4(c)(1), purchases a security 
for a customer ``with the understanding that he is to deliver the 
security promptly to the customer, and the full cash payment is to be 
made promptly by the customer is to be made against such delivery'', the 
creditor may at his option treat the transaction as one to which the 
period applicable under Sec. 220.4(c)(2) is not the seven days therein 
specified but 35 days after the date of such purchase. It will be 
observed that the application of Sec. 220.4 (c)(5) is specifically 
conditioned on the creditor acting in good faith in accordance with 
Sec. 220.4(c)(1). As noted above, the existence of the arrangements for 
delayed delivery and payment in the case presented would prevent this 
condition from being met, since the customer could not be regarded as 
having agreed to make full cash payment ``promptly''. Furthermore, such 
arrangements clearly would be inconsistent with the requirement of Sec. 
220.4(c)(5) that the creditor ``deliver the security promptly to the 
customer''.
    (f) Section 220.4(c)(5) was discussed in the Board's published 
interpretation, referred to above, which states that ``it is not the 
purpose of (Sec. 220.4 (c)(5)) to allow additional time to customers 
for making payment. The `prompt delivery' described in (Sec. 220.4 
(c)(5)) is delivery which is to be made as soon as the broker or dealer 
can reasonably make it in view of the mechanics of the securities 
business and the bona fide usages of the trade. The provision merely 
recognizes the fact that in certain circumstances it is an established 
bona fide practice in the trade to obtain payment against delivery of 
the security to the customer, and the further fact that the mechanics of 
the trade, unrelated to the customer's readiness to pay, may sometimes 
delay such delivery to the customer''.
    (g) In the case presented, it appears that the only reason for the 
delay is related solely to the customer's readiness to pay and is in no 
way attributable to the mechanics of the securities business. 
Accordingly, it is the Board's view that the exception in Sec. 
220.4(c)(5) should not be regarded as permitting the transactions in 
question to be effected in a special cash account.

[22 FR 5954, July 27, 1957]



Sec. Sec. 220.114-220.116  [Reserved]



Sec. 220.117  Exception to 90-day rule in special cash account.

    (a) The Board of Governors has recently interpreted certain of the 
provisions of Sec. 220.4(c)(8), with respect to the withdrawal of 
proceeds of a sale of stock in a ``special cash account'' when the stock 
has been sold out of the account prior to payment for its purchase.
    (b) The specific factual situation presented may be summarized as 
follows:


[[Page 23]]


    Customer purchased stock in a special cash account with a member 
firm on Day 1. On Day 3 customer sold the same stock at a profit. On Day 
8 customer delivered his check for the cost of the purchase to the 
creditor (member firm). On Day 9 the creditor mailed to the customer a 
check for the proceeds of the sale.

    (c) Section 220.4(c)(8) prohibits a creditor, as a general rule, 
from effecting a purchase of a security in a customer's special cash 
account if any security has been purchased in that account during the 
preceding 90 days and has then been sold in the account or delivered out 
to any broker or dealer without having been previously paid for in full 
by the customer. One exception to this general rule reads as follows:

    * * * The creditor may disregard for the purposes of this 
subparagraph (Sec. 220.4(c) (8)) a sale without prior payment provided 
full cash payment is received within the period described by 
subparagraph (2) of this paragraph (seven days after the date of 
purchase) and the customer has not withdrawn the proceeds of sale on or 
before the day on which such payment (and also final payment of any 
check received in that connection) is received. * * *

    (d) Final payment of customer's check: (1) The first question is: 
When is the creditor to be regarded as having received ``final payment 
of any check received'' in connection with the purchase?
    (2) The clear purpose of Sec. 220.4(c) (8) is to prevent the use of 
the proceeds of sale of a stock by a customer to pay for its purchase--
i.e., to prevent him from trading on the creditor's funds by being able 
to deposit the sale proceeds prior to presentment of his own check to 
the drawee bank. Thus, when a customer undertakes to pay for a purchase 
by check, that check does not constitute payment for the purchase, 
within the language and intent of the above-quoted exception in Sec. 
220.4(c)(8), until it has been honored by the drawee bank, indicating 
the sufficiency of his account to pay the check.
    (3) The phrase ``final payment of any check'' is interpreted as 
above notwithstanding Sec. 220.6(f), which provides that:

    For the purposes of this part (Regulation T), a creditor may, at his 
option (1) treat the receipt in good faith of any check or draft drawn 
on a bank which in the ordinary course of business is payable on 
presentation, * * * as receipt of payment of the amount of such check, 
draft or order; * * *


This is a general provision substantially the same as language found in 
section 4(f) of Regulation T as originally promulgated in 1934. The 
language of the subject exception to the 90-day rule of Sec. 
220.4(c)(8), i.e., the exception based expressly on final ``payment of 
any check,'' was added to the regulation in 1949 by an amendment 
directed at a specific type of situation. Because the exception is a 
special, more recent provision, and because Sec. 220.6(f), if 
controlling, would permit the exception to undermine, to some extent, 
the effectiveness of the 90-day rule, sound principles of construction 
require that the phrase ``final payment of any check'' be given its 
literal and intended effect.
    (4) There is no fixed period of time from the moment of receipt by 
the payee, or of deposit, within which it is certain that any check will 
be paid by the drawee bank. Therefore, in the rare case where the 
operation of the subject exception to Sec. 220.4(c)(8) is necessary to 
avoid application of the 90-day rule, a creditor should ascertain (from 
his bank of deposit or otherwise) the fact of payment of a customer's 
check given for the purchase. Having so determined the day of final 
payment, the creditor can permit withdrawal on any subsequent day.
    (e) Mailing as ``withdrawal'': (1) Also presented is the question 
whether the mailing to the customer of the creditor's check for the sale 
proceeds constitutes a withdrawal of such proceeds by the customer at 
the time of mailing so that, if the check for the sale proceeds is 
mailed on or before the day on which the customer's check for the 
purchase is finally paid, the 90-day rule applies. It may be that a 
check mailed one day will not ordinarily be received by the customer 
until the next. The Board is of the view, however, that when the check 
for sale proceeds is issued and released into the mails, the proceeds 
are to be regarded as withdrawn by the customer; a more liberal 
interpretation would open a way for circumvention. Accordingly, the 
creditor's check should not be mailed nor the sale proceeds otherwise 
released to

[[Page 24]]

the customer ``on or before the day'' on which payment for the purchase, 
including final payment of any check given for such payment, is received 
by the creditor, as determined in accordance with the principles stated 
herein.
    (2) Applying the above principles to the schedule of transactions 
described in the second paragraph of this interpretation, the mailing of 
the creditor's check on ``Day 9'' would be consistent with the subject 
exception to Sec. 220.4(c)(8), as interpreted herein, only if the 
customer's check was paid by the drawee bank on ``Day 8''.

[27 FR 3511, Apr. 12, 1962]



Sec. 220.118  Time of payment for mutual fund shares purchased in a special 

cash account.

    (a) The Board has recently considered the question whether, in 
connection with the purchase of mutual fund shares in a ``special cash 
account'' under the provisions of this part 220, the 7-day period with 
respect to liquidation for nonpayment is that described in Sec. 
220.4(c)(2) or that described in Sec. 220.4(c)(3).
    (b) Section 220.4(c)(2) provides as follows:

    In case a customer purchases a security (other than an exempted 
security) in the special cash account and does not make full cash 
payment for the security within 7 days after the date on which the 
security is so purchased, the creditor shall, except as provided in 
subparagraphs (3)-(7) of this paragraph, promptly cancel or otherwise 
liquidate the transaction or the unsettled portion thereof.


Section 220.4(c)(3), one of the exceptions referred to, provides in 
relevant part as follows:

    If the security when so purchased is an unissued security, the 
period applicable to the transaction under subparagraph (2) of this 
paragraph shall be 7 days after the date on which the security is made 
available by the issuer for delivery to purchasers.

    (c) In the case presented, the shares of the mutual fund (open-end 
investment company) are technically not issued at the time they are sold 
by the underwriter and distributor. Several days may elapse from the 
date of sale before a certificate can be delivered by the transfer 
agent. The specific inquiry to the Board was, in effect, whether the 7-
day period after which a purchase transaction must be liquidated or 
cancelled for nonpayment should run, in the case of mutual fund shares, 
from the time when a certificate for the purchased shares is available 
for delivery to the purchaser, instead of from the date of the purchase.
    (d) Under the general rule of Sec. 220.4 (c)(2) that is applicable 
to purchases of outstanding securities, the 7-day period runs from the 
date of purchase without regard to the time required for the mechanical 
acts of transfer of ownership and delivery of a certificate. This rule 
is based on the principles governing the use of special cash accounts in 
accordance with which, in the absence of special circumstances, payment 
is to be made promptly upon the purchase of securities.
    (e) The purpose of Sec. 220.4(c)(3) is to recognize the fact that, 
when an issue of securities is to be issued at some fixed future date, a 
security that is a part of such issue can be purchased on a ``when-
issued'' basis and that payment may reasonably be delayed until after 
such date of issue, subject to other basic conditions for transactions 
in a special cash account. Thus, unissued securities should be regarded 
as ``made available for delivery to purchasers'' on the date when they 
are substantially as available as outstanding securities are available 
upon purchase, and this would ordinarily be the designated date of 
issuance or, in the case of a stock dividend, the ``payment date''. In 
any case, the time required for the mechanics of transfer and delivery 
of a certificate is not material under Sec. 220.4(c)(3) any more than 
it is under Sec. 220.4(c)(2).
    (f) Mutual fund shares are essentially available upon purchase to 
the same extent as outstanding securities. The mechanics of their 
issuance and of the delivery of certificates are not significantly 
different from the mechanics of transfer and delivery of certificates 
for shares of outstanding securities, and the issuance of mutual fund 
shares is not a future event in a sense that would warrant the extension 
of the time for payment beyond that afforded in the case of outstanding 
securities. Consequently, the Board has concluded that a purchase of 
mutual fund shares

[[Page 25]]

is not a purchase of an ``unissued security'' to which Sec. 220.4(c)(3) 
applies, but is a transaction to which Sec. 220.4(c)(2) applies.

[27 FR 10885, Nov. 8, 1962]



Sec. 220.119  Applicability of margin requirements to credit extended to 

corporation in connection with retirement of stock.

    (a) The Board of Governors has been asked whether part 220 was 
violated when a dealer in securities transferred to a corporation 4,161 
shares of the stock of such corporation for a consideration of $33,288, 
of which only 10 percent was paid in cash.
    (b) If the transaction was of a kind that must be included in the 
corporation's ``general account'' with the dealer (Sec. 220.3), it 
would involve an excessive extension of credit in violation of Sec. 
220.3 (b)(1). However, the transaction would be permissible if the 
transaction came within the scope of Sec. 220.4(f)(8), which permits a 
``creditor'' (such as the dealer) to ``Extend and maintain credit to or 
for any customer without collateral or on any collateral whatever for 
any purpose other than purchasing or carrying or trading in 
securities.'' Accordingly, the crucial question is whether the 
corporation, in this transaction, was ``purchasing'' the 4,161 shares of 
its stock, within the meaning of that term as used in this part.
    (c) Upon first examination, it might seem apparent that the 
transaction was a purchase by the corporation. From the viewpoint of the 
dealer the transaction was a sale, and ordinarily, at least a sale by 
one party connotes a purchase by the other. Furthermore, other indicia 
of a sale/purchase transaction were present, such as a transfer of 
property for a pecuniary consideration. However, when the underlying 
objectives of the margin regulations are considered, it appears that 
they do not encompass a transaction of this nature, where securities are 
transferred on credit to the issuer thereof for the purpose of 
retirement.
    (d) Section 7(a) of the Securities Exchange Act of 1934 requires the 
Board of Governors to prescribe margin regulations ``For the purpose of 
preventing the excessive use of credit for the purchase or carrying of 
securities.'' Accordingly, the provisions of this part are not intended 
to prevent the use of credit where the transaction will not have the 
effect of increasing the volume of credit in the securities markets.
    (e) It appears that the instant transaction would have no such 
effect. When the transaction was completed, the equity interest of the 
dealer was transmuted into a dollar-obligation interest; in lieu of its 
status as a stockholder of the corporation, the dealer became a creditor 
of that corporation. The corporation did not become the owner of any 
securities acquired through the use of credit; its outstanding stock was 
simply reduced by 4,161 shares.
    (f) The meaning of ``sale'' and ``purchase'' in the Securities 
Exchange Act has been considered by the Federal courts in a series of 
decisions dealing with corporate ``insiders'' profits under section 
16(b) of that Act. Although the statutory purpose sought to be 
effectuated in those cases is quite different from the purpose of the 
margin regulations, the decisions in question support the propriety of 
not regarding a transaction as a ``purchase'' where this accords with 
the probable legislative intent, even though, literally, the statutory 
definition seems to include the particular transaction. See Roberts v. 
Eaton (CA 2 1954) 212 F. 2d 82, and cases and other authorities there 
cited. The governing principle, of course, is to effectuate the purpose 
embodied in the statutory or regulatory provision being interpreted, 
even where that purpose may conflict with the literal words. U.S. v. 
Amer. Trucking Ass'ns, 310 U.S. 534, 543 (1940); 2 Sutherland, Statutory 
Construction (3d ed. 1943) ch. 45.
    (g) There can be little doubt that an extension of credit to a 
corporation to enable it to retire debt securities would not be for the 
purpose of ``purchasing * * * securities'' and therefore would come 
within Sec. 220.4(f)(8), regardless of whether the retirement was 
obligatory (e.g., at maturity) or was a voluntary ``call'' by the 
issuer. This is true, it is difficult to see any valid distinction, for 
this purpose, between (1) voluntary retirement of an indebtedness 
security and (2) voluntary retirement of an equity security.

[[Page 26]]

    (h) For the reasons indicated above, it is the opinion of the Board 
of Governors that the extension of credit here involved is not of the 
kind which the margin requirements are intended to regulate and that the 
transaction described does not involve an unlawful extension of credit 
as far as this part is concerned.
    (i) The foregoing interpretation relates, of course, only to cases 
of the type described. It should not be regarded as governing any other 
situations; for example, the interpretation does not deal with cases 
where securities are being transferred to someone other than the issuer, 
or to the issuer for a purpose other than immediate retirement. Whether 
the margin requirements are inapplicable to any such situations would 
depend upon the relevant facts of actual cases presented.

[27 FR 12346, Dec. 13, 1962]



Sec. 220.120  [Reserved]



Sec. 220.121  Applicability of margin requirements to joint account between 

two creditors.

    (a) The Board has recently been asked whether extensions of credit 
in a joint account between two brokerage firms, a member of a national 
securities exchange (``Firm X'') and a member of the National 
Association of Securities Dealers (``Firm Y'') are subject to the margin 
requirements of this part (Regulation T). It is understood that similar 
joint accounts are not uncommon, and it appears that the margin 
requirements of the regulation are not consistently applied to 
extensions of credit in the accounts.
    (b) When the account in question was opened, Firm Y deposited $5,000 
with Firm X and has made no further deposit in the account, except for 
the monthly settlement described below. Both firms have the privilege of 
buying and selling specified securities in the account, but it appears 
that Firm X initiates most of the transactions therein. Trading volume 
may run from half a million to a million dollars a month. Firm X carries 
the ``official'' ledger of the account and sends Firm Y a monthly 
statement with a complete record of all transactions effected during the 
month. Settlement is then made in accordance with the agreement between 
the two firms, which provides that profits and losses shall be shared 
equally on a fifty-fifty basis. However, all transactions are confirmed 
and reconfirmed between the two on a daily basis.
    (c) Section 220.3(a) provides that

    All financial relations between a creditor and a customer, whether 
recorded in one record or in more than one record, shall be included in 
and be deemed to be part of the customer's general account with the 
creditor, * * *.


and Sec. 220.2(c) defines the term ``customer'' to include

    * * * any person, or any group of persons acting jointly, * * * to 
or for whom a creditor is extending or maintaining any credit * * *


In the course of a normal month's operations, both Firm X and Firm Y are 
at one time or another extending credit to the joint account, since both 
make purchases for the account that are not ``settled'' until the 
month's end. Consequently, the account would be a ``customer'' within 
the above definition.
    (d) Section 220.6(b) provides, with respect to the account of a 
joint adventure in which a creditor participates, that

    * * * the adjusted debit balance of the account shall include, in 
addition to the items specified in Sec. 220.3(d), any amount by which 
the creditor's contribution to the joint adventure exceeds the 
contribution which he would have made if he had contributed merely in 
proportion to his right to share in the profits of the joint adventure.


In addition, the final paragraph of Sec. 220.2(c) states that the 
definition of ``customer''

    * * * includes any joint adventure in which a creditor participates 
and which would be considered a customer of the creditor if the creditor 
were not a participant.

    (e) The above provisions clearly evince the Board's intent that the 
regulation shall cover trading accounts in which a creditor 
participates. If additional confirmation were needed, it is supplied by 
the fact that the Board found it needful specifically to exempt from 
ordinary margin requirements

[[Page 27]]

credit extended to certain joint accounts in which a creditor 
participates. These include the account in which transactions of odd-lot 
dealers may be financed under Sec. 220.4(f) (4), and the specialist's 
account under Sec. 220.4(g). Accordingly, the Board concluded that the 
joint account between Firm X and Firm Y is a ``customer'' within the 
meaning of the regulation, and that extensions of credit in the account 
are subject to margin requirements.

[31 FR 7169, May 17, 1966]



Sec. 220.122  ``Deep in the money put and call options'' as extensions of 

credit.

    (a) The Board of Governors has been asked to determine whether the 
business of selling instruments described as ``deep in the money put and 
call options'' would involve an extension of credit for the purposes of 
the Board's regulations governing margin requirements for securities 
transactions. Most of such options would be of the ``call'' type, such 
as the following proposal that was presented to the Board for its 
consideration:

    If X stock is selling at $100 per share, the customer would pay 
about $3,250 for a contract to purchase 100 shares of X at $70 per share 
within a 30-day period. The contract would be guaranteed by an exchange 
member, as are standard ``puts'' and ``calls''. When the contract is 
made with the customer, the seller, who will also be the writer of the 
contract, will immediately purchase 100 shares of X at $100 per share 
through the guarantor member firm in a margin account. If the customer 
exercises the option, the shares will be delivered to him; if the option 
is not exercised, the writer will sell the shares in the margin account 
to close out the transaction. As a practical matter, it is anticipated 
that the customer will exercise the option in almost every case.

    (b) An ordinary ``put'' is an option given to a person to sell to 
the writer of the put a specified amount of securities at a stated price 
within a certain time. A ``call'' is an option given to a person to buy 
from the writer a specified amount of securities at a stated price 
within a certain time. To be freely saleable, options must be indorsed, 
or guaranteed, by a member firm of the exchange on which the security is 
registered. The guarantor charges a fee for this service.
    (c) The option embodied in the normal put or call is exercisable 
either at the market price of the security at the time the option is 
written, or some ``points away'' from the market. The price of a normal 
option is modest by comparison with the margin required to take a 
position. Writers of normal options are persons who are satisfied with 
the current price of a security, and are prepared to purchase or sell at 
that price, with the small profit provided by the fee. Moreover, since a 
large proportion of all options are never exercised, a person who 
customarily writes normal options can anticipate that the fee would be 
clear profit in many cases, and he will not be obligated to buy or sell 
the stock in question.
    (d) The stock exchanges require that the writer of an option deposit 
and maintain in his margin account with the indorser 30 percent of the 
current market price in the case of a call (unless he has a long 
position in the stock) and 25 percent in the case of a put (unless he 
has a short position in the stock). Many indorsing firms in fact require 
larger deposits. Under Sec. 220.3(a) of Regulation T, all financial 
relations between a broker and his customer must be included in the 
customer's general account, unless specifically eligible for one of the 
special accounts authorized by Sec. 220.4. Accordingly, the writer, as 
a customer of the member firm, must make a deposit, which is included in 
his general account.
    (e) In order to prevent the deposit from being available against 
other margin purchases, and in effect counted twice, Sec. 220.3(d)(5) 
requires that in computing the customer's adjusted debit balance, there 
shall be included ``the amount of any margin customarily required by the 
creditor in connection with his endorsement or guarantee of any put, 
call, or other option''. No other margin deposit is required in 
connection with a normal put or call option under Regulation T.
    (f) Turning to the ``deep in the money'' proposed option contract 
described above, the price paid by the buyer can be divided into (1) a 
deposit of 30 percent of the current market

[[Page 28]]

value of the stock, and (2) an additional fixed charge, or fee. To the 
extent that the price of the stock rose during the 30 ensuing days the 
proposed instrument would produce results similar to those in the case 
of an ordinary profitable call, and the contract right would be 
exercised. But even if the price fell, unlike the situation with a 
normal option, the buyer would still be virtually certain to exercise 
his right to purchase before it expired, in order to minimize his loss. 
The result would be that the buyer would not have a genuine choice 
whether or not to buy. Rather, the instrument would have made it 
possible for him, in effect, to purchase stock as of the time the 
contract was written by depositing 30 percent of the stock's current 
market price.
    (g) It was suggested that the proposed contract is not unusual, 
since there are examples of ordinary options selling at up to 28 percent 
of current market value. However, such examples are of options running 
for 12 months, and reflect expectations of changes in the price of the 
stock over that period. The 30-day contracts discussed above are not 
comparable to such 12-month options, because instances of true 
expectations of price changes of this magnitude over a 30-day period 
would be exceedingly rare. And a contract that does not reflect such 
true expectations of price change, plus a reasonable fee for the 
services of the writer, is not an option in the accepted meaning of the 
term.
    (h) Because of the virtual certainty that the contract right would 
be exercised under the proposal described above, the writer would buy 
the stock in a margin account with an indorsing firm immediately on 
writing the contract. The indorsing firm would extend credit in the 
amount of 20 percent of the current market price of the stock, the 
maximum permitted by the current Sec. 220.8 (supplement to Regulation 
T). The writer would deposit the 30 percent supplied by the buyer, and 
furnish the remaining 50 percent out of his own working capital. His 
account with the indorsing firm would thus be appropriately margined.
    (i) As to the buyer, however, the writer would function as a broker. 
In effect, he would purchase the stock for the account, or use, of the 
buyer, on what might be described as a deferred payment arrangement. 
Like an ordinary broker, the writer of the contract described above 
would put up funds to pay for the difference between the price of 
securities the customer wished to purchase and the customer's own 
contribution. His only risk would be that the price of the securities 
would decline in excess of the customer's contribution. True, he would 
be locked in, and could not liquidate the customer's collateral for 30 
days even if the market price should fall in excess of 30 percent, but 
the risk of such a decline is extremely slight.
    (j) Like any other broker who extends credit in a margin account, 
the writer who was in the business of writing and selling such a 
contract would be satisfied with a fixed predetermined amount of return 
on his venture, since he would realize only the fee charged. Unlike a 
writer of ordinary puts and calls, he would not receive a substantial 
part of his income from fees on unexercised contract rights. The 
similarity of his activities to those of a broker, and the dissimilarity 
to a writer of ordinary options, would be underscored by the fact that 
his fee would be a fixed predetermined amount of return similar to an 
interest charge, rather than a fee arrived at individually for each 
transaction according to the volatility of the stock and other 
individual considerations.
    (k) The buyer's general account with the writer would in effect 
reflect a debit for the purchase price of the stock and, on the credit 
side, a deposit of cash in the amount of 30 percent of that price, plus 
an extension of credit for the remaining 70 percent, rather than the 
maximum permissible 20 percent.
    (l) For the reasons stated above, the Board concluded that the 
proposed contracts would involve extensions of credit by the writer as 
broker in an amount exceeding that permitted by the current supplement 
to Regulation T. Accordingly, the writing of such contracts by a 
brokerage firm is presently prohibited by such regulation, and any 
brokerage firm that endorses such a contract would be arranging for

[[Page 29]]

credit in an amount greater than the firm itself could extend, a 
practice that is prohibited by Sec. 220.7(a).

[35 FR 3280, Feb. 21, 1970]



Sec. 220.123  Partial delayed issue contracts covering nonconvertible bonds.

    (a) During recent years, it has become customary for portions of new 
issues of nonconvertible bonds and preferred stocks to be sold subject 
to partial delayed issue contracts, which have customarily been referred 
to in the industry as ``delayed delivery'' contracts, and the Board of 
Governors has been asked for its views as to whether such transactions 
involve any violations of the Board's margin regulations.
    (b) The practice of issuing a portion of a debt (or equivalent) 
security issue at a date subsequent to the main underwriting has arisen 
where market conditions made it difficult or impossible, in a number of 
instances, to place an entire issue simultaneously. In instances of this 
kind, institutional investors (e.g., insurance companies or pension 
funds) whose cash flow is such that they expect to have funds available 
some months in the future, have been willing to subscribe to a portion, 
to be issued to them at a future date. The issuer has been willing to 
agree to issue the securities in two or more stages because it did not 
immediately need the proceeds to be realized from the deferred portion, 
because it could not raise funds on better terms, or because it 
preferred to have a certain portion of the issue taken down by an 
investor of this type.
    (c) In the case of such a delayed issue contract, the underwriter is 
authorized to solicit from institutional customers offers to purchase 
from the issuer, pursuant to contracts of the kind described above, and 
the agreement becomes binding at the underwriters' closing, subject to 
specified conditions. When securities are issued pursuant to the 
agreement, the purchase price includes accrued interest or dividends, 
and until they are issued to it, the purchaser does not, in the case of 
bonds, have rights under the trust indenture, or, in the case of 
preferred stocks, voting rights.
    (d) Securities sold pursuant to such arrangements are high quality 
debt issues (or their equivalent). The purchasers buy with a view to 
investment and do not resell or otherwise dispose of the contract prior 
to its completion. Delayed issue arrangements are not acceptable to 
issuers unless a substantial portion of an issue, not less than 10 
percent, is involved.
    (e) Sections 3(a) (13) and (14) of the Securities Exchange Act of 
1934 provide that an agreement to purchase is equivalent to a purchase, 
and an agreement to sell to a sale. The Board has hitherto expressed the 
view that credit is extended at the time when there is a firm agreement 
to extend such credit (1968 Federal Reserve Bulletin 328; 12 CFR 
207.101; ] 6800 Published Interpretations of the Board of Governors). 
Accordingly, in instances of the kind described above, the issuer may be 
regarded as extending credit to the institutional purchaser at the time 
of the underwriters' closing, when the obligations of both become fixed.
    (f) Section 220.7(a) of the Board's Regulation T (12 CFR 220.7(a)), 
with an exception not applicable here, forbids a creditor subject to 
that regulation to arrange for credit on terms on which the creditor 
could not itself extend the credit. Sections 220.4(c) (1) and (2) (12 
CFR 220.4(c) (1) and (2)) provide that a creditor may not sell 
securities to a customer except in good faith reliance upon an agreement 
that the customer will promptly, and in no event in more than 7 full 
business days, make full cash payment for the securities. Since the 
underwriters in question are creditors subject to the regulation, unless 
some specific exception applies, they are forbidden to arrange for the 
credit described above. This result follows because payment is not made 
until more than 7 full business days have passed from the time the 
credit is extended.
    (g) However, Sec. 220.4(c)(3) provides that:

    If the security when so purchased is an unissued security, the 
period applicable to the transaction under subparagraph (2) of this 
paragraph shall be 7 days after the date on which the security is made 
available by the issuer for delivery to purchasers.


[[Page 30]]


    (h) In interpreting Sec. 220.4(c)(3), the Board has stated that the 
purpose of the provision:

    * * * is to recognize the fact that, when an issue of securities is 
to be issued at some future fixed date, a security that is part of such 
issue can be purchased on a ``when-issued'' basis and that payment may 
reasonably be delayed until after such date of issue, subject to other 
basic conditions for transactions in a special cash account. (1962 
Federal Reserve Bulletin 1427; 12 CFR 220.118; ] 5996, Published 
Interpretations of the Board of Governors.)


In that situation, the Board distinguished the case of mutual fund 
shares, which technically are not issued until the certificate can be 
delivered by the transfer agent. The Board held that mutual fund shares 
must be regarded as issued at the time of purchase because they are:

    * * * essentially available upon purchase to the same extent as 
outstanding securities. The mechanics of their issuance and of the 
delivery of certificates are not significantly different from the 
mechanics of transfer and delivery of certificates for shares of 
outstanding securities, and the issuance of mutual fund shares is not a 
future event in the sense that would warrant the extension of the time 
for payment beyond that afforded in the case of outstanding securities. 
(ibid.)


The issuance of debt securities subject to delayed issue contracts, by 
contrast with that of mutual fund shares, which are in a status of 
continual underwriting, is a specific single event taking place at a 
future date fixed by the issuer with a view to its need for funds and 
the availability of those funds under current market conditions.
    (i) For the reasons stated above the Board concluded that the 
nonconvertible debt and preferred stock subject to delayed issue 
contracts of the kind described above should not be regarded as having 
been issued until delivered, pursuant to the agreement, to the 
institutional purchaser. This interpretation does not apply, of course, 
to fact situations different from that described in this section.

[36 FR 2777, Feb. 10, 1971]



Sec. 220.124  Installment sale of tax-shelter programs as ``arranging'' for 

credit.

    (a) The Board has been asked whether the sale by brokers and dealers 
of tax-shelter programs containing a provision that payment for the 
program may be made in installments would constitute ``arranging'' for 
credit in violation of this part 220. For the purposes of this 
interpretation, the term ``tax-shelter program'' means a program which 
is required to be registered pursuant to section 5 of the Securities Act 
of 1933 (15 U.S.C. section 77e), in which tax benefits, such as the 
ability to deduct substantial amounts of depreciation or oil exploration 
expenses, are made available to a person investing in the program. The 
programs may take various legal forms and can relate to a variety of 
industries including, but not limited to, oil and gas exploration 
programs, real estate syndications (except real estate investment 
trusts), citrus grove developments and cattle programs.
    (b) The most common type of tax-shelter program takes the form of a 
limited partnership. In the case of the programs under consideration, 
the investor would commit himself to purchase and the partnership would 
commit itself to sell the interests. The investor would be entitled to 
the benefits, and become subject to the risks of ownership at the time 
the contract is made, although the full purchase price is not then 
required to be paid. The balance of the purchase price after the 
downpayment usually is payable in installments which range from 1 to 10 
years depending on the program. Thus, the partnership would be extending 
credit to the purchaser until the time when the latter's contractual 
obligation has been fulfilled and the final payment made.
    (c) With an exception not applicable here, Sec. 220.7(a) of 
Regulation T provides that:

    A creditor [broker or dealer] may arrange for the extension or 
maintenance of credit to or for any customer of such creditor by any 
person upon the same terms and conditions as those upon which the 
creditor, under the provisions of this part, may himself extend or 
maintain such credit to such customer, but only such terms and 
conditions * * *


[[Page 31]]


    (d) In the case of credit for the purpose of purchasing or carrying 
securities (purpose credit), Sec. 220.8 of the regulation (the 
Supplement to Regulation T) does not permit any loan value to be given 
securities that are not registered on a national securities exchange, 
included on the Board's OTC Margin List, or exempted by statute from the 
regulation.
    (e) The courts have consistently held investment programs such as 
those described above to be ``securities'' for purpose of both the 
Securities Act of 1933 and the Securities Exchange Act of 1934. The 
courts have also held that the two statutes are to be construed 
together. Tax-shelter programs, accordingly, are securities for purposes 
of Regulation T. They also are not registered on a national securities 
exchange, included on the Board's OTC Margin List, or exempted by 
statute from the regulation.
    (f) Accordingly, the Board concludes that the sale by a broker/
dealer of tax-shelter programs containing a provision that payment for 
the program may be made in installments would constitute ``arranging'' 
for the extension of credit to purchase or carry securities in violation 
of the prohibitions of Sec. Sec. 220.7(a) and 220.8 of Regulation T.

[37 FR 6568, Mar. 31, 1972]



Sec. 220.125-220.126  [Reserved]



Sec. 220.127  Independent broker/dealers arranging credit in connection with 

the sale of insurance premium funding programs.

    (a) The Board's September 5, 1972, clarifying amendment to Sec. 
220.4(k) set forth that creditors who arrange credit for the acquisition 
of mutual fund shares and insurance are also permitted to sell mutual 
fund shares without insurance under the provisions of the special cash 
account. It should be understood, of course, that such account provides 
a relatively short credit period of up to 7 business days even with so-
called cash transactions. This amendment was in accordance with the 
Board's understanding in 1969, when the insurance premium funding 
provisions were adopted in Sec. 220.4(k), that firms engaged in a 
general securities business would not also be engaged in the sale and 
arranging of credit in connection with such insurance premium funding 
programs.
    (b) The 1972 amendment eliminated from Sec. 220.4(k) the 
requirement that, to be eligible for the provisions of the section, a 
creditor had to be the issuer, or a subsidiary or affiliate of the 
issuer, of programs which combine the acquisition of both mutual fund 
shares and insurance. Thus the amendment permits an independent broker/
dealer to sell such a program and to arrange for financing in that 
connection. In reaching such decision, the Board again relied upon the 
earlier understanding that independent broker/dealers who would sell 
such programs would not be engaged in transacting a general securities 
business.
    (c) In response to a specific view recently expressed, the Board 
agrees that under Regulation T:

    * * * a broker/dealer dealing in special insurance premium funding 
products can only extend credit in connection with such products or in 
connection with the sale of shares of registered investment companies 
under the cash accounts * * * (and) cannot engage in the general 
securities business or sell any securities other than shares * * * (in) 
registered investment companies through a cash account or any other 
manner involving the extension of credit.

    (d) There is a way, of course, as has been indicated, that an 
independent broker/dealer might be able to sell other than shares of 
registered investment companies without creating any conflict with the 
regulation. Such sales could be executed on a ``funds on hand'' basis 
and in the case of payment by check, would have to include the 
collection of such check. It is understood from industry sources, 
however, that few if any independent broker/dealers engage solely in a 
``fund on hand'' type of operation.

[38 FR 11066, May 4, 1973]



Sec. 220.128  Treatment of simultaneous long and short positions in the same 

margin account when put or call options or combinations thereof on such stock 

are also outstanding in the account.

    (a) The Board was recently asked whether under Regulation T, 
``Credit by Brokers and Dealers'' (12 CFR part

[[Page 32]]

220), if there are simultaneous long and short positions in the same 
security in the same margin account (often referred to as a short sale 
``against the box''), such positions may be used to supply the place of 
the deposit of margin ordinarily required in connection with the 
guarantee by a creditor of a put or call option or combination thereof 
on such stock.
    (b) The applicable provisions of regulation T are Sec. 220.3(d)(3) 
and (5) and Sec. 220.3(g)(4) and (5) which provide as follows:

    (d) * * * the adjusted debit balance of a general account * * * 
shall be calculated by taking the sum of the following items:

                                * * * * *

    (3) The current market value of any securities (other than unissued 
securities) sold short in the general account plus, for each security 
(other than an exempted security), such amount as the board shall 
prescribe from time to time in Sec. 220.8(d) (the supplement to 
regulation T) as the margin required for such short sales, except that 
such amount so prescribed in such Sec. 220.8(d) need not be included 
when there are held in the general account * * * the same securities or 
securities exchangeable or convertible within 90 calendar days, without 
restriction other than the payment of money, into such securities sold 
short;

                                * * * * *

    (5) The amount of any margin customarily required by the creditor in 
connection with his endorsement or guarantee of any put, call, or other 
option;

                                * * * * *

    (g) * * * (4) Any transaction which serves to meet the requirements 
of paragraph (e) of this section or otherwise serves to permit any 
offsetting transaction in an account shall, to that extent, be 
unavailable to permit any other transaction in such account.
    (5) For the purposes of this part (regulation T), if a security has 
maximum loan value under paragraph (c)(1) of this section in a general 
account, or under Sec. 220.4(j) in a special convertible debt security 
account, a sale of the same security (even though not the same 
certificate) in such account shall be deemed to be a long sale and shall 
not be deemed to be or treated as a short sale.

    (c) Rule 431 of the New York Stock Exchange requires that a creditor 
obtain a minimum deposit of 25 percent of the current market value of 
the optioned stock in connection with his issuance or guarantee of a 
put, and at least 30 percent in the case of a call (and that such 
position be ``marked to the market''), but permits a short position in 
the stock to serve in lieu of the required deposit in the case of a put 
and a long position to serve in the case of a call. Thus, where the 
appropriate position is held in an account, that position may serve as 
the margin required by Sec. 220.3(d)(5).
    (d) In a short sale ``against the box,'' however, the customer is 
both long and short the same security. He may have established either 
position, properly margined, prior to taking the other, or he may have 
deposited fully paid securities in his margin account on the same day he 
makes a short sale of such securities. In either case, he will have 
directed his broker to borrow securities elsewhere in order to make 
delivery on the short sale rather than using his long position for this 
purpose (see also 17 CFR 240.3b-3).
    (e) Generally speaking, a customer makes a short sale ``against the 
box'' for tax reasons. Regulation T, however, provides in Sec. 220.3(g) 
that the two positions must be ``netted out'' for the purposes of the 
calculations required by the regulation. Thus, the board concludes that 
neither position would be available to serve as the deposit of margin 
required in connection with the endorsement by the creditor of an 
option.
    (f) A similar conclusion obtains under Sec. 220.3(d)(3). That 
section provides, in essence, that the margin otherwise required in 
connection with a short sale need not be included in the account if the 
customer has in the account a long position in the same security. In 
Sec. 220.3(g) (4), however, it is provided that ``[A]ny transaction 
which * * * serves to permit any offsetting transaction in an account 
shall, to that extent, be unavailable to permit any other transaction in 
such account.'' Thus, if a customer has, for example, a long position in 
a security and that long position has been used to supply the margin 
required in connection with

[[Page 33]]

a short sale of the same security, then the long position is unavailable 
to serve as the margin required in connection with the creditor's 
endorsement of a call option on such security.
    (g) A situation was also described in which a customer has purported 
to establish simultaneous offsetting long and short positions by 
executing a ``cross'' or wash sale of the security on the same day. In 
this situation, no change in the beneficial ownership of stock has taken 
place. Since there is no actual ``contra'' party to either transaction, 
and no stock has been borrowed or delivered to accomplish the short 
sale, such fictitious positions would have no value for purposes of the 
Board's margin regulations. Indeed, the adoption of such a scheme in 
connection with an overall strategy involving the issuance, endorsement, 
or guarantee of put or call options or combinations thereof appears to 
be manipulative and may have been employed for the purpose of 
circumventing the requirements of the regulations.

[38 FR 12098, May 9, 1973]



Sec. Sec. 220.129-220.130  [Reserved]



Sec. 220.131  Application of the arranging section to broker-dealer activities 

under SEC Rule 144A.

    (a) The Board has been asked whether the purchase by a broker-dealer 
of debt securities for resale in reliance on Rule 144A of the Securities 
and Exchange Commission (17 CFR 230.144A) \1\ may be considered an 
arranging of credit permitted as an ``investment banking service'' under 
Sec. 220.13(a) of Regulation T.
---------------------------------------------------------------------------

    \1\ Rule 144A, 17 CFR 230.144A, was originally published in the 
Federal Register at 55 FR 17933, April 30, 1990.
---------------------------------------------------------------------------

    (b) SEC Rule 144A provides a safe harbor exemption from the 
registration requirements of the Securities Act of 1933 for resales of 
restricted securities to qualified institutional buyers, as defined in 
the rule. In general, a qualified institutional buyer is an 
institutional investor that in the aggregate owns and invests on a 
discretionary basis at least $100 million in securities of issuers that 
are not affiliated with the buyer. Registered broker-dealers need only 
own and invest on a discretionary basis at least $10 million of 
securities in order to purchase as principal under the rule. Section 
4(2) of the Securities Act of 1933 provides an exemption from the 
registration requirements for ``transactions by an issuer not involving 
any public offering.'' Securities acquired in a transaction under 
section 4(2) cannot be resold without registration under the Act or an 
exemption therefrom. Rule 144A provides a safe harbor exemption for 
resales of such securities. Accordingly, broker-dealers that previously 
acted only as agents in intermediating between issuers and purchasers of 
privately-placed securities, due to the lack of such a safe harbor, now 
may purchase privately-placed securities from issuers as principal and 
resell such securities to ``qualified institutional buyers'' under Rule 
144A.
    (c) The Board has consistently treated the purchase of a privately-
placed debt security as an extension of credit subject to the margin 
regulations. If the issuer uses the proceeds to buy securities, the 
purchase of the privately-placed debt security by a creditor represents 
an extension of ``purpose credit'' to the issuer. Section 7(c) of the 
Securities Exchange Act of 1934 prohibits the extension of purpose 
credit by a creditor if the credit is unsecured, secured by collateral 
other than securities, or secured by any security (other than an 
exempted security) in contravention of Federal Reserve regulations. If a 
debt security sold pursuant to Rule 144A represents purpose credit and 
is not properly collateralized by securities, the statute and Regulation 
T can be viewed as preventing the broker-dealer from taking the security 
into inventory in spite of the fact that the broker-dealer intends to 
immediately resell the debt security.
    (d) Under Sec. 220.13 of Regulation T, a creditor may arrange 
credit it cannot itself extend if the arrangement is an ``investment 
banking service'' and the credit does not violate Regulations G and U. 
Investment banking services are defined to include, but not be limited 
to, ``underwritings, private placements, and advice and other services 
in connection with exchange offers, mergers, or acquisitions, except for

[[Page 34]]

underwritings that involve the public distribution of an equity security 
with installment or other deferred-payment provisions.'' To comply with 
Regulations G and U where the proceeds of debt securities sold under 
Rule 144A may be used to purchase or carry margin stock and the debt 
securities are secured in whole or in part, directly or indirectly by 
margin stock (see 12 CFR 207.2(f), 207.112, and 221.2(g)), the margin 
requirements of the regulations must be met.
    (e) The SEC's objective in adopting Rule 144A is to achieve ``a more 
liquid and efficient institutional resale market for unregistered 
securities.'' To further this objective, the Board believes it is 
appropriate for Regulation T purposes to characterize the participation 
of broker-dealers in this unique and limited market as an ``investment 
banking service.'' The Board is therefore of the view that the purchase 
by a creditor of debt securities for resale pursuant to SEC Rule 144A 
may be considered an investment banking service under the arranging 
section of Regulation T. The market-making activities of broker-dealers 
who hold themselves out to other institutions as willing to buy and sell 
Rule 144A securities on a regular and continuous basis may also be 
considered an arranging of credit permissible under Sec. 220.13(a) of 
Regulation T.

[Reg. T, 55 FR 29566, July 20, 1990]



Sec. 220.132  Credit to brokers and dealers.

    For text of this interpretation, see Sec. 221.125 of this 
subchapter.

[Reg. T, 61 FR 60167, Nov. 26, 1996, as amended at 72 FR 70486, Dec. 12, 
2007]



PART 221_CREDIT BY BANKS AND PERSONS OTHER THAN BROKERS OR DEALERS FOR THE 

PURPOSE OF PURCHASING OR CARRYING MARGIN STOCK (REGULATION U)--Table of 

Contents




Sec.
221.1 Authority, purpose, and scope.
221.2 Definitions.
221.3 General requirements.
221.4 Employee stock option, purchase, and ownership plans.
221.5 Special purpose loans to brokers and dealers.
221.6 Exempted transactions.
221.7 Supplement: Maximum loan value of margin stock and other 
          collateral.

                             Interpretations

221.101 Determination and effect of purpose of loan.
221.102 Application to committed credit where funds are disbursed 
          thereafter.
221.103 Loans to brokers or dealers.
221.104 Federal credit unions.
221.105 Arranging for extensions of credit to be made by a bank.
221.106 Reliance in ``good faith'' on statement of purpose of loan.
221.107 Arranging loan to purchase open-end investment company shares.
221.108 Effect of registration of stock subsequent to making of loan.
221.109 Loan to open-end investment company.
221.110 Questions arising under this part.
221.111 Contribution to joint venture as extension of credit when the 
          contribution is disproportionate to the contributor's share in 
          the venture's profits or losses.
221.112 Loans by bank in capacity as trustee.
221.113 Loan which is secured indirectly by stock.
221.114 Bank loans to purchase stock of American Telephone and Telegraph 
          Company under Employees' Stock Plan.
221.115 Accepting a purpose statement through the mail without benefit 
          of face-to-face interview.
221.116 Bank loans to replenish working capital used to purchase mutual 
          fund shares.
221.117 When bank in ``good faith'' has not relied on stock as 
          collateral.
221.118 Bank arranging for extension of credit by corporation.
221.119 Applicability of plan-lender provisions to financing of stock 
          options and stock purchase rights qualified or restricted 
          under Internal Revenue Code.
221.120 Allocation of stock collateral to purpose and nonpurpose credits 
          to same customer.
221.121 Extension of credit in certain stock option and stock purchase 
          plans.
221.122 Applicability of margin requirements to credit in connection 
          with Insurance Premium Funding Programs.
221.123 Combined credit for exercising employee stock options and paying 
          income taxes incurred as a result of such exercise.
221.124 Purchase of debt securities to finance corporate takeovers.
221.125 Credit to brokers and dealers.

    Authority: 15 U.S.C. 78c, 78g, 78q, and 78w.

[[Page 35]]


    Source: Reg. U, 63 FR 2827, Jan. 16, 1998, unless otherwise noted.



Sec. 221.1  Authority, purpose, and scope.

    (a) Authority. Regulation U (this part) is issued by the Board of 
Governors of the Federal Reserve System (the Board) pursuant to the 
Securities Exchange Act of 1934 (the Act) (15 U.S.C. 78a et seq.).
    (b) Purpose and scope. (1) This part imposes credit restrictions 
upon persons other than brokers or dealers (hereinafter lenders) that 
extend credit for the purpose of buying or carrying margin stock if the 
credit is secured directly or indirectly by margin stock. Lenders 
include ``banks'' (as defined in Sec. 221.2) and other persons who are 
required to register with the Board under Sec. 221.3(b). Lenders may 
not extend more than the maximum loan value of the collateral securing 
such credit, as set by the Board in Sec. 221.7 (the Supplement).
    (2) This part does not apply to clearing agencies regulated by the 
Securities and Exchange Commission or the Commodity Futures Trading 
Commission that accept deposits of margin stock in connection with:
    (i) The issuance of, or guarantee of, or the clearance of 
transactions in, any security (including options on any security, 
certificate of deposit, securities index or foreign currency); or
    (ii) The guarantee of contracts for the purchase or sale of a 
commodity for future delivery or options on such contracts.
    (3) This part does not apply to credit extended to an exempted 
borrower.
    (c) Availability of forms. The forms referenced in this part are 
available from the Federal Reserve Banks.



Sec. 221.2  Definitions.

    The terms used in this part have the meanings given them in section 
3(a) of the Act or as defined in this section as follows:
    Affiliate means:
    (1) For banks:
    (i) Any bank holding company of which a bank is a subsidiary within 
the meaning of the Bank Holding Company Act of 1956, as amended (12 
U.S.C. 1841(d));
    (ii) Any other subsidiary of such bank holding company; and
    (iii) Any other corporation, business trust, association, or other 
similar organization that is an affiliate as defined in section 2(b) of 
the Banking Act of 1933 (12 U.S.C. 221a(c));
    (2) For nonbank lenders, affiliate means any person who, directly or 
indirectly, through one or more intermediaries, controls, or is 
controlled by, or is under common control with the lender.
    Bank--(1) Bank. Has the meaning given to it in section 3(a)(6) of 
the Act (15 U.S.C. 78c(a)(6)) and includes:
    (i) Any subsidiary of a bank;
    (ii) Any corporation organized under section 25(a) of the Federal 
Reserve Act (12 U.S.C. 611); and
    (iii) Any agency or branch of a foreign bank located within the 
United States.
    (2) Bank does not include:
    (i) Any savings and loan association;
    (ii) Any credit union;
    (iii) Any lending institution that is an instrumentality or agency 
of the United States; or
    (iv) Any member of a national securities exchange.
    Carrying credit is credit that enables a customer to maintain, 
reduce, or retire indebtedness originally incurred to purchase a 
security that is currently a margin stock.
    Current market value of:
    (1) A security means:
    (i) If quotations are available, the closing sale price of the 
security on the preceding business day, as appearing on any regularly 
published reporting or quotation service; or
    (ii) If there is no closing sale price, the lender may use any 
reasonable estimate of the market value of the security as of the close 
of business on the preceding business day; or
    (iii) If the credit is used to finance the purchase of the security, 
the total cost of purchase, which may include any commissions charged.
    (2) Any other collateral means a value determined by any reasonable 
method.
    Customer excludes an exempted borrower and includes any person or 
persons acting jointly, to or for whom a lender extends or maintains 
credit.

[[Page 36]]

    Examining authority means:
    (1) The national securities exchange or national securities 
association of which a broker or dealer is a member; or
    (2) If a member of more than one self-regulatory organization, the 
organization designated by the Securities and Exchange Commission as the 
examining authority for the broker or dealer.
    Exempted borrower means a member of a national securities exchange 
or a registered broker or dealer, a substantial portion of whose 
business consists of transactions with persons other than brokers or 
dealers, and includes a borrower who:
    (1) Maintains at least 1000 active accounts on an annual basis for 
persons other than brokers, dealers, and persons associated with a 
broker or dealer;
    (2) Earns at least $10 million in gross revenues on an annual basis 
from transactions with persons other than brokers, dealers, and persons 
associated with a broker or dealer; or
    (3) Earns at least 10 percent of its gross revenues on an annual 
basis from transactions with persons other than brokers, dealers, and 
persons associated with a broker-dealer.
    Good faith with respect to:
    (1) The loan value of collateral means that amount (not exceeding 
100 per cent of the current market value of the collateral) which a 
lender, exercising sound credit judgment, would lend, without regard to 
the customer's other assets held as collateral in connection with 
unrelated transactions.
    (2) Making a determination or accepting a statement concerning a 
borrower means that the lender or its duly authorized representative is 
alert to the circumstances surrounding the credit, and if in possession 
of information that would cause a prudent person not to make the 
determination or accept the notice or certification without inquiry, 
investigates and is satisfied that it is correct;
    In the ordinary course of business means occurring or reasonably 
expected to occur in carrying out or furthering any business purpose, or 
in the case of an individual, in the course of any activity for profit 
or the management or preservation of property.
    Indirectly secured. (1) Includes any arrangement with the customer 
under which:
    (i) The customer's right or ability to sell, pledge, or otherwise 
dispose of margin stock owned by the customer is in any way restricted 
while the credit remains outstanding; or
    (ii) The exercise of such right is or may be cause for accelerating 
the maturity of the credit.
    (2) Does not include such an arrangement if:
    (i) After applying the proceeds of the credit, not more than 25 
percent of the value (as determined by any reasonable method) of the 
assets subject to the arrangement is represented by margin stock;
    (ii) It is a lending arrangement that permits accelerating the 
maturity of the credit as a result of a default or renegotiation of 
another credit to the customer by another lender that is not an 
affiliate of the lender;
    (iii) The lender holds the margin stock only in the capacity of 
custodian, depositary, or trustee, or under similar circumstances, and, 
in good faith, has not relied upon the margin stock as collateral; or
    (iv) The lender, in good faith, has not relied upon the margin stock 
as collateral in extending or maintaining the particular credit.
    Lender means:
    (1) Any bank; or
    (2) Any person subject to the registration requirements of this 
part.
    Margin stock means:
    (1) Any equity security registered or having unlisted trading 
privileges on a national securities exchange;
    (2) Any OTC security designated as qualified for trading in the 
National Market System under a designation plan approved by the 
Securities and Exchange Commission (NMS security);
    (3) Any debt security convertible into a margin stock or carrying a 
warrant or right to subscribe to or purchase a margin stock;
    (4) Any warrant or right to subscribe to or purchase a margin stock; 
or
    (5) Any security issued by an investment company registered under 
section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other 
than:

[[Page 37]]

    (i) A company licensed under the Small Business Investment Company 
Act of 1958, as amended (15 U.S.C. 661); or
    (ii) A company which has at least 95 percent of its assets 
continuously invested in exempted securities (as defined in 15 U.S.C. 
78c(a)(12)); or
    (iii) A company which issues face-amount certificates as defined in 
15 U.S.C. 80a-2(a)(15), but only with respect of such securities; or
    (iv) A company which is considered a money market fund under SEC 
Rule 2a-7 (17 CFR 270.2a-7).
    Maximum loan value is the percentage of current market value 
assigned by the Board under Sec. 221.7 (the Supplement) to specified 
types of collateral. The maximum loan value of margin stock is stated as 
a percentage of its current market value. Puts, calls and combinations 
thereof that do not qualify as margin stock have no loan value. All 
other collateral has good faith loan value.
    Nonbank lender means any person subject to the registration 
requirements of this part.
    Purpose credit is any credit for the purpose, whether immediate, 
incidental, or ultimate, of buying or carrying margin stock.



Sec. 221.3  General requirements.

    (a) Extending, maintaining, and arranging credit--(1) Extending 
credit. No lender, except a plan-lender, as defined in Sec. 221.4(a), 
shall extend any purpose credit, secured directly or indirectly by 
margin stock, in an amount that exceeds the maximum loan value of the 
collateral securing the credit.
    (2) Maintaining credit. A lender may continue to maintain any credit 
initially extended in compliance with this part, regardless of:
    (i) Reduction in the customer's equity resulting from change in 
market prices;
    (ii) Change in the maximum loan value prescribed by this part; or
    (iii) Change in the status of the security (from nonmargin to 
margin) securing an existing purpose credit.
    (3) Arranging credit. No lender may arrange for the extension or 
maintenance of any purpose credit, except upon the same terms and 
conditions under which the lender itself may extend or maintain purpose 
credit under this part.
    (b) Registration of nonbank lenders; termination of registration; 
annual report--(1) Registration. Every person other than a person 
subject to part 220 of this chapter or a bank who, in the ordinary 
course of business, extends or maintains credit secured, directly or 
indirectly, by any margin stock shall register on Federal Reserve Form 
FR G-1 (OMB control number 7100-0011) within 30 days after the end of 
any calendar quarter during which:
    (i) The amount of credit extended equals $200,000 or more; or
    (ii) The amount of credit outstanding at any time during that 
calendar quarter equals $500,000 or more.
    (2) Deregistration. A registered nonbank lender may apply to 
terminate its registration, by filing Federal Reserve Form FR G-2 (OMB 
control number 7100-0011), if the lender has not, during the preceding 
six calendar months, had more than $200,000 of such credit outstanding. 
Registration shall be deemed terminated when the application is approved 
by the Board.
    (3) Annual report. Every registered nonbank lender shall, within 30 
days following June 30 of every year, file Form FR G-4 (OMB control 
number 7100-0011).
    (4) Where to register and file applications and reports. 
Registration statements, applications to terminate registration, and 
annual reports shall be filed with the Federal Reserve Bank of the 
district in which the principal office of the lender is located.
    (c) Purpose statement--(1) General rule--(i) Banks. Except for 
credit extended under paragraph (c)(2) of this section, whenever a bank 
extends credit secured directly or indirectly by any margin stock, in an 
amount exceeding $100,000, the bank shall require its customer to 
execute Form FR U-1 (OMB No. 7100-0115), which shall be signed and 
accepted by a duly authorized officer of the bank acting in good faith.
    (ii) Nonbank lenders. Except for credit extended under paragraph 
(c)(2) of this section or Sec. 221.4, whenever a nonbank lender extends 
credit secured directly or indirectly by any margin stock, the

[[Page 38]]

nonbank lender shall require its customer to execute Form FR G-3 (OMB 
control number 7100-0018), which shall be signed and accepted by a duly 
authorized representative of the nonbank lender acting in good faith.
    (2) Purpose statement for revolving-credit or multiple-draw 
agreements or financing of securities purchases on a payment-against-
delivery basis--(i) Banks. If a bank extends credit, secured directly or 
indirectly by any margin stock, in an amount exceeding $100,000, under a 
revolving-credit or other multiple-draw agreement, Form FR U-1 must be 
executed at the time the credit arrangement is originally established 
and must be amended as described in paragraph (c)(2)(iv) of this section 
for each disbursement if all of the collateral for the agreement is not 
pledged at the time the agreement is originally established.
    (ii) Nonbank lenders. If a nonbank lender extends credit, secured 
directly or indirectly by any margin stock, under a revolving-credit or 
other multiple-draw agreement, Form FR G-3 must be executed at the time 
the credit arrangement is originally established and must be amended as 
described in paragraph (c)(2)(iv) of this section for each disbursement 
if all of the collateral for the agreement is not pledged at the time 
the agreement is originally established.
    (iii) Collateral. If a purpose statement executed at the time the 
credit arrangement is initially made indicates that the purpose is to 
purchase or carry margin stock, the credit will be deemed in compliance 
with this part if:
    (A) The maximum loan value of the collateral at least equals the 
aggregate amount of funds actually disbursed; or
    (B) At the end of any day on which credit is extended under the 
agreement, the lender calls for additional collateral sufficient to 
bring the credit into compliance with Sec. 221.7 (the Supplement).
    (iv) Amendment of purpose statement. For any purpose credit 
disbursed under the agreement, the lender shall obtain and attach to the 
executed Form FR U-1 or FR G-3 a current list of collateral which 
adequately supports all credit extended under the agreement.
    (d) Single credit rule. (1) All purpose credit extended to a 
customer shall be treated as a single credit, and all the collateral 
securing such credit shall be considered in determining whether or not 
the credit complies with this part, except that syndicated loans need 
not be aggregated with other unrelated purpose credit extended by the 
same lender.
    (2) A lender that has extended purpose credit secured by margin 
stock may not subsequently extend unsecured purpose credit to the same 
customer unless the combined credit does not exceed the maximum loan 
value of the collateral securing the prior credit.
    (3) If a lender extended unsecured purpose credit to a customer 
prior to the extension of purpose credit secured by margin stock, the 
credits shall be combined and treated as a single credit solely for the 
purposes of the withdrawal and substitution provision of paragraph (f) 
of this section.
    (4) If a lender extends purpose credit secured by any margin stock 
and non-purpose credit to the same customer, the lender shall treat the 
credits as two separate loans and may not rely upon the required 
collateral securing the purpose credit for the nonpurpose credit.
    (e) Exempted borrowers. (1) An exempted borrower that has been in 
existence for less than one year may meet the definition of exempted 
borrower based on a six-month period.
    (2) Once a member of a national securities exchange or registered 
broker or dealer ceases to qualify as an exempted borrower, it shall 
notify its lenders of this fact. Any new extensions of credit to such a 
borrower, including rollovers, renewals, and additional draws on 
existing lines of credit, are subject to the provisions of this part.
    (f) Withdrawals and substitutions. (1) A lender may permit any 
withdrawal or substitution of cash or collateral by the customer if the 
withdrawal or substitution would not:
    (i) Cause the credit to exceed the maximum loan value of the 
collateral; or
    (ii) Increase the amount by which the credit exceeds the maximum 
loan value of the collateral.

[[Page 39]]

    (2) For purposes of this section, the maximum loan value of the 
collateral on the day of the withdrawal or substitution shall be used.
    (g) Exchange offers. To enable a customer to participate in a 
reorganization, recapitalization or exchange offer that is made to 
holders of an issue of margin stock, a lender may permit substitution of 
the securities received. A nonmargin, nonexempted security acquired in 
exchange for a margin stock shall be treated as if it is margin stock 
for a period of 60 days following the exchange.
    (h) Renewals and extensions of maturity. A renewal or extension of 
maturity of a credit need not be considered a new extension of credit if 
the amount of the credit is increased only by the addition of interest, 
service charges, or taxes with respect to the credit.
    (i) Transfers of credit. (1) A transfer of a credit between 
customers or between lenders shall not be considered a new extension of 
credit if:
    (i) The original credit was extended by a lender in compliance with 
this part or by a lender subject to part 207 of this chapter in effect 
prior to April 1, 1998, (See part 207 appearing in the 12 CFR parts 200 
to 219 edition revised as of January 1, 1997), in a manner that would 
have complied with this part;
    (ii) The transfer is not made to evade this part;
    (iii) The amount of credit is not increased; and
    (iv) The collateral for the credit is not changed.
    (2) Any transfer between customers at the same lender shall be 
accompanied by a statement by the transferor customer describing the 
circumstances giving rise to the transfer and shall be accepted and 
signed by a representative of the lender acting in good faith. The 
lender shall keep such statement with its records of the transferee 
account.
    (3) When a transfer is made between lenders, the transferee shall 
obtain a copy of the Form FR U-1 or Form FR G-3 originally filed with 
the transferor and retain the copy with its records of the transferee 
account. If no form was originally filed with the transferor, the 
transferee may accept in good faith a statement from the transferor 
describing the purpose of the loan and the collateral securing it.
    (j) Action for lender's protection. Nothing in this part shall 
require a bank to waive or forego any lien or prevent a bank from taking 
any action it deems necessary in good faith for its protection.
    (k) Mistakes in good faith. A mistake in good faith in connection 
with the extension or maintenance of credit shall not be a violation of 
this part.



Sec. 221.4  Employee stock option, purchase, and ownership plans.

    (a) Plan-lender; eligible plan. (1) Plan-lender means any 
corporation, (including a wholly-owned subsidiary, or a lender that is a 
thrift organization whose membership is limited to employees and former 
employees of the corporation, its subsidiaries or affiliates) that 
extends or maintains credit to finance the acquisition of margin stock 
of the corporation, its subsidiaries or affiliates under an eligible 
plan.
    (2) Eligible plan. An eligible plan means any employee stock option, 
purchase, or ownership plan adopted by a corporation and approved by its 
stockholders that provides for the purchase of margin stock of the 
corporation, its subsidiaries, or affiliates.
    (b) Credit to exercise rights under or finance an eligible plan. (1) 
If a plan-lender extends or maintains credit under an eligible plan, any 
margin stock that directly or indirectly secured that credit shall have 
good faith loan value.
    (2) Credit extended under this section shall be treated separately 
from credit extended under any other section of this part except Sec. 
221.3(b)(1) and (b)(3).
    (c) Credit to ESOPs. A nonbank lender may extend and maintain 
purpose credit without regard to the provisions of this part, except for 
Sec. 221.3(b)(1) and (b)(3), if such credit is extended to an employee 
stock ownership plan (ESOP) qualified under section 401 of the Internal 
Revenue Code, as amended (26 U.S.C. 401).

[[Page 40]]



Sec. 221.5  Special purpose loans to brokers and dealers.

    (a) Special purpose loans. A lender may extend and maintain purpose 
credit to brokers and dealers without regard to the limitations set 
forth in Sec. Sec. 221.3 and 221.7, if the credit is for any of the 
specific purposes and meets the conditions set forth in paragraph (c) of 
this section.
    (b) Written notice. Prior to extending credit for more than a day 
under this section, the lender shall obtain and accept in good faith a 
written notice or certification from the borrower as to the purposes of 
the loan. The written notice or certification shall be evidence of 
continued eligibility for the special credit provisions until the 
borrower notifies the lender that it is no longer eligible or the lender 
has information that would cause a reasonable person to question whether 
the credit is being used for the purpose specified.
    (c) Types of special purpose credit. The types of credit that may be 
extended and maintained on a good faith basis are as follows:
    (1) Hypothecation loans. Credit secured by hypothecated customer 
securities that, according to written notice received from the broker or 
dealer, may be hypothecated by the broker or dealer under Securities and 
Exchange Commission (SEC) rules.
    (2) Temporary advances in payment-against-delivery transactions. 
Credit to finance the purchase or sale of securities for prompt 
delivery, if the credit is to be repaid upon completion of the 
transaction.
    (3) Loans for securities in transit or transfer. Credit to finance 
securities in transit or surrendered for transfer, if the credit is to 
be repaid upon completion of the transaction.
    (4) Intra-day loans. Credit to enable a broker or dealer to pay for 
securities, if the credit is to be repaid on the same day it is 
extended.
    (5) Arbitrage loans. Credit to finance proprietary or customer bona 
fide arbitrage transactions. For the purpose of this section bona fide 
arbitrage means:
    (i) Purchase or sale of a security in one market, together with an 
offsetting sale or purchase of the same security in a different market 
at nearly the same time as practicable, for the purpose of taking 
advantage of a difference in prices in the two markets; or
    (ii) Purchase of a security that is, without restriction other than 
the payment of money, exchangeable or convertible within 90 calendar 
days of the purchase into a second security, together with an offsetting 
sale of the second security at or about the same time, for the purpose 
of taking advantage of a concurrent disparity in the price of the two 
securities.
    (6) Market maker and specialist loans. Credit to a member of a 
national securities exchange or registered broker or dealer to finance 
its activities as a market maker or specialist.
    (7) Underwriter loans. Credit to a member of a national securities 
exchange or registered broker or dealer to finance its activities as an 
underwriter.
    (8) Emergency loans. Credit that is essential to meet emergency 
needs of the broker-dealer business arising from exceptional 
circumstances.
    (9) Capital contribution loans. Capital contribution loans include:
    (i) Credit that Board has exempted by order upon a finding that the 
exemption is necessary or appropriate in the public interest or for the 
protection of investors, provided the Securities Investor Protection 
Corporation certifies to the Board that the exemption is appropriate; or
    (ii) Credit to a customer for the purpose of making a subordinated 
loan or capital contribution to a broker or dealer in conformity with 
the SEC's net capital rules and the rules of the broker's or dealer's 
examining authority, provided:
    (A) The customer reduces the credit by the amount of any reduction 
in the loan or contribution to the broker or dealer; and
    (B) The credit is not used to purchase securities issued by the 
broker or dealer in a public distribution.
    (10) Credit to clearing brokers or dealers. Credit to a member of a 
national securities exchange or registered broker or dealer whose 
nonproprietary business is limited to financing and carrying the 
accounts of registered market makers.

[[Page 41]]



Sec. 221.6  Exempted transactions.

    A bank may extend and maintain purpose credit without regard to the 
provisions of this part if such credit is extended:
    (a) To any bank;
    (b) To any foreign banking institution;
    (c) Outside the United States;
    (d) To an employee stock ownership plan (ESOP) qualified under 
section 401 of the Internal Revenue Code (26 U.S.C. 401);
    (e) To any plan lender as defined in Sec. 221.4(a) to finance an 
eligible plan as defined in Sec. 221.4(b), provided the bank has no 
recourse to any securities purchased pursuant to the plan;
    (f) To any customer, other than a broker or dealer, to temporarily 
finance the purchase or sale of securities for prompt delivery, if the 
credit is to be repaid in the ordinary course of business upon 
completion of the transaction and is not extended to enable the customer 
to pay for securities purchased in an account subject to part 220 of 
this chapter;
    (g) Against securities in transit, if the credit is not extended to 
enable the customer to pay for securities purchased in an account 
subject to part 220 of this chapter; or
    (h) To enable a customer to meet emergency expenses not reasonably 
foreseeable, and if the extension of credit is supported by a statement 
executed by the customer and accepted and signed by an officer of the 
bank acting in good faith. For this purpose, emergency expenses include 
expenses arising from circumstances such as the death or disability of 
the customer, or some other change in circumstances involving extreme 
hardship, not reasonably foreseeable at the time the credit was 
extended. The opportunity to realize monetary gain or to avoid loss is 
not a ``change in circumstances'' for this purpose.



Sec. 221.7  Supplement: Maximum loan value of margin stock and other 

collateral.

    (a) Maximum loan value of margin stock. The maximum loan value of 
any margin stock is fifty per cent of its current market value.
    (b) Maximum loan value of nonmargin stock and all other collateral. 
The maximum loan value of nonmargin stock and all other collateral 
except puts, calls, or combinations thereof is their good faith loan 
value.
    (c) Maximum loan value of options. Except for options that qualify 
as margin stock, puts, calls, and combinations thereof have no loan 
value.

                             Interpretations



Sec. 221.101  Determination and effect of purpose of loan.

    (a) Under this part the original purpose of a loan is controlling. 
In other words, if a loan originally is not for the purpose of 
purchasing or carrying margin stock, changes in the collateral for the 
loan do not change its exempted character.
    (b) However, a so-called increase in the loan is necessarily on an 
entirely different basis. So far as the purpose of the credit is 
concerned, it is a new loan, and the question of whether or not it is 
subject to this part must be determined accordingly.
    (c) Certain facts should also be mentioned regarding the 
determination of the purpose of a loan. Section 221.3(c) provides in 
that whenever a lender is required to have its customer execute a 
``Statement of Purpose for an Extension of Credit Secured by Margin 
Stock,'' the statement must be accepted by the lender ``acting in good 
faith.'' The requirement of ``good faith'' is of vital importance here. 
Its application will necessarily vary with the facts of the particular 
case, but it is clear that the bank must be alert to the circumstances 
surrounding the loan. For example, if the loan is to be made to a 
customer who is not a broker or dealer in securities, but such a broker 
or dealer is to deliver margin stock to secure the loan or is to receive 
the proceeds of the loan, the bank would be put on notice that the loan 
would probably be subject to this part. It could not accept in good 
faith a statement to the contrary without obtaining a reliable and 
satisfactory explanation of the situation.
    (d) Furthermore, the purpose of a loan means just that. It cannot be 
altered by some temporary application of

[[Page 42]]

the proceeds. For example, if a borrower is to purchase Government 
securities with the proceeds of a loan, but is soon thereafter to sell 
such securities and replace them with margin stock, the loan is clearly 
for the purpose of purchasing or carrying margin stock.



Sec. 221.102  Application to committed credit where funds are disbursed 

thereafter.

    The Board has concluded that the date a commitment to extend credit 
becomes binding should be regarded as the date when the credit is 
extended, since:
    (a) On that date the parties should be aware of law and facts 
surrounding the transaction; and
    (b) Generally, the date of contract is controlling for purposes of 
margin regulations and Federal securities law, regardless of the 
delivery of cash or securities.



Sec. 221.103  Loans to brokers or dealers.

    Questions have arisen as to the adequacy of statements received by 
lending banks under Sec. 221.3(c), ``Purpose Statement,'' in the case 
of loans to brokers or dealers secured by margin stock where the 
proceeds of the loans are to be used to finance customer transactions 
involving the purchasing or carrying of margin stock. While some such 
loans may qualify for exemption under Sec. Sec. 221.1(b)(2), 221.4, 
221.5 or 221.6, unless they do qualify for such an exemption they are 
subject to this part. For example, if a loan so secured is made to a 
broker to furnish cash working capital for the conduct of his brokerage 
business (i.e., for purchasing and carrying securities for the account 
of customers), the maximum loan value prescribed in Sec. 221.7 (the 
Supplement) would be applicable unless the loan should be of a kind 
exempted under this part. This result would not be affected by the fact 
that the margin stock given as security for the loan was or included 
margin stock owned by the brokerage firm. In view of the foregoing, the 
statement referred to in Sec. 221.3(c) which the lending bank must 
accept in good faith in determining the purpose of the loan would be 
inadequate if the form of statement accepted or used by the bank failed 
to call for answers which would indicate whether or not the loan was of 
the kind discussed elsewhere in this section.



Sec. 221.104  Federal credit unions.

    For text of the interpretation on Federal credit unions, see 12 CFR 
220.110.



Sec. 221.105  Arranging for extensions of credit to be made by a bank.

    For text of the interpretation on Arranging for extensions of credit 
to be made by a bank, see 12 CFR 220.111.



Sec. 221.106  Reliance in ``good faith'' on statement of purpose of loan.

    (a) Certain situations have arisen from time to time under this part 
wherein it appeared doubtful that, in the circumstances, the lending 
banks may have been entitled to rely upon the statements accepted by 
them in determining whether the purposes of certain loans were such as 
to cause the loans to be not subject to the part.
    (b) The use by a lending bank of a statement in determining the 
purpose of a particular loan is, of course, provided for by Sec. 
221.3(c). However, under that paragraph a lending bank may accept such 
statement only if it is ``acting in good faith.'' As the Board stated in 
the interpretation contained in Sec. 221.101, the ``requirement of 
`good faith' is of vital importance''; and, to fulfill such requirement, 
``it is clear that the bank must be alert to the circumstances 
surrounding the loan.''
    (c) Obviously, such a statement would not be accepted by the bank in 
``good faith'' if at the time the loan was made the bank had knowledge, 
from any source, of facts or circumstances which were contrary to the 
natural purport of the statement, or which were sufficient reasonably to 
put the bank on notice of the questionable reliability or completeness 
of the statement.
    (d) Furthermore, the same requirement of ``good faith'' is to be 
applied whether the statement accepted by the bank is signed by the 
borrower or by an officer of the bank. In either case, ``good faith'' 
requires the exercise of special diligence in any instance in which the 
borrower is not personally

[[Page 43]]

known to the bank or to the officer who processes the loan.
    (e) The interpretation set forth in Sec. 221.101 contains an 
example of the application of the ``good faith'' test. There it was 
stated that ``if the loan is to be made to a customer who is not a 
broker or dealer in securities, but such a broker or dealer is to 
deliver margin stock to secure the loan or is to receive the proceeds of 
the loan, the bank would be put on notice that the loan would probably 
be subject to this part. It could not accept in good faith a statement 
to the contrary without obtaining a reliable and satisfactory 
explanation of the situation''.
    (f) Moreover, and as also stated by the interpretation contained in 
Sec. 221.101, the purpose of a loan, of course, ``cannot be altered by 
some temporary application of the proceeds. For example, if a borrower 
is to purchase Government securities with the proceeds of a loan, but is 
soon thereafter to sell such securities and replace them with margin 
stock, the loan is clearly for the purpose of purchasing or carrying 
margin stock''. The purpose of a loan therefore, should not be 
determined upon a narrow analysis of the immediate use to which the 
proceeds of the loan are put. Accordingly, a bank acting in ``good 
faith'' should carefully scrutinize cases in which there is any 
indication that the borrower is concealing the true purpose of the loan, 
and there would be reason for special vigilance if margin stock is 
substituted for bonds or nonmargin stock soon after the loan is made, or 
on more than one occasion.
    (g) Similarly, the fact that a loan made on the borrower's signature 
only, for example, becomes secured by margin stock shortly after the 
disbursement of the loan usually would afford reasonable grounds for 
questioning the bank's apparent reliance upon merely a statement that 
the purpose of the loan was not to purchase or carry margin stock.
    (h) The examples in this section are, of course, by no means 
exhaustive. They simply illustrate the fundamental fact that no 
statement accepted by a lender is of any value for the purposes of this 
part unless the lender accepting the statement is ``acting in good 
faith'', and that ``good faith'' requires, among other things, 
reasonable diligence to learn the truth.



Sec. 221.107  Arranging loan to purchase open-end investment company shares.

    For text of the interpretation on Arranging loan to purchase open-
end investment company shares, see 12 CFR 220.112.



Sec. 221.108  Effect of registration of stock subsequent to making of loan.

    (a) The Board recently was asked whether a loan by a bank to enable 
the borrower to purchase a newly issued nonmargin stock during the 
initial over-the-counter trading period prior to the stock becoming 
registered (listed) on a national securities exchange would be subject 
to this part. The Board replied that, until such stock qualifies as 
margin stock, this would not be applicable to such a loan.
    (b) The Board has now been asked what the position of the lending 
bank would be under this part if, after the date on which the stock 
should become registered, such bank continued to hold a loan of the kind 
just described. It is assumed that the loan was in an amount greater 
than the maximum loan value for the collateral specified in this part.
    (c) If the stock should become registered, the loan would then be 
for the purpose of purchasing or carrying a margin stock, and, if 
secured directly or indirectly by any margin stock, would be subject to 
this part as from the date the stock was registered. Under this part, 
this does not mean that the bank would have to obtain reduction of the 
loan in order to reduce it to an amount no more than the specified 
maximum loan value. It does mean, however, that so long as the loan 
balance exceeded the specified maximum loan value, the bank could not 
permit any withdrawals or substitutions of collateral that would 
increase such excess; nor could the bank increase the amount of the loan 
balance unless there was provided additional collateral having a maximum 
loan value at least equal to the amount of the increase. In other words, 
as from the date the stock should become a

[[Page 44]]

margin stock, the loan would be subject to this part in exactly the same 
way, for example, as a loan subject to this part that became under-
margined because of a decline in the current market value of the loan 
collateral or because of a decrease by the Board in the maximum loan 
value of the loan collateral.



Sec. 221.109  Loan to open-end investment company.

    In response to a question regarding a possible loan by a bank to an 
open-end investment company that customarily purchases stocks registered 
on a national securities exchange, the Board stated that in view of the 
general nature and operations of such a company, any loan by a bank to 
such a company should be presumed to be subject to this part as a loan 
for the purpose of purchasing or carrying margin stock. This would not 
be altered by the fact that the open-end company had used, or proposed 
to use, its own funds or proceeds of the loan to redeem some of its own 
shares, since mere application of the proceeds of a loan to some other 
use cannot prevent the ultimate purpose of a loan from being to purchase 
or carry registered stocks.



Sec. 221.110  Questions arising under this part.

    (a) This part governs ``any purpose credit'' extended by a lender 
``secured directly or indirectly by margin stock'' and defines ``purpose 
credit'' as ``any credit for the purpose, whether immediate, incidental, 
or ultimate, of buying or carrying margin stock, `` with certain 
exceptions, and provides that the maximum loan value of such margin 
stock shall be a fixed percentage ``of its current market value.''
    (b) The Board of Governors has had occasion to consider the 
application of the language in paragraph (a) of this section to the two 
following questions:
    (1) Loan secured by stock. First, is a loan to purchase or carry 
margin stock subject to this part where made in unsecured form, if 
margin stock is subsequently deposited as security with the lender, and 
surrounding circumstances indicate that the parties originally 
contemplated that the loan should be so secured? The Board answered that 
in a case of this kind, the loan would be subject to this part, for the 
following reasons:
    (i) The Board has long held, in the closely related purpose area, 
that the original purpose of a loan should not be determined upon a 
narrow analysis of the technical circumstances under which a loan is 
made. Instead, the fundamental purpose of the loan is considered to be 
controlling. Indeed, ``the fact that a loan made on the borrower's 
signature only, for example, becomes secured by registered stock shortly 
after the disbursement of the loan'' affords reasonable grounds for 
questioning whether the bank was entitled to rely upon the borrower's 
statement as to the purpose of the loan. 1953 Fed. Res. Bull. 951 (See, 
Sec. 221.106).
    (ii) Where security is involved, standards of interpretation should 
be equally searching. If, for example, the original agreement between 
borrower and lender contemplated that the loan should be secured by 
margin stock, and such stock is in fact delivered to the bank when 
available, the transaction must be regarded as fundamentally a secured 
loan. This view is strengthened by the fact that this part applies to a 
loan ``secured directly or indirectly by margin stock.''
    (2) Loan to acquire controlling shares. (i) The second question is 
whether this part governs a margin stock-secured loan made for the 
business purpose of purchasing a controlling interest in a corporation, 
or whether such a loan would be exempt on the ground that this part is 
directed solely toward purchases of stock for speculative or investment 
purposes. The Board answered that a margin stock-secured loan for the 
purpose of purchasing or carrying margin stock is subject to this part, 
regardless of the reason for which the purchase is made.
    (ii) The answer is required, in the Board's view, since the language 
of this part is explicitly inclusive, covering ``any purpose credit, 
secured directly or indirectly by margin stock.'' Moreover, the 
withdrawal in 1945 of the original section 2(e) of this part, which 
exempted ``any loan for the purpose of purchasing a stock from or 
through a person who is not a member of a national securities exchange . 
. .'' plainly

[[Page 45]]

implies that transactions of the sort described are now subject to the 
general prohibition of Sec. 221.3(a).



Sec. 221.111  Contribution to joint venture as extension of credit when the 

contribution is disproportionate to the contributor's share in the venture's 

profits or losses.

    (a) The Board considered the question whether a joint venture, 
structured so that the amount of capital contribution to the venture 
would be disproportionate to the right of participation in profits or 
losses, constitutes an ``extension of credit'' for the purpose of this 
part.
    (b) An individual and a corporation plan to establish a joint 
venture to engage in the business of buying and selling securities, 
including margin stock. The individual would contribute 20 percent of 
the capital and receive 80 percent of the profits or losses; the 
corporate share would be the reverse. In computing profits or losses, 
each participant would first receive interest at the rate of 8 percent 
on his respective capital contribution. Although purchases and sales 
would be mutually agreed upon, the corporation could liquidate the joint 
portfolio if the individual's share of the losses equaled or exceeded 
his 20 percent contribution to the venture. The corporation would hold 
the securities, and upon termination of the venture, the assets would 
first be applied to repayment of capital contributions.
    (c) In general, the relationship of joint venture is created when 
two or more persons combine their money, property, or time in the 
conduct of some particular line of trade or some particular business and 
agree to share jointly, or in proportion to capital contributed, the 
profits and losses of the undertaking.
    (d) The incidents of the joint venture described in paragraph (b) of 
this section, however, closely parallel those of an extension of margin 
credit, with the corporation as lender and the individual as borrower. 
The corporation supplies 80 percent of the purchase price of securities 
in exchange for a net return of 8 percent of the amount advanced plus 20 
percent of any gain. Like a lender of securities credit, the corporation 
is insulated against loss by retaining the right to liquidate the 
collateral before the securities decline in price below the amount of 
its contribution. Conversely, the individual--like a customer who 
borrows to purchase securities--puts up only 20 percent of their cost, 
is entitled to the principal portion of any appreciation in their value, 
bears the principal risk of loss should that value decline, and does not 
stand to gain or lose except through a change in value of the securities 
purchased.
    (e) The Board is of the opinion that where the right of an 
individual to share in profits and losses of such a joint venture is 
disproportionate to his contribution to the venture:
    (1) The joint venture involves an extension of credit by the 
corporation to the individual;
    (2) The extension of credit is to purchase or carry margin stock, 
and is collateralized by such margin stock; and
    (3) If the corporation is not a broker or dealer subject to 
Regulation T (12 CFR part 220), the credit is of the kind described by 
Sec. 221.3(a).



Sec. 221.112  Loans by bank in capacity as trustee.

    (a) The Board's advice has been requested whether a bank's 
activities in connection with the administration of an employees' 
savings plan are subject to this part.
    (b) Under the plan, any regular, full-time employee may participate 
by authorizing the sponsoring company to deduct a percentage of his 
salary and wages and transmit the same to the bank as trustee. Voluntary 
contributions by the company are allocated among the participants. A 
participant may direct that funds held for him be invested by the 
trustee in insurance, annuity contracts, Series E Bonds, or in one or 
more of three specified securities which are listed on a stock exchange. 
Loans to purchase the stocks may be made to participants from funds of 
the trust, subject to approval of the administrative committee, which is 
composed of five participants, and of the trustee. The bank's right to 
approve is said to be restricted to the

[[Page 46]]

mechanics of making the loan, the purpose being to avoid cumbersome 
procedures.
    (c) Loans are secured by the credit balance of the borrowing 
participants in the savings fund, including stock, but excluding (in 
practice) insurance and annuity contracts and government securities. 
Additional stocks may be, but, in practice, have not been pledged as 
collateral for loans. Loans are not made, under the plan, from bank 
funds, and participants do not borrow from the bank upon assignment of 
the participants' accounts in the trust.
    (d) It is urged that loans under the plan are not subject to this 
part because a loan should not be considered as having been made by a 
bank where the bank acts solely in its capacity of trustee, without 
exercise of any discretion.
    (e) The Board reviewed this question upon at least one other 
occasion, and full consideration has again been given to the matter. 
After considering the arguments on both sides, the Board has reaffirmed 
its earlier view that, in conformity with an interpretation not 
published in the Code of Federal Regulations which was published at page 
874 of the 1946 Federal Reserve Bulletin (See 12 CFR 261.10(f) for 
information on how to obtain Board publications.), this part applies to 
the activities of a bank when it is acting in its capacity as trustee. 
Although the bank in that case had at best a limited discretion with 
respect to loans made by it in its capacity as trustee, the Board 
concluded that this fact did not affect the application of the 
regulation to such loans.



Sec. 221.113  Loan which is secured indirectly by stock.

    (a) A question has been presented to the Board as to whether a loan 
by a bank to a mutual investment fund is ``secured * * * indirectly by 
margin stock'' within the meaning of Sec. 221.(3)(a), so that the loan 
should be treated as subject to this part.
    (b) Briefly, the facts are as follows. Fund X, an open-end 
investment company, entered into a loan agreement with Bank Y, which was 
(and still is) custodian of the securities which comprise the portfolio 
of Fund X. The agreement includes the following terms, which are 
material to the question before the Board:
    (1) Fund X agrees to have an ``asset coverage'' (as defined in the 
agreements) of 400 percent of all its borrowings, including the proposed 
borrowing, at the time when it takes down any part of the loan.
    (2) Fund X agrees to maintain an ``asset coverage'' of at least 300 
percent of its borrowings at all times.
    (3) Fund X agrees not to amend its custody agreement with Bank Y, or 
to substitute another custodian without Bank Y's consent.
    (4) Fund X agrees not to mortgage, pledge, or otherwise encumber any 
of its assets elsewhere than with Bank Y.
    (c) In Sec. 221.109 the Board stated that because of ``the general 
nature and operations of such a company'', any ``loan by a bank to an 
open-end investment company that customarily purchases margin stock * * 
* should be presumed to be subject to this part as a loan for the 
purpose of purchasing or carrying margin stock'' (purpose credit). The 
Board's interpretation went on to say that: ``this would not be altered 
by the fact that the open-end company had used, or proposed to use, its 
own funds or proceeds of the loan to redeem some of its own shares * * 
*.''
    (d) Accordingly, the loan by Bank Y to Fund X was and is a ``purpose 
credit''. However, a loan by a bank is not subject to this part unless: 
it is a purpose credit; and it is ``secured directly or indirectly by 
margin stock''. In the present case, the loan is not ``secured 
directly'' by stock in the ordinary sense, since the portfolio of Fund X 
is not pledged to secure the credit from Bank Y. But the word 
``indirectly'' must signify some form of security arrangement other than 
the ``direct'' security which arises from the ordinary ``transaction 
that gives recourse against a particular chattel or land or against a 
third party on an obligation'' described in the American Law Institute's 
Restatement of the Law of Security, page 1. Otherwise the word 
``indirectly'' would be superfluous, and a regulation, like a statute, 
must be construed if possible to give meaning to every word.

[[Page 47]]

    (e) The Board has indicated its view that any arrangement under 
which margin stock is more readily available as security to the lending 
bank than to other creditors of the borrower may amount to indirect 
security within the meaning of this part. In an interpretation published 
at Sec. 221.110 it stated: ``The Board has long held, in the * * * 
purpose area, that the original purpose of a loan should not be 
determined upon a narrow analysis of the technical circumstances under 
which a loan is made * * * . Where security is involved, standards of 
interpretation should be equally searching.'' In its pamphlet issued for 
the benefit and guidance of banks and bank examiners, entitled 
``Questions and Answers Illustrating Application of Regulation U'', the 
Board said: ``In determining whether a loan is ``indirectly'' secured, 
it should be borne in mind that the reason the Board has thus far 
refrained * * * from regulating loans not secured by stock has been to 
simplify operations under the regulation. This objective of simplifying 
operations does not apply to loans in which arrangements are made to 
retain the substance of stock collateral while sacrificing only the 
form''.
    (f) A wide variety of arrangements as to collateral can be made 
between bank and borrower which will serve, to some extent, to protect 
the interest of the bank in seeing that the loan is repaid, without 
giving the bank a conventional direct ``security'' interest in the 
collateral. Among such arrangements which have come to the Board's 
attention are the following:
    (1) The borrower may deposit margin stock in the custody of the 
bank. An arrangement of this kind may not, it is true, place the bank in 
the position of a secured creditor in case of bankruptcy, or even of 
conflicting claims, but it is likely effectively to strengthen the 
bank's position. The definition of indirectly secured in Sec. 221.2, 
which provides that a loan is not indirectly secured if the lender 
``holds the margin stock only in the capacity of custodian, depositary 
or trustee, or under similar circumstances, and, in good faith has not 
relied upon the margin stock as collateral,'' does not exempt a deposit 
of this kind from the impact of the regulation unless it is clear that 
the bank ``has not relied'' upon the margin stock deposited with it.
    (2) A borrower may not deposit his margin stock with the bank, but 
agree not to pledge or encumber his assets elsewhere while the loan is 
outstanding. Such an agreement may be difficult to police, yet it serves 
to some extent to protect the interest of the bank if only because the 
future credit standing and business reputation of the borrower will 
depend upon his keeping his word. If the assets covered by such an 
agreement include margin stock, then, the credit is ``indirectly 
secured'' by the margin stock within the meaning of this part.
    (3) The borrower may deposit margin stock with a third party who 
agrees to hold the stock until the loan has been paid off. Here, even 
though the parties may purport to provide that the stock is not 
``security'' for the loan (for example, by agreeing that the stock may 
not be sold and the proceeds applied to the debt if the borrower fails 
to pay), the mere fact that the stock is out of the borrower's control 
for the duration of the loan serves to some extent to protect the bank.
    (g) The three instances described in paragraph (f) of this section 
are merely illustrative. Other methods, or combinations of methods, may 
serve a similar purpose. The conclusion that any given arrangement makes 
a credit ``indirectly secured'' by margin stock may, but need not, be 
reinforced by facts such as that the stock in question was purchased 
with proceeds of the loan, that the lender suggests or insists upon the 
arrangement, or that the loan would probably be subject to criticism by 
supervisory authorities were it not for the protective arrangement.
    (h) Accordingly, the Board concludes that the loan by Bank Y to Fund 
X is indirectly secured by the portfolio of the fund and must be treated 
by the bank as a regulated loan.



Sec. 221.114  Bank loans to purchase stock of American Telephone and Telegraph 

Company under Employees' Stock Plan.

    (a) The Board of Governors interpreted this part in connection with 
proposed loans by a bank to persons who are purchasing shares of stock 
of

[[Page 48]]

American Telephone and Telegraph Company pursuant to its Employees' 
Stock Plan.
    (b) According to the current offering under the Plan, an employee of 
the AT&T system may purchase shares through regular deductions from his 
pay over a period of 24 months. At the end of that period, a certificate 
for the appropriate number of shares will be issued to the participating 
employee by AT&T. Each employee is entitled to purchase, as a maximum, 
shares that will cost him approximately three-fourths of his annual base 
pay. Since the program extends over two years, it follows that the 
payroll deductions for this purpose may be in the neighborhood of 38 
percent of base pay and a larger percentage of ``take-home pay.'' 
Deductions of this magnitude are in excess of the saving rate of many 
employees.
    (c) Certain AT&T employees, who wish to take advantage of the 
current offering under the Plan, are the owners of shares of AT&T stock 
that they purchased under previous offerings. A bank proposed to receive 
such stock as collateral for a ``living expenses'' loan that will be 
advanced to the employee in monthly installments over the 24-month 
period, each installment being in the amount of the employee's monthly 
payroll deduction under the Plan. The aggregate amount of the advances 
over the 24-month period would be substantially greater than the maximum 
loan value of the collateral as prescribed in Sec. 221.7 (the 
Supplement).
    (d) In the opinion of the Board of Governors, a loan of the kind 
described would violate this part if it exceeded the maximum loan value 
of the collateral. The regulation applies to any margin stock-secured 
loan for the purpose of purchasing or carrying margin stock (Sec. 
221.3(a)). Although the proposed loan would purport to be for living 
expenses, it seems quite clear, in view of the relationship of the loan 
to the Employees' Stock Plan, that its actual purpose would be to enable 
the borrower to purchase AT&T stock, which is margin stock. At the end 
of the 24-month period the borrower would acquire a certain number of 
shares of that stock and would be indebted to the lending bank in an 
amount approximately equal to the amount he would pay for such shares. 
In these circumstances, the loan by the bank must be regarded as a loan 
``for the purpose of purchasing'' the stock, and therefore it is subject 
to the limitations prescribed by this part. This conclusion follows from 
the provisions of this part, and it may also be observed that a contrary 
conclusion could largely defeat the basic purpose of the margin 
regulations.
    (e) Accordingly, the Board concluded that a loan of the kind 
described may not be made in an amount exceeding the maximum loan value 
of the collateral, as prescribed by the current Sec. 221.7 (the 
Supplement).



Sec. 221.115  Accepting a purpose statement through the mail without benefit 

of face-to-face interview.

    (a) The Board has been asked whether the acceptance of a purpose 
statement submitted through the mail by a lender subject to the 
provisions of this part will meet the good faith requirement of Sec. 
221.3(c). Section 221.3(c) states that in connection with any credit 
secured by collateral which includes any margin stock, a nonbank lender 
must obtain a purpose statement executed by the borrower and accepted by 
the lender in good faith. Such acceptance requires that the lender be 
alert to the circumstances surrounding the credit and if further 
information suggests inquiry, he must investigate and be satisfied that 
the statement is truthful.
    (b) The lender is a subsidiary of a holding company which also has 
another subsidiary which serves as underwriter and investment advisor to 
various mutual funds. The sole business of the lender will be to make 
``non-purpose'' consumer loans to shareholders of the mutual funds, such 
loans to be collateralized by the fund shares. Most mutual funds shares 
are margin stock for purposes of this part. Solicitation and acceptance 
of these consumer loans will be done principally through the mail and 
the lender wishes to obtain the required purpose statement by mail 
rather than by a face-to-face interview. Personal interviews are not 
practicable for the lender because shareholders of the funds are 
scattered throughout the country. In order to

[[Page 49]]

provide the same safeguards inherent in face-to-face interviews, the 
lender has developed certain procedures designed to satisfy the good 
faith acceptance requirement of this part.
    (c) The purpose statement will be supplemented with several 
additional questions relevant to the prospective borrower's investment 
activities such as purchases of any security within the last 6 months, 
dollar amount, and obligations to purchase or pay for previous 
purchases; present plans to purchase securities in the near future, 
participations in securities purchase plans, list of unpaid debts, and 
present income level. Some questions have been modified to facilitate 
understanding but no questions have been deleted. If additional inquiry 
is indicated by the answers on the form, a loan officer of the lender 
will interview the borrower by telephone to make sure the loan is ``non-
purpose''. Whenever the loan exceeds the ``maximum loan value'' of the 
collateral for a regulated loan, a telephone interview will be done as a 
matter of course.
    (d) One of the stated purposes of Regulation X (12 CFR part 224) was 
to prevent the infusion of unregulated credit into the securities 
markets by borrowers falsely certifying the purpose of a loan. The Board 
is of the view that the existence of Regulation X (12 CFR part 224), 
which makes the borrower liable for willful violations of the margin 
regulations, will allow a lender subject to this part to meet the good 
faith acceptance requirement of Sec. 221.3(c) without a face-to-face 
interview if the lender adopts a program, such as the one described in 
paragraph (c) of this section, which requires additional detailed 
information from the borrower and proper procedures are instituted to 
verify the truth of the information received. Lenders intending to 
embark on a similar program should discuss proposed plans with their 
district Federal Reserve Bank. Lenders may have existing or future loans 
with the prospective customers which could complicate the efforts to 
determine the true purpose of the loan.



Sec. 221.116  Bank loans to replenish working capital used to purchase mutual 

fund shares.

    (a) In a situation considered by the Board of Governors, a business 
concern (X) proposed to purchase mutual fund shares, from time to time, 
with proceeds from its accounts receivable, then pledge the shares with 
a bank in order to secure working capital. The bank was prepared to lend 
amounts equal to 70 percent of the current value of the shares as they 
were purchased by X. If the loans were subject to this part, only 50 
percent of the current market value of the shares could be lent.
    (b) The immediate purpose of the loans would be to replenish X's 
working capital. However, as time went on, X would be acquiring mutual 
fund shares at a cost that would exceed the net earnings it would 
normally have accumulated, and would become indebted to the lending bank 
in an amount approximately 70 percent of the prices of said shares.
    (c) The Board held that the loans were for the purpose of purchasing 
the shares, and therefore subject to the limitations prescribed by this 
part. As pointed out in Sec. 221.114 with respect to a similar program 
for putting a high proportion of cash income into stock, the borrowing 
against the margin stock to meet needs for which the cash would 
otherwise have been required, a contrary conclusion could largely defeat 
the basic purpose of the margin regulations.
    (d) Also considered was an alternative proposal under which X would 
deposit proceeds from accounts receivable in a time account for 1 year, 
before using those funds to purchase mutual fund shares. The Board held 
that this procedure would not change the situation in any significant 
way. Once the arrangement was established, the proceeds would be flowing 
into the time account at the same time that similar amounts were 
released to purchase the shares, and over any extended period of time 
the result would be the same. Accordingly, the Board concluded that bank 
loans made under the alternative proposal would similarly be subject to 
this part.

[[Page 50]]



Sec. 221.117  When bank in ``good faith'' has not relied on stock as 

collateral.

    (a) The Board has received questions regarding the circumstances in 
which an extension or maintenance of credit will not be deemed to be 
``indirectly secured'' by stock as indicated by the phrase, ``if the 
lender, in good faith, has not relied upon the margin stock as 
collateral,'' contained in paragraph (2)(iv) of the definition of 
indirectly secured in Sec. 221.2.
    (b) In response, the Board noted that in amending this portion of 
the regulation in 1968 it was indicated that one of the purposes of the 
change was to make clear that the definition of indirectly secured does 
not apply to certain routine negative covenants in loan agreements. 
Also, while the question of whether or not a bank has relied upon 
particular stock as collateral is necessarily a question of fact to be 
determined in each case in the light of all relevant circumstances, some 
indication that the bank had not relied upon stock as collateral would 
seem to be afforded by such circumstances as the fact that:
    (1) The bank had obtained a reasonably current financial statement 
of the borrower and this statement could reasonably support the loan; 
and
    (2) The loan was not payable on demand or because of fluctuations in 
market value of the stock, but instead was payable on one or more fixed 
maturities which were typical of maturities applied by the bank to loans 
otherwise similar except for not involving any possible question of 
stock collateral.



Sec. 221.118  Bank arranging for extension of credit by corporation.

    (a) The Board considered the questions whether:
    (1) The guaranty by a corporation of an ``unsecured'' bank loan to 
exercise an option to purchase stock of the corporation is an 
``extension of credit'' for the purpose of this part;
    (2) Such a guaranty is given ``in the ordinary course of business'' 
of the corporation, as defined in Sec. 221.2; and
    (3) The bank involved took part in arranging for such credit on 
better terms than it could extend under the provisions of this part.
    (b) The Board understood that any officer or employee included under 
the corporation's stock option plan who wished to exercise his option 
could obtain a loan for the purchase price of the stock by executing an 
unsecured note to the bank. The corporation would issue to the bank a 
guaranty of the loan and hold the purchased shares as collateral to 
secure it against loss on the guaranty. Stock of the corporation is 
registered on a national securities exchange and therefore qualifies as 
``margin stock'' under this part.
    (c) A nonbank lender is subject to the registration and other 
requirements of this part if, in the ordinary course of his business, he 
extends credit on collateral that includes any margin stock in the 
amount of $200,000 or more in any calendar quarter, or has such credit 
outstanding in any calendar quarter in the amount of $500,000 or more. 
The Board understood that the corporation in question had sufficient 
guaranties outstanding during the applicable calendar quarter to meet 
the dollar thresholds for registration.
    (d) In the Board's judgment a person who guarantees a loan, and 
thereby becomes liable for the amount of the loan in the event the 
borrower should default, is lending his credit to the borrower. In the 
circumstances described, such a lending of credit must be considered an 
``extension of credit'' under this part in order to prevent 
circumvention of the regulation's limitation on the amount of credit 
that can be extended on the security of margin stock.
    (e) Under Sec. 221.2, the term in the ordinary course of business 
means ``occurring or reasonably expected to occur in carrying out or 
furthering any business purpose. * * *'' In general, stock option plans 
are designed to provide a company's employees with a proprietary 
interest in the company in the form of ownership of the company's stock. 
Such plans increase the company's ability to attract and retain able 
personnel and, accordingly, promote the interest of the company and its 
stockholders, while at the same time providing the company's employees 
with additional incentive to work toward

[[Page 51]]

the company's future success. An arrangement whereby participating 
employees may finance the exercise of their options through an unsecured 
bank loan guaranteed by the company, thereby facilitating the employees' 
acquisition of company stock, is likewise designed to promote the 
company's interest and is, therefore, in furtherance of a business 
purpose.
    (f) For the reasons indicated, the Board concluded that under the 
circumstances described a guaranty by the corporation constitutes credit 
extended in the ordinary course of business under this part, that the 
corporation is required to register pursuant to Sec. 221.3(b), and that 
such guaranties may not be given in excess of the maximum loan value of 
the collateral pledged to secure the guaranty.
    (g) Section 221.3(a)(3) provides that ``no lender may arrange for 
the extension or maintenance of any purpose credit, except upon the same 
terms and conditions on which the lender itself may extend or maintain 
purpose credit under this part''. Since the Board concluded that the 
giving of a guaranty by the corporation to secure the loan described 
above constitutes an extension of credit, and since the use of a 
guaranty in the manner described could not be effectuated without the 
concurrence of the bank involved, the Board further concluded that the 
bank took part in ``arranging'' for the extension of credit in excess of 
the maximum loan value of the margin stock pledged to secure the 
guaranties.



Sec. 221.119  Applicability of plan-lender provisions to financing of stock 

options and stock purchase rights qualified or restricted under Internal 

Revenue Code.

    (a) The Board has been asked whether the plan-lender provisions of 
Sec. 221.4(a) and (b) were intended to apply to the financing of stock 
options restricted or qualified under the Internal Revenue Code where 
such options or the option plan do not provide for such financing.
    (b) It is the Board's experience that in some nonqualified plans, 
particularly stock purchase plans, the credit arrangement is distinct 
from the plan. So long as the credit extended, and particularly, the 
character of the plan-lender, conforms with the requirements of the 
regulation, the fact that option and credit are provided for in separate 
documents is immaterial. It should be emphasized that the Board does not 
express any view on the preferability of qualified as opposed to 
nonqualified options; its role is merely to prevent excessive credit in 
this area.
    (c) Section 221.4(a) provides that a plan-lender may include a 
wholly-owned subsidiary of the issuer of the collateral (taking as a 
whole, corporate groups including subsidiaries and affiliates). This 
clarifies the Board's intent that, to qualify for special treatment 
under that section, the lender must stand in a special employer-employee 
relationship with the borrower, and a special relationship of issuer 
with regard to the collateral. The fact that the Board, for convenience 
and practical reasons, permitted the employing corporation to act 
through a subsidiary or other entity should not be interpreted to mean 
the Board intended the lender to be other than an entity whose 
overriding interests were coextensive with the issuer. An independent 
corporation, with independent interests was never intended, regardless 
of form, to be at the base of exempt stock-plan lending.



Sec. 221.120  Allocation of stock collateral to purpose and nonpurpose credits 

to same customer.

    (a) A bank proposes to extend two credits (Credits A and B) to its 
customer. Although the two credits are proposed to be extended at the 
same time, each would be evidenced by a separate agreement. Credit A 
would be extended for the purpose of providing the customer with working 
capital (nonpurpose credit), collateralized by margin stock. Credit B 
would be extended for the purpose of purchasing or carrying margin stock 
(purpose credit), without collateral or on collateral other than stock.
    (b) This part allows a bank to extend purpose and nonpurpose credits 
simultaneously or successively to the same customer. This rule is 
expressed in Sec. 221.3(d)(4) which provides in substance that for any 
nonpurpose credit to the same customer, the lender shall in good faith 
require as much collateral

[[Page 52]]

not already identified to the customer's purpose credit as the lender 
would require if it held neither the purpose loan nor the identified 
collateral. This rule in Sec. 221.3(d)(4) also takes into account that 
the lender would not necessarily be required to hold collateral for the 
nonpurpose credit if, consistent with good faith banking practices, it 
would normally make this kind of nonpurpose loan without collateral.
    (c) The Board views Sec. 221.3(d)(4), when read in conjunction with 
Sec. 221.3(c) and (f), as requiring that whenever a lender extends two 
credits to the same customer, one a purpose credit and the other 
nonpurpose, any margin stock collateral must first be identified with 
and attributed to the purpose loan by taking into account the maximum 
loan value of such collateral as prescribed in Sec. 221.7 (the 
Supplement).
    (d) The Board is further of the opinion that under the foregoing 
circumstances Credit B would be indirectly secured by stock, despite the 
fact that there would be separate loan agreements for both credits. This 
conclusion flows from the circumstance that the lender would hold in its 
possession stock collateral to which it would have access with respect 
to Credit B, despite any ostensible allocation of such collateral to 
Credit A.



Sec. 221.121  Extension of credit in certain stock option and stock purchase 

plans.

    Questions have been raised as to whether certain stock option and 
stock purchase plans involve extensions of credit subject to this part 
when the participant is free to cancel his participation at any time 
prior to full payment, but in the event of cancellation the participant 
remains liable for damages. It thus appears that the participant has the 
opportunity to gain and bears the risk of loss from the time the 
transaction is executed and payment is deferred. In some cases brought 
to the Board's attention damages are related to the market price of the 
stock, but in others, there may be no such relationship. In either of 
these circumstances, it is the Board's view that such plans involve 
extensions of credit. Accordingly, where the security being purchased is 
a margin security and the credit is secured, directly or indirectly, by 
any margin security, the creditor must register and the credit must 
conform with either the regular margin requirements of Sec. 221.3(a) or 
the special ``plan-lender'' provisions set forth in Sec. 221.4, 
whichever is applicable. This assumes, of course, that the amount of 
credit extended is such that the creditor is subject to the registration 
requirements of Sec. 221.3(b).



Sec. 221.122  Applicability of margin requirements to credit in connection 

with Insurance Premium Funding Programs.

    (a) The Board has been asked numerous questions regarding purpose 
credit in connection with insurance premium funding programs. The 
inquiries are included in a set of guidelines in the format of questions 
and answers. (The guidelines are available pursuant to the Board's Rules 
Regarding Availability of Information, 12 CFR part 261.) A glossary of 
terms customarily used in connection with insurance premium funding 
credit activities is included in the guidelines. Under a typical 
insurance premium funding program, a borrower acquires mutual fund 
shares for cash, or takes fund shares which he already owns, and then 
uses the loan value (currently 50 percent as set by the Board) to buy 
insurance. Usually, a funding company (the issuer) will sell both the 
fund shares and the insurance through either independent broker/dealers 
or subsidiaries or affiliates of the issuer. A typical plan may run for 
10 or 15 years with annual insurance premiums due. To illustrate, 
assuming an annual insurance premium of $300, the participant is 
required to put up mutual fund shares equivalent to 250 percent of the 
premium or $600 ($600 x 50 percent loan value equals $300 the amount of 
the insurance premium which is also the amount of the credit extended).
    (b) The guidelines referenced in paragraph (a) of this section also:
    (1) Clarify an earlier 1969 Board interpretation to show that the 
public offering price of mutual fund shares (which includes the front 
load, or sales commission) may be used as a measure of their current 
market value when the shares serve as collateral on a purpose

[[Page 53]]

credit throughout the day of the purchase of the fund shares; and
    (2) Relax a 1965 Board position in connection with accepting purpose 
statements by mail.
    (c) It is the Board's view that when it is clearly established that 
a purpose statement supports a purpose credit then such statement 
executed by the borrower may be accepted by mail, provided it is 
received and also executed by the lender before the credit is extended.



Sec. 221.123  Combined credit for exercising employee stock options and paying 

income taxes incurred as a result of such exercise.

    (a) Section 221.4(a) and (b), which provides special treatment for 
credit extended under employee stock option plans, was designed to 
encourage their use in recognition of their value in giving an employee 
a proprietary interest in the business. Taking a position that might 
discourage the exercise of options because of tax complications would 
conflict with the purpose of Sec. 221.4(a) and (b).
    (b) Accordingly, the Board has concluded that the combined loans for 
the exercise of the option and the payment of the taxes in connection 
therewith under plans complying with Sec. 221.4(a)(2) may be regarded 
as purpose credit within the meaning of Sec. 221.2.



Sec. 221.124  Purchase of debt securities to finance corporate takeovers.

    (a) Petitions have been filed with the Board raising questions as to 
whether the margin requirements in this part apply to two types of 
corporate acquisitions in which debt securities are issued to finance 
the acquisition of margin stock of a target company.
    (b) In the first situation, the acquiring company, Company A, 
controls a shell corporation that would make a tender offer for the 
stock of Company B, which is margin stock (as defined in Sec. 221.2). 
The shell corporation has virtually no operations, has no significant 
business function other than to acquire and hold the stock of Company B, 
and has substantially no assets other than the margin stock to be 
acquired. To finance the tender offer, the shell corporation would issue 
debt securities which, by their terms, would be unsecured. If the tender 
offer is successful, the shell corporation would seek to merge with 
Company B. However, the tender offer seeks to acquire fewer shares of 
Company B than is necessary under state law to effect a short form 
merger with Company B, which could be consummated without the approval 
of shareholders or the board of directors of Company B.
    (c) The purchase of the debt securities issued by the shell 
corporation to finance the acquisition clearly involves purpose credit 
(as defined in Sec. 221.2). In addition, such debt securities would be 
purchased only by sophisticated investors in very large minimum 
denominations, so that the purchasers may be lenders for purposes of 
this part. See Sec. 221.3(b). Since the debt securities contain no 
direct security agreement involving the margin stock, applicability of 
the lending restrictions of this part turns on whether the arrangement 
constitutes an extension of credit that is secured indirectly by margin 
stock.
    (d) As the Board has recognized, indirect security can encompass a 
wide variety of arrangements between lenders and borrowers with respect 
to margin stock collateral that serve to protect the lenders' interest 
in assuring that a credit is repaid where the lenders do not have a 
conventional direct security interest in the collateral. See Sec. 
221.124. However, credit is not ``indirectly secured'' by margin stock 
if the lender in good faith has not relied on the margin stock as 
collateral extending or maintaining credit. See Sec. 221.2.
    (e) The Board is of the view that, in the situation described in 
paragraph (b) of this section, the debt securities would be presumed to 
be indirectly secured by the margin stock to be acquired by the shell 
acquisition vehicle. The staff has previously expressed the view that 
nominally unsecured credit extended to an investment company, a 
substantial portion of whose assets consist of margin stock, is 
indirectly secured by the margin stock. See Federal Reserve Regulatory 
Service 5-917.12. (See 12 CFR 261.10(f) for information on how to obtain 
Board publications.) This opinion notes that the investment company has 
substantially no assets other than margin stock to

[[Page 54]]

support indebtedness and thus credit could not be extended to such a 
company in good faith without reliance on the margin stock as 
collateral.
    (f) The Board believes that this rationale applies to the debt 
securities issued by the shell corporation described in paragraph (b) of 
this section. At the time the debt securities are issued, the shell 
corporation has substantially no assets to support the credit other than 
the margin stock that it has acquired or intends to acquire and has no 
significant business function other than to hold the stock of the target 
company in order to facilitate the acquisition. Moreover, it is possible 
that the shell may hold the margin stock for a significant and 
indefinite period of time, if defensive measures by the target prevent 
consummation of the acquisition. Because of the difficulty in predicting 
the outcome of a contested takeover at the time that credit is committed 
to the shell corporation, the Board believes that the purchasers of the 
debt securities could not, in good faith, lend without reliance on the 
margin stock as collateral. The presumption that the debt securities are 
indirectly secured by margin stock would not apply if there is specific 
evidence that lenders could in good faith rely on assets other than 
margin stock as collateral, such as a guaranty of the debt securities by 
the shell corporation's parent company or another company that has 
substantial non-margin stock assets or cash flow. This presumption would 
also not apply if there is a merger agreement between the acquiring and 
target companies entered into at the time the commitment is made to 
purchase the debt securities or in any event before loan funds are 
advanced. In addition, the presumption would not apply if the obligation 
of the purchasers of the debt securities to advance funds to the shell 
corporation is contingent on the shell's acquisition of the minimum 
number of shares necessary under applicable state law to effect a merger 
between the acquiring and target companies without the approval of 
either the shareholders or directors of the target company. In these two 
situations where the merger will take place promptly, the Board believes 
the lenders could reasonably be presumed to be relying on the assets of 
the target for repayment.
    (g) In addition, the Board is of the view that the debt securities 
described in paragraph (b) of this section are indirectly secured by 
margin stock because there is a practical restriction on the ability of 
the shell corporation to dispose of the margin stock of the target 
company. Indirectly secured is defined in Sec. 221.2 to include any 
arrangement under which the customer's right or ability to sell, pledge, 
or otherwise dispose of margin stock owned by the customer is in any way 
restricted while the credit remains outstanding. The purchasers of the 
debt securities issued by a shell corporation to finance a takeover 
attempt clearly understand that the shell corporation intends to acquire 
the margin stock of the target company in order to effect the 
acquisition of that company. This understanding represents a practical 
restriction on the ability of the shell corporation to dispose of the 
target's margin stock and to acquire other assets with the proceeds of 
the credit.
    (h) In the second situation, Company C, an operating company with 
substantial assets or cash flow, seeks to acquire Company D, which is 
significantly larger than Company C. Company C establishes a shell 
corporation that together with Company C makes a tender offer for the 
shares of Company D, which is margin stock. To finance the tender offer, 
the shell corporation would obtain a bank loan that complies with the 
margin lending restrictions of this part and Company C would issue debt 
securities that would not be directly secured by any margin stock. The 
Board is of the opinion that these debt securities should not be 
presumed to be indirectly secured by the margin stock of Company D, 
since, as an operating business, Company C has substantial assets or 
cash flow without regard to the margin stock of Company D. Any 
presumption would not be appropriate because the purchasers of the debt 
securities may be relying on assets other than margin stock of Company D 
for repayment of the credit.

[[Page 55]]



Sec. 221.125  Credit to brokers and dealers.

    (a) The National Securities Markets Improvement Act of 1996 (Pub. L. 
104-290, 110 Stat. 3416) restricts the Board's margin authority by 
repealing section 8(a) of the Securities Exchange Act of 1934 (the 
Exchange Act) and amending section 7 of the Exchange Act (15 U.S.C. 78g) 
to exclude the borrowing by a member of a national securities exchange 
or a registered broker or dealer ``a substantial portion of whose 
business consists of transactions with persons other than brokers or 
dealers'' and borrowing by a member of a national securities exchange or 
a registered broker or dealer to finance its activities as a market 
maker or an underwriter. Notwithstanding this exclusion, the Board may 
impose such rules and regulations if it determines they are ``necessary 
or appropriate in the public interest or for the protection of 
investors.''
    (b) The Board has not found that it is necessary or appropriate in 
the public interest or for the protection of investors to impose rules 
and regulations regarding loans to brokers and dealers covered by the 
National Securities Markets Improvement Act of 1996.



PART 222_FAIR CREDIT REPORTING (REGULATION V)--Table of Contents




                      Subpart A_General Provisions

Sec.
222.1 Purpose, scope, and effective dates.
222.2 Examples.
222.3 Definitions.

Subpart B [Reserved]

                      Subpart C_Affiliate Marketing

222.20 Coverage and definitions.
222.21 Affiliate marketing opt-out and exceptions.
222.22 Scope and duration of opt-out.
222.23 Contents of opt-out notice; consolidated and equivalent notices.
222.24 Reasonable opportunity to opt out.
222.25 Reasonable and simple methods of opting out.
222.26 Delivery of opt-out notices.
222.27 Renewal of opt-out.
222.28 Effective date, compliance date, and prospective application.

                      Subpart D_Medical Information

222.30 Obtaining or using medical information in connection with a 
          determination of eligibility for credit.
222.31 Limits on redisclosure of information.
222.32 Sharing medical information with affiliates.

Subparts E-H [Reserved]

    Subpart I_Duties of Users of Consumer Reports Regarding Address 
                   Discrepancies and Records Disposal

222.80-222.81 [Reserved]
222.82 Duties of users regarding address discrepancies.
222.83 Disposal of consumer information.

                   Subpart J_Identity Theft Red Flags

222.90 Duties regarding the detection, prevention, and mitigation of 
          identity theft.
222.91 Duties of card issuers regarding changes of address.

Appendix A to Part 222 [Reserved]
Appendix B to Part 222--Model Notices of Furnishing Negative Information
Appendix C to Part 222--Model Forms for Opt-Out Notices
Appendices D-I to Part 222 [Reserved]
Appendix J to Part 222-- Interagency Guidelines on Identity Theft 
          Detection, Prevention, and Mitigation

    Authority: 15 U.S.C. 1681a, 1681b, 1681c, 1681m, 1681s, 1681s-2, 
1681s-3, 1681t, and 1681w; Secs. 3 and 214, Pub. L. 108-159, 117 Stat. 
1952.

    Source: Reg. V, 68 FR 74469, Dec. 24, 2003, unless otherwise noted.



                      Subpart A_General Provisions



Sec. 222.1  Purpose, scope, and effective dates.

    (a) Purpose. The purpose of this part is to implement the Fair 
Credit Reporting Act. This part generally applies to persons that obtain 
and use information about consumers to determine the consumer's 
eligibility for products, services, or employment, share such 
information among affiliates, and furnish information to consumer 
reporting agencies.
    (b) Scope. (1) [Reserved]
    (2) Institutions covered. (i) Except as otherwise provided in this 
part, the regulations in this part apply to banks that are members of 
the Federal Reserve System (other than national banks) and their 
respective operating

[[Page 56]]

subsidiaries that are not functionally regulated within the meaning of 
section 5(c)(5) of the Bank Holding Company Act, as amended (12 U.S.C. 
1844(c)(5)), 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, organizations operating under section 25 or 25A of the Federal 
Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.), and bank holding 
companies and affiliates of such holding companies, but do not apply to 
affiliates of bank holding companies that are depository institutions 
regulated by another federal banking agency or to consumer reporting 
agencies.
    (ii) For purposes of appendix B to this part, financial institutions 
as defined in section 509 of the Gramm-Leach-Bliley Act (12 U.S.C. 
6809), may use the model notices in appendix B to this part to comply 
with the notice requirement in section 623(a)(7) of the Fair Credit 
Reporting Act (15 U.S.C. 1681s-2(a)(7)).
    (c) Effective dates. The applicable provisions of the Fair and 
Accurate Credit Transactions Act of 2003 (FACT Act), Pub. L. 108-159, 
117 Stat. 1952, shall be effective in accordance with the following 
schedule:
    (1) Provisions effective December 31, 2003--(i) Sections 151(a)(2), 
212(e), 214(c), 311(b), and 711, concerning the relation to state laws; 
and
    (ii) Each of the provisions of the FACT Act that authorizes an 
agency to issue a regulation or to take other action to implement the 
applicable provision of the FACT Act or the applicable provision of the 
Fair Credit Reporting Act, as amended by the FACT Act, but only with 
respect to that agency's authority to propose and adopt the implementing 
regulation or to take such other action.
    (2) Provisions effective March 31, 2004--(i) Section 111, concerning 
the definitions;
    (ii) Section 156, concerning the statute of limitations;
    (iii) Sections 312(d), (e), and (f), concerning the furnisher 
liability exception, liability and enforcement, and rule of 
construction, respectively;
    (iv) Section 313(a), concerning action regarding complaints;
    (v) Section 611, concerning communications for certain employee 
investigations; and
    (vi) Section 811, concerning clerical amendments.
    (3) Provisions effective December 1, 2004--(i) Section 112, 
concerning fraud alerts and active duty alerts;
    (ii) Section 114, concerning procedures for the identification of 
possible instances of identity theft;
    (iii) Section 115, concerning truncation of the social security 
number in a consumer report;
    (iv) Section 151(a)(1), concerning the summary of rights of identity 
theft victims;
    (v) Section 152, concerning blocking of information resulting from 
identity theft;
    (vi) Section 153, concerning the coordination of identity theft 
complaint investigations;
    (vii) Section 154, concerning the prevention of repollution of 
consumer reports;
    (viii) Section 155, concerning notice by debt collectors with 
respect to fraudulent information;
    (ix) Section 211(c), concerning a summary of rights of consumers;
    (x) Section 212(a)-(d), concerning the disclosure of credit scores;
    (xi) Section 213(c), concerning enhanced disclosure of the means 
available to opt out of prescreened lists;
    (xii) Section 217(a), concerning the duty to provide notice to a 
consumer;
    (xiii) Section 311(a), concerning the risk-based pricing notice;
    (xiv) Section 312(a)-(c), concerning procedures to enhance the 
accuracy and integrity of information furnished to consumer reporting 
agencies;
    (xv) Section 314, concerning improved disclosure of the results of 
reinvestigation;
    (xvi) Section 315, concerning reconciling addresses;
    (xvii) Section 316, concerning notice of dispute through reseller; 
and

[[Page 57]]

    (xviii) Section 317, concerning the duty to conduct a reasonable 
reinvestigation.

[68 FR 74469, Dec. 24, 2003, as amended at 69 FR 6530, Feb. 11, 2004; 69 
FR 33284, June 15, 2004; 69 FR 77618, Dec. 28, 2004; 72 FR 62954, Nov. 
7, 2007]



Sec. 222.2  Examples.

    The examples in this part are not exclusive. Compliance with an 
example, to the extent applicable, constitutes compliance with this 
part. Examples in a paragraph illustrate only the issue described in the 
paragraph and do not illustrate any other issue that may arise in this 
part.

[70 FR 70678, Nov. 22, 2005]



Sec. 222.3  Definitions.

    For purposes of this part, unless explicitly stated otherwise:
    (a) Act means the Fair Credit Reporting Act (15 U.S.C. 1681 et 
seq.).
    (b) Affiliate means any company that is related by common ownership 
or common corporate control with another company.
    (c) [Reserved]
    (d) Company means any corporation, limited liability company, 
business trust, general or limited partnership, association, or similar 
organization.
    (e) Consumer means an individual.
    (f)-(h) [Reserved]
    (i) Common ownership or common corporate control means a 
relationship between two companies under which:
    (1) One company has, with respect to the other company:
    (i) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting security of a company, 
directly or indirectly, or acting through one or more other persons;
    (ii) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of a company; or
    (iii) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of a company, as the Board 
determines; or
    (2) Any other person has, with respect to both companies, a 
relationship described in paragraphs (i)(1)(i) through (i)(1)(iii) of 
this section.
    (j) [Reserved]
    (k) Medical information means:
    (1) Information or data, whether oral or recorded, in any form or 
medium, created by or derived from a health care provider or the 
consumer, that relates to:
    (i) The past, present, or future physical, mental, or behavioral 
health or condition of an individual;
    (ii) The provision of health care to an individual; or
    (iii) The payment for the provision of health care to an individual.
    (2) The term does not include:
    (i) The age or gender of a consumer;
    (ii) Demographic information about the consumer, including a 
consumer's residence address or e-mail address;
    (iii) Any other information about a consumer that does not relate to 
the physical, mental, or behavioral health or condition of a consumer, 
including the existence or value of any insurance policy; or
    (iv) Information that does not identify a specific consumer.
    (l) Person means any individual, partnership, corporation, trust, 
estate cooperative, association, government or governmental subdivision 
or agency, or other entity.

[Reg. V, 70 FR 70678, Nov. 22, 2005, as amended at 72 FR 63756, Nov. 9, 
2007]

Subpart B [Reserved]



                      Subpart C_Affiliate Marketing

    Source: Reg. V, 72 FR 62955, Nov. 7, 2007, unless otherwise noted.



Sec. 222.20  Coverage and definitions.

    (a) Coverage. Subpart C of this part applies to member banks of the 
Federal Reserve System (other than national banks) and their respective 
operating subsidiaries that are not functionally regulated within the 
meaning of section 5(c)(5) of the Bank Holding Company Act, as amended 
(12 U.S.C. 1844(c)(5)), 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

[[Page 58]]

or 25A of the Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et 
seq.).
    (b) Definitions. For purposes of this subpart:
    (1) Clear and conspicuous. The term ``clear and conspicuous'' means 
reasonably understandable and designed to call attention to the nature 
and significance of the information presented.
    (2) Concise--(i) In general. The term ``concise'' means a reasonably 
brief expression or statement.
    (ii) Combination with other required disclosures. A notice required 
by this subpart may be concise even if it is combined with other 
disclosures required or authorized by federal or state law.
    (3) Eligibility information. The term ``eligibility information'' 
means any information the communication of which would be a consumer 
report if the exclusions from the definition of ``consumer report'' in 
section 603(d)(2)(A) of the Act did not apply. Eligibility information 
does not include aggregate or blind data that does not contain personal 
identifiers such as account numbers, names, or addresses.
    (4) Pre-existing business relationship--(i) In general. The term 
``pre-existing business relationship'' means a relationship between a 
person, or a person's licensed agent, and a consumer based on--
    (A) A financial contract between the person and the consumer which 
is in force on the date on which the consumer is sent a solicitation 
covered by this subpart;
    (B) The purchase, rental, or lease by the consumer of the person's 
goods or services, or a financial transaction (including holding an 
active account or a policy in force or having another continuing 
relationship) between the consumer and the person, during the 18-month 
period immediately preceding the date on which the consumer is sent a 
solicitation covered by this subpart; or
    (C) An inquiry or application by the consumer regarding a product or 
service offered by that person during the three-month period immediately 
preceding the date on which the consumer is sent a solicitation covered 
by this subpart.
    (ii) Examples of pre-existing business relationships. (A) If a 
consumer has a time deposit account, such as a certificate of deposit, 
at a depository institution that is currently in force, the depository 
institution has a pre-existing business relationship with the consumer 
and can use eligibility information it receives from its affiliates to 
make solicitations to the consumer about its products or services.
    (B) If a consumer obtained a certificate of deposit from a 
depository institution, but did not renew the certificate at maturity, 
the depository institution has a pre-existing business relationship with 
the consumer and can use eligibility information it receives from its 
affiliates to make solicitations to the consumer about its products or 
services for 18 months after the date of maturity of the certificate of 
deposit.
    (C) If a consumer obtains a mortgage, the mortgage lender has a pre-
existing business relationship with the consumer. If the mortgage lender 
sells the consumer's entire loan to an investor, the mortgage lender has 
a pre-existing business relationship with the consumer and can use 
eligibility information it receives from its affiliates to make 
solicitations to the consumer about its products or services for 18 
months after the date it sells the loan, and the investor has a pre-
existing business relationship with the consumer upon purchasing the 
loan. If, however, the mortgage lender sells a fractional interest in 
the consumer's loan to an investor but also retains an ownership 
interest in the loan, the mortgage lender continues to have a pre-
existing business relationship with the consumer, but the investor does 
not have a pre-existing business relationship with the consumer. If the 
mortgage lender retains ownership of the loan, but sells ownership of 
the servicing rights to the consumer's loan, the mortgage lender 
continues to have a pre-existing business relationship with the 
consumer. The purchaser of the servicing rights also has a pre-existing 
business relationship with the consumer as of the date it purchases 
ownership of the servicing rights, but only if it collects payments from 
or

[[Page 59]]

otherwise deals directly with the consumer on a continuing basis.
    (D) If a consumer applies to a depository institution for a product 
or service that it offers, but does not obtain a product or service from 
or enter into a financial contract or transaction with the institution, 
the depository institution has a pre-existing business relationship with 
the consumer and can therefore use eligibility information it receives 
from an affiliate to make solicitations to the consumer about its 
products or services for three months after the date of the application.
    (E) If a consumer makes a telephone inquiry to a depository 
institution about its products or services and provides contact 
information to the institution, but does not obtain a product or service 
from or enter into a financial contract or transaction with the 
institution, the depository institution has a pre-existing business 
relationship with the consumer and can therefore use eligibility 
information it receives from an affiliate to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (F) If a consumer makes an inquiry to a depository institution by e-
mail about its products or services, but does not obtain a product or 
service from or enter into a financial contract or transaction with the 
institution, the depository institution has a pre-existing business 
relationship with the consumer and can therefore use eligibility 
information it receives from an affiliate to make solicitations to the 
consumer about its products or services for three months after the date 
of the inquiry.
    (G) If a consumer has an existing relationship with a depository 
institution that is part of a group of affiliated companies, makes a 
telephone call to the centralized call center for the group of 
affiliated companies to inquire about products or services offered by 
the insurance affiliate, and provides contact information to the call 
center, the call constitutes an inquiry to the insurance affiliate that 
offers those products or services. The insurance affiliate has a pre-
existing business relationship with the consumer and can therefore use 
eligibility information it receives from its affiliated depository 
institution to make solicitations to the consumer about its products or 
services for three months after the date of the inquiry.
    (iii) Examples where no pre-existing business relationship is 
created. (A) If a consumer makes a telephone call to a centralized call 
center for a group of affiliated companies to inquire about the 
consumer's existing account at a depository institution, the call does 
not constitute an inquiry to any affiliate other than the depository 
institution that holds the consumer's account and does not establish a 
pre-existing business relationship between the consumer and any 
affiliate of the account-holding depository institution.
    (B) If a consumer who has a deposit account with a depository 
institution makes a telephone call to an affiliate of the institution to 
ask about the affiliate's retail locations and hours, but does not make 
an inquiry about the affiliate's products or services, the call does not 
constitute an inquiry and does not establish a pre-existing business 
relationship between the consumer and the affiliate. Also, the 
affiliate's capture of the consumer's telephone number does not 
constitute an inquiry and does not establish a pre-existing business 
relationship between the consumer and the affiliate.
    (C) If a consumer makes a telephone call to a depository institution 
in response to an advertisement that offers a free promotional item to 
consumers who call a toll-free number, but the advertisement does not 
indicate that the depository institution's products or services will be 
marketed to consumers who call in response, the call does not create a 
pre-existing business relationship between the consumer and the 
depository institution because the consumer has not made an inquiry 
about a product or service offered by the institution, but has merely 
responded to an offer for a free promotional item.
    (5) Solicitation--(i) In general. The term ``solicitation'' means 
the marketing of a product or service initiated by a person to a 
particular consumer that is--
    (A) Based on eligibility information communicated to that person by 
its affiliate as described in this subpart; and

[[Page 60]]

    (B) Intended to encourage the consumer to purchase or obtain such 
product or service.
    (ii) Exclusion of marketing directed at the general public. A 
solicitation does not include marketing communications that are directed 
at the general public. For example, television, general circulation 
magazine, and billboard advertisements do not constitute solicitations, 
even if those communications are intended to encourage consumers to 
purchase products and services from the person initiating the 
communications.
    (iii) Examples of solicitations. A solicitation would include, for 
example, a telemarketing call, direct mail, e-mail, or other form of 
marketing communication directed to a particular consumer that is based 
on eligibility information received from an affiliate.
    (6) You means a person described in paragraph (a) of this section.



Sec. 222.21  Affiliate marketing opt-out and exceptions.

    (a) Initial notice and opt-out requirement--(1) In general. You may 
not use eligibility information about a consumer that you receive from 
an affiliate to make a solicitation for marketing purposes to the 
consumer, unless--
    (i) It is clearly and conspicuously disclosed to the consumer in 
writing or, if the consumer agrees, electronically, in a concise notice 
that you may use eligibility information about that consumer received 
from an affiliate to make solicitations for marketing purposes to the 
consumer;
    (ii) The consumer is provided a reasonable opportunity and a 
reasonable and simple method to ``opt out,'' or prohibit you from using 
eligibility information to make solicitations for marketing purposes to 
the consumer; and
    (iii) The consumer has not opted out.
    (2) Example. A consumer has a homeowner's insurance policy with an 
insurance company. The insurance company furnishes eligibility 
information about the consumer to its affiliated depository institution. 
Based on that eligibility information, the depository institution wants 
to make a solicitation to the consumer about its home equity loan 
products. The depository institution does not have a pre-existing 
business relationship with the consumer and none of the other exceptions 
apply. The depository institution is prohibited from using eligibility 
information received from its insurance affiliate to make solicitations 
to the consumer about its home equity loan products unless the consumer 
is given a notice and opportunity to opt out and the consumer does not 
opt out.
    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By an affiliate that has or has previously had a pre-existing 
business relationship with the consumer; or
    (ii) As part of a joint notice from two or more members of an 
affiliated group of companies, provided that at least one of the 
affiliates on the joint notice has or has previously had a pre-existing 
business relationship with the consumer.
    (b) Making solicitations--(1) In general. For purposes of this 
subpart, you make a solicitation for marketing purposes if--
    (i) You receive eligibility information from an affiliate;
    (ii) You use that eligibility information to do one or more of the 
following:
    (A) Identify the consumer or type of consumer to receive a 
solicitation;
    (B) Establish criteria used to select the consumer to receive a 
solicitation; or
    (C) Decide which of your products or services to market to the 
consumer or tailor your solicitation to that consumer; and
    (iii) As a result of your use of the eligibility information, the 
consumer is provided a solicitation.
    (2) Receiving eligibility information from an affiliate, including 
through a common database. You may receive eligibility information from 
an affiliate in various ways, including when the affiliate places that 
information into a common database that you may access.
    (3) Receipt or use of eligibility information by your service 
provider. Except as provided in paragraph (b)(5) of this section, you 
receive or use an affiliate's eligibility information if a service 
provider acting on your behalf (whether an affiliate or a nonaffiliated 
third party)

[[Page 61]]

receives or uses that information in the manner described in paragraphs 
(b)(1)(i) or (b)(1)(ii) of this section. All relevant facts and 
circumstances will determine whether a person is acting as your service 
provider when it receives or uses an affiliate's eligibility information 
in connection with marketing your products and services.
    (4) Use by an affiliate of its own eligibility information. Unless 
you have used eligibility information that you receive from an affiliate 
in the manner described in paragraph (b)(1)(ii) of this section, you do 
not make a solicitation subject to this subpart if your affiliate:
    (i) Uses its own eligibility information that it obtained in 
connection with a pre-existing business relationship it has or had with 
the consumer to market your products or services to the consumer; or
    (ii) Directs its service provider to use the affiliate's own 
eligibility information that it obtained in connection with a pre-
existing business relationship it has or had with the consumer to market 
your products or services to the consumer, and you do not communicate 
directly with the service provider regarding that use.
    (5) Use of eligibility information by a service provider--(i) In 
general. You do not make a solicitation subject to Subpart C of this 
part if a service provider (including an affiliated or third-party 
service provider that maintains or accesses a common database that you 
may access) receives eligibility information from your affiliate that 
your affiliate obtained in connection with a pre-existing business 
relationship it has or had with the consumer and uses that eligibility 
information to market your products or services to the consumer, so long 
as--
    (A) Your affiliate controls access to and use of its eligibility 
information by the service provider (including the right to establish 
the specific terms and conditions under which the service provider may 
use such information to market your products or services);
    (B) Your affiliate establishes specific terms and conditions under 
which the service provider may access and use the affiliate's 
eligibility information to market your products and services (or those 
of affiliates generally) to the consumer, such as the identity of the 
affiliated companies whose products or services may be marketed to the 
consumer by the service provider, the types of products or services of 
affiliated companies that may be marketed, and the number of times the 
consumer may receive marketing materials, and periodically evaluates the 
service provider's compliance with those terms and conditions;
    (C) Your affiliate requires the service provider to implement 
reasonable policies and procedures designed to ensure that the service 
provider uses the affiliate's eligibility information in accordance with 
the terms and conditions established by the affiliate relating to the 
marketing of your products or services;
    (D) Your affiliate is identified on or with the marketing materials 
provided to the consumer; and
    (E) You do not directly use your affiliate's eligibility information 
in the manner described in paragraph (b)(1)(ii) of this section.
    (ii) Writing requirements. (A) The requirements of paragraphs 
(b)(5)(i)(A) and (C) of this section must be set forth in a written 
agreement between your affiliate and the service provider; and
    (B) The specific terms and conditions established by your affiliate 
as provided in paragraph (b)(5)(i)(B) of this section must be set forth 
in writing.
    (6) Examples of making solicitations. (i) A consumer has a deposit 
account with a depository institution, which is affiliated with an 
insurance company. The insurance company receives eligibility 
information about the consumer from the depository institution. The 
insurance company uses that eligibility information to identify the 
consumer to receive a solicitation about insurance products, and, as a 
result, the insurance company provides a solicitation to the consumer 
about its insurance products. Pursuant to paragraph (b)(1) of this 
section, the insurance company has made a solicitation to the consumer.
    (ii) The same facts as in the example in paragraph (b)(6)(i) of this 
section, except that after using the eligibility information to identify 
the consumer

[[Page 62]]

to receive a solicitation about insurance products, the insurance 
company asks the depository institution to send the solicitation to the 
consumer and the depository institution does so. Pursuant to paragraph 
(b)(1) of this section, the insurance company has made a solicitation to 
the consumer because it used eligibility information about the consumer 
that it received from an affiliate to identify the consumer to receive a 
solicitation about its products or services, and, as a result, a 
solicitation was provided to the consumer about the insurance company's 
products.
    (iii) The same facts as in the example in paragraph (b)(6)(i) of 
this section, except that eligibility information about consumers that 
have deposit accounts with the depository institution is placed into a 
common database that all members of the affiliated group of companies 
may independently access and use. Without using the depository 
institution's eligibility information, the insurance company develops 
selection criteria and provides those criteria, marketing materials, and 
related instructions to the depository institution. The depository 
institution reviews eligibility information about its own consumers 
using the selection criteria provided by the insurance company to 
determine which consumers should receive the insurance company's 
marketing materials and sends marketing materials about the insurance 
company's products to those consumers. Even though the insurance company 
has received eligibility information through the common database as 
provided in paragraph (b)(2) of this section, it did not use that 
information to identify consumers or establish selection criteria; 
instead, the depository institution used its own eligibility 
information. Therefore, pursuant to paragraph (b)(4)(i) of this section, 
the insurance company has not made a solicitation to the consumer.
    (iv) The same facts as in the example in paragraph (b)(6)(iii) of 
this section, except that the depository institution provides the 
insurance company's criteria to the depository institution's service 
provider and directs the service provider to use the depository 
institution's eligibility information to identify depository institution 
consumers who meet the criteria and to send the insurance company's 
marketing materials to those consumers. The insurance company does not 
communicate directly with the service provider regarding the use of the 
depository institution's information to market its products to the 
depository institution's consumers. Pursuant to paragraph (b)(4)(ii) of 
this section, the insurance company has not made a solicitation to the 
consumer.
    (v) An affiliated group of companies includes a depository 
institution, an insurance company, and a service provider. Each 
affiliate in the group places information about its consumers into a 
common database. The service provider has access to all information in 
the common database. The depository institution controls access to and 
use of its eligibility information by the service provider. This control 
is set forth in a written agreement between the depository institution 
and the service provider. The written agreement also requires the 
service provider to establish reasonable policies and procedures 
designed to ensure that the service provider uses the depository 
institution's eligibility information in accordance with specific terms 
and conditions established by the depository institution relating to the 
marketing of the products and services of all affiliates, including the 
insurance company. In a separate written communication, the depository 
institution specifies the terms and conditions under which the service 
provider may use the depository institution's eligibility information to 
market the insurance company's products and services to the depository 
institution's consumers. The specific terms and conditions are: A list 
of affiliated companies (including the insurance company) whose products 
or services may be marketed to the depository institution's consumers by 
the service provider; the specific products or types of products that 
may be marketed to the depository institution's consumers by the service 
provider; the categories of eligibility information that may be used by 
the service provider in marketing products

[[Page 63]]

or services to the depository institution's consumers; the types or 
categories of the depository institution's consumers to whom the service 
provider may market products or services of depository institution 
affiliates; the number and/or types of marketing communications that the 
service provider may send to the depository institution's consumers; and 
the length of time during which the service provider may market the 
products or services of the depository institution's affiliates to its 
consumers. The depository institution periodically evaluates the service 
provider's compliance with these terms and conditions. The insurance 
company asks the service provider to market insurance products to 
certain consumers who have deposit accounts with the depository 
institution. Without using the depository institution's eligibility 
information, the insurance company develops selection criteria and 
provides those criteria, marketing materials, and related instructions 
to the service provider. The service provider uses the depository 
institution's eligibility information from the common database to 
identify the depository institution's consumers to whom insurance 
products will be marketed. When the insurance company's marketing 
materials are provided to the identified consumers, the name of the 
depository institution is displayed on the insurance marketing 
materials, an introductory letter that accompanies the marketing 
materials, an account statement that accompanies the marketing 
materials, or the envelope containing the marketing materials. The 
requirements of paragraph (b)(5) of this section have been satisfied, 
and the insurance company has not made a solicitation to the consumer.
    (vi) The same facts as in the example in paragraph (b)(6)(v) of this 
section, except that the terms and conditions permit the service 
provider to use the depository institution's eligibility information to 
market the products and services of other affiliates to the depository 
institution's consumers whenever the service provider deems it 
appropriate to do so. The service provider uses the depository 
institution's eligibility information in accordance with the discretion 
afforded to it by the terms and conditions. Because the terms and 
conditions are not specific, the requirements of paragraph (b)(5) of 
this section have not been satisfied.
    (c) Exceptions. The provisions of this subpart do not apply to you 
if you use eligibility information that you receive from an affiliate:
    (1) To make a solicitation for marketing purposes to a consumer with 
whom you have a pre-existing business relationship;
    (2) To facilitate communications to an individual for whose benefit 
you provide employee benefit or other services pursuant to a contract 
with an employer related to and arising out of the current employment 
relationship or status of the individual as a participant or beneficiary 
of an employee benefit plan;
    (3) To perform services on behalf of an affiliate, except that this 
subparagraph shall not be construed as permitting you to send 
solicitations on behalf of an affiliate if the affiliate would not be 
permitted to send the solicitation as a result of the election of the 
consumer to opt out under this subpart;
    (4) In response to a communication about your products or services 
initiated by the consumer;
    (5) In response to an authorization or request by the consumer to 
receive solicitations; or
    (6) If your compliance with this subpart would prevent you from 
complying with any provision of State insurance laws pertaining to 
unfair discrimination in any State in which you are lawfully doing 
business.
    (d) Examples of exceptions--(1) Example of the pre-existing business 
relationship exception. A consumer has a deposit account with a 
depository institution. The consumer also has a relationship with the 
depository institution's securities affiliate for management of the 
consumer's securities portfolio. The depository institution receives 
eligibility information about the consumer from its securities affiliate 
and uses that information to make a solicitation to the consumer about 
the depository institution's wealth management services. The depository 
institution may make this solicitation even if the consumer

[[Page 64]]

has not been given a notice and opportunity to opt out because the 
depository institution has a pre-existing business relationship with the 
consumer.
    (2) Examples of service provider exception. (i) A consumer has an 
insurance policy issued by an insurance company. The insurance company 
furnishes eligibility information about the consumer to its affiliated 
depository institution. Based on that eligibility information, the 
depository institution wants to make a solicitation to the consumer 
about its deposit products. The depository institution does not have a 
pre-existing business relationship with the consumer and none of the 
other exceptions in paragraph (c) of this section apply. The consumer 
has been given an opt-out notice and has elected to opt out of receiving 
such solicitations. The depository institution asks a service provider 
to send the solicitation to the consumer on its behalf. The service 
provider may not send the solicitation on behalf of the depository 
institution because, as a result of the consumer's opt-out election, the 
depository institution is not permitted to make the solicitation.
    (ii) The same facts as in paragraph (d)(2)(i) of this section, 
except the consumer has been given an opt-out notice, but has not 
elected to opt out. The depository institution asks a service provider 
to send the solicitation to the consumer on its behalf. The service 
provider may send the solicitation on behalf of the depository 
institution because, as a result of the consumer's not opting out, the 
depository institution is permitted to make the solicitation.
    (3) Examples of consumer-initiated communications. (i) A consumer 
who has a deposit account with a depository institution initiates a 
communication with the depository institution's credit card affiliate to 
request information about a credit card. The credit card affiliate may 
use eligibility information about the consumer it obtains from the 
depository institution or any other affiliate to make solicitations 
regarding credit card products in response to the consumer-initiated 
communication.
    (ii) A consumer who has a deposit account with a depository 
institution contacts the institution to request information about how to 
save and invest for a child's college education without specifying the 
type of product in which the consumer may be interested. Information 
about a range of different products or services offered by the 
depository institution and one or more affiliates of the institution may 
be responsive to that communication. Such products or services may 
include the following: Mutual funds offered by the institution's mutual 
fund affiliate; section 529 plans offered by the institution, its mutual 
fund affiliate, or another securities affiliate; or trust services 
offered by a different financial institution in the affiliated group. 
Any affiliate offering investment products or services that would be 
responsive to the consumer's request for information about saving and 
investing for a child's college education may use eligibility 
information to make solicitations to the consumer in response to this 
communication.
    (iii) A credit card issuer makes a marketing call to the consumer 
without using eligibility information received from an affiliate. The 
issuer leaves a voice-mail message that invites the consumer to call a 
toll-free number to apply for the issuer's credit card. If the consumer 
calls the toll-free number to inquire about the credit card, the call is 
a consumer-initiated communication about a product or service and the 
credit card issuer may now use eligibility information it receives from 
its affiliates to make solicitations to the consumer.
    (iv) A consumer calls a depository institution to ask about retail 
locations and hours, but does not request information about products or 
services. The institution may not use eligibility information it 
receives from an affiliate to make solicitations to the consumer about 
its products or services because the consumer-initiated communication 
does not relate to the depository institution's products or services. 
Thus, the use of eligibility information received from an affiliate 
would not be responsive to the communication and the exception does not 
apply.
    (v) A consumer calls a depository institution to ask about retail 
locations and hours. The customer service representative asks the 
consumer if there

[[Page 65]]

is a particular product or service about which the consumer is seeking 
information. The consumer responds that the consumer wants to stop in 
and find out about certificates of deposit. The customer service 
representative offers to provide that information by telephone and mail 
additional information and application materials to the consumer. The 
consumer agrees and provides or confirms contact information for receipt 
of the materials to be mailed. The depository institution may use 
eligibility information it receives from an affiliate to make 
solicitations to the consumer about certificates of deposit because such 
solicitations would respond to the consumer-initiated communication 
about products or services.
    (4) Examples of consumer authorization or request for solicitations. 
(i) A consumer who obtains a mortgage from a mortgage lender authorizes 
or requests information about homeowner's insurance offered by the 
mortgage lender's insurance affiliate. Such authorization or request, 
whether given to the mortgage lender or to the insurance affiliate, 
would permit the insurance affiliate to use eligibility information 
about the consumer it obtains from the mortgage lender or any other 
affiliate to make solicitations to the consumer about homeowner's 
insurance.
    (ii) A consumer completes an online application to apply for a 
credit card from a credit card issuer. The issuer's online application 
contains a blank check box that the consumer may check to authorize or 
request information from the credit card issuer's affiliates. The 
consumer checks the box. The consumer has authorized or requested 
solicitations from the card issuer's affiliates.
    (iii) A consumer completes an online application to apply for a 
credit card from a credit card issuer. The issuer's online application 
contains a pre-selected check box indicating that the consumer 
authorizes or requests information from the issuer's affiliates. The 
consumer does not deselect the check box. The consumer has not 
authorized or requested solicitations from the card issuer's affiliates.
    (iv) The terms and conditions of a credit card account agreement 
contain preprinted boilerplate language stating that by applying to open 
an account the consumer authorizes or requests to receive solicitations 
from the credit card issuer's affiliates. The consumer has not 
authorized or requested solicitations from the card issuer's affiliates.
    (e) Relation to affiliate-sharing notice and opt-out. Nothing in 
this subpart limits the responsibility of a person to comply with the 
notice and opt-out provisions of section 603(d)(2)(A)(iii) of the Act 
where applicable.



Sec. 222.22  Scope and duration of opt-out.

    (a) Scope of opt-out--(1) In general. Except as otherwise provided 
in this section, the consumer's election to opt out prohibits any 
affiliate covered by the opt-out notice from using eligibility 
information received from another affiliate as described in the notice 
to make solicitations to the consumer.
    (2) Continuing relationship--(i) In general. If the consumer 
establishes a continuing relationship with you or your affiliate, an 
opt-out notice may apply to eligibility information obtained in 
connection with--
    (A) A single continuing relationship or multiple continuing 
relationships that the consumer establishes with you or your affiliates, 
including continuing relationships established subsequent to delivery of 
the opt-out notice, so long as the notice adequately describes the 
continuing relationships covered by the opt-out; or
    (B) Any other transaction between the consumer and you or your 
affiliates as described in the notice.
    (ii) Examples of continuing relationships. A consumer has a 
continuing relationship with you or your affiliate if the consumer--
    (A) Opens a deposit or investment account with you or your 
affiliate;
    (B) Obtains a loan for which you or your affiliate owns the 
servicing rights;
    (C) Purchases an insurance product from you or your affiliate;
    (D) Holds an investment product through you or your affiliate, such 
as when you act or your affiliate acts as a custodian for securities or 
for assets in an individual retirement arrangement;

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    (E) Enters into an agreement or understanding with you or your 
affiliate whereby you or your affiliate undertakes to arrange or broker 
a home mortgage loan for the consumer;
    (F) Enters into a lease of personal property with you or your 
affiliate; or
    (G) Obtains financial, investment, or economic advisory services 
from you or your affiliate for a fee.
    (3) No continuing relationship--(i) In general. If there is no 
continuing relationship between a consumer and you or your affiliate, 
and you or your affiliate obtain eligibility information about a 
consumer in connection with a transaction with the consumer, such as an 
isolated transaction or a credit application that is denied, an opt-out 
notice provided to the consumer only applies to eligibility information 
obtained in connection with that transaction.
    (ii) Examples of isolated transactions. An isolated transaction 
occurs if-
    (A) The consumer uses your or your affiliate's ATM to withdraw cash 
from an account at another financial institution; or
    (B) You or your affiliate sells the consumer a cashier's check or 
money order, airline tickets, travel insurance, or traveler's checks in 
isolated transactions.
    (4) Menu of alternatives. A consumer may be given the opportunity to 
choose from a menu of alternatives when electing to prohibit 
solicitations, such as by electing to prohibit solicitations from 
certain types of affiliates covered by the opt-out notice but not other 
types of affiliates covered by the notice, electing to prohibit 
solicitations based on certain types of eligibility information but not 
other types of eligibility information, or electing to prohibit 
solicitations by certain methods of delivery but not other methods of 
delivery. However, one of the alternatives must allow the consumer to 
prohibit all solicitations from all of the affiliates that are covered 
by the notice.
    (5) Special rule for a notice following termination of all 
continuing relationships--(i) In general. A consumer must be given a new 
opt-out notice if, after all continuing relationships with you or your 
affiliate(s) are terminated, the consumer subsequently establishes 
another continuing relationship with you or your affiliate(s) and the 
consumer's eligibility information is to be used to make a solicitation. 
The new opt-out notice must apply, at a minimum, to eligibility 
information obtained in connection with the new continuing relationship. 
Consistent with paragraph (b) of this section, the consumer's decision 
not to opt out after receiving the new opt-out notice would not override 
a prior opt-out election by the consumer that applies to eligibility 
information obtained in connection with a terminated relationship, 
regardless of whether the new opt-out notice applies to eligibility 
information obtained in connection with the terminated relationship.
    (ii) Example. A consumer has a checking account with a depository 
institution that is part of an affiliated group. The consumer closes the 
checking account. One year after closing the checking account, the 
consumer opens a savings account with the same depository institution. 
The consumer must be given a new notice and opportunity to opt out 
before the depository institution's affiliates may make solicitations to 
the consumer using eligibility information obtained by the depository 
institution in connection with the new savings account relationship, 
regardless of whether the consumer opted out in connection with the 
checking account.
    (b) Duration of opt-out. The election of a consumer to opt out must 
be effective for a period of at least five years (the ``opt-out 
period'') beginning when the consumer's opt-out election is received and 
implemented, unless the consumer subsequently revokes the opt-out in 
writing or, if the consumer agrees, electronically. An opt-out period of 
more than five years may be established, including an opt-out period 
that does not expire unless revoked by the consumer.
    (c) Time of opt-out. A consumer may opt out at any time.

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Sec. 222.23  Contents of opt-out notice; consolidated and equivalent notices.

    (a) Contents of opt-out notice--(1) In general. A notice must be 
clear, conspicuous, and concise, and must accurately disclose:
    (i) The name of the affiliate(s) providing the notice. If the notice 
is provided jointly by multiple affiliates and each affiliate shares a 
common name, such as ``ABC,'' then the notice may indicate that it is 
being provided by multiple companies with the ABC name or multiple 
companies in the ABC group or family of companies, for example, by 
stating that the notice is provided by ``all of the ABC companies,'' 
``the ABC banking, credit card, insurance, and securities companies,'' 
or by listing the name of each affiliate providing the notice. But if 
the affiliates providing the joint notice do not all share a common 
name, then the notice must either separately identify each affiliate by 
name or identify each of the common names used by those affiliates, for 
example, by stating that the notice is provided by ``all of the ABC and 
XYZ companies'' or by ``the ABC banking and credit card companies and 
the XYZ insurance companies'';
    (ii) A list of the affiliates or types of affiliates whose use of 
eligibility information is covered by the notice, which may include 
companies that become affiliates after the notice is provided to the 
consumer. If each affiliate covered by the notice shares a common name, 
such as ``ABC,'' then the notice may indicate that it applies to 
multiple companies with the ABC name or multiple companies in the ABC 
group or family of companies, for example, by stating that the notice is 
provided by ``all of the ABC companies,'' ``the ABC banking, credit 
card, insurance, and securities companies,'' or by listing the name of 
each affiliate providing the notice. But if the affiliates covered by 
the notice do not all share a common name, then the notice must either 
separately identify each covered affiliate by name or identify each of 
the common names used by those affiliates, for example, by stating that 
the notice applies to ``all of the ABC and XYZ companies'' or to ``the 
ABC banking and credit card companies and the XYZ insurance companies'';
    (iii) A general description of the types of eligibility information 
that may be used to make solicitations to the consumer;
    (iv) That the consumer may elect to limit the use of eligibility 
information to make solicitations to the consumer;
    (v) That the consumer's election will apply for the specified period 
of time stated in the notice and, if applicable, that the consumer will 
be allowed to renew the election once that period expires;
    (vi) If the notice is provided to consumers who may have previously 
opted out, such as if a notice is provided to consumers annually, that 
the consumer who has chosen to limit solicitations does not need to act 
again until the consumer receives a renewal notice; and
    (vii) A reasonable and simple method for the consumer to opt out.
    (2) Joint relationships. (i) If two or more consumers jointly obtain 
a product or service, a single opt-out notice may be provided to the 
joint consumers. Any of the joint consumers may exercise the right to 
opt out.
    (ii) The opt-out notice must explain how an opt-out direction by a 
joint consumer will be treated. An opt-out direction by a joint consumer 
may be treated as applying to all of the associated joint consumers, or 
each joint consumer may be permitted to opt out separately. If each 
joint consumer is permitted to opt out separately, one of the joint 
consumers must be permitted to opt out on behalf of all of the joint 
consumers and the joint consumers must be permitted to exercise their 
separate rights to opt out in a single response.
    (iii) It is impermissible to require all joint consumers to opt out 
before implementing any opt-out direction.
    (3) Alternative contents. If the consumer is afforded a broader 
right to opt out of receiving marketing than is required by this 
subpart, the requirements of this section may be satisfied by providing 
the consumer with a clear, conspicuous, and concise notice that 
accurately discloses the consumer's opt-out rights.

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    (4) Model notices. Model notices are provided in appendix C of this 
part.
    (b) Coordinated and consolidated notices. A notice required by this 
subpart may be coordinated and consolidated with any other notice or 
disclosure required to be issued under any other provision of law by the 
entity providing the notice, including but not limited to the notice 
described in section 603(d)(2)(A)(iii) of the Act and the Gramm-Leach-
Bliley Act privacy notice.
    (c) Equivalent notices. A notice or other disclosure that is 
equivalent to the notice required by this subpart, and that is provided 
to a consumer together with disclosures required by any other provision 
of law, satisfies the requirements of this section.



Sec. 222.24  Reasonable opportunity to opt out.

    (a) In general. You must not use eligibility information about a 
consumer that you receive from an affiliate to make a solicitation to 
the consumer about your products or services, unless the consumer is 
provided a reasonable opportunity to opt out, as required by Sec. 
222.21(a)(1)(ii) of this part.
    (b) Examples of a reasonable opportunity to opt out. The consumer is 
given a reasonable opportunity to opt out if:
    (1) By mail. The opt-out notice is mailed to the consumer. The 
consumer is given 30 days from the date the notice is mailed to elect to 
opt out by any reasonable means.
    (2) By electronic means. (i) The opt-out notice is provided 
electronically to the consumer, such as by posting the notice at an 
Internet Web site at which the consumer has obtained a product or 
service. The consumer acknowledges receipt of the electronic notice. The 
consumer is given 30 days after the date the consumer acknowledges 
receipt to elect to opt out by any reasonable means.
    (ii) The opt-out notice is provided to the consumer by e-mail where 
the consumer has agreed to receive disclosures by e-mail from the person 
sending the notice. The consumer is given 30 days after the e-mail is 
sent to elect to opt out by any reasonable means.
    (3) At the time of an electronic transaction. The opt-out notice is 
provided to the consumer at the time of an electronic transaction, such 
as a transaction conducted on an Internet Web site. The consumer is 
required to decide, as a necessary part of proceeding with the 
transaction, whether to opt out before completing the transaction. There 
is a simple process that the consumer may use to opt out at that time 
using the same mechanism through which the transaction is conducted.
    (4) At the time of an in-person transaction. The opt-out notice is 
provided to the consumer in writing at the time of an in-person 
transaction. The consumer is required to decide, as a necessary part of 
proceeding with the transaction, whether to opt out before completing 
the transaction, and is not permitted to complete the transaction 
without making a choice. There is a simple process that the consumer may 
use during the course of the in-person transaction to opt out, such as 
completing a form that requires consumers to write a ``yes'' or ``no'' 
to indicate their opt-out preference or that requires the consumer to 
check one of two blank check boxes--one that allows consumers to 
indicate that they want to opt out and one that allows consumers to 
indicate that they do not want to opt out.
    (5) By including in a privacy notice. The opt-out notice is included 
in a Gramm-Leach-Bliley Act privacy notice. The consumer is allowed to 
exercise the opt-out within a reasonable period of time and in the same 
manner as the opt-out under that privacy notice.



Sec. 222.25  Reasonable and simple methods of opting out.

    (a) In general. You must not use eligibility information about a 
consumer that you receive from an affiliate to make a solicitation to 
the consumer about your products or services, unless the consumer is 
provided a reasonable and simple method to opt out, as required by Sec. 
222.21(a)(1)(ii) of this part.
    (b) Examples--(1) Reasonable and simple opt-out methods. Reasonable 
and simple methods for exercising the opt-out right include--
    (i) Designating a check-off box in a prominent position on the opt-
out form;

[[Page 69]]

    (ii) Including a reply form and a self-addressed envelope together 
with the opt-out notice;
    (iii) Providing an electronic means to opt out, such as a form that 
can be electronically mailed or processed at an Internet Web site, if 
the consumer agrees to the electronic delivery of information;
    (iv) Providing a toll-free telephone number that consumers may call 
to opt out; or
    (v) Allowing consumers to exercise all of their opt-out rights 
described in a consolidated opt-out notice that includes the privacy 
opt-out under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., the 
affiliate sharing opt-out under the Act, and the affiliate marketing 
opt-out under the Act, by a single method, such as by calling a single 
toll-free telephone number.
    (2) Opt-out methods that are not reasonable and simple. Reasonable 
and simple methods for exercising an opt-out right do not include--
    (i) Requiring the consumer to write his or her own letter;
    (ii) Requiring the consumer to call or write to obtain a form for 
opting out, rather than including the form with the opt-out notice;
    (iii) Requiring the consumer who receives the opt-out notice in 
electronic form only, such as through posting at an Internet Web site, 
to opt out solely by paper mail or by visiting a different Web site 
without providing a link to that site.
    (c) Specific opt-out means. Each consumer may be required to opt out 
through a specific means, as long as that means is reasonable and simple 
for that consumer.



Sec. 222.26  Delivery of opt-out notices.

    (a) In general. The opt-out notice must be provided so that each 
consumer can reasonably be expected to receive actual notice. For opt-
out notices provided electronically, the notice may be provided in 
compliance with either the electronic disclosure provisions in this 
subpart or the provisions in section 101 of the Electronic Signatures in 
Global and National Commerce Act, 15 U.S.C. 7001 et seq.
    (b) Examples of reasonable expectation of actual notice. A consumer 
may reasonably be expected to receive actual notice if the affiliate 
providing the notice:
    (1) Hand-delivers a printed copy of the notice to the consumer;
    (2) Mails a printed copy of the notice to the last known mailing 
address of the consumer;
    (3) Provides a notice by e-mail to a consumer who has agreed to 
receive electronic disclosures by e-mail from the affiliate providing 
the notice; or
    (4) Posts the notice on the Internet Web site at which the consumer 
obtained a product or service electronically and requires the consumer 
to acknowledge receipt of the notice.
    (c) Examples of no reasonable expectation of actual notice. A 
consumer may not reasonably be expected to receive actual notice if the 
affiliate providing the notice:
    (1) Only posts the notice on a sign in a branch or office or 
generally publishes the notice in a newspaper;
    (2) Sends the notice via e-mail to a consumer who has not agreed to 
receive electronic disclosures by e-mail from the affiliate providing 
the notice; or
    (3) Posts the notice on an Internet Web site without requiring the 
consumer to acknowledge receipt of the notice.



Sec. 222.27  Renewal of opt-out.

    (a) Renewal notice and opt-out requirement--(1) In general. After 
the opt-out period expires, you may not make solicitations based on 
eligibility information you receive from an affiliate to a consumer who 
previously opted out, unless:
    (i) The consumer has been given a renewal notice that complies with 
the requirements of this section and Sec. Sec. 222.24 through 222.26 of 
this part, and a reasonable opportunity and a reasonable and simple 
method to renew the opt-out, and the consumer does not renew the opt-
out; or
    (ii) An exception in Sec. 222.21(c) of this part applies.
    (2) Renewal period. Each opt-out renewal must be effective for a 
period of at least five years as provided in Sec. 222.22(b) of this 
part.

[[Page 70]]

    (3) Affiliates who may provide the notice. The notice required by 
this paragraph must be provided:
    (i) By the affiliate that provided the previous opt-out notice, or 
its successor; or
    (ii) As part of a joint renewal notice from two or more members of 
an affiliated group of companies, or their successors, that jointly 
provided the previous opt-out notice.
    (b) Contents of renewal notice. The renewal notice must be clear, 
conspicuous, and concise, and must accurately disclose:
    (1) The name of the affiliate(s) providing the notice. If the notice 
is provided jointly by multiple affiliates and each affiliate shares a 
common name, such as ``ABC,'' then the notice may indicate that it is 
being provided by multiple companies with the ABC name or multiple 
companies in the ABC group or family of companies, for example, by 
stating that the notice is provided by ``all of the ABC companies,'' 
``the ABC banking, credit card, insurance, and securities companies,'' 
or by listing the name of each affiliate providing the notice. But if 
the affiliates providing the joint notice do not all share a common 
name, then the notice must either separately identify each affiliate by 
name or identify each of the common names used by those affiliates, for 
example, by stating that the notice is provided by ``all of the ABC and 
XYZ companies'' or by ``the ABC banking and credit card companies and 
the XYZ insurance companies'';
    (2) A list of the affiliates or types of affiliates whose use of 
eligibility information is covered by the notice, which may include 
companies that become affiliates after the notice is provided to the 
consumer. If each affiliate covered by the notice shares a common name, 
such as ``ABC,'' then the notice may indicate that it applies to 
multiple companies with the ABC name or multiple companies in the ABC 
group or family of companies, for example, by stating that the notice is 
provided by ``all of the ABC companies,'' ``the ABC banking, credit 
card, insurance, and securities companies,'' or by listing the name of 
each affiliate providing the notice. But if the affiliates covered by 
the notice do not all share a common name, then the notice must either 
separately identify each covered affiliate by name or identify each of 
the common names used by those affiliates, for example, by stating that 
the notice applies to ``all of the ABC and XYZ companies'' or to ``the 
ABC banking and credit card companies and the XYZ insurance companies'';
    (3) A general description of the types of eligibility information 
that may be used to make solicitations to the consumer;
    (4) That the consumer previously elected to limit the use of certain 
information to make solicitations to the consumer;
    (5) That the consumer's election has expired or is about to expire;
    (6) That the consumer may elect to renew the consumer's previous 
election;
    (7) If applicable, that the consumer's election to renew will apply 
for the specified period of time stated in the notice and that the 
consumer will be allowed to renew the election once that period expires; 
and
    (8) A reasonable and simple method for the consumer to opt out.
    (c) Timing of the renewal notice.--(1) In general. A renewal notice 
may be provided to the consumer either--
    (i) A reasonable period of time before the expiration of the opt-out 
period; or
    (ii) Any time after the expiration of the opt-out period but before 
solicitations that would have been prohibited by the expired opt-out are 
made to the consumer.
    (2) Combination with annual privacy notice. If you provide an annual 
privacy notice under the Gramm-Leach-Bliley Act, 15 U.S.C. 6801 et seq., 
providing a renewal notice with the last annual privacy notice provided 
to the consumer before expiration of the opt-out period is a reasonable 
period of time before expiration of the opt-out in all cases.
    (d) No effect on opt-out period. An opt-out period may not be 
shortened by sending a renewal notice to the consumer before expiration 
of the opt-out period, even if the consumer does not renew the opt out.

[[Page 71]]



Sec. 222.28  Effective date, compliance date, and prospective application.

    (a) Effective date. This subpart is effective January 1, 2008.
    (b) Mandatory compliance date. Compliance with this subpart is 
required not later than October 1, 2008.
    (c) Prospective application. The provisions of this subpart shall 
not prohibit you from using eligibility information that you receive 
from an affiliate to make solicitations to a consumer if you receive 
such information prior to October 1, 2008. For purposes of this section, 
you are deemed to receive eligibility information when such information 
is placed into a common database and is accessible by you.



                      Subpart D_Medical Information

    Source: 70 FR 70679, Nov. 22, 2005, unless otherwise noted.



Sec. 222.30  Obtaining or using medical information in connection with a 

determination of eligibility for credit.

    (a) Scope. This section applies to
    (1) Any of the following that participates as a creditor in a 
transaction--
    (i) A bank that is a member of the Federal Reserve System (other 
than national banks) and its subsidiaries;
    (ii) A branch or Agency of a foreign bank (other than Federal 
branches, Federal Agencies, and insured State branches of foreign banks) 
and its subsidiaries;
    (iii) A commercial lending company owned or controlled by foreign 
banks;
    (iv) An organization operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.);
    (v) A bank holding company and an affiliate of such holding company 
(other than depository institutions and consumer reporting agencies); or
    (2) Any other person that participates as a creditor in a 
transaction involving a person described in paragraph (a)(1) of this 
section.
    (b) General prohibition on obtaining or using medical information. 
(1) In general. A creditor may not obtain or use medical information 
pertaining to a consumer in connection with any determination of the 
consumer's eligibility, or continued eligibility, for credit, except as 
provided in this section.
    (2) Definitions. (i) Credit has the same meaning as in section 702 
of the Equal Credit Opportunity Act, 15 U.S.C. 1691a.
    (ii) Creditor has the same meaning as in section 702 of the Equal 
Credit Opportunity Act, 15 U.S.C. 1691a.
    (iii) Eligibility, or continued eligibility, for credit means the 
consumer's qualification or fitness to receive, or continue to receive, 
credit, including the terms on which credit is offered. The term does 
not include:
    (A) Any determination of the consumer's qualification or fitness for 
employment, insurance (other than a credit insurance product), or other 
non-credit products or services;
    (B) Authorizing, processing, or documenting a payment or transaction 
on behalf of the consumer in a manner that does not involve a 
determination of the consumer's eligibility, or continued eligibility, 
for credit; or
    (C) Maintaining or servicing the consumer's account in a manner that 
does not involve a determination of the consumer's eligibility, or 
continued eligibility, for credit.
    (c) Rule of construction for obtaining and using unsolicited medical 
information--(1) In general. A creditor does not obtain medical 
information in violation of the prohibition if it receives medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit without specifically requesting medical information.
    (2) Use of unsolicited medical information. A creditor that receives 
unsolicited medical information in the manner described in paragraph 
(c)(1) of this section may use that information in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit to the extent the creditor can rely on at least one of the 
exceptions in Sec. 222.30(d) or (e).
    (3) Examples. A creditor does not obtain medical information in 
violation of the prohibition if, for example:
    (i) In response to a general question regarding a consumer's debts 
or expenses, the creditor receives information that the consumer owes a 
debt to a hospital.

[[Page 72]]

    (ii) In a conversation with the creditor's loan officer, the 
consumer informs the creditor that the consumer has a particular medical 
condition.
    (iii) In connection with a consumer's application for an extension 
of credit, the creditor requests a consumer report from a consumer 
reporting agency and receives medical information in the consumer report 
furnished by the agency even though the creditor did not specifically 
request medical information from the consumer reporting agency.
    (d) Financial information exception for obtaining and using medical 
information--(1) In general. A creditor may obtain and use medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit so long as:
    (i) The information is the type of information routinely used in 
making credit eligibility determinations, such as information relating 
to debts, expenses, income, benefits, assets, collateral, or the purpose 
of the loan, including the use of proceeds;
    (ii) The creditor uses the medical information in a manner and to an 
extent that is no less favorable than it would use comparable 
information that is not medical information in a credit transaction; and
    (iii) The creditor does not take the consumer's physical, mental, or 
behavioral health, condition or history, type of treatment, or prognosis 
into account as part of any such determination.
    (2) Examples. (i) Examples of the types of information routinely 
used in making credit eligibility determinations. Paragraph (d)(1)(i) of 
this section permits a creditor, for example, to obtain and use 
information about:
    (A) The dollar amount, repayment terms, repayment history, and 
similar information regarding medical debts to calculate, measure, or 
verify the repayment ability of the consumer, the use of proceeds, or 
the terms for granting credit;
    (B) The value, condition, and lien status of a medical device that 
may serve as collateral to secure a loan;
    (C) The dollar amount and continued eligibility for disability 
income, workers' compensation income, or other benefits related to 
health or a medical condition that is relied on as a source of 
repayment; or
    (D) The identity of creditors to whom outstanding medical debts are 
owed in connection with an application for credit, including but not 
limited to, a transaction involving the consolidation of medical debts.
    (ii) Examples of uses of medical information consistent with the 
exception. (A) A consumer includes on an application for credit 
information about two $20,000 debts. One debt is to a hospital; the 
other debt is to a retailer. The creditor contacts the hospital and the 
retailer to verify the amount and payment status of the debts. The 
creditor learns that both debts are more than 90 days past due. Any two 
debts of this size that are more than 90 days past due would disqualify 
the consumer under the creditor's established underwriting criteria. The 
creditor denies the application on the basis that the consumer has a 
poor repayment history on outstanding debts. The creditor has used 
medical information in a manner and to an extent no less favorable than 
it would use comparable non-medical information.
    (B) A consumer indicates on an application for a $200,000 mortgage 
loan that she receives $15,000 in long-term disability income each year 
from her former employer and has no other income. Annual income of 
$15,000, regardless of source, would not be sufficient to support the 
requested amount of credit. The creditor denies the application on the 
basis that the projected debt-to-income ratio of the consumer does not 
meet the creditor's underwriting criteria. The creditor has used medical 
information in a manner and to an extent that is no less favorable than 
it would use comparable non-medical information.
    (C) A consumer includes on an application for a $10,000 home equity 
loan that he has a $50,000 debt to a medical facility that specializes 
in treating a potentially terminal disease. The creditor contacts the 
medical facility to verify the debt and obtain the repayment history and 
current status of the loan. The creditor learns that the debt is 
current. The applicant meets the income and other requirements of the

[[Page 73]]

creditor's underwriting guidelines. The creditor grants the application. 
The creditor has used medical information in accordance with the 
exception.
    (iii) Examples of uses of medical information inconsistent with the 
exception. (A) A consumer applies for $25,000 of credit and includes on 
the application information about a $50,000 debt to a hospital. The 
creditor contacts the hospital to verify the amount and payment status 
of the debt, and learns that the debt is current and that the consumer 
has no delinquencies in her repayment history. If the existing debt were 
instead owed to a retail department store, the creditor would approve 
the application and extend credit based on the amount and repayment 
history of the outstanding debt. The creditor, however, denies the 
application because the consumer is indebted to a hospital. The creditor 
has used medical information, here the identity of the medical creditor, 
in a manner and to an extent that is less favorable than it would use 
comparable non-medical information.
    (B) A consumer meets with a loan officer of a creditor to apply for 
a mortgage loan. While filling out the loan application, the consumer 
informs the loan officer orally that she has a potentially terminal 
disease. The consumer meets the creditor's established requirements for 
the requested mortgage loan. The loan officer recommends to the credit 
committee that the consumer be denied credit because the consumer has 
that disease. The credit committee follows the loan officer's 
recommendation and denies the application because the consumer has a 
potentially terminal disease. The creditor has used medical information 
in a manner inconsistent with the exception by taking into account the 
consumer's physical, mental, or behavioral health, condition, or 
history, type of treatment, or prognosis as part of a determination of 
eligibility or continued eligibility for credit.
    (C) A consumer who has an apparent medical condition, such as a 
consumer who uses a wheelchair or an oxygen tank, meets with a loan 
officer to apply for a home equity loan. The consumer meets the 
creditor's established requirements for the requested home equity loan 
and the creditor typically does not require consumers to obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product in connection with such loans. However, based on the consumer's 
apparent medical condition, the loan officer recommends to the credit 
committee that credit be extended to the consumer only if the consumer 
obtains a debt cancellation contract, debt suspension agreement, or 
credit insurance product from a nonaffiliated third party. The credit 
committee agrees with the loan officer's recommendation. The loan 
officer informs the consumer that the consumer must obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product from a nonaffiliated third party to qualify for the loan. The 
consumer obtains one of these products and the creditor approves the 
loan. The creditor has used medical information in a manner inconsistent 
with the exception by taking into account the consumer's physical, 
mental, or behavioral health, condition, or history, type of treatment, 
or prognosis in setting conditions on the consumer's eligibility for 
credit.
    (e) Specific exceptions for obtaining and using medical 
information--(1) In general. A creditor may obtain and use medical 
information pertaining to a consumer in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit--
    (i) To determine whether the use of a power of attorney or legal 
representative that is triggered by a medical condition or event is 
necessary and appropriate or whether the consumer has the legal capacity 
to contract when a person seeks to exercise a power of attorney or act 
as legal representative for a consumer based on an asserted medical 
condition or event;
    (ii) To comply with applicable requirements of local, state, or 
Federal laws;
    (iii) To determine, at the consumer's request, whether the consumer 
qualifies for a legally permissible special credit program or credit-
related assistance program that is--
    (A) Designed to meet the special needs of consumers with medical 
conditions; and

[[Page 74]]

    (B) Established and administered pursuant to a written plan that--
    (1) Identifies the class of persons that the program is designed to 
benefit; and
    (2) Sets forth the procedures and standards for extending credit or 
providing other credit-related assistance under the program;
    (iv) To the extent necessary for purposes of fraud prevention or 
detection;
    (v) In the case of credit for the purpose of financing medical 
products or services, to determine and verify the medical purpose of a 
loan and the use of proceeds;
    (vi) Consistent with safe and sound practices, if the consumer or 
the consumer's legal representative specifically requests that the 
creditor use medical information in determining the consumer's 
eligibility, or continued eligibility, for credit, to accommodate the 
consumer's particular circumstances, and such request is documented by 
the creditor;
    (vii) Consistent with safe and sound practices, to determine whether 
the provisions of a forbearance practice or program that is triggered by 
a medical condition or event apply to a consumer;
    (viii) To determine the consumer's eligibility for, the triggering 
of, or the reactivation of a debt cancellation contract or debt 
suspension agreement if a medical condition or event is a triggering 
event for the provision of benefits under the contract or agreement; or
    (ix) To determine the consumer's eligibility for, the triggering of, 
or the reactivation of a credit insurance product if a medical condition 
or event is a triggering event for the provision of benefits under the 
product.
    (2) Example of determining eligibility for a special credit program 
or credit assistance program. A not-for-profit organization establishes 
a credit assistance program pursuant to a written plan that is designed 
to assist disabled veterans in purchasing homes by subsidizing the down 
payment for the home purchase mortgage loans of qualifying veterans. The 
organization works through mortgage lenders and requires mortgage 
lenders to obtain medical information about the disability of any 
consumer that seeks to qualify for the program, use that information to 
verify the consumer's eligibility for the program, and forward that 
information to the organization. A consumer who is a veteran applies to 
a creditor for a home purchase mortgage loan. The creditor informs the 
consumer about the credit assistance program for disabled veterans and 
the consumer seeks to qualify for the program. Assuming that the program 
complies with all applicable law, including applicable fair lending 
laws, the creditor may obtain and use medical information about the 
medical condition and disability, if any, of the consumer to determine 
whether the consumer qualifies for the credit assistance program.
    (3) Examples of verifying the medical purpose of the loan or the use 
of proceeds. (i) If a consumer applies for $10,000 of credit for the 
purpose of financing vision correction surgery, the creditor may verify 
with the surgeon that the procedure will be performed. If the surgeon 
reports that surgery will not be performed on the consumer, the creditor 
may use that medical information to deny the consumer's application for 
credit, because the loan would not be used for the stated purpose.
    (ii) If a consumer applies for $10,000 of credit for the purpose of 
financing cosmetic surgery, the creditor may confirm the cost of the 
procedure with the surgeon. If the surgeon reports that the cost of the 
procedure is $5,000, the creditor may use that medical information to 
offer the consumer only $5,000 of credit.
    (iii) A creditor has an established medical loan program for 
financing particular elective surgical procedures. The creditor receives 
a loan application from a consumer requesting $10,000 of credit under 
the established loan program for an elective surgical procedure. The 
consumer indicates on the application that the purpose of the loan is to 
finance an elective surgical procedure not eligible for funding under 
the guidelines of the established loan program. The creditor may deny 
the consumer's application because the purpose of the loan is not for a 
particular procedure funded by the established loan program.
    (4) Examples of obtaining and using medical information at the 
request of the

[[Page 75]]

consumer. (i) If a consumer applies for a loan and specifically requests 
that the creditor consider the consumer's medical disability at the 
relevant time as an explanation for adverse payment history information 
in his credit report, the creditor may consider such medical information 
in evaluating the consumer's willingness and ability to repay the 
requested loan to accommodate the consumer's particular circumstances, 
consistent with safe and sound practices. The creditor may also decline 
to consider such medical information to accommodate the consumer, but 
may evaluate the consumer's application in accordance with its otherwise 
applicable underwriting criteria. The creditor may not deny the 
consumer's application or otherwise treat the consumer less favorably 
because the consumer specifically requested a medical accommodation, if 
the creditor would have extended the credit or treated the consumer more 
favorably under the creditor's otherwise applicable underwriting 
criteria.
    (ii) If a consumer applies for a loan by telephone and explains that 
his income has been and will continue to be interrupted on account of a 
medical condition and that he expects to repay the loan by liquidating 
assets, the creditor may, but is not required to, evaluate the 
application using the sale of assets as the primary source of repayment, 
consistent with safe and sound practices, provided that the creditor 
documents the consumer's request by recording the oral conversation or 
making a notation of the request in the consumer's file.
    (iii) If a consumer applies for a loan and the application form 
provides a space where the consumer may provide any other information or 
special circumstances, whether medical or non-medical, that the consumer 
would like the creditor to consider in evaluating the consumer's 
application, the creditor may use medical information provided by the 
consumer in that space on that application to accommodate the consumer's 
application for credit, consistent with safe and sound practices, or may 
disregard that information.
    (iv) If a consumer specifically requests that the creditor use 
medical information in determining the consumer's eligibility, or 
continued eligibility, for credit and provides the creditor with medical 
information for that purpose, and the creditor determines that it needs 
additional information regarding the consumer's circumstances, the 
creditor may request, obtain, and use additional medical information 
about the consumer as necessary to verify the information provided by 
the consumer or to determine whether to make an accommodation for the 
consumer. The consumer may decline to provide additional information, 
withdraw the request for an accommodation, and have the application 
considered under the creditor's otherwise applicable underwriting 
criteria.
    (v) If a consumer completes and signs a credit application that is 
not for medical purpose credit and the application contains boilerplate 
language that routinely requests medical information from the consumer 
or that indicates that by applying for credit the consumer authorizes or 
consents to the creditor obtaining and using medical information in 
connection with a determination of the consumer's eligibility, or 
continued eligibility, for credit, the consumer has not specifically 
requested that the creditor obtain and use medical information to 
accommodate the consumer's particular circumstances.
    (5) Example of a forbearance practice or program. After an 
appropriate safety and soundness review, a creditor institutes a program 
that allows consumers who are or will be hospitalized to defer payments 
as needed for up to three months, without penalty, if the credit account 
has been open for more than one year and has not previously been in 
default, and the consumer provides confirming documentation at an 
appropriate time. A consumer is hospitalized and does not pay her bill 
for a particular month. This consumer has had a credit account with the 
creditor for more than one year and has not previously been in default. 
The creditor attempts to contact the consumer and speaks with the 
consumer's adult child, who is not the consumer's legal representative. 
The adult child informs the creditor that the consumer is hospitalized 
and is unable to pay the bill

[[Page 76]]

at that time. The creditor defers payments for up to three months, 
without penalty, for the hospitalized consumer and sends the consumer a 
letter confirming this practice and the date on which the next payment 
will be due. The creditor has obtained and used medical information to 
determine whether the provisions of a medically-triggered forbearance 
practice or program apply to a consumer.



Sec. 222.31  Limits on redisclosure of information.

    (a) Scope. This section applies to banks that are members of the 
Federal Reserve System (other than national banks) and their respective 
operating subsidiaries, 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, organizations operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.), and bank 
holding companies and affiliates of such holding companies (other than 
depository institutions and consumer reporting agencies).
    (b) Limits on redisclosure. If a person described in paragraph (a) 
of this section receives medical information about a consumer from a 
consumer reporting agency or its affiliate, the person must not disclose 
that information to any other person, except as necessary to carry out 
the purpose for which the information was initially disclosed, or as 
otherwise permitted by statute, regulation, or order.



Sec. 222.32  Sharing medical information with affiliates.

    (a) Scope. This section applies to banks that are members of the 
Federal Reserve System (other than national banks) and their respective 
operating subsidiaries, 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, organizations operating under section 25 or 25A of the 
Federal Reserve Act (12 U.S.C. 601 et seq., and 611 et seq.).
    (b) In general. The exclusions from the term ``consumer report'' in 
section 603(d)(2) of the Act that allow the sharing of information with 
affiliates do not apply to a person described in paragraph (a) of this 
section if that person communicates to an affiliate:
    (1) Medical information;
    (2) An individualized list or description based on the payment 
transactions of the consumer for medical products or services; or
    (3) An aggregate list of identified consumers based on payment 
transactions for medical products or services.
    (c) Exceptions. A person described in paragraph (a) of this section 
may rely on the exclusions from the term ``consumer report'' in section 
603(d)(2) of the Act to communicate the information in paragraph (b) of 
this section to an affiliate:
    (1) In connection with the business of insurance or annuities 
(including the activities described in section 18B of the model Privacy 
of Consumer Financial and Health Information Regulation issued by the 
National Association of Insurance Commissioners, as in effect on January 
1, 2003);
    (2) For any purpose permitted without authorization under the 
regulations promulgated by the Department of Health and Human Services 
pursuant to the Health Insurance Portability and Accountability Act of 
1996 (HIPAA);
    (3) For any purpose referred to in section 1179 of HIPAA;
    (4) For any purpose described in section 502(e) of the Gramm-Leach-
Bliley Act;
    (5) In connection with a determination of the consumer's 
eligibility, or continued eligibility, for credit consistent with Sec. 
222.30 of this part; or
    (6) As otherwise permitted by order of the Board.

Subparts E-H [Reserved]



 Subpart I_Duties of Users of Consumer Reports Regarding Identity Theft

    Source: 69 FR 77618, Dec. 28, 2004, unless otherwise noted.

[[Page 77]]



Sec. 222.80-222.81  [Reserved]



Sec. 222.82  Duties of users regarding address discrepancies.

    (a) Scope. This section applies to a user of consumer reports (user) 
that receives a notice of address discrepancy from a consumer reporting 
agency, and that is a member bank of the Federal Reserve System (other 
than a national bank) and its respective operating subsidiaries, a 
branch or agency of a foreign bank (other than a Federal branch, Federal 
agency, or insured State branch of a foreign bank), commercial lending 
company owned or controlled by a foreign bank, and an organization 
operating under section 25 or 25A of the Federal Reserve Act (12 U.S.C. 
601 et seq., and 611 et seq.).
    (b) Definition. For purposes of this section, a notice of address 
discrepancy means a notice sent to a user by a consumer reporting agency 
pursuant to 15 U.S.C. 1681c(h)(1), that informs the user of a 
substantial difference between the address for the consumer that the 
user provided to request the consumer report and the address(es) in the 
agency's file for the consumer.
    (c) Reasonable belief--(1) Requirement to form a reasonable belief. 
A user must develop and implement reasonable policies and procedures 
designed to enable the user to form a reasonable belief that a consumer 
report relates to the consumer about whom it has requested the report, 
when the user receives a notice of address discrepancy.
    (2) Examples of reasonable policies and procedures. (i) Comparing 
the information in the consumer report provided by the consumer 
reporting agency with information the user:
    (A) Obtains and uses to verify the consumer's identity in accordance 
with the requirements of the Customer Information Program (CIP) rules 
implementing 31 U.S.C. 5318(l) (31 CFR 103.121);
    (B) Maintains in its own records, such as applications, change of 
address notifications, other customer account records, or retained CIP 
documentation; or
    (C) Obtains from third-party sources; or
    (ii) Verifying the information in the consumer report provided by 
the consumer reporting agency with the consumer.
    (d) Consumer's address.--(1) Requirement to furnish consumer's 
address to a consumer reporting agency. A user must develop and 
implement reasonable policies and procedures for furnishing an address 
for the consumer that the user has reasonably confirmed is accurate to 
the consumer reporting agency from whom it received the notice of 
address discrepancy when the user:
    (i) Can form a reasonable belief that the consumer report relates to 
the consumer about whom the user requested the report;
    (ii) Establishes a continuing relationship with the consumer; and
    (iii) Regularly and in the ordinary course of business furnishes 
information to the consumer reporting agency from which the notice of 
address discrepancy relating to the consumer was obtained.
    (2) Examples of confirmation methods. The user may reasonably 
confirm an address is accurate by:
    (i) Verifying the address with the consumer about whom it has 
requested the report;
    (ii) Reviewing its own records to verify the address of the 
consumer;
    (iii) Verifying the address through third-party sources; or
    (iv) Using other reasonable means.
    (3) Timing. The policies and procedures developed in accordance with 
paragraph (d)(1) of this section must provide that the user will furnish 
the consumer's address that the user has reasonably confirmed is 
accurate to the consumer reporting agency as part of the information it 
regularly furnishes for the reporting period in which it establishes a 
relationship with the consumer.

[Reg. V, 72 FR 63756, Nov. 9, 2007]



Sec. 222.83  Disposal of consumer information.

    (a) Definitions as used in this section. (1) You means member banks 
of the Federal Reserve System (other than national banks) and their 
respective operating subsidiaries, branches and agencies of foreign 
banks (other than Federal branches, Federal agencies and insured State 
branches of foreign banks), commercial lending companies

[[Page 78]]

owned or controlled by foreign banks, and organizations operating under 
section 25 or 25A of the Federal Reserve Act (12 U.S.C. 601 et seq., 611 
et seq.).
    (b) In general. You must properly dispose of any consumer 
information that you maintain or otherwise possess in accordance with 
the Interagency Guidelines Establishing Information Security Standards, 
as required under sections 208.3(d) (Regulation H), 211.5(l) and 
211.24(i) (Regulation K) of this chapter, to the extent that you are 
covered by the scope of the Guidelines.
    (c) Rule of construction. Nothing in this section shall be construed 
to:
    (1) Require you to maintain or destroy any record pertaining to a 
consumer that is not imposed under any other law; or
    (2) Alter or affect any requirement imposed under any other 
provision of law to maintain or destroy such a record.



                   Subpart J_Identity Theft Red Flags

    Source: Reg. V, 72 FR 63758, Nov. 9, 2007, unless otherwise noted.



Sec. 222.90  Duties regarding the detection, prevention, and mitigation of 

identity theft.

    (a) Scope. This section applies to financial institutions and 
creditors that are member banks of the Federal Reserve System (other 
than national banks) and their respective operating subsidiaries, 
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 (12 U.S.C. 601 et seq., and 611 et seq.).
    (b) Definitions. For purposes of this section and appendix J, the 
following definitions apply:
    (1) Account means a continuing relationship established by a person 
with a financial institution or creditor to obtain a product or service 
for personal, family, household or business purposes. Account includes:
    (i) An extension of credit, such as the purchase of property or 
services involving a deferred payment; and
    (ii) A deposit account.
    (2) The term board of directors includes:
    (i) In the case of a branch or agency of a foreign bank, the 
managing official in charge of the branch or agency; and
    (ii) In the case of any other creditor that does not have a board of 
directors, a designated employee at the level of senior management.
    (3) Covered account means:
    (i) An account that a financial institution or creditor offers or 
maintains, primarily for personal, family, or household purposes, that 
involves or is designed to permit multiple payments or transactions, 
such as a credit card account, mortgage loan, automobile loan, margin 
account, cell phone account, utility account, checking account, or 
savings account; and
    (ii) Any other account that the financial institution or creditor 
offers or maintains for which there is a reasonably foreseeable risk to 
customers or to the safety and soundness of the financial institution or 
creditor from identity theft, including financial, operational, 
compliance, reputation, or litigation risks.
    (4) Credit has the same meaning as in 15 U.S.C. 1681a(r)(5).
    (5) Creditor has the same meaning as in 15 U.S.C. 1681a(r)(5), and 
includes lenders such as banks, finance companies, automobile dealers, 
mortgage brokers, utility companies, and telecommunications companies.
    (6) Customer means a person that has a covered account with a 
financial institution or creditor.
    (7) Financial institution has the same meaning as in 15 U.S.C. 
1681a(t).
    (8) Identity theft has the same meaning as in 16 CFR 603.2(a).
    (9) Red Flag means a pattern, practice, or specific activity that 
indicates the possible existence of identity theft.
    (10) Service provider means a person that provides a service 
directly to the financial institution or creditor.
    (c) Periodic Identification of Covered Accounts. Each financial 
institution or creditor must periodically determine whether it offers or 
maintains covered accounts. As a part of this determination, a financial 
institution or creditor

[[Page 79]]

must conduct a risk assessment to determine whether it offers or 
maintains covered accounts described in paragraph (b)(3)(ii) of this 
section, taking into consideration:
    (1) The methods it provides to open its accounts;
    (2) The methods it provides to access its accounts; and
    (3) Its previous experiences with identity theft.
    (d) Establishment of an Identity Theft Prevention Program--(1) 
Program requirement. Each financial institution or creditor that offers 
or maintains one or more covered accounts must develop and implement a 
written Identity Theft Prevention Program (Program) that is designed to 
detect, prevent, and mitigate identity theft in connection with the 
opening of a covered account or any existing covered account. The 
Program must be appropriate to the size and complexity of the financial 
institution or creditor and the nature and scope of its activities.
    (2) Elements of the Program. The Program must include reasonable 
policies and procedures to:
    (i) Identify relevant Red Flags for the covered accounts that the 
financial institution or creditor offers or maintains, and incorporate 
those Red Flags into its Program;
    (ii) Detect Red Flags that have been incorporated into the Program 
of the financial institution or creditor;
    (iii) Respond appropriately to any Red Flags that are detected 
pursuant to paragraph (d)(2)(ii) of this section to prevent and mitigate 
identity theft; and
    (iv) Ensure the Program (including the Red Flags determined to be 
relevant) is updated periodically, to reflect changes in risks to 
customers and to the safety and soundness of the financial institution 
or creditor from identity theft.
    (e) Administration of the Program. Each financial institution or 
creditor that is required to implement a Program must provide for the 
continued administration of the Program and must:
    (1) Obtain approval of the initial written Program from either its 
board of directors or an appropriate committee of the board of 
directors;
    (2) Involve the board of directors, an appropriate committee 
thereof, or a designated employee at the level of senior management in 
the oversight, development, implementation and administration of the 
Program;
    (3) Train staff, as necessary, to effectively implement the Program; 
and
    (4) Exercise appropriate and effective oversight of service provider 
arrangements.
    (f) Guidelines. Each financial institution or creditor that is 
required to implement a Program must consider the guidelines in appendix 
J of this part and include in its Program those guidelines that are 
appropriate.



Sec. 222.91  Duties of card issuers regarding changes of address.

    (a) Scope. This section applies to a person described in Sec. 
222.90(a) that issues a debit or credit card (card issuer).
    (b) Definitions. For purposes of this section:
    (1) Cardholder means a consumer who has been issued a credit or 
debit card.
    (2) Clear and conspicuous means reasonably understandable and 
designed to call attention to the nature and significance of the 
information presented.
    (c) Address validation requirements. A card issuer must establish 
and implement reasonable policies and procedures to assess the validity 
of a change of address if it receives notification of a change of 
address for a consumer's debit or credit card account and, within a 
short period of time afterwards (during at least the first 30 days after 
it receives such notification), the card issuer receives a request for 
an additional or replacement card for the same account. Under these 
circumstances, the card issuer may not issue an additional or 
replacement card, until, in accordance with its reasonable policies and 
procedures and for the purpose of assessing the validity of the change 
of address, the card issuer:
    (1)(i) Notifies the cardholder of the request:
    (A) At the cardholder's former address; or
    (B) By any other means of communication that the card issuer and the 
cardholder have previously agreed to use; and

[[Page 80]]

    (ii) Provides to the cardholder a reasonable means of promptly 
reporting incorrect address changes; or
    (2) Otherwise assesses the validity of the change of address in 
accordance with the policies and procedures the card issuer has 
established pursuant to Sec. 222.90 of this part.
    (d) Alternative timing of address validation. A card issuer may 
satisfy the requirements of paragraph (c) of this section if it 
validates an address pursuant to the methods in paragraph (c)(1) or 
(c)(2) of this section when it receives an address change notification, 
before it receives a request for an additional or replacement card.
    (e) Form of notice. Any written or electronic notice that the card 
issuer provides under this paragraph must be clear and conspicuous and 
provided separately from its regular correspondence with the cardholder.



                 Sec. Appendix A to Part 222 [Reserved]



   Sec. Appendix B to Part 222--Model Notices of Furnishing Negative 
                               Information

    a. Although use of the model notices is not required, a financial 
institution that is subject to section 623(a)(7) of the FCRA shall be 
deemed to be in compliance with the notice requirement in section 
623(a)(7) of the FCRA if the institution properly uses the model notices 
in this appendix (as applicable).
    b. A financial institution may use Model Notice B-1 if the 
institution provides the notice prior to furnishing negative information 
to a nationwide consumer reporting agency.
    c. A financial institution may use Model Notice B-2 if the 
institution provides the notice after furnishing negative information to 
a nationwide consumer reporting agency.
    d. Financial institutions may make certain changes to the language 
or format of the model notices without losing the safe harbor from 
liability provided by the model notices. The changes to the model 
notices may not be so extensive as to affect the substance, clarity, or 
meaningful sequence of the language in the model notices. Financial 
institutions making such extensive revisions will lose the safe harbor 
from liability that this appendix provides. Acceptable changes include, 
for example,
    1. Rearranging the order of the references to ``late payment(s),'' 
or ``missed payment(s)''
    2. Pluralizing the terms ``credit bureau,'' ``credit report,'' and 
``account''
    3. Specifying the particular type of account on which information 
may be furnished, such as ``credit card account''
    4. Rearranging in Model Notice B-1 the phrases ``information about 
your account'' and ``to credit bureaus'' such that it would read ``We 
may report to credit bureaus information about your account.''

                            Model Notice B-1

    We may report information about your account to credit bureaus. Late 
payments, missed payments, or other defaults on your account may be 
reflected in your credit report.

                            Model Notice B-2

    We have told a credit bureau about a late payment, missed payment or 
other default on your account. This information may be reflected in your 
credit report.

[69 FR 33285, June 15, 2004]



      Sec. Appendix C to Part 222--Model Forms for Opt-Out Notices

    a. Although use of the model forms is not required, use of the model 
forms in this appendix (as applicable) complies with the requirement in 
section 624 of the Act for clear, conspicuous, and concise notices.
    b. Certain changes may be made to the language or format of the 
model forms without losing the protection from liability afforded by use 
of the model forms. These changes may not be so extensive as to affect 
the substance, clarity, or meaningful sequence of the language in the 
model forms. Persons making such extensive revisions will lose the safe 
harbor that this appendix provides. Acceptable changes include, for 
example:
    1. Rearranging the order of the references to ``your income,'' 
``your account history,'' and ``your credit score.''
    2. Substituting other types of information for ``income,'' ``account 
history,'' or ``credit score'' for accuracy, such as ``payment 
history,'' ``credit history,'' ``payoff status,'' or ``claims history.''
    3. Substituting a clearer and more accurate description of the 
affiliates providing or covered by the notice for phrases such as ``the 
[ABC] group of companies,'' including without limitation a statement 
that the entity providing the notice recently purchased the consumer's 
account.
    4. Substituting other types of affiliates covered by the notice for 
``credit card,'' ``insurance,'' or ``securities'' affiliates.
    5. Omitting items that are not accurate or applicable. For example, 
if a person does not limit the duration of the opt-out period, the 
notice may omit information about the renewal notice.
    6. Adding a statement informing consumers how much time they have to 
opt out

[[Page 81]]

before shared eligibility information may be used to make solicitations 
to them.
    7. Adding a statement that the consumer may exercise the right to 
opt out at any time.
    8. Adding the following statement, if accurate: ``If you previously 
opted out, you do not need to do so again.''
    9. Providing a place on the form for the consumer to fill in 
identifying information, such as his or her name and address

C-1 Model Form for Initial Opt-out Notice (Single-Affiliate Notice)

C-2 Model Form for Initial Opt-out Notice (Joint Notice)
C-3 Model Form for Renewal Notice (Single-Affiliate Notice)
C-4 Model Form for Renewal Notice (Joint Notice)
C-5 Model Form for Voluntary ``No Marketing'' Notice

 C-1--Model Form for Initial Opt-out Notice (Single-Affiliate Notice)--
          [Your Choice To Limit Marketing]/[Marketing Opt-out]

     [Name of Affiliate] is providing this notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from our affiliates. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from our affiliates.]
     You may limit our affiliates in the [ABC] group 
of companies, such as our [credit card, insurance, and securities] 
affiliates, from marketing their products or services to you based on 
your personal information that we collect and share with them. This 
information includes your [income], your [account history with us], and 
your [credit score].
     Your choice to limit marketing offers from our 
affiliates will apply [until you tell us to change your choice]/[for x 
years from when you tell us your choice]/[for at least 5 years from when 
you tell us your choice]. [Include if the opt-out period expires.] Once 
that period expires, you will receive a renewal notice that will allow 
you to continue to limit marketing offers from our affiliates for 
[another x years]/[at least another 5 years].
     [Include, if applicable, in a subsequent notice, 
including an annual notice, for consumers who may have previously opted 
out.] If you have already made a choice to limit marketing offers from 
our affiliates, you do not need to act again until you receive the 
renewal notice.
    To limit marketing offers, contact us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

    --Do not allow your affiliates to use my personal information to 
market to me.

C-2--Model Form for Initial Opt-out Notice (Joint Notice)--[Your Choice 
                 To Limit Marketing]/[Marketing Opt-out]

     The [ABC group of companies] is providing this 
notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from the [ABC] companies. Federal law 
also requires us to give you this notice to tell you about your choice 
to limit marketing from the [ABC] companies.]
     You may limit the [ABC] companies, such as the 
[ABC credit card, insurance, and securities] affiliates, from marketing 
their products or services to you based on your personal information 
that they receive from other [ABC] companies. This information includes 
your [income], your [account history], and your [credit score].
     Your choice to limit marketing offers from the 
[ABC] companies will apply [until you tell us to change your choice]/
[for x years from when you tell us your choice]/[for at least 5 years 
from when you tell us your choice]. [Include if the opt-out period 
expires.] Once that period expires, you will receive a renewal notice 
that will allow you to continue to limit marketing offers from the [ABC] 
companies for [another x years]/[at least another 5 years].
     [Include, if applicable, in a subsequent notice, 
including an annual notice, for consumers who may have previously opted 
out.] If you have already made a choice to limit marketing offers from 
the [ABC] companies, you do not need to act again until you receive the 
renewal notice.
    To limit marketing offers, contact us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

    --Do not allow any company [in the ABC group of companies] to use my 
personal information to market to me.

C-3--Model Form for Renewal Notice (Single-Affiliate Notice)--[Renewing 
    Your Choice To Limit Marketing]/[Renewing Your Marketing Opt-Out]

     [Name of Affiliate] is providing this notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from our affiliates. Federal law also 
requires us to give you this notice to tell you about your choice to 
limit marketing from our affiliates.]

[[Page 82]]

     You previously chose to limit our affiliates in 
the [ABC] group of companies, such as our [credit card, insurance, and 
securities] affiliates, from marketing their products or services to you 
based on your personal information that we share with them. This 
information includes your [income], your [account history with us], and 
your [credit score].
     Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

--Renew my choice to limit marketing for [x] more years.

C-4--Model Form for Renewal Notice (Joint Notice)--[Renewing Your Choice 
          To Limit Marketing]/[Renewing Your Marketing Opt-Out]

     The [ABC group of companies] is providing this 
notice.
     [Optional: Federal law gives you the right to 
limit some but not all marketing from the [ABC] companies. Federal law 
also requires us to give you this notice to tell you about your choice 
to limit marketing from the [ABC] companies.]
     You previously chose to limit the [ABC] 
companies, such as the [ABC credit card, insurance, and securities] 
affiliates, from marketing their products or services to you based on 
your personal information that they receive from other ABC companies. 
This information includes your [income], your [account history], and 
your [credit score].
     Your choice has expired or is about to expire.
    To renew your choice to limit marketing for [x] more years, contact 
us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

--Renew my choice to limit marketing for [x] more years.

 C-5--Model Form for Voluntary ``No Marketing'' Notice--Your Choice To 
                             Stop Marketing

     [Name of Affiliate] is providing this notice.
     You may choose to stop all marketing from us and 
our affiliates.
    To stop all marketing, contact us [include all that apply]:
     By telephone: 1-877--

     On the Web: www.---.com
     By mail: Check the box and complete the form 
below, and send the form to:

[Company name]
[Company address]

--Do not market to me.

[72 FR 62962, Nov. 7, 2007]



               Sec. Appendices D-I to Part 222 [Reserved]



 Sec. Appendix J to Part 222--Interagency Guidelines on Identity Theft 

                  Detection, Prevention, and Mitigation

    Section 222.90 of this part requires each financial institution and 
creditor that offers or maintains one or more covered accounts, as 
defined in Sec. 222.90(b)(3) of this part, to develop and provide for 
the continued administration of a written Program to detect, prevent, 
and mitigate identity theft in connection with the opening of a covered 
account or any existing covered account. These guidelines are intended 
to assist financial institutions and creditors in the formulation and 
maintenance of a Program that satisfies the requirements of Sec. 222.90 
of this part.

                             I. The Program

    In designing its Program, a financial institution or creditor may 
incorporate, as appropriate, its existing policies, procedures, and 
other arrangements that control reasonably foreseeable risks to 
customers or to the safety and soundness of the financial institution or 
creditor from identity theft.

                   II. Identifying Relevant Red Flags

    (a) Risk Factors. A financial institution or creditor should 
consider the following factors in identifying relevant Red Flags for 
covered accounts, as appropriate:
    (1) The types of covered accounts it offers or maintains;
    (2) The methods it provides to open its covered accounts;
    (3) The methods it provides to access its covered accounts; and
    (4) Its previous experiences with identity theft.
    (b) Sources of Red Flags. Financial institutions and creditors 
should incorporate relevant Red Flags from sources such as:
    (1) Incidents of identity theft that the financial institution or 
creditor has experienced;
    (2) Methods of identity theft that the financial institution or 
creditor has identified that reflect changes in identity theft risks; 
and

[[Page 83]]

    (3) Applicable supervisory guidance.
    (c) Categories of Red Flags. The Program should include relevant Red 
Flags from the following categories, as appropriate. Examples of Red 
Flags from each of these categories are appended as Supplement A to this 
appendix J.
    (1) Alerts, notifications, or other warnings received from consumer 
reporting agencies or service providers, such as fraud detection 
services;
    (2) The presentation of suspicious documents;
    (3) The presentation of suspicious personal identifying information, 
such as a suspicious address change;
    (4) The unusual use of, or other suspicious activity related to, a 
covered account; and
    (5) Notice from customers, victims of identity theft, law 
enforcement authorities, or other persons regarding possible identity 
theft in connection with covered accounts held by the financial 
institution or creditor.

                        III. Detecting Red Flags

    The Program's policies and procedures should address the detection 
of Red Flags in connection with the opening of covered accounts and 
existing covered accounts, such as by:
    (a) Obtaining identifying information about, and verifying the 
identity of, a person opening a covered account, for example, using the 
policies and procedures regarding identification and verification set 
forth in the Customer Identification Program rules implementing 31 
U.S.C. 5318(l) (31 CFR 103.121); and
    (b) Authenticating customers, monitoring transactions, and verifying 
the validity of change of address requests, in the case of existing 
covered accounts.

              IV. Preventing and Mitigating Identity Theft

    The Program's policies and procedures should provide for appropriate 
responses to the Red Flags the financial institution or creditor has 
detected that are commensurate with the degree of risk posed. In 
determining an appropriate response, a financial institution or creditor 
should consider aggravating factors that may heighten the risk of 
identity theft, such as a data security incident that results in 
unauthorized access to a customer's account records held by the 
financial institution, creditor, or third party, or notice that a 
customer has provided information related to a covered account held by 
the financial institution or creditor to someone fraudulently claiming 
to represent the financial institution or creditor or to a fraudulent 
website. Appropriate responses may include the following:
    (a) Monitoring a covered account for evidence of identity theft;
    (b) Contacting the customer;
    (c) Changing any passwords, security codes, or other security 
devices that permit access to a covered account;
    (d) Reopening a covered account with a new account number;
    (e) Not opening a new covered account;
    (f) Closing an existing covered account;
    (g) Not attempting to collect on a covered account or not selling a 
covered account to a debt collector;
    (h) Notifying law enforcement; or
    (i) Determining that no response is warranted under the particular 
circumstances.

                         V. Updating the Program

    Financial institutions and creditors should update the Program 
(including the Red Flags determined to be relevant) periodically, to 
reflect changes in risks to customers or to the safety and soundness of 
the financial institution or creditor from identity theft, based on 
factors such as:
    (a) The experiences of the financial institution or creditor with 
identity theft;
    (b) Changes in methods of identity theft;
    (c) Changes in methods to detect, prevent, and mitigate identity 
theft;
    (d) Changes in the types of accounts that the financial institution 
or creditor offers or maintains; and
    (e) Changes in the business arrangements of the financial 
institution or creditor, including mergers, acquisitions, alliances, 
joint ventures, and service provider arrangements.

                VI. Methods for Administering the Program

    (a) Oversight of Program. Oversight by the board of directors, an 
appropriate committee of the board, or a designated employee at the 
level of senior management should include:
    (1) Assigning specific responsibility for the Program's 
implementation;
    (2) Reviewing reports prepared by staff regarding compliance by the 
financial institution or creditor with Sec. 222.90 of this part; and
    (3) Approving material changes to the Program as necessary to 
address changing identity theft risks.
    (b) Reports. (1) In general. Staff of the financial institution or 
creditor responsible for development, implementation, and administration 
of its Program should report to the board of directors, an appropriate 
committee of the board, or a designated employee at the level of senior 
management, at least annually, on compliance by the financial 
institution or creditor with Sec. 222.90 of this part.
    (2) Contents of report. The report should address material matters 
related to the Program and evaluate issues such as: the effectiveness of 
the policies and procedures of the financial institution or creditor in 
addressing the risk of identity theft in connection with the opening of 
covered accounts and with respect to existing covered accounts;

[[Page 84]]

service provider arrangements; significant incidents involving identity 
theft and management's response; and recommendations for material 
changes to the Program.
    (c) Oversight of service provider arrangements. Whenever a financial 
institution or creditor engages a service provider to perform an 
activity in connection with one or more covered accounts the financial 
institution or creditor should take steps to ensure that the activity of 
the service provider is conducted in accordance with reasonable policies 
and procedures designed to detect, prevent, and mitigate the risk of 
identity theft. For example, a financial institution or creditor could 
require the service provider by contract to have policies and procedures 
to detect relevant Red Flags that may arise in the performance of the 
service provider's activities, and either report the Red Flags to the 
financial institution or creditor, or to take appropriate steps to 
prevent or mitigate identity theft.

                VII. Other Applicable Legal Requirements

    Financial institutions and creditors should be mindful of other 
related legal requirements that may be applicable, such as:
    (a) For financial institutions and creditors that are subject to 31 
U.S.C. 5318(g), filing a Suspicious Activity Report in accordance with 
applicable law and regulation;
    (b) Implementing any requirements under 15 U.S.C. 1681c-1(h) 
regarding the circumstances under which credit may be extended when the 
financial institution or creditor detects a fraud or active duty alert;
    (c) Implementing any requirements for furnishers of information to 
consumer reporting agencies under 15 U.S.C. 1681s-2, for example, to 
correct or update inaccurate or incomplete information, and to not 
report information that the furnisher has reasonable cause to believe is 
inaccurate; and
    (d) Complying with the prohibitions in 15 U.S.C. 1681m on the sale, 
transfer, and placement for collection of certain debts resulting from 
identity theft.

                       Supplement A to Appendix J

    In addition to incorporating Red Flags from the sources recommended 
in section II.b. of the Guidelines in appendix J of this part, each 
financial institution or creditor may consider incorporating into its 
Program, whether singly or in combination, Red Flags from the following 
illustrative examples in connection with covered accounts:

   Alerts, Notifications or Warnings from a Consumer Reporting Agency

    1. A fraud or active duty alert is included with a consumer report.
    2. A consumer reporting agency provides a notice of credit freeze in 
response to a request for a consumer report.
    3. A consumer reporting agency provides a notice of address 
discrepancy, as defined in Sec. 222.82(b) of this part.
    4. A consumer report indicates a pattern of activity that is 
inconsistent with the history and usual pattern of activity of an 
applicant or customer, such as:
    a. A recent and significant increase in the volume of inquiries;
    b. An unusual number of recently established credit relationships;
    c. A material change in the use of credit, especially with respect 
to recently established credit relationships; or
    d. An account that was closed for cause or identified for abuse of 
account privileges by a financial institution or creditor.

                          Suspicious Documents

    5. Documents provided for identification appear to have been altered 
or forged.
    6. The photograph or physical description on the identification is 
not consistent with the appearance of the applicant or customer 
presenting the identification.
    7. Other information on the identification is not consistent with 
information provided by the person opening a new covered account or 
customer presenting the identification.
    8. Other information on the identification is not consistent with 
readily accessible information that is on file with the financial 
institution or creditor, such as a signature card or a recent check.
    9. An application appears to have been altered or forged, or gives 
the appearance of having been destroyed and reassembled.

               Suspicious Personal Identifying Information

    10. Personal identifying information provided is inconsistent when 
compared against external information sources used by the financial 
institution or creditor. For example:
    a. The address does not match any address in the consumer report; or
    b. The Social Security Number (SSN) has not been issued, or is 
listed on the Social Security Administration's Death Master File.
    11. Personal identifying information provided by the customer is not 
consistent with other personal identifying information provided by the 
customer. For example, there is a lack of correlation between the SSN 
range and date of birth.
    12. Personal identifying information provided is associated with 
known fraudulent activity as indicated by internal or third-party 
sources used by the financial institution or creditor. For example:
    a. The address on an application is the same as the address provided 
on a fraudulent application; or
    b. The phone number on an application is the same as the number 
provided on a fraudulent application.

[[Page 85]]

    13. Personal identifying information provided is of a type commonly 
associated with fraudulent activity as indicated by internal or third-
party sources used by the financial institution or creditor. For 
example:
    a. The address on an application is fictitious, a mail drop, or a 
prison; or
    b. The phone number is invalid, or is associated with a pager or 
answering service.
    14. The SSN provided is the same as that submitted by other persons 
opening an account or other customers.
    15. The address or telephone number provided is the same as or 
similar to the account number or telephone number submitted by an 
unusually large number of other persons opening accounts or other 
customers.
    16. The person opening the covered account or the customer fails to 
provide all required personal identifying information on an application 
or in response to notification that the application is incomplete.
    17. Personal identifying information provided is not consistent with 
personal identifying information that is on file with the financial 
institution or creditor.
    18. For financial institutions and creditors that use challenge 
questions, the person opening the covered account or the customer cannot 
provide authenticating information beyond that which generally would be 
available from a wallet or consumer report.

 Unusual Use of, or Suspicious Activity Related to, the Covered Account

    19. Shortly following the notice of a change of address for a 
covered account, the institution or creditor receives a request for a 
new, additional, or replacement card or a cell phone, or for the 
addition of authorized users on the account.
    20. A new revolving credit account is used in a manner commonly 
associated with known patterns of fraud patterns. For example:
    a. The majority of available credit is used for cash advances or 
merchandise that is easily convertible to cash (e.g., electronics 
equipment or jewelry); or
    b. The customer fails to make the first payment or makes an initial 
payment but no subsequent payments.
    21. A covered account is used in a manner that is not consistent 
with established patterns of activity on the account. There is, for 
example:
    a. Nonpayment when there is no history of late or missed payments;
    b. A material increase in the use of available credit;
    c. A material change in purchasing or spending patterns;
    d. A material change in electronic fund transfer patterns in 
connection with a deposit account; or
    e. A material change in telephone call patterns in connection with a 
cellular phone account.
    22. A covered account that has been inactive for a reasonably 
lengthy period of time is used (taking into consideration the type of 
account, the expected pattern of usage and other relevant factors).
    23. Mail sent to the customer is returned repeatedly as 
undeliverable although transactions continue to be conducted in 
connection with the customer's covered account.
    24. The financial institution or creditor is notified that the 
customer is not receiving paper account statements.
    25. The financial institution or creditor is notified of 
unauthorized charges or transactions in connection with a customer's 
covered account.

   Notice from Customers, Victims of Identity Theft, Law Enforcement 
   Authorities, or Other Persons Regarding Possible Identity Theft in 
 Connection with Covered Accounts Held by the Financial Institution or 
                                Creditor

    26. The financial institution or creditor is notified by a customer, 
a victim of identity theft, a law enforcement authority, or any other 
person that it has opened a fraudulent account for a person engaged in 
identity theft.

[Reg. V, 72 FR 63758, Nov. 9, 2007]



PART 223_TRANSACTIONS BETWEEN MEMBER BANKS AND THEIR AFFILIATES (REGULATION 

W)--Table of Contents




                 Subpart A_Introduction and Definitions

Sec.
223.1 Authority, purpose, and scope.
223.2 What is an ``affiliate'' for purposes of sections 23A and 23B and 
          this part?
223.3 What are the meanings of the other terms used in sections 23A and 
          23B and this part?

               Subpart B_General Provisions of Section 23A

223.11 What is the maximum amount of covered transactions that a member 
          bank may enter into with any single affiliate?
223.12 What is the maximum amount of covered transactions that a member 
          bank may enter into with all affiliates?
223.13 What safety and soundness requirement applies to covered 
          transactions?
223.14 What are the collateral requirements for a credit transaction 
          with an affiliate?
223.15 May a member bank purchase a low-quality asset from an affiliate?

[[Page 86]]

223.16 What transactions by a member bank with any person are treated as 
          transactions with an affiliate?

       Subpart C_Valuation and Timing Principles Under Section 23A

223.21 What valuation and timing principles apply to credit 
          transactions?
223.22 What valuation and timing principles apply to asset purchases?
223.23 What valuation and timing principles apply to purchases of and 
          investments in securities issued by an affiliate?
223.24 What valuation principles apply to extensions of credit secured 
          by affiliate securities?

             Subpart D_Other Requirements Under Section 23A

223.31 How does section 23A apply to a member bank's acquisition of an 
          affiliate that becomes an operating subsidiary of the member 
          bank after the acquisition?
223.32 What rules apply to financial subsidiaries of a member bank?
223.33 What rules apply to derivative transactions?

         Subpart E_Exemptions from the Provisions of Section 23A

223.41 What covered transactions are exempt from the quantitative limits 
          and collateral requirements?
223.42 What covered transactions are exempt from the quantitative 
          limits, collateral requirements, and low-quality asset 
          prohibition?
223.43 What are the standards under which the Board may grant additional 
          exemptions from the requirements of section 23A?

               Subpart F_General Provisions of Section 23B

223.51 What is the market terms requirement of section 23B?
223.52 What transactions with affiliates or others must comply with 
          section 23B's market terms requirement?
223.53 What asset purchases are prohibited by section 23B?
223.54 What advertisements and statements are prohibited by section 23B?
223.55 What are the standards under which the Board may grant exemptions 
          from the requirements of section 23B?
223.56 What transactions are exempt from the market-terms requirement of 
          section 23B?

   Subpart G_Application of Sections 23A and 23B to U.S. Branches and 
                        Agencies of Foreign Banks

223.61 How do sections 23A and 23B apply to U.S. branches and agencies 
          of foreign banks?

                 Subpart H_Miscellaneous Interpretations

223.71 How do sections 23A and 23B apply to transactions in which a 
          member bank purchases from one affiliate an asset relating to 
          another affiliate?

    Authority: 12 U.S.C. 371c(b)(1)(E), (b)(2)(A), and (f), 371c-1(e), 
1828(j), and 1468(a).

    Source: 67 FR 76604, Dec. 12, 2002, unless otherwise noted.



                 Subpart A_Introduction and Definitions



Sec. 223.1  Authority, purpose, and scope.

    (a) Authority. The Board of Governors of the Federal Reserve System 
(Board) has issued this part (Regulation W) under the authority of 
sections 23A(f) and 23B(e) of the Federal Reserve Act (12 U.S.C. 
371c(f), 371c-1(e)).
    (b) Purpose. Sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1) establish certain quantitative limits and other 
prudential requirements for loans, purchases of assets, and certain 
other transactions between a member bank and its affiliates. This 
regulation implements sections 23A and 23B by defining terms used in the 
statute, explaining the statute's requirements, and exempting certain 
transactions.
    (c) Scope. Sections 23A and 23B and this regulation apply by their 
terms to ``member banks''--that is, any national bank, State bank, trust 
company, or other institution that is a member of the Federal Reserve 
System. In addition, the Federal Deposit Insurance Act (12 U.S.C. 
1828(j)) applies sections 23A and 23B to insured State nonmember banks 
in the same manner and to the same extent as if they were member banks. 
The Home Owners' Loan Act (12 U.S.C. 1468(a)) also applies sections 23A 
and 23B to insured savings associations in the same manner and to

[[Page 87]]

the same extent as if they were member banks (and imposes two additional 
restrictions).



Sec. 223.2  What is an ``affiliate'' for purposes of sections 23A and 23B and 

this part?

    (a) For purposes of this part and except as provided in paragraphs 
(b) and (c) of this section, ``affiliate'' with respect to a member bank 
means:
    (1) Parent companies. Any company that controls the member bank;
    (2) Companies under common control by a parent company. Any company, 
including any subsidiary of the member bank, that is controlled by a 
company that controls the member bank;
    (3) Companies under other common control. Any company, including any 
subsidiary of the member bank, that is controlled, directly or 
indirectly, by trust or otherwise, by or for the benefit of shareholders 
who beneficially or otherwise control, directly or indirectly, by trust 
or otherwise, the member bank or any company that controls the member 
bank;
    (4) Companies with interlocking directorates. Any company in which a 
majority of its directors, trustees, or general partners (or individuals 
exercising similar functions) constitute a majority of the persons 
holding any such office with the member bank or any company that 
controls the member bank;
    (5) Sponsored and advised companies. Any company, including a real 
estate investment trust, that is sponsored and advised on a contractual 
basis by the member bank or an affiliate of the member bank;
    (6) Investment companies. (i) Any investment company for which the 
member bank or any affiliate of the member bank serves as an investment 
adviser, as defined in section 2(a)(20) of the Investment Company Act of 
1940 (15 U.S.C. 80a-2(a)(20)); and
    (ii) Any other investment fund for which the member bank or any 
affiliate of the member bank serves as an investment advisor, if the 
member bank and its affiliates own or control in the aggregate more than 
5 percent of any class of voting securities or of the equity capital of 
the fund;
    (7) Depository institution subsidiaries. A depository institution 
that is a subsidiary of the member bank;
    (8) Financial subsidiaries. A financial subsidiary of the member 
bank;
    (9) Companies held under merchant banking or insurance company 
investment authority--(i) In general. Any company in which a holding 
company of the member bank owns or controls, directly or indirectly, or 
acting through one or more other persons, 15 percent or more of the 
equity capital pursuant to section 4(k)(4)(H) or (I) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(4)(H) or (I)).
    (ii) General exemption. A company will not be an affiliate under 
paragraph (a)(9)(i) of this section if the holding company presents 
information to the Board that demonstrates, to the Board's satisfaction, 
that the holding company does not control the company.
    (iii) Specific exemptions. A company also will not be an affiliate 
under paragraph (a)(9)(i) of this section if:
    (A) No director, officer, or employee of the holding company serves 
as a director, trustee, or general partner (or individual exercising 
similar functions) of the company;
    (B) A person that is not affiliated or associated with the holding 
company owns or controls a greater percentage of the equity capital of 
the company than is owned or controlled by the holding company, and no 
more than one officer or employee of the holding company serves as a 
director or trustee (or individual exercising similar functions) of the 
company; or
    (C) A person that is not affiliated or associated with the holding 
company owns or controls more than 50 percent of the voting shares of 
the company, and officers and employees of the holding company do not 
constitute a majority of the directors or trustees (or individuals 
exercising similar functions) of the company.
    (iv) Application of rule to private equity funds. A holding company 
will not be deemed to own or control the equity capital of a company for 
purposes of paragraph (a)(9)(i) of this section solely by virtue of an 
investment made by the holding company in a private equity

[[Page 88]]

fund (as defined in the merchant banking subpart of the Board's 
Regulation Y (12 CFR 225.173(a))) that owns or controls the equity 
capital of the company unless the holding company controls the private 
equity fund under 12 CFR 225.173(d)(4).
    (v) Definition. For purposes of this paragraph (a)(9), ``holding 
company'' with respect to a member bank means a company that controls 
the member bank, or a company that is controlled by shareholders that 
control the member bank, and all subsidiaries of the company (including 
any depository institution that is a subsidiary of the company).
    (10) Partnerships associated with the member bank or an affiliate. 
Any partnership for which the member bank or any affiliate of the member 
bank serves as a general partner or for which the member bank or any 
affiliate of the member bank causes any director, officer, or employee 
of the member bank or affiliate to serve as a general partner;
    (11) Subsidiaries of affiliates. Any subsidiary of a company 
described in paragraphs (a)(1) through (10) of this section; and
    (12) Other companies. Any company that the Board determines by 
regulation or order, or that the appropriate Federal banking agency for 
the member bank determines by order, to have a relationship with the 
member bank, or any affiliate of the member bank, such that covered 
transactions by the member bank with that company may be affected by the 
relationship to the detriment of the member bank.
    (b) ``Affiliate'' with respect to a member bank does not include:
    (1) Subsidiaries. Any company that is a subsidiary of the member 
bank, unless the company is:
    (i) A depository institution;
    (ii) A financial subsidiary;
    (iii) Directly controlled by:
    (A) One or more affiliates (other than depository institution 
affiliates) of the member bank; or
    (B) A shareholder that controls the member bank or a group of 
shareholders that together control the member bank;
    (iv) An employee stock option plan, trust, or similar organization 
that exists for the benefit of the shareholders, partners, members, or 
employees of the member bank or any of its affiliates; or
    (v) Any other company determined to be an affiliate under paragraph 
(a)(12) of this section;
    (2) Bank premises. Any company engaged solely in holding the 
premises of the member bank;
    (3) Safe deposit. Any company engaged solely in conducting a safe 
deposit business;
    (4) Government securities. Any company engaged solely in holding 
obligations of the United States or its agencies or obligations fully 
guaranteed by the United States or its agencies as to principal and 
interest; and
    (5) Companies held DPC. Any company where control results from the 
exercise of rights arising out of a bona fide debt previously 
contracted. This exclusion from the definition of ``affiliate'' applies 
only for the period of time specifically authorized under applicable 
State or Federal law or regulation or, in the absence of such law or 
regulation, for a period of two years from the date of the exercise of 
such rights. The Board may authorize, upon application and for good 
cause shown, extensions of time for not more than one year at a time, 
but such extensions in the aggregate will not exceed three years.
    (c) For purposes of subpart F (implementing section 23B), 
``affiliate'' with respect to a member bank also does not include any 
depository institution.



Sec. 223.3  What are the meanings of the other terms used in sections 23A and 

23B and this part?

    For purposes of this part:
    (a) Aggregate amount of covered transactions means the amount of the 
covered transaction about to be engaged in added to the current amount 
of all outstanding covered transactions.
    (b) Appropriate Federal banking agency with respect to a member bank 
or other depository institution has the same meaning as in section 3 of 
the Federal Deposit Insurance Act (12 U.S.C. 1813).
    (c) ``Bank holding company'' has the same meaning as in 12 CFR 
225.2.
    (d) ``Capital stock and surplus'' means the sum of:

[[Page 89]]

    (1) A member bank's tier 1 and tier 2 capital under the risk-based 
capital guidelines of the appropriate Federal banking agency, based on 
the member bank's most recent consolidated Report of Condition and 
Income filed under 12 U.S.C. 1817(a)(3);
    (2) The balance of a member bank's allowance for loan and lease 
losses not included in its tier 2 capital under the risk-based capital 
guidelines of the appropriate Federal banking agency, based on the 
member bank's most recent consolidated Report of Condition and Income 
filed under 12 U.S.C. 1817(a)(3); and
    (3) The amount of any investment by a member bank in a financial 
subsidiary that counts as a covered transaction and is required to be 
deducted from the member bank's capital for regulatory capital purposes.
    (e) Carrying value with respect to a security means (unless 
otherwise provided) the value of the security on the financial 
statements of the member bank, determined in accordance with GAAP.
    (f) Company means a corporation, partnership, limited liability 
company, business trust, association, or similar organization and, 
unless specifically excluded, includes a member bank and a depository 
institution.
    (g) Control--(1) In general. ``Control'' by a company or shareholder 
over another company means that:
    (i) The company or shareholder, directly or indirectly, or acting 
through one or more other persons, owns, controls, or has power to vote 
25 percent or more of any class of voting securities of the other 
company;
    (ii) The company or shareholder controls in any manner the election 
of a majority of the directors, trustees, or general partners (or 
individuals exercising similar functions) of the other company; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company or shareholder, directly or indirectly, 
exercises a controlling influence over the management or policies of the 
other company.
    (2) Ownership or control of shares as fiduciary. Notwithstanding any 
other provision of this regulation, no company will be deemed to control 
another company by virtue of its ownership or control of shares in a 
fiduciary capacity, except as provided in paragraph (a)(3) of Sec. 
223.2 or if the company owning or controlling the shares is a business 
trust.
    (3) Ownership or control of securities by subsidiary. A company 
controls securities, assets, or other ownership interests owned or 
controlled, directly or indirectly, by any subsidiary (including a 
subsidiary depository institution) of the company.
    (4) Ownership or control of convertible instruments. A company or 
shareholder that owns or controls instruments (including options or 
warrants) that are convertible or exercisable, at the option of the 
holder or owner, into securities, controls the securities, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder should not be deemed to control the securities.
    (5) Ownership or control of nonvoting securities. A company or 
shareholder that owns or controls 25 percent or more of the equity 
capital of another company controls the other company, unless the 
company or shareholder presents information to the Board that 
demonstrates, to the Board's satisfaction, that the company or 
shareholder does not control the other company.
    (h) Covered transaction with respect to an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) A purchase of, or an investment in, a security issued by the 
affiliate;
    (3) A purchase of an asset from the affiliate, including an asset 
subject to recourse or an agreement to repurchase, except such purchases 
of real and personal property as may be specifically exempted by the 
Board by order or regulation;
    (4) The acceptance of a security issued by the affiliate as 
collateral for an extension of credit to any person or company; and
    (5) The issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of credit, on behalf of the 
affiliate, a confirmation of a letter of credit issued by

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the affiliate, and a cross-affiliate netting arrangement.
    (i) Credit transaction with an affiliate means:
    (1) An extension of credit to the affiliate;
    (2) An issuance of a guarantee, acceptance, or letter of credit, 
including an endorsement or standby letter of credit, on behalf of the 
affiliate and a confirmation of a letter of credit issued by the 
affiliate; and
    (3) A cross-affiliate netting arrangement.
    (j) Cross-affiliate netting arrangement means an arrangement among a 
member bank, one or more affiliates of the member bank, and one or more 
nonaffiliates of the member bank in which:
    (1) A nonaffiliate is permitted to deduct any obligations of an 
affiliate of the member bank to the nonaffiliate when settling the 
nonaffiliate's obligations to the member bank; or
    (2) The member bank is permitted or required to add any obligations 
of its affiliate to a nonaffiliate when determining the member bank's 
obligations to the nonaffiliate.
    (k) ``Depository institution'' means, unless otherwise noted, an 
insured depository institution (as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813)), but does not include any branch 
of a foreign bank. For purposes of this definition, an operating 
subsidiary of a depository institution is treated as part of the 
depository institution.
    (l) ``Derivative transaction'' means any derivative contract listed 
in sections III.E.1.a. through d. of appendix A to 12 CFR part 225 and 
any similar derivative contract, including a credit derivative contract.
    (m) ``Eligible affiliated mutual fund securities'' has the meaning 
specified in paragraph (c)(2) of Sec. 223.24.
    (n) ``Equity capital'' means:
    (1) With respect to a corporation, preferred stock, common stock, 
capital surplus, retained earnings, and accumulated other comprehensive 
income, less treasury stock, plus any other account that constitutes 
equity of the corporation; and
    (2) With respect to a partnership, limited liability company, or 
other company, equity accounts similar to those described in paragraph 
(n)(1) of this section.
    (o) ``Extension of credit'' to an affiliate means the making or 
renewal of a loan, the granting of a line of credit, or the extending of 
credit in any manner whatsoever, including on an intraday basis, to an 
affiliate. An extension of credit to an affiliate includes, without 
limitation:
    (1) An advance to an affiliate by means of an overdraft, cash item, 
or otherwise;
    (2) A sale of Federal funds to an affiliate;
    (3) A lease that is the functional equivalent of an extension of 
credit to an affiliate;
    (4) An acquisition by purchase, discount, exchange, or otherwise of 
a note or other obligation, including commercial paper or other debt 
securities, of an affiliate;
    (5) Any increase in the amount of, extension of the maturity of, or 
adjustment to the interest rate term or other material term of, an 
extension of credit to an affiliate; and
    (6) Any other similar transaction as a result of which an affiliate 
becomes obligated to pay money (or its equivalent).
    (p) ``Financial subsidiary''
    (1) In general. Except as provided in paragraph (p)(2) of this 
section, the term ``financial subsidiary'' means any subsidiary of a 
member bank that:
    (i) Engages, directly or indirectly, in any activity that national 
banks are not permitted to engage in directly or that is conducted under 
terms and conditions that differ from those that govern the conduct of 
such activity by national banks; and
    (ii) Is not a subsidiary that a national bank is specifically 
authorized to own or control by the express terms of a Federal statute 
(other than 12 U.S.C. 24a), and not by implication or interpretation.
    (2) Exceptions. ``Financial subsidiary'' does not include:
    (i) A subsidiary of a member bank that is considered a financial 
subsidiary under paragraph (p)(1) of this section solely because the 
subsidiary engages in the sale of insurance as agent or broker in a 
manner that is not permitted for national banks; and

[[Page 91]]

    (ii) A subsidiary of a State bank (other than a subsidiary described 
in section 46(a) of the Federal Deposit Insurance Act (12 U.S.C. 
1831w(a))) that is considered a financial subsidiary under paragraph 
(p)(1) of this section solely because the subsidiary engages in one or 
more of the following activities:
    (A) An activity that the State bank may engage in directly under 
applicable Federal and State law and that is conducted under the same 
terms and conditions that govern the conduct of the activity by the 
State bank; and
    (B) An activity that the subsidiary was authorized by applicable 
Federal and State law to engage in prior to December 12, 2002, and that 
was lawfully engaged in by the subsidiary on that date.
    (3) Subsidiaries of financial subsidiaries. If a company is a 
financial subsidiary under paragraphs (p)(1) and (p)(2) of this section, 
any subsidiary of such a company is also a financial subsidiary.
    (q) ``Foreign bank'' and an ``agency,'' ``branch,'' or ``commercial 
lending company'' of a foreign bank have the same meanings as in section 
1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
    (r) ``GAAP'' means U.S. generally accepted accounting principles.
    (s) ``General purpose credit card'' has the meaning specified in 
paragraph (c)(4)(ii) of Sec. 223.16.
    (t) In contemplation. A transaction between a member bank and a 
nonaffiliate is presumed to be ``in contemplation'' of the nonaffiliate 
becoming an affiliate of the member bank if the member bank enters into 
the transaction with the nonaffiliate after the execution of, or 
commencement of negotiations designed to result in, an agreement under 
the terms of which the nonaffiliate would become an affiliate.
    (u) ``Intraday extension of credit'' has the meaning specified in 
paragraph (l)(2) of Sec. 223.42.
    (v) ``Low-quality asset'' means:
    (1) An asset (including a security) classified as ``substandard,'' 
``doubtful,'' or ``loss,'' or treated as ``special mention'' or ``other 
transfer risk problems,'' either in the most recent report of 
examination or inspection of an affiliate prepared by either a Federal 
or State supervisory agency or in any internal classification system 
used by the member bank or the affiliate (including an asset that 
receives a rating that is substantially equivalent to ``classified'' or 
``special mention'' in the internal system of the member bank or 
affiliate);
    (2) An asset in a nonaccrual status;
    (3) An asset on which principal or interest payments are more than 
thirty days past due;
    (4) An asset whose terms have been renegotiated or compromised due 
to the deteriorating financial condition of the obligor; and
    (5) An asset acquired through foreclosure, repossession, or 
otherwise in satisfaction of a debt previously contracted, if the asset 
has not yet been reviewed in an examination or inspection.
    (w) ``Member bank'' means any national bank, State bank, banking 
association, or trust company that is a member of the Federal Reserve 
System. For purposes of this definition, an operating subsidiary of a 
member bank is treated as part of the member bank.
    (x) ``Municipal securities'' has the same meaning as in section 
3(a)(29) of the Securities Exchange Act of 1934 (17 U.S.C. 78c(a)(29)).
    (y) ``Nonaffiliate'' with respect to a member bank means any person 
that is not an affiliate of the member bank.
    (z) ``Obligations of, or fully guaranteed as to principal and 
interest by, the United States or its agencies'' includes those 
obligations listed in 12 CFR 201.108(b) and any additional obligations 
as determined by the Board. The term does not include Federal Housing 
Administration or Veterans Administration loans.
    (aa) ``Operating subsidiary'' with respect to a member bank or other 
depository institution means any subsidiary of the member bank or 
depository institution other than a subsidiary described in paragraphs 
(b)(1)(i) through (v) of Sec. 223.2.
    (bb) ``Person'' means an individual, company, trust, joint venture, 
pool, syndicate, sole proprietorship, unincorporated organization, or 
any other form of entity.

[[Page 92]]

    (cc) ``Principal underwriter'' has the meaning specified in 
paragraph (c)(1) of Sec. 223.53.
    (dd) ``Purchase of an asset'' by a member bank from an affiliate 
means the acquisition by a member bank of an asset from an affiliate in 
exchange for cash or any other consideration, including an assumption of 
liabilities. The merger of an affiliate into a member bank is a purchase 
of assets by the member bank from an affiliate if the member bank 
assumes any liabilities of the affiliate or pays any other form of 
consideration in the transaction.
    (ee) Riskless principal. A company is ``acting exclusively as a 
riskless principal'' if, after receiving an order to buy (or sell) a 
security from a customer, the company purchases (or sells) the security 
in the secondary market for its own account to offset a contemporaneous 
sale to (or purchase from) the customer.
    (ff) ``Securities'' means stocks, bonds, debentures, notes, or 
similar obligations (including commercial paper).
    (gg) ``Securities affiliate'' with respect to a member bank means:
    (1) An affiliate of the member bank that is registered with the 
Securities and Exchange Commission as a broker or dealer; or
    (2) Any other securities broker or dealer affiliate of a member bank 
that is approved by the Board.
    (hh) ``State bank'' has the same meaning as in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813).
    (ii) ``Subsidiary'' with respect to a specified company means a 
company that is controlled by the specified company.
    (jj) ``Voting securities'' has the same meaning as in 12 CFR 225.2.
    (kk) ``Well capitalized'' has the same meaning as in 12 CFR 225.2 
and, in the case of any holding company that is not a bank holding 
company, ``well capitalized'' means that the holding company has and 
maintains at least the capital levels required for a bank holding 
company to be well capitalized under 12 CFR 225.2.
    (ll) ``Well managed'' has the same meaning as in 12 CFR 225.2.



               Subpart B_General Provisions of Section 23A



Sec. 223.11  What is the maximum amount of covered transactions that a member 

bank may enter into with any single affiliate?

    A member bank may not engage in a covered transaction with an 
affiliate (other than a financial subsidiary of the member bank) if the 
aggregate amount of the member bank's covered transactions with such 
affiliate would exceed 10 percent of the capital stock and surplus of 
the member bank.



Sec. 223.12  What is the maximum amount of covered transactions that a member 

bank may enter into with all affiliates?

    A member bank may not engage in a covered transaction with any 
affiliate if the aggregate amount of the member bank's covered 
transactions with all affiliates would exceed 20 percent of the capital 
stock and surplus of the member bank.



Sec. 223.13  What safety and soundness requirement applies to covered 

transactions?

    A member bank may not engage in any covered transaction, including 
any transaction exempt under this regulation, unless the transaction is 
on terms and conditions that are consistent with safe and sound banking 
practices.



Sec. 223.14  What are the collateral requirements for a credit transaction 

with an affiliate?

    (a) Collateral required for extensions of credit and certain other 
covered transactions. A member bank must ensure that each of its credit 
transactions with an affiliate is secured by the amount of collateral 
required by paragraph (b) of this section at the time of the 
transaction.
    (b) Amount of collateral required--(1) The rule. A credit 
transaction described in paragraph (a) of this section must be secured 
by collateral having a market value equal to at least:
    (i) 100 percent of the amount of the transaction, if the collateral 
is:
    (A) Obligations of the United States or its agencies;

[[Page 93]]

    (B) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest;
    (C) Notes, drafts, bills of exchange, or bankers' acceptances that 
are eligible for rediscount or purchase by a Federal Reserve Bank; or
    (D) A segregated, earmarked deposit account with the member bank 
that is for the sole purpose of securing credit transactions between the 
member bank and its affiliates and is identified as such;
    (ii) 110 percent of the amount of the transaction, if the collateral 
is obligations of any State or political subdivision of any State;
    (iii) 120 percent of the amount of the transaction, if the 
collateral is other debt instruments, including loans and other 
receivables; or
    (iv) 130 percent of the amount of the transaction, if the collateral 
is stock, leases, or other real or personal property.
    (2) Example. A member bank makes a $1,000 loan to an affiliate. The 
affiliate posts as collateral for the loan $500 in U.S. Treasury 
securities, $480 in corporate debt securities, and $130 in real estate. 
The loan satisfies the collateral requirements of this section because 
$500 of the loan is 100 percent secured by obligations of the United 
States, $400 of the loan is 120 percent secured by debt instruments, and 
$100 of the loan is 130 percent secured by real estate.
    (c) Ineligible collateral. The following items are not eligible 
collateral for purposes of this section:
    (1) Low-quality assets;
    (2) Securities issued by any affiliate;
    (3) Equity securities issued by the member bank, and debt securities 
issued by the member bank that represent regulatory capital of the 
member bank;
    (4) Intangible assets (including servicing assets), unless 
specifically approved by the Board; and
    (5) Guarantees, letters of credit, and other similar instruments.
    (d) Perfection and priority requirements for collateral--(1) 
Perfection. A member bank must maintain a security interest in 
collateral required by this section that is perfected and enforceable 
under applicable law, including in the event of default resulting from 
bankruptcy, insolvency, liquidation, or similar circumstances.
    (2) Priority. A member bank either must obtain a first priority 
security interest in collateral required by this section or must deduct 
from the value of collateral obtained by the member bank the lesser of:
    (i) The amount of any security interest in the collateral that is 
senior to that of the member bank; or
    (ii) The amount of any credit secured by the collateral that is 
senior to that of the member bank.
    (3) Example. A member bank makes a $2,000 loan to an affiliate. The 
affiliate grants the member bank a second priority security interest in 
a piece of real estate valued at $3,000. Another institution that 
previously lent $1,000 to the affiliate has a first priority security 
interest in the entire parcel of real estate. This transaction is not in 
compliance with the collateral requirements of this section. Due to the 
existence of the prior third-party lien on the real estate, the 
effective value of the real estate collateral for the member bank for 
purposes of this section is only $2,000--$600 less than the amount of 
real estate collateral required by this section for the transaction 
($2,000 x 130 percent = $2,600).
    (e) Replacement requirement for retired or amortized collateral. A 
member bank must ensure that any required collateral that subsequently 
is retired or amortized is replaced with additional eligible collateral 
as needed to keep the percentage of the collateral value relative to the 
amount of the outstanding credit transaction equal to the minimum 
percentage required at the inception of the transaction.
    (f) Inapplicability of the collateral requirements to certain 
transactions. The collateral requirements of this section do not apply 
to the following transactions.
    (1) Acceptances. An acceptance that already is fully secured either 
by attached documents or by other property that is involved in the 
transaction and has an ascertainable market value.
    (2) The unused portion of certain extensions of credit. The unused 
portion of an extension of credit to an affiliate as long as the member 
bank does not have

[[Page 94]]

any legal obligation to advance additional funds under the extension of 
credit until the affiliate provides the amount of collateral required by 
paragraph (b) of this section with respect to the entire used portion 
(including the amount of the requested advance) of the extension of 
credit.
    (3) Purchases of affiliate debt securities in the secondary market. 
The purchase of a debt security issued by an affiliate as long as the 
member bank purchases the debt security from a nonaffiliate in a bona 
fide secondary market transaction.



Sec. 223.15  May a member bank purchase a low-quality asset from an affiliate?

    (a) In general. A member bank may not purchase a low-quality asset 
from an affiliate unless, pursuant to an independent credit evaluation, 
the member bank had committed itself to purchase the asset before the 
time the asset was acquired by the affiliate.
    (b) Exemption for renewals of loan participations involving problem 
loans. The prohibition contained in paragraph (a) of this section does 
not apply to the renewal of, or extension of additional credit with 
respect to, a member bank's participation in a loan to a nonaffiliate 
that was originated by an affiliate if:
    (1) The loan was not a low-quality asset at the time the member bank 
purchased its participation;
    (2) The renewal or extension of additional credit is approved, as 
necessary to protect the participating member bank's investment by 
enhancing the ultimate collection of the original indebtedness, by the 
board of directors of the participating member bank or, if the 
originating affiliate is a depository institution, by:
    (i) An executive committee of the board of directors of the 
participating member bank; or
    (ii) One or more senior management officials of the participating 
member bank, if:
    (A) The board of directors of the member bank approves standards for 
the member bank's renewals or extensions of additional credit described 
in this paragraph (b), based on the determination set forth in paragraph 
(b)(2) of this section;
    (B) Each renewal or extension of additional credit described in this 
paragraph (b) meets the standards; and
    (C) The board of directors of the member bank periodically reviews 
renewals and extensions of additional credit described in this paragraph 
(b) to ensure that they meet the standards and periodically reviews the 
standards to ensure that they continue to meet the criterion set forth 
in paragraph (b)(2) of this section;
    (3) The participating member bank's share of the renewal or 
extension of additional credit does not exceed its proportional share of 
the original transaction by more than 5 percent, unless the member bank 
obtains the prior written approval of its appropriate Federal banking 
agency; and
    (4) The participating member bank provides its appropriate Federal 
banking agency with written notice of the renewal or extension of 
additional credit not later than 20 days after consummation.



Sec. 223.16  What transactions by a member bank with any person are treated as 

transactions with an affiliate?

    (a) In general. A member bank must treat any of its transactions 
with any person as a transaction with an affiliate to the extent that 
the proceeds of the transaction are used for the benefit of, or 
transferred to, an affiliate.
    (b) Certain agency transactions. (1) Except to the extent described 
in paragraph (b)(2) of this section, an extension of credit by a member 
bank to a nonaffiliate is not treated as an extension of credit to an 
affiliate under paragraph (a) of this section if:
    (i) The proceeds of the extension of credit are used to purchase an 
asset through an affiliate of the member bank, and the affiliate is 
acting exclusively as an agent or broker in the transaction; and
    (ii) The asset purchased by the nonaffiliate is not issued, 
underwritten, or sold as principal by any affiliate of the member bank.
    (2) The interpretation set forth in paragraph (b)(1) of this section 
does not apply to the extent of any agency fee,

[[Page 95]]

brokerage commission, or other compensation received by an affiliate 
from the proceeds of the extension of credit. The receipt of such 
compensation may qualify, however, for the exemption contained in 
paragraph (c)(2) of this section.
    (c) Exemptions. Notwithstanding paragraph (a) of this section, the 
following transactions are not subject to the quantitative limits of 
Sec. Sec. 223.11 and 223.12 or the collateral requirements of Sec. 
223.14. The transactions are, however, subject to the safety and 
soundness requirement of Sec. 223.13 and the market terms requirement 
and other provisions of subpart F (implementing section 23B).
    (1) Certain riskless principal transactions. An extension of credit 
by a member bank to a nonaffiliate, if:
    (i) The proceeds of the extension of credit are used to purchase a 
security through a securities affiliate of the member bank, and the 
securities affiliate is acting exclusively as a riskless principal in 
the transaction;
    (ii) The security purchased by the nonaffiliate is not issued, 
underwritten, or sold as principal (other than as riskless principal) by 
any affiliate of the member bank; and
    (iii) Any riskless principal mark-up or other compensation received 
by the securities affiliate from the proceeds of the extension of credit 
meets the market terms standard set forth in paragraph (c)(2) of this 
section.
    (2) Brokerage commissions, agency fees, and riskless principal mark-
ups. An affiliate's retention of a portion of the proceeds of an 
extension of credit described in paragraph (b) or (c)(1) of this section 
as a brokerage commission, agency fee, or riskless principal mark-up, if 
that commission, fee, or mark-up is substantially the same as, or lower 
than, those prevailing at the same time for comparable transactions with 
or involving other nonaffiliates, in accordance with the market terms 
requirement of Sec. 223.51.
    (3) Preexisting lines of credit. An extension of credit by a member 
bank to a nonaffiliate, if:
    (i) The proceeds of the extension of credit are used to purchase a 
security from or through a securities affiliate of the member bank; and
    (ii) The extension of credit is made pursuant to, and consistent 
with any conditions imposed in, a preexisting line of credit that was 
not established in contemplation of the purchase of securities from or 
through an affiliate of the member bank.
    (4) General purpose credit card transactions.
    (i) In general. An extension of credit by a member bank to a 
nonaffiliate, if:
    (A) The proceeds of the extension of credit are used by the 
nonaffiliate to purchase a product or service from an affiliate of the 
member bank; and
    (B) The extension of credit is made pursuant to, and consistent with 
any conditions imposed in, a general purpose credit card issued by the 
member bank to the nonaffiliate.
    (ii) Definition. ``General purpose credit card'' means a credit card 
issued by a member bank that is widely accepted by merchants that are 
not affiliates of the member bank for the purchase of products or 
services, if:
    (A) Less than 25 percent of the total value of products and services 
purchased with the card by all cardholders are purchases of products and 
services from one or more affiliates of the member bank;
    (B) All affiliates of the member bank would be permissible for a 
financial holding company (as defined in 12 U.S.C. 1841) under section 4 
of the Bank Holding Company Act (12 U.S.C. 1843), and the member bank 
has no reason to believe that 25 percent or more of the total value of 
products and services purchased with the card by all cardholders are or 
would be purchases of products and services from one or more affiliates 
of the member bank; or
    (C) The member bank presents information to the Board that 
demonstrates, to the Board's satisfaction, that less than 25 percent of 
the total value of products and services purchased with the card by all 
cardholders are and would be purchases of products and services from one 
or more affiliates of the member bank.
    (iii) Calculating compliance. To determine whether a credit card 
qualifies as a general purpose credit card under the standard set forth 
in paragraph (c)(4)(ii)(A) of this section, a member bank must compute 
compliance on a

[[Page 96]]

monthly basis, based on cardholder purchases that were financed by the 
credit card during the preceding 12 calendar months. If a credit card 
has qualified as a general purpose credit card for 3 consecutive months 
but then ceases to qualify in the following month, the member bank may 
continue to treat the credit card as a general purpose credit card for 
such month and three additional months (or such longer period as may be 
permitted by the Board).
    (iv) Example of calculating compliance with the 25 percent test. A 
member bank seeks to qualify a credit card as a general purpose credit 
card under paragraph (c)(4)(ii)(A) of this section. The member bank 
assesses its compliance under paragraph (c)(4)(iii) of this section on 
the 15th day of every month (for the preceding 12 calendar months). The 
credit card qualifies as a general purpose credit card for at least 
three consecutive months. On June 15, 2005, however, the member bank 
determines that, for the 12-calendar-month period from June 1, 2004, 
through May 31, 2005, 27 percent of the total value of products and 
services purchased with the card by all cardholders were purchases of 
products and services from an affiliate of the member bank. Unless the 
credit card returns to compliance with the 25 percent limit by the 12-
calendar-month period ending August 31, 2005, the card will cease to 
qualify as a general purpose credit card as of September 1, 2005. Any 
outstanding extensions of credit under the credit card that were used to 
purchase products or services from an affiliate of the member bank would 
become covered transactions at such time.



       Subpart C_Valuation and Timing Principles Under Section 23A



Sec. 223.21  What valuation and timing principles apply to credit 

transactions?

    (a) Valuation--(1) Initial valuation. Except as provided in 
paragraph (a)(2) or (3) of this section, a credit transaction with an 
affiliate initially must be valued at the greater of:
    (i) The principal amount of the transaction;
    (ii) The amount owed by the affiliate to the member bank under the 
transaction; or
    (iii) The sum of:
    (A) The amount provided to, or on behalf of, the affiliate in the 
transaction; and
    (B) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (2) Initial valuation of certain acquisitions of a credit 
transaction. If a member bank acquires from a nonaffiliate a credit 
transaction with an affiliate, the covered transaction initially must be 
valued at the sum of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the credit transaction; and
    (ii) Any additional amount that the member bank could be required to 
provide to, or on behalf of, the affiliate under the terms of the 
transaction.
    (3) Debt securities. The valuation principles of paragraphs (a)(1) 
and (2) of this section do not apply to a member bank's purchase of or 
investment in a debt security issued by an affiliate, which is governed 
by Sec. 223.23.
    (4) Examples. The following are examples of how to value a member 
bank's credit transactions with an affiliate.
    (i) Term loan. A member bank makes a loan to an affiliate that has a 
principal amount of $100. The affiliate pays $2 in up-front fees to the 
member bank, and the affiliate receives net loan proceeds of $98. The 
member bank must initially value the covered transaction at $100.
    (ii) Revolving credit. A member bank establishes a $300 revolving 
credit facility for an affiliate. The affiliate has drawn down $100 
under the facility. The member bank must value the covered transaction 
at $300 throughout the life of the facility.
    (iii) Guarantee. A member bank has issued a guarantee to a 
nonaffiliate on behalf of an affiliate under which the member bank would 
be obligated to pay the nonaffiliate $500 if the affiliate defaults on 
an issuance of debt securities. The member bank must value the guarantee 
at $500 throughout the life of the guarantee.

[[Page 97]]

    (iv) Acquisition of a loan to an affiliate. A member bank purchases 
from a nonaffiliate a fixed-rate loan to an affiliate. The loan has an 
outstanding principal amount of $100 but, due to movements in the 
general level of interest rates since the time of the loan's 
origination, the member bank is able to purchase the loan for $90. The 
member bank initially must value the credit transaction at $90 (and must 
ensure that the credit transaction complies with the collateral 
requirements of Sec. 223.14 at the time of its acquisition of the 
loan).
    (b) Timing--(1) In general. A member bank engages in a credit 
transaction with an affiliate at the time during the day that:
    (i) The member bank becomes legally obligated to make an extension 
of credit to, issue a guarantee, acceptance, or letter of credit on 
behalf of, or confirm a letter of credit issued by, an affiliate;
    (ii) The member bank enters into a cross-affiliate netting 
arrangement; or
    (iii) The member bank acquires an extension of credit to, or 
guarantee, acceptance, or letter of credit issued on behalf of, an 
affiliate.
    (2) Credit transactions by a member bank with a nonaffiliate that 
becomes an affiliate of the member bank.
    (i) In general. A credit transaction with a nonaffiliate becomes a 
covered transaction at the time that the nonaffiliate becomes an 
affiliate of the member bank. The member bank must treat the amount of 
any such credit transaction as part of the aggregate amount of the 
member bank's covered transactions for purposes of determining 
compliance with the quantitative limits of Sec. Sec. 223.11 and 223.12 
in connection with any future covered transactions. Except as described 
in paragraph (b)(2)(ii) of this section, the member bank is not required 
to reduce the amount of its covered transactions with any affiliate 
because the nonaffiliate has become an affiliate. If the nonaffiliate 
becomes an affiliate less than one year after the member bank enters 
into the credit transaction with the nonaffiliate, the member bank also 
must ensure that the credit transaction complies with the collateral 
requirements of Sec. 223.14 promptly after the nonaffiliate becomes an 
affiliate.
    (ii) Credit transactions by a member bank with a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. Notwithstanding the provisions of paragraph (b)(2)(i) of this 
section, if a member bank engages in a credit transaction with a 
nonaffiliate in contemplation of the nonaffiliate becoming an affiliate 
of the member bank, the member bank must ensure that:
    (A) The aggregate amount of the member bank's covered transactions 
(including any such credit transaction with the nonaffiliate) would not 
exceed the quantitative limits of Sec. 223.11 or 223.12 at the time the 
nonaffiliate becomes an affiliate; and
    (B) The credit transaction complies with the collateral requirements 
of Sec. 223.14 at the time the nonaffiliate becomes an affiliate.
    (iii) Example. A member bank with capital stock and surplus of 
$1,000 and no outstanding covered transactions makes a $120 unsecured 
loan to a nonaffiliate. The member bank does not make the loan in 
contemplation of the nonaffiliate becoming an affiliate. Nine months 
later, the member bank's holding company purchases all the stock of the 
nonaffiliate, thereby making the nonaffiliate an affiliate of the member 
bank. The member bank is not in violation of the quantitative limits of 
Sec. 223.11 or 223.12 at the time of the stock acquisition. The member 
bank is, however, prohibited from engaging in any additional covered 
transactions with the new affiliate at least until such time as the 
value of the loan transaction falls below 10 percent of the member 
bank's capital stock and surplus. In addition, the member bank must 
bring the loan into compliance with the collateral requirements of Sec. 
223.14 promptly after the stock acquisition.



Sec. 223.22  What valuation and timing principles apply to asset purchases?

    (a) Valuation--(1) In general. Except as provided in paragraph 
(a)(2) of this section, a purchase of an asset by a member bank from an 
affiliate must be valued initially at the total amount of consideration 
given (including liabilities assumed) by the member bank in exchange for 
the asset. The value of

[[Page 98]]

the covered transaction after the purchase may be reduced to reflect 
amortization or depreciation of the asset, to the extent that such 
reductions are consistent with GAAP.
    (2) Exceptions. (i) Purchase of an extension of credit to an 
affiliate. A purchase from an affiliate of an extension of credit to an 
affiliate must be valued in accordance with Sec. 223.21, unless the 
note or obligation evidencing the extension of credit is a security 
issued by an affiliate (in which case the transaction must be valued in 
accordance with Sec. 223.23).
    (ii) Purchase of a security issued by an affiliate. A purchase from 
an affiliate of a security issued by an affiliate must be valued in 
accordance with Sec. 223.23.
    (iii) Transfer of a subsidiary. A transfer to a member bank of 
securities issued by an affiliate that is treated as a purchase of 
assets from an affiliate under Sec. 223.31 must be valued in accordance 
with paragraph (b) of Sec. 223.31.
    (iv) Purchase of a line of credit. A purchase from an affiliate of a 
line of credit, revolving credit facility, or other similar credit 
arrangement for a nonaffiliate must be valued initially at the total 
amount of consideration given by the member bank in exchange for the 
asset plus any additional amount that the member bank could be required 
to provide to the borrower under the terms of the credit arrangement.
    (b) Timing--(1) In general. A purchase of an asset from an affiliate 
remains a covered transaction for a member bank for as long as the 
member bank holds the asset.
    (2) Asset purchases by a member bank from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank. If a member bank purchases an asset from a nonaffiliate in 
contemplation of the nonaffiliate becoming an affiliate of the member 
bank, the asset purchase becomes a covered transaction at the time that 
the nonaffiliate becomes an affiliate of the member bank. In addition, 
the member bank must ensure that the aggregate amount of the member 
bank's covered transactions (including any such transaction with the 
nonaffiliate) would not exceed the quantitative limits of Sec. 223.11 
or 223.12 at the time the nonaffiliate becomes an affiliate.
    (c) Examples. The following are examples of how to value a member 
bank's purchase of an asset from an affiliate.
    (1) Cash purchase of assets. A member bank purchases a pool of loans 
from an affiliate for $10 million. The member bank initially must value 
the covered transaction at $10 million. Going forward, if the borrowers 
repay $6 million of the principal amount of the loans, the member bank 
may value the covered transaction at $4 million.
    (2) Purchase of assets through an assumption of liabilities. An 
affiliate of a member bank contributes real property with a fair market 
value of $200,000 to the member bank. The member bank pays the affiliate 
no cash for the property, but assumes a $50,000 mortgage on the 
property. The member bank has engaged in a covered transaction with the 
affiliate and initially must value the transaction at $50,000. Going 
forward, if the member bank retains the real property but pays off the 
mortgage, the member bank must continue to value the covered transaction 
at $50,000. If the member bank, however, sells the real property, the 
transaction ceases to be a covered transaction at the time of the sale 
(regardless of the status of the mortgage).



Sec. 223.23  What valuation and timing principles apply to purchases of and 

investments in securities issued by an affiliate?

    (a) Valuation--(1) In general. Except as provided in paragraph (b) 
of Sec. 223.32 with respect to financial subsidiaries, a member bank's 
purchase of or investment in a security issued by an affiliate must be 
valued at the greater of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the security, reduced to 
reflect amortization of the security to the extent consistent with GAAP; 
or
    (ii) The carrying value of the security.
    (2) Examples. The following are examples of how to value a member 
bank's purchase of or investment in securities issued by an affiliate 
(other than a financial subsidiary of the member bank).
    (i) Purchase of the debt securities of an affiliate. The parent 
holding company

[[Page 99]]

of a member bank owns 100 percent of the shares of a mortgage company. 
The member bank purchases debt securities issued by the mortgage company 
for $600. The initial carrying value of the securities is $600. The 
member bank initially must value the investment at $600.
    (ii) Purchase of the shares of an affiliate. The parent holding 
company of a member bank owns 51 percent of the shares of a mortgage 
company. The member bank purchases an additional 30 percent of the 
shares of the mortgage company from a third party for $100. The initial 
carrying value of the shares is $100. The member bank initially must 
value the investment at $100. Going forward, if the member bank's 
carrying value of the shares declines to $40, the member bank must 
continue to value the investment at $100.
    (iii) Contribution of the shares of an affiliate. The parent holding 
company of a member bank owns 100 percent of the shares of a mortgage 
company and contributes 30 percent of the shares to the member bank. The 
member bank gives no consideration in exchange for the shares. If the 
initial carrying value of the shares is $300, then the member bank 
initially must value the investment at $300. Going forward, if the 
member bank's carrying value of the shares increases to $500, the member 
bank must value the investment at $500.
    (b) Timing--(1) In general. A purchase of or investment in a 
security issued by an affiliate remains a covered transaction for a 
member bank for as long as the member bank holds the security.
    (2) A member bank's purchase of or investment in a security issued 
by a nonaffiliate that becomes an affiliate of the member bank. A member 
bank's purchase of or investment in a security issued by a nonaffiliate 
that becomes an affiliate of the member bank must be treated according 
to the same transition rules that apply to credit transactions described 
in paragraph (b)(2) of Sec. 223.21.



Sec. 223.24  What valuation principles apply to extensions of credit secured 

by affiliate securities?

    (a) Valuation of extensions of credit secured exclusively by 
affiliate securities. An extension of credit by a member bank to a 
nonaffiliate secured exclusively by securities issued by an affiliate of 
the member bank must be valued at the lesser of:
    (1) The total value of the extension of credit; or
    (2) The fair market value of the securities issued by an affiliate 
that are pledged as collateral, if the member bank verifies that such 
securities meet the market quotation standard contained in paragraph (e) 
of Sec. 223.42 or the standards set forth in paragraphs (f)(1) and (5) 
of Sec. 223.42.
    (b) Valuation of extensions of credit secured by affiliate 
securities and other collateral. An extension of credit by a member bank 
to a nonaffiliate secured in part by securities issued by an affiliate 
of the member bank and in part by nonaffiliate collateral must be valued 
at the lesser of:
    (1) The total value of the extension of credit less the fair market 
value of the nonaffiliate collateral; or
    (2) The fair market value of the securities issued by an affiliate 
that are pledged as collateral, if the member bank verifies that such 
securities meet the market quotation standard contained in paragraph (e) 
of Sec. 223.42 or the standards set forth in paragraphs (f)(1) and (5) 
of Sec. 223.42.
    (c) Exclusion of eligible affiliated mutual fund securities--(1) The 
exclusion. Eligible affiliated mutual fund securities are not considered 
to be securities issued by an affiliate, and are instead considered to 
be nonaffiliate collateral, for purposes of paragraphs (a) and (b) of 
this section, unless the member bank knows or has reason to know that 
the proceeds of the extension of credit will be used to purchase the 
eligible affiliated mutual fund securities collateral or will otherwise 
be used for the benefit of or transferred to an affiliate of the member 
bank.
    (2) Definition. ``Eligible affiliated mutual fund securities'' with 
respect to a member bank are securities issued by an affiliate of the 
member bank that is

[[Page 100]]

an open-end investment company registered with the Securities and 
Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 
80a-1 et seq.), if:
    (i) The securities issued by the investment company:
    (A) Meet the market quotation standard contained in paragraph (e) of 
Sec. 223.42;
    (B) Meet the standards set forth in paragraphs (f)(1) and (5) of 
Sec. 223.42; or
    (C) Have closing prices that are made public through a mutual fund 
``supermarket'' website maintained by an unaffiliated securities broker-
dealer or mutual fund distributor; and
    (ii) The member bank and its affiliates do not own or control in the 
aggregate more than 5 percent of any class of voting securities or of 
the equity capital of the investment company (excluding securities held 
by the member bank or an affiliate in good faith in a fiduciary 
capacity, unless the member bank or affiliate holds the securities for 
the benefit of the member bank or affiliate, or the shareholders, 
employees, or subsidiaries of the member bank or affiliate).
    (3) Example. A member bank proposes to lend $100 to a nonaffiliate 
secured exclusively by eligible affiliated mutual fund securities. The 
member bank knows that the nonaffiliate intends to use all the loan 
proceeds to purchase the eligible affiliated mutual fund securities that 
would serve as collateral for the loan. Under the attribution rule in 
Sec. 223.16, the member bank must treat the loan to the nonaffiliate as 
a loan to an affiliate, and, because securities issued by an affiliate 
are ineligible collateral under Sec. 223.14, the loan would not be in 
compliance with Sec. 223.14.



             Subpart D_Other Requirements Under Section 23A



Sec. 223.31  How does section 23A apply to a member bank's acquisition of an 

affiliate that becomes an operating subsidiary of the member bank after the 

acquisition?

    (a) Certain acquisitions by a member bank of securities issued by an 
affiliate are treated as a purchase of assets from an affiliate. A 
member bank's acquisition of a security issued by a company that was an 
affiliate of the member bank before the acquisition is treated as a 
purchase of assets from an affiliate, if:
    (1) As a result of the transaction, the company becomes an operating 
subsidiary of the member bank; and
    (2) The company has liabilities, or the member bank gives cash or 
any other consideration in exchange for the security.
    (b) Valuation--(1) Initial valuation. A transaction described in 
paragraph (a) of this section must be valued initially at the greater 
of:
    (i) The sum of:
    (A) The total amount of consideration given by the member bank in 
exchange for the security; and
    (B) The total liabilities of the company whose security has been 
acquired by the member bank, as of the time of the acquisition; or
    (ii) The total value of all covered transactions (as computed under 
this part) acquired by the member bank as a result of the security 
acquisition.
    (2) Ongoing valuation. The value of a transaction described in 
paragraph (a) of this section may be reduced after the initial transfer 
to reflect:
    (i) Amortization or depreciation of the assets of the transferred 
company, to the extent that such reductions are consistent with GAAP; 
and
    (ii) Sales of the assets of the transferred company.
    (c) Valuation example. The parent holding company of a member bank 
contributes between 25 and 100 percent of the voting shares of a 
mortgage company to the member bank. The parent holding company retains 
no shares of the mortgage company. The member bank gives no 
consideration in exchange for the transferred shares. The mortgage 
company has total assets of $300,000 and total liabilities of $100,000. 
The mortgage company's assets do not include any loans to an affiliate 
of the member bank or any other asset that would represent a separate 
covered transaction for the member bank upon consummation of the share 
transfer. As a result of the transaction, the mortgage company becomes 
an operating subsidiary of the member bank. The transaction is treated 
as a purchase of the assets of the mortgage company by

[[Page 101]]

the member bank from an affiliate under paragraph (a) of this section. 
The member bank initially must value the transaction at $100,000, the 
total amount of the liabilities of the mortgage company. Going forward, 
if the member bank pays off the liabilities, the member bank must 
continue to value the covered transaction at $100,000. If the member 
bank, however, sells $15,000 of the transferred assets of the mortgage 
company or if $15,000 of the transferred assets amortize, the member 
bank may value the covered transaction at $85,000.
    (d) Exemption for step transactions. A transaction described in 
paragraph (a) of this section is exempt from the requirements of this 
regulation (other than the safety and soundness requirement of Sec. 
223.13 and the market terms requirement of Sec. 223.51) if:
    (1) The member bank acquires the securities issued by the 
transferred company within one business day (or such longer period, up 
to three months, as may be permitted by the member bank's appropriate 
Federal banking agency) after the company becomes an affiliate of the 
member bank;
    (2) The member bank acquires all the securities of the transferred 
company that were transferred in connection with the transaction that 
made the company an affiliate of the member bank;
    (3) The business and financial condition (including the asset 
quality and liabilities) of the transferred company does not materially 
change from the time the company becomes an affiliate of the member bank 
and the time the member bank acquires the securities issued by the 
company; and
    (4) At or before the time that the transferred company becomes an 
affiliate of the member bank, the member bank notifies its appropriate 
Federal banking agency and the Board of the member bank's intent to 
acquire the company.
    (e) Example of step transaction. A bank holding company acquires 100 
percent of the shares of an unaffiliated leasing company. At that time, 
the subsidiary member bank of the holding company notifies its 
appropriate Federal banking agency and the Board of its intent to 
acquire the leasing company from its holding company. On the day after 
consummation of the acquisition, the holding company transfers all of 
the shares of the leasing company to the member bank. No material change 
in the business or financial condition of the leasing company occurs 
between the time of the holding company's acquisition and the member 
bank's acquisition. The leasing company has liabilities. The leasing 
company becomes an operating subsidiary of the member bank at the time 
of the transfer. This transfer by the holding company to the member 
bank, although deemed an asset purchase by the member bank from an 
affiliate under paragraph (a) of this section, would qualify for the 
exemption in paragraph (d) of this section.



Sec. 223.32  What rules apply to financial subsidiaries of a member bank?

    (a) Exemption from the 10 percent limit for covered transactions 
between a member bank and a single financial subsidiary. The 10 percent 
quantitative limit contained in Sec. 223.11 does not apply with respect 
to covered transactions between a member bank and a financial subsidiary 
of the member bank. The 20 percent quantitative limit contained in Sec. 
223.12 does apply to such transactions.
    (b) Valuation of purchases of or investments in the securities of a 
financial subsidiary--(1) General rule. A member bank's purchase of or 
investment in a security issued by a financial subsidiary of the member 
bank must be valued at the greater of:
    (i) The total amount of consideration given (including liabilities 
assumed) by the member bank in exchange for the security, reduced to 
reflect amortization of the security to the extent consistent with GAAP; 
and
    (ii) The carrying value of the security (adjusted so as not to 
reflect the member bank's pro rata portion of any earnings retained or 
losses incurred by the financial subsidiary after the member bank's 
acquisition of the security).
    (2) Carrying value of an investment in a consolidated financial 
subsidiary. If a financial subsidiary is consolidated with its parent 
member bank under GAAP, the carrying value of the member bank's 
investment in securities issued

[[Page 102]]

by the financial subsidiary shall be equal to the carrying value of the 
securities on parent-only financial statements of the member bank, 
determined in accordance with GAAP (adjusted so as not to reflect the 
member bank's pro rata portion of any earnings retained or losses 
incurred by the financial subsidiary after the member bank's acquisition 
of the securities).
    (3) Examples of the valuation of purchases of and investments in the 
securities of a financial subsidiary. The following are examples of how 
a member bank must value its purchase of or investment in securities 
issued by a financial subsidiary of the member bank. Each example 
involves a securities underwriter that becomes a financial subsidiary of 
the member bank after the transactions described below.
    (i) Initial valuation. (A) Direct acquisition by a member bank. A 
member bank pays $500 to acquire 100 percent of the shares of a 
securities underwriter. The initial carrying value of the shares on the 
member bank's parent-only GAAP financial statements is $500. The member 
bank initially must value the investment at $500.
    (B) Contribution of a financial subsidiary to a member bank. The 
parent holding company of a member bank acquires 100 percent of the 
shares of a securities underwriter in a transaction valued at $500, and 
immediately contributes the shares to the member bank. The member bank 
gives no consideration in exchange for the shares. The member bank 
initially must value the investment at the carrying value of the shares 
on the member bank's parent-only GAAP financial statements. Under GAAP, 
the member bank's initial carrying value of the shares would be $500.
    (ii) Carrying value not adjusted for earnings and losses of the 
financial subsidiary. A member bank and its parent holding company 
engage in the transaction described in paragraph (b)(3)(i)(B) of this 
section, and the member bank initially values the investment at $500. In 
the following year, the securities underwriter earns $25 in profit, 
which is added to its retained earnings. The member bank's carrying 
value of the shares of the underwriter is not adjusted for purposes of 
this part, and the member bank must continue to value the investment at 
$500. If, however, the member bank contributes $100 of additional 
capital to the securities underwriter, the member bank must value the 
aggregate investment at $600.
    (c) Treatment of an affiliate's investments in, and extensions of 
credit to, a financial subsidiary of a member bank--(1) Investments. Any 
purchase of, or investment in, the securities of a financial subsidiary 
of a member bank by an affiliate of the member bank is treated as a 
purchase of or investment in such securities by the member bank.
    (2) Extensions of credit that are treated as regulatory capital of 
the financial subsidiary. Any extension of credit to a financial 
subsidiary of a member bank by an affiliate of the member bank is 
treated as an extension of credit by the member bank to the financial 
subsidiary if the extension of credit is treated as capital of the 
financial subsidiary under any Federal or State law, regulation, or 
interpretation applicable to the subsidiary.
    (3) Other extensions of credit. Any other extension of credit to a 
financial subsidiary of a member bank by an affiliate of the member bank 
will be treated as an extension of credit by the member bank to the 
financial subsidiary, if the Board determines, by regulation or order, 
that such treatment is necessary or appropriate to prevent evasions of 
the Federal Reserve Act or the Gramm-Leach-Bliley Act.



Sec. 223.33  What rules apply to derivative transactions?

    (a) Market terms requirement. Derivative transactions between a 
member bank and its affiliates (other than depository institutions) are 
subject to the market terms requirement of Sec. 223.51.
    (b) Policies and procedures. A member bank must establish and 
maintain policies and procedures reasonably designed to manage the 
credit exposure arising from its derivative transactions with affiliates 
in a safe and sound manner. The policies and procedures must at a 
minimum provide for:
    (1) Monitoring and controlling the credit exposure arising at any 
one time

[[Page 103]]

from the member bank's derivative transactions with each affiliate and 
all affiliates in the aggregate (through, among other things, imposing 
appropriate credit limits, mark-to-market requirements, and collateral 
requirements); and
    (2) Ensuring that the member bank's derivative transactions with 
affiliates comply with the market terms requirement of Sec. 223.51.
    (c) Credit derivatives. A credit derivative between a member bank 
and a nonaffiliate in which the member bank provides credit protection 
to the nonaffiliate with respect to an obligation of an affiliate of the 
member bank is a guarantee by a member bank on behalf of an affiliate 
for purposes of this regulation. Such derivatives would include:
    (1) An agreement under which the member bank, in exchange for a fee, 
agrees to compensate the nonaffiliate for any default of the underlying 
obligation of the affiliate; and
    (2) An agreement under which the member bank, in exchange for 
payments based on the total return of the underlying obligation of the 
affiliate, agrees to pay the nonaffiliate a spread over funding costs 
plus any depreciation in the value of the underlying obligation of the 
affiliate.



         Subpart E_Exemptions from the Provisions of Section 23A



Sec. 223.41  What covered transactions are exempt from the quantitative limits 

and collateral requirements?

    The following transactions are not subject to the quantitative 
limits of Sec. Sec. 223.11 and 223.12 or the collateral requirements of 
Sec. 223.14. The transactions are, however, subject to the safety and 
soundness requirement of Sec. 223.13 and the prohibition on the 
purchase of a low-quality asset of Sec. 223.15.
    (a) Parent institution/subsidiary institution transactions. 
Transactions with a depository institution if the member bank controls 
80 percent or more of the voting securities of the depository 
institution or the depository institution controls 80 percent or more of 
the voting securities of the member bank.
    (b) Transactions between a member bank and a depository institution 
owned by the same holding company. Transactions with a depository 
institution if the same company controls 80 percent or more of the 
voting securities of the member bank and the depository institution.
    (c) Certain loan purchases from an affiliated depository 
institution. Purchasing a loan on a nonrecourse basis from an affiliated 
depository institution.
    (d) Internal corporate reorganization transactions. Purchasing 
assets from an affiliate (including in connection with a transfer of 
securities issued by an affiliate to a member bank described in 
paragraph (a) of Sec. 223.31), if:
    (1) The asset purchase is part of an internal corporate 
reorganization of a holding company and involves the transfer of all or 
substantially all of the shares or assets of an affiliate or of a 
division or department of an affiliate;
    (2) The member bank provides its appropriate Federal banking agency 
and the Board with written notice of the transaction before 
consummation, including a description of the primary business activities 
of the affiliate and an indication of the proposed date of the asset 
purchase;
    (3) The member bank's top-tier holding company commits to its 
appropriate Federal banking agency and the Board before consummation 
either:
    (i) To make quarterly cash contributions to the member bank, for a 
two-year period following the member bank's purchase, equal to the book 
value plus any write-downs taken by the member bank, of any transferred 
assets that have become low-quality assets during the quarter; or
    (ii) To repurchase, on a quarterly basis for a two-year period 
following the member bank's purchase, at a price equal to the book value 
plus any write-downs taken by the member bank, any transferred assets 
that have become low-quality assets during the quarter;
    (4) The member bank's top-tier holding company complies with the 
commitment made under paragraph (d)(3) of this section;
    (5) A majority of the member bank's directors reviews and approves 
the transaction before consummation;
    (6) The value of the covered transaction (as computed under this 
part), when aggregated with the value of any

[[Page 104]]

other covered transactions (as computed under this part) engaged in by 
the member bank under this exemption during the preceding 12 calendar 
months, represents less than 10 percent of the member bank's capital 
stock and surplus (or such higher amount, up to 25 percent of the member 
bank's capital stock and surplus, as may be permitted by the member 
bank's appropriate Federal banking agency after conducting a review of 
the member bank's financial condition and the quality of the assets 
transferred to the member bank); and
    (7) The holding company and all its subsidiary member banks and 
other subsidiary depository institutions are well capitalized and well 
managed and would remain well capitalized upon consummation of the 
transaction.



Sec. 223.42  What covered transactions are exempt from the quantitative 

limits, collateral requirements, and low-quality asset prohibition?

    The following transactions are not subject to the quantitative 
limits of Sec. Sec. 223.11 and 223.12, the collateral requirements of 
Sec. 223.14, or the prohibition on the purchase of a low-quality asset 
of Sec. 223.15. The transactions are, however, subject to the safety 
and soundness requirement of Sec. 223.13.
    (a) Making correspondent banking deposits. Making a deposit in an 
affiliated depository institution (as defined in section 3 of the 
Federal Deposit Insurance Act (12 U.S.C. 1813)) or affiliated foreign 
bank that represents an ongoing, working balance maintained in the 
ordinary course of correspondent business.
    (b) Giving credit for uncollected items. Giving immediate credit to 
an affiliate for uncollected items received in the ordinary course of 
business.
    (c) Transactions secured by cash or U.S. government securities.
    (1) In general. Engaging in a credit transaction with an affiliate 
to the extent that the transaction is and remains secured by:
    (i) Obligations of the United States or its agencies;
    (ii) Obligations fully guaranteed by the United States or its 
agencies as to principal and interest; or
    (iii) A segregated, earmarked deposit account with the member bank 
that is for the sole purpose of securing credit transactions between the 
member bank and its affiliates and is identified as such.
    (2) Example. A member bank makes a $100 non-amortizing term loan to 
an affiliate secured by U.S. Treasury securities with a market value of 
$50 and real estate with a market value of $75. The value of the covered 
transaction is $50. If the market value of the U.S. Treasury securities 
falls to $45 during the life of the loan, the value of the covered 
transaction would increase to $55.
    (d) Purchasing securities of a servicing affiliate. Purchasing a 
security issued by any company engaged solely in providing services 
described in section 4(c)(1) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(1)).
    (e) Purchasing certain liquid assets. Purchasing an asset having a 
readily identifiable and publicly available market quotation and 
purchased at or below the asset's current market quotation. An asset has 
a readily identifiable and publicly available market quotation if the 
asset's price is quoted routinely in a widely disseminated publication 
that is readily available to the general public.
    (f) Purchasing certain marketable securities. Purchasing a security 
from a securities affiliate, if:
    (1) The security has a ``ready market,'' as defined in 17 CFR 
240.15c3-1(c)(11)(i);
    (2) The security is eligible for a State member bank to purchase 
directly, subject to the same terms and conditions that govern the 
investment activities of a State member bank, and the member bank 
records the transaction as a purchase of a security for purposes of its 
Call Report, consistent with the requirements for a State member bank;
    (3) The security is not a low-quality asset;
    (4) The member bank does not purchase the security during an 
underwriting, or within 30 days of an underwriting, if an affiliate is 
an underwriter of the security, unless the security is purchased as part 
of an issue of obligations of, or obligations fully

[[Page 105]]

guaranteed as to principal and interest by, the United States or its 
agencies;
    (5) The security's price is quoted routinely on an unaffiliated 
electronic service that provides indicative data from real-time 
financial networks, provided that:
    (i) The price paid by the member bank is at or below the current 
market quotation for the security; and
    (ii) The size of the transaction executed by the member bank does 
not cast material doubt on the appropriateness of relying on the current 
market quotation for the security; and
    (6) The member bank maintains, for a period of two years, records 
and supporting information that are sufficient to enable the appropriate 
Federal banking agency to ensure the member bank's compliance with the 
terms of this exemption.
    (g) Purchasing municipal securities. Purchasing a municipal security 
from a securities affiliate if:
    (1) The security is rated by a nationally recognized statistical 
rating organization or is part of an issue of securities that does not 
exceed $25 million;
    (2) The security is eligible for purchase by a State member bank, 
subject to the same terms and conditions that govern the investment 
activities of a State member bank, and the member bank records the 
transaction as a purchase of a security for purposes of its Call Report, 
consistent with the requirements for a State member bank; and
    (3)(i) The security's price is quoted routinely on an unaffiliated 
electronic service that provides indicative data from real-time 
financial networks, provided that:
    (A) The price paid by the member bank is at or below the current 
market quotation for the security; and
    (B) The size of the transaction executed by the member bank does not 
cast material doubt on the appropriateness of relying on the current 
market quotation for the security; or
    (ii) The price paid for the security can be verified by reference to 
two or more actual, current price quotes from unaffiliated broker-
dealers on the exact security to be purchased or a security comparable 
to the security to be purchased, where:
    (A) The price quotes obtained from the unaffiliated broker-dealers 
are based on a transaction similar in size to the transaction that is 
actually executed; and
    (B) The price paid is no higher than the average of the price 
quotes; or
    (iii) The price paid for the security can be verified by reference 
to the written summary provided by the syndicate manager to syndicate 
members that discloses the aggregate par values and prices of all bonds 
sold from the syndicate account, if the member bank:
    (A) Purchases the municipal security during the underwriting period 
at a price that is at or below that indicated in the summary; and
    (B) Obtains a copy of the summary from its securities affiliate and 
retains the summary for three years.
    (h) Purchasing an extension of credit subject to a repurchase 
agreement. Purchasing from an affiliate an extension of credit that was 
originated by the member bank and sold to the affiliate subject to a 
repurchase agreement or with recourse.
    (i) Asset purchases by a newly formed member bank. The purchase of 
an asset from an affiliate by a newly formed member bank, if the 
appropriate Federal banking agency for the member bank has approved the 
asset purchase in writing in connection with its review of the formation 
of the member bank.
    (j) Transactions approved under the Bank Merger Act. Any merger or 
consolidation between a member bank and an affiliated depository 
institution or U.S. branch or agency of a foreign bank, or any 
acquisition of assets or assumption of deposit liabilities by a member 
bank from an affiliated depository institution or U.S. branch or agency 
of a foreign bank, if the transaction has been approved by the 
responsible Federal banking agency pursuant to the Bank Merger Act (12 
U.S.C. 1828(c)).
    (k) Purchasing an extension of credit from an affiliate. Purchasing 
from an affiliate, on a nonrecourse basis, an extension of credit, if:
    (1) The extension of credit was originated by the affiliate;
    (2) The member bank makes an independent evaluation of the 
creditworthiness of the borrower before the affiliate

[[Page 106]]

makes or commits to make the extension of credit;
    (3) The member bank commits to purchase the extension of credit 
before the affiliate makes or commits to make the extension of credit;
    (4) The member bank does not make a blanket advance commitment to 
purchase extensions of credit from the affiliate; and
    (5) The dollar amount of the extension of credit, when aggregated 
with the dollar amount of all other extensions of credit purchased from 
the affiliate during the preceding 12 calendar months by the member bank 
and its depository institution affiliates, does not represent more than 
50 percent (or such lower percent as is imposed by the member bank's 
appropriate Federal banking agency) of the dollar amount of extensions 
of credit originated by the affiliate during the preceding 12 calendar 
months.
    (l) Intraday extensions of credit--(1) In general. An intraday 
extension of credit to an affiliate, if the member bank:
    (i) Has established and maintains policies and procedures reasonably 
designed to manage the credit exposure arising from the member bank's 
intraday extensions of credit to affiliates in a safe and sound manner, 
including policies and procedures for:
    (A) Monitoring and controlling the credit exposure arising at any 
one time from the member bank's intraday extensions of credit to each 
affiliate and all affiliates in the aggregate; and
    (B) Ensuring that any intraday extension of credit by the member 
bank to an affiliate complies with the market terms requirement of Sec. 
223.51;
    (ii) Has no reason to believe that the affiliate will have 
difficulty repaying the extension of credit in accordance with its 
terms; and
    (iii) Ceases to treat any such extension of credit (regardless of 
jurisdiction) as an intraday extension of credit at the end of the 
member bank's business day in the United States.
    (2) Definition. Intraday extension of credit by a member bank to an 
affiliate means an extension of credit by a member bank to an affiliate 
that the member bank expects to be repaid, sold, or terminated, or to 
qualify for a complete exemption under this regulation, by the end of 
its business day in the United States.
    (m) Riskless principal transactions. Purchasing a security from a 
securities affiliate of the member bank if:
    (1) The member bank or the securities affiliate is acting 
exclusively as a riskless principal in the transaction; and
    (2) The security purchased is not issued, underwritten, or sold as 
principal (other than as riskless principal) by any affiliate of the 
member bank.
    (n) Securities financing transactions. (1) From September 15, 2008, 
until January 30, 2009 (unless further extended by the Board), 
securities financing transactions with an affiliate, if:
    (i) The security or other asset financed by the member bank in the 
transaction is of a type that the affiliate financed in the U.S. tri-
party repurchase agreement market at any time during the week of 
September 8-12, 2008;
    (ii) The transaction is marked to market daily and subject to daily 
margin-maintenance requirements, and the member bank is at least as 
over-collateralized in the transaction as the affiliate's clearing bank 
was over-collateralized in comparable transactions with the affiliate in 
the U.S. tri-party repurchase agreement market on September 12, 2008;
    (iii) The aggregate risk profile of the securities financing 
transactions under this exemption is no greater than the aggregate risk 
profile of the securities financing transactions of the affiliate in the 
U.S. tri-party repurchase agreement market on September 12, 2008;
    (iv) The member bank's top-tier holding company guarantees the 
obligations of the affiliate under the securities financing transactions 
(or provides other security to the bank that is acceptable to the 
Board); and
    (v) The member bank has not been specifically informed by the Board, 
after consultation with the member bank's appropriate Federal banking 
agency, that the member bank may not use this exemption.
    (2) For purposes of this exemption:
    (i) Securities financing transaction means:
    (A) A purchase by a member bank from an affiliate of a security or 
other

[[Page 107]]

asset, subject to an agreement by the affiliate to repurchase the asset 
from the member bank;
    (B) A borrowing of a security by a member bank from an affiliate on 
a collateralized basis; or
    (C) A secured extension of credit by a member bank to an affiliate.
    (ii) U.S. tri-party repurchase agreement market means the U.S. 
market for securities financing transactions in which the counterparties 
use custodial arrangements provided by JPMorgan Chase Bank or Bank of 
New York or another financial institution approved by the Board.
    (o) Purchases of certain asset-backed commercial paper. Purchases of 
asset-backed commercial paper from an affiliated SEC-registered open-end 
investment company that holds itself out as a money market mutual fund 
under SEC Rule 2a-7 (17 CFR 270.2a-7), if the member bank:
    (1) Purchases the asset-backed commercial paper between September 
19, 2008, and January 30, 2009 (unless extended by the Board), pursuant 
to the asset-backed commercial paper lending facility established by the 
Board on September 19, 2008; and
    (2) Has not been specifically informed by the Board, after 
consultation with the member bank's appropriate Federal banking agency, 
that the member bank may not use this exemption.

[67 FR 76604, Dec. 12, 2002, as amended at 73 FR 54308, Sept. 19, 2008; 
73 FR 55709, Sept. 26, 2008]



Sec. 223.43  What are the standards under which the Board may grant additional 

exemptions from the requirements of section 23A?

    (a) The standards. The Board may, at its discretion, by regulation 
or order, exempt transactions or relationships from the requirements of 
section 23A and subparts B, C, and D of this part if it finds such 
exemptions to be in the public interest and consistent with the purposes 
of section 23A.
    (b) Procedure. A member bank may request an exemption from the 
requirements of section 23A and subparts B, C, and D of this part by 
submitting a written request to the General Counsel of the Board. Such a 
request must:
    (1) Describe in detail the transaction or relationship for which the 
member bank seeks exemption;
    (2) Explain why the Board should exempt the transaction or 
relationship; and
    (3) Explain how the exemption would be in the public interest and 
consistent with the purposes of section 23A.



               Subpart F_General Provisions of Section 23B



Sec. 223.51  What is the market terms requirement of section 23B?

    A member bank may not engage in a transaction described in Sec. 
223.52 unless the transaction is:
    (a) On terms and under circumstances, including credit standards, 
that are substantially the same, or at least as favorable to the member 
bank, as those prevailing at the time for comparable transactions with 
or involving nonaffiliates; or
    (b) In the absence of comparable transactions, on terms and under 
circumstances, including credit standards, that in good faith would be 
offered to, or would apply to, nonaffiliates.



Sec. 223.52  What transactions with affiliates or others must comply with 

section 23B's market terms requirement?

    (a) The market terms requirement of Sec. 223.51 applies to the 
following transactions:
    (1) Any covered transaction with an affiliate, unless the 
transaction is exempt under paragraphs (a) through (c) of Sec. 223.41 
or paragraphs (a) through (e) or (h) through (j) of Sec. 223.42;
    (2) The sale of a security or other asset to an affiliate, including 
an asset subject to an agreement to repurchase;
    (3) The payment of money or the furnishing of a service to an 
affiliate under contract, lease, or otherwise;
    (4) Any transaction in which an affiliate acts as an agent or broker 
or receives a fee for its services to the member bank or to any other 
person; and
    (5) Any transaction or series of transactions with a nonaffiliate, 
if an affiliate:
    (i) Has a financial interest in the nonaffiliate; or

[[Page 108]]

    (ii) Is a participant in the transaction or series of transactions.
    (b) For the purpose of this section, any transaction by a member 
bank with any person will be deemed to be a transaction with an 
affiliate of the member bank if any of the proceeds of the transaction 
are used for the benefit of, or transferred to, the affiliate.



Sec. 223.53  What asset purchases are prohibited by section 23B?

    (a) Fiduciary purchases of assets from an affiliate. A member bank 
may not purchase as fiduciary any security or other asset from any 
affiliate unless the purchase is permitted:
    (1) Under the instrument creating the fiduciary relationship;
    (2) By court order; or
    (3) By law of the jurisdiction governing the fiduciary relationship.
    (b) Purchase of a security underwritten by an affiliate. (1) A 
member bank, whether acting as principal or fiduciary, may not knowingly 
purchase or otherwise acquire, during the existence of any underwriting 
or selling syndicate, any security if a principal underwriter of that 
security is an affiliate of the member bank.
    (2) Paragraph (b)(1) of this section does not apply if the purchase 
or acquisition of the security has been approved, before the security is 
initially offered for sale to the public, by a majority of the directors 
of the member bank based on a determination that the purchase is a sound 
investment for the member bank, or for the person on whose behalf the 
member bank is acting as fiduciary, as the case may be, irrespective of 
the fact that an affiliate of the member bank is a principal underwriter 
of the security.
    (3) The approval requirement of paragraph (b)(2) of this section may 
be met if:
    (i) A majority of the directors of the member bank approves 
standards for the member bank's acquisitions of securities described in 
paragraph (b)(1) of this section, based on the determination set forth 
in paragraph (b)(2) of this section;
    (ii) Each acquisition described in paragraph (b)(1) of this section 
meets the standards; and
    (iii) A majority of the directors of the member bank periodically 
reviews acquisitions described in paragraph (b)(1) of this section to 
ensure that they meet the standards and periodically reviews the 
standards to ensure that they continue to meet the criterion set forth 
in paragraph (b)(2) of this section.
    (4) A U.S. branch, agency, or commercial lending company of a 
foreign bank may comply with paragraphs (b)(2) and (b)(3) of this 
section by obtaining the approvals and reviews required by paragraphs 
(b)(2) and (b)(3) from either:
    (i) A majority of the directors of the foreign bank; or
    (ii) A majority of the senior executive officers of the foreign 
bank.
    (c) Special definitions. For purposes of this section:
    (1) ``Principal underwriter'' means any underwriter who, in 
connection with a primary distribution of securities:
    (i) Is in privity of contract with the issuer or an affiliated 
person of the issuer;
    (ii) Acting alone or in concert with one or more other persons, 
initiates or directs the formation of an underwriting syndicate; or
    (iii) Is allowed a rate of gross commission, spread, or other profit 
greater than the rate allowed another underwriter participating in the 
distribution.
    (2) ``Security'' has the same meaning as in section 3(a)(10) of the 
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(10)).



Sec. 223.54  What advertisements and statements are prohibited by section 23B?

    (a) In general. A member bank and its affiliates may not publish any 
advertisement or enter into any agreement stating or suggesting that the 
member bank will in any way be responsible for the obligations of its 
affiliates.
    (b) Guarantees, acceptances, letters of credit, and cross-affiliate 
netting arrangements subject to section 23A. Paragraph (a) of this 
section does not prohibit a member bank from:
    (1) Issuing a guarantee, acceptance, or letter of credit on behalf 
of an affiliate, confirming a letter of credit

[[Page 109]]

issued by an affiliate, or entering into a cross-affiliate netting 
arrangement, to the extent such transaction satisfies the quantitative 
limits of Sec. Sec. 223.11 and 223.12 and the collateral requirements 
of Sec. 223.14, and is otherwise permitted under this regulation; or
    (2) Making reference to such a guarantee, acceptance, letter of 
credit, or cross-affiliate netting arrangement if otherwise required by 
law.



Sec. 223.55  What are the standards under which the Board may grant exemptions 

from the requirements of section 23B?

    The Board may prescribe regulations to exempt transactions or 
relationships from the requirements of section 23B and subpart F of this 
part if it finds such exemptions to be in the public interest and 
consistent with the purposes of section 23B.



Sec. 223.56  What transactions are exempt from the market-terms requirement of 

section 23B?

    The following transactions are exempt from the market-terms 
requirement of Sec. 223.51.
    (a) Purchases of certain asset-backed commercial paper. Purchases of 
asset-backed commercial paper from an affiliated SEC-registered open-end 
investment company that holds itself out as a money market mutual fund 
under SEC Rule 2a-7 (17 CFR 270.2a-7), if the member bank:
    (1) Purchases the asset-backed commercial paper between September 
19, 2008, and January 30, 2009 (unless extended by the Board), pursuant 
to the asset-backed commercial paper lending facility established by the 
Board on September 19, 2008; and
    (2) Has not been specifically informed by the Board, after 
consultation with the member bank's appropriate Federal banking agency, 
that the member bank may not use this exemption.
    (b) [Reserved]

[73 FR 55709, Sept. 26, 2008]



   Subpart G_Application of Sections 23A and 23B to U.S. Branches and 
                        Agencies of Foreign Banks



Sec. 223.61  How do sections 23A and 23B apply to U.S. branches and agencies 

of foreign banks?

    (a) Applicability of sections 23A and 23B to foreign banks engaged 
in underwriting insurance, underwriting or dealing in securities, 
merchant banking, or insurance company investment in the United States. 
Except as provided in this subpart, sections 23A and 23B of the Federal 
Reserve Act and the provisions of this regulation apply to each U.S. 
branch, agency, or commercial lending company of a foreign bank in the 
same manner and to the same extent as if the branch, agency, or 
commercial lending company were a member bank.
    (b) Affiliate defined. For purposes of this subpart, any company 
that would be an affiliate of a U.S. branch, agency, or commercial 
lending company of a foreign bank if such branch, agency, or commercial 
lending company were a member bank is an affiliate of the branch, 
agency, or commercial lending company if the company also is:
    (1) Directly engaged in the United States in any of the following 
activities:
    (i) Insurance underwriting pursuant to section 4(k)(4)(B) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(B));
    (ii) Securities underwriting, dealing, or market making pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E));
    (iii) Merchant banking activities pursuant to section 4(k)(4)(H) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) (but only to the 
extent that the proceeds of the transaction are used for the purpose of 
funding the affiliate's merchant banking activities);
    (iv) Insurance company investment activities pursuant to section 
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I)); or
    (v) Any other activity designated by the Board;

[[Page 110]]

    (2) A portfolio company (as defined in the merchant banking subpart 
of Regulation Y (12 CFR 225.177(c))) controlled by the foreign bank or 
an affiliate of the foreign bank or a company that would be an affiliate 
of the branch, agency, or commercial lending company of the foreign bank 
under paragraph (a)(9) of Sec. 223.2 if such branch, agency, or 
commercial lending company were a member bank; or
    (3) A subsidiary of an affiliate described in paragraph (b)(1) or 
(2) of this section.
    (c) Capital stock and surplus. For purposes of this subpart, the 
``capital stock and surplus'' of a U.S. branch, agency, or commercial 
lending company of a foreign bank will be determined by reference to the 
capital of the foreign bank as calculated under its home country capital 
standards.



                 Subpart H_Miscellaneous Interpretations



Sec. 223.71  How do sections 23A and 23B apply to transactions in which a 

member bank purchases from one affiliate an asset relating to another 

affiliate?

    (a) In general. In some situations in which a member bank purchases 
an asset from an affiliate, the asset purchase qualifies for an 
exemption under this regulation, but the member bank's resulting 
ownership of the purchased asset also represents a covered transaction 
(which may or may not qualify for an exemption under this part). In 
these situations, the transaction engaged in by the member bank would 
qualify as two different types of covered transaction. Although an asset 
purchase exemption may suffice to exempt the member bank's asset 
purchase from the first affiliate, the asset purchase exemption does not 
exempt the member bank's resulting covered transaction with the second 
affiliate. The exemptions subject to this interpretation include 
Sec. Sec. 223.31(e), 223.41(a) through (d), and 223.42(e), (f), (i), 
(j), (k), and (m).
    (b) Examples--(1) The (d)(6) exemption. A member bank purchases from 
Affiliate A securities issued by Affiliate B in a purchase that 
qualifies for the (d)(6) exemption in section 23A. The member bank's 
asset purchase from Affiliate A would be an exempt covered transaction 
under Sec. 223.42(e); but the member bank also would have acquired an 
investment in securities issued by Affiliate B, which would be a covered 
transaction between the member bank and Affiliate B under Sec. 
223.3(h)(2) that does not qualify for the (d)(6) exemption. The (d)(6) 
exemption, by its terms, only exempts asset purchases by a member bank 
from an affiliate; hence, the (d)(6) exemption cannot exempt a member 
bank's investment in securities issued by an affiliate (even if the 
securities would qualify for the (d)(6) exemption).
    (2) The sister-bank exemption. A member bank purchases from Sister-
Bank Affiliate A a loan to Affiliate B in a purchase that qualifies for 
the sister-bank exemption in section 23A. The member bank's asset 
purchase from Sister-Bank Affiliate A would be an exempt covered 
transaction under Sec. 223.41(b); but the member bank also would have 
acquired an extension of credit to Affiliate B, which would be a covered 
transaction between the member bank and Affiliate B under Sec. 
223.3(h)(1) that does not qualify for the sister-bank exemption. The 
sister-bank exemption, by its terms, only exempts transactions by a 
member bank with a sister-bank affiliate; hence, the sister-bank 
exemption cannot exempt a member bank's extension of credit to an 
affiliate that is not a sister bank (even if the extension of credit was 
purchased from a sister bank).



PART 224_BORROWERS OF SECURITIES CREDIT (REGULATION X)--Table of Contents




Sec.
224.1 Authority, purpose, and scope.
224.2 Definitions.
224.3 Margin regulations to be applied by nonexempted borrowers.

    Authority: 15 U.S.C. 78g.

    Source: Reg. X, 48 FR 56572, Dec. 22, 1983, unless otherwise noted.

    Editorial Note: See the List of CFR Sections Affected, which appears 
in the Finding Aids section of the printed volume and on GPO Access, for 
FR citations to Part 224 OTC Margin Stocks changes.

[[Page 111]]



Sec. 224.1  Authority, purpose, and scope.

    (a) Authority and purpose. Regulation X (this part) is issued by the 
Board of Governors of the Federal Reserve System (the Board) under the 
Securities Exchange Act of 1934, as amended (the Act) (15 U.S.C. 78a et 
seq.). This part implements section 7(f) of the Act (15 U.S.C. 78g(f)), 
the purpose of which is to require that credit obtained within or 
outside the United States complies with the limitations of the Board's 
Margin Regulations T and U (12 CFR parts 220 and 221, respectively).
    (b) Scope and exemptions. The Act and this part apply the Board's 
margin regulations to United States persons and foreign persons 
controlled by or acting on behalf of or in conjunction with United 
States persons (hereinafter borrowers), who obtain credit outside the 
United States to purchase or carry United States securities, or within 
the United States to purchase or carry any securities (both types of 
credit are hereinafter referred to as purpose credit). The following 
borrowers are exempt from the Act and this part:
    (1) Any borrower who obtains purpose credit within the United 
States, unless the borrower willfully causes the credit to be extended 
in contravention of Regulations T or U.
    (2) Any borrower whose permanent residence is outside the United 
States and who does not obtain or have outstanding, during any calendar 
year, a total of more than $100,000 in purpose credit obtained outside 
the United States; and
    (3) Any borrower who is exempt by Order upon terms and conditions 
set by the Board.

[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839, 
Jan. 16, 1998]



Sec. 224.2  Definitions.

    The terms used in this part have the meanings given to them in 
sections 3(a) and 7(f) of the Act, and in Regulations T and U. Section 
7(f) of the Act contains the following definitions:
    (a) United States person includes a person which is organized or 
exists under the laws of any State or, in the case of a natural person, 
a citizen or resident of the United States; a domestic estate; or a 
trust in which one or more of the foregoing persons has a cumulative 
direct or indirect beneficial interest in excess of 50 per centum of the 
valve of the trust.
    (b) United States security means a security (other than an exempted 
security) issued by a person incorporated under the laws of any State, 
or whose principal place of business is within a State.
    (c) Foreign person controlled by a United States person includes any 
noncorporate entity in which United States persons directly or 
indirectly have more than a 50 per centum beneficial interest, and any 
corporation in which one or more United States persons, directly or 
indirectly, own stock possessing more than 50 per centum of the total 
combined voting power of all classes of stock entitled to vote, or more 
than 50 per centum of the total value of shares of all classes of stock.

[Reg. X, 48 FR 56572, Dec. 22, 1983, as amended by Reg. X, 63 FR 2839, 
Jan. 16, 1998]



Sec. 224.3  Margin regulations to be applied by nonexempted borrowers.

    (a) Credit transactions outside the United States. No borrower shall 
obtain purpose credit from outside the United States unless it conforms 
to the following margin regulations:
    (1) Regulation T (12 CFR part 220) if the credit is obtained from a 
foreign branch of a broker-dealer;
    (2) Regulation U (12 CFR part 221), as it applies to banks, if the 
credit is obtained from a foreign branch of a bank, except for the 
requirement of a purpose statement (12 CFR 221.3(c)(1)(i) and 
(c)(2)(i)); and
    (3) Regulation U (12 CFR part 221), as it applies to nonbank 
lenders, if the credit is obtained from any other lender outside the 
United States, except for the requirement of a purpose statement (12 CFR 
221.3(c)(1)(ii) and (c)(2)(ii)).
    (b) Credit transactions within the United States. Any borrower who 
willfully causes credit to be extended in contravention of Regulations T 
and U (12 CFR parts 220 and 221), and who, therefore, is not exempted by 
Sec. 224.1(b)(1), must conform the credit to

[[Page 112]]

the margin regulation that applies to the lender.

[Reg. X, 63 FR 2839, Jan. 16, 1998]



PART 225_BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y)--

Table of Contents




                               Regulations

                      Subpart A_General Provisions

Sec.
225.1 Authority, purpose, and scope.
225.2 Definitions.
225.3 Administration.
225.4 Corporate practices.
225.5 Registration, reports, and inspections.
225.6 Penalties for violations.
225.7 Exceptions to tying restrictions.

           Subpart B_Acquisition of Bank Securities or Assets

225.11 Transactions requiring Board approval.
225.12 Transactions not requiring Board approval.
225.13 Factors considered in acting on bank acquisition proposals.
225.14 Expedited action for certain bank acquisitions by well-run bank 
          holding companies.
225.15 Procedures for other bank acquisition proposals.
225.16 Public notice, comments, hearings, and other provisions governing 
          applications and notices.
225.17 Notice procedure for one-bank holding company formations.

    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 
                                Companies

225.21 Prohibited nonbanking activities and acquisitions; exempt bank 
          holding companies.
225.22 Exempt nonbanking activities and acquisitions.
225.23 Expedited action for certain nonbanking proposals by well-run 
          bank holding companies.
225.24 Procedures for other nonbanking proposals.
225.25 Hearings, alteration of activities, and other matters.
225.26 Factors considered in acting on nonbanking proposals.
225.27 Procedures for determining scope of nonbanking activities.
225.28 List of permissible nonbanking activities.

              Subpart D_Control and Divestiture Proceedings

225.31 Control proceedings.

                    Subpart E_Change in Bank Control

225.41 Transactions requiring prior notice.
225.42 Transactions not requiring prior notice.
225.43 Procedures for filing, processing, publishing, and acting on 
          notices.
225.44 Reporting of stock loans.

                 Subpart F_Limitations on Nonbank Banks

225.52 Limitation on overdrafts.

    Subpart G_Appraisal Standards for Federally Related Transactions

225.61 Authority, purpose, and scope.
225.62 Definitions.
225.63 Appraisals required; transactions requiring a State certified or 
          licensed appraiser.
225.64 Minimum appraisal standards.
225.65 Appraiser independence.
225.66 Professional association membership; competency.
225.67 Enforcement.

Subpart H_Notice of Addition or Change of Directors and Senior Executive 
                                Officers

225.71 Definitions.
225.72 Director and officer appointments; prior notice requirement.
225.73 Procedures for filing, processing, and acting on notices; 
          standards for disapproval; waiver of notice.

                  Subpart I_Financial Holding Companies

225.81 What is a financial holding company?
225.82 How does a bank holding company elect to become a financial 
          holding company?
225.83 What are the consequences of failing to continue to meet 
          applicable capital and management requirements?
225.84 What are the consequences of failing to maintain a satisfactory 
          or better rating under the Community Reinvestment Act at all 
          insured depository institution subsidiaries?
225.85 Is notice to or approval from the Board required prior to 
          engaging in a financial activity?
225.86 What activities are permissible for any financial holding 
          company?
225.87 Is notice to the Board required after engaging in a financial 
          activity?
225.88 How to request the Board to determine that an activity is 
          financial in nature or incidental to a financial activity?

[[Page 113]]

225.89 How to request approval to engage in an activity that is 
          complementary to a financial activity?
225.90 What are the requirements for a foreign bank to be treated as a 
          financial holding company?
225.91 How may a foreign bank elect to be treated as a financial holding 
          company?
225.92 How does an election by a foreign bank become effective?
225.93 What are the consequences of a foreign bank failing to continue 
          to meet applicable capital and management requirements?
225.94 What are the consequences of an insured branch or depository 
          institution failing to maintain a satisfactory or better 
          rating under the Community Reinvestment Act?

                             Interpretations

225.101 Bank holding company's subsidiary banks owning shares of 
          nonbanking companies.
225.102 Bank holding company indirectly owning nonbanking company 
          through subsidiaries.
225.103 Bank holding company acquiring stock by dividends, stock splits 
          or exercise of rights.
225.104 ``Services'' under section 4(c)(1) of Bank Holding Company Act.
225.107 Acquisition of stock in small business investment company.
225.109 ``Services'' under section 4(c)(1) of Bank Holding Company Act.
225.111 Limit on investment by bank holding company system in stock of 
          small business investment companies.
225.112 Indirect control of small business concern through convertible 
          debentures held by small business investment company.
225.113 Services under section 4(a) of Bank Holding Company Act.
225.115 Applicability of Bank Service Corporation Act in certain bank 
          holding company situations.
225.118 Computer services for customers of subsidiary banks.
225.121 Acquisition of Edge corporation affiliate by State member banks 
          of registered bank holding company.
225.122 Bank holding company ownership of mortgage companies.
225.123 Activities closely related to banking.
225.124 Foreign bank holding companies.
225.125 Investment adviser activities.
225.126 Activities not closely related to banking.
225.127 Investment in corporations or projects designed primarily to 
          promote community welfare.
225.129 Activities closely related to banking.
225.130 Issuance and sale of short-term debt obligations by bank holding 
          companies.
225.131 Activities closely related to banking.
225.132 Acquisition of assets.
225.133 Computation of amount invested in foreign corporations under 
          general consent procedures.
225.134 Escrow arrangements involving bank stock resulting in a 
          violation of the Bank Holding Company Act.
225.136 Utilization of foreign subsidiaries to sell long-term debt 
          obligations in foreign markets and to transfer the proceeds to 
          their United States parent(s) for domestic purposes.
225.137 Acquisitions of shares pursuant to section 4(c)(6) of the Bank 
          Holding Company Act.
225.138 Statement of policy concerning divestitures by bank holding 
          companies.
225.139 Presumption of continued control under section (2)(g)(3) of the 
          Bank Holding Company Act.
225.140 Disposition of property acquired in satisfaction of debts 
          previously contracted.
225.141 Operations subsidiaries of a bank holding company.
225.142 Statement of policy concerning bank holding companies engaging 
          in futures, forward and options contracts on U.S. Government 
          and agency securities and money market instruments.
225.143 Policy statement on nonvoting equity investments by bank holding 
          companies.
225.145 Limitations established by the Competitive Equality Banking Act 
          of 1987 on the activities and growth of nonbank banks.

                 Subpart J_Merchant Banking Investments

225.170 What type of investments are permitted by this subpart, and 
          under what conditions may they be made?
225.171 What are the limitations on managing or operating a portfolio 
          company held as a merchant banking investment?
225.172 What are the holding periods permitted for merchant banking 
          investments?
225.173 How are investments in private equity funds treated under this 
          subpart?
225.174 What aggregate thresholds apply to merchant banking investments?
225.175 What risk management, record keeping and reporting policies are 
          required to make merchant banking investments?
225.176 How do the statutory cross marketing and sections 23A and B 
          limitations apply to merchant banking investments?
225.177 Definitions.

[[Page 114]]

                          Conditions to Orders

225.200 Conditions to Board's section 20 orders.

Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Risk-Based Measure
Appendix B to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies and State Member Banks: Leverage Measure
Appendix C to Part 225--Small Bank Holding Company Policy Statement
Appendix D to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Tier 1 Leverage Measure
Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Market Risk Measure
Appendix F to Part 225--Interagency Guidelines Establishing Information 
          Security Standards
Appendix G to Part 225--Capital Adequacy Guidelines for Bank Holding 
          Companies: Internal-Ratings-Based and Advanced Measurement 
          Approaches

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1, 
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3906, 3907, 
and 3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.

    Source: Reg. Y, 49 FR 818, Jan. 5, 1984, unless otherwise noted.

    Editorial Note: Nomenclature changes for part 225 appear at 69 FR 
77618, Dec. 28, 2004.

                               Regulations



                      Subpart A_General Provisions

    Source: Reg. Y, 62 FR 9319, Feb. 28, 1997, unless otherwise noted.



Sec. 225.1  Authority, purpose, and scope.

    (a) Authority. This part \1\ (Regulation Y) is issued by the Board 
of Governors of the Federal Reserve System (Board) under section 5(b) of 
the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1844(b)) 
(BHC Act); sections 8 and 13(a) of the International Banking Act of 1978 
(12 U.S.C. 3106 and 3108); section 7(j)(13) of the Federal Deposit 
Insurance Act, as amended by the Change in Bank Control Act of 1978 (12 
U.S.C. 1817(j)(13)) (Bank Control Act); section 8(b) of the Federal 
Deposit Insurance Act (12 U.S.C. 1818(b)); section 914 of the Financial 
Institutions Reform, Recovery and Enforcement Act of 1989 (12 U.S.C. 
1831i); section 106 of the Bank Holding Company Act Amendments of 1970 
(12 U.S.C. 1972); and the International Lending Supervision Act of 1983 
(Pub. L. 98-181, title IX). The BHC Act is codified at 12 U.S.C. 1841, 
et seq.
---------------------------------------------------------------------------

    \1\ Code of Federal Regulations, title 12, chapter II, part 225.
---------------------------------------------------------------------------

    (b) Purpose. The principal purposes of this part are to:
    (1) Regulate the acquisition of control of banks by companies and 
individuals;
    (2) Define and regulate the nonbanking activities in which bank 
holding companies and foreign banking organizations with United States 
operations may engage; and
    (3) Set forth the procedures for securing approval for these 
transactions and activities.
    (c) Scope--(1) Subpart A contains general provisions and definitions 
of terms used in this regulation.
    (2) Subpart B governs acquisitions of bank or bank holding company 
securities and assets by bank holding companies or by any company that 
will become a bank holding company as a result of the acquisition.
    (3) Subpart C defines and regulates the nonbanking activities in 
which bank holding companies and foreign banking organizations may 
engage directly or through a subsidiary. The Board's Regulation K 
governs certain nonbanking activities conducted by foreign banking 
organizations and certain foreign activities conducted by bank holding 
companies (12 CFR part 211, International Banking Operations).
    (4) Subpart D specifies situations in which a company is presumed to 
control voting securities or to have the power to exercise a controlling 
influence over the management or policies of a bank or other company; 
sets forth the procedures for making a control determination; and 
provides rules governing the effectiveness of divestitures by bank 
holding companies.
    (5) Subpart E governs changes in bank control resulting from the 
acquisition by individuals or companies (other than bank holding 
companies) of voting securities of a bank holding company or state 
member bank of the Federal Reserve System.
    (6) Subpart F specifies the limitations that govern companies that 
control so-

[[Page 115]]

called nonbank banks and the activities of nonbank banks.
    (7) Subpart G prescribes minimum standards that apply to the 
performance of real estate appraisals and identifies transactions that 
require state certified appraisers.
    (8) Subpart H identifies the circumstances when written notice must 
be provided to the Board prior to the appointment of a director or 
senior officer of a bank holding company and establishes procedures for 
obtaining the required Board approval.
    (9) Subpart I establishes the procedure by which a bank holding 
company may elect to become a financial holding company, enumerates the 
consequences if a financial holding company ceases to meet a requirement 
applicable to a financial holding company, lists the activities in which 
a financial holding company may engage, establishes the procedure by 
which a person may request the Board to authorize additional activities 
as financial in nature or incidental thereto, and establishes the 
procedure by which a financial holding company may seek approval to 
engage in an activity that is complementary to a financial activity.
    (10) Subpart J governs the conduct of merchant banking investment 
activities by financial holding companies as permitted under section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)).
    (11) Appendix A to the regulation contains the Board's Risk-Based 
Capital Adequacy Guidelines for bank holding companies.
    (12) Appendix B contains the Board's Capital Adequacy Guidelines for 
measuring leverage for bank holding companies and state member banks.
    (13) Appendix C contains the Board's policy statement governing 
small bank holding companies.
    (14) Appendix D contains the Board's Capital Adequacy Guidelines for 
measuring tier 1 leverage for bank holding companies.
    (15) Appendix E contains the Board's Capital Adequacy Guidelines for 
measuring market risk of bank holding companies.
    (16) Appendix F contains the Interagency Guidelines Establishing 
Information Security Standards.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 16472, Mar. 28, 
2000; 66 FR 414, Jan. 3, 2001; 66 FR 8484, Jan. 31, 2001; 66 FR 8636, 
Feb. 1, 2001]



Sec. 225.2  Definitions.

    Except as modified in this regulation or unless the context 
otherwise requires, the terms used in this regulation have the same 
meaning as set forth in the relevant statutes.
    (a) Affiliate means any company that controls, is controlled by, or 
is under common control with, another company.
    (b)(1) Bank means:
    (i) An insured bank as defined in section 3(h) of the Federal 
Deposit Insurance Act (12 U.S.C. 1813(h)); or
    (ii) An institution organized under the laws of the United States 
which both:
    (A) Accepts demand deposits or deposits that the depositor may 
withdraw by check or similar means for payment to third parties or 
others; and
    (B) Is engaged in the business of making commercial loans.
    (2) Bank does not include those institutions qualifying under the 
exceptions listed in section 2(c)(2) of the BHC Act (12 U.S.C. 
1841(c)(2)).
    (c)(1) Bank holding company means any company (including a bank) 
that has direct or indirect control of a bank, other than control that 
results from the ownership or control of:
    (i) Voting securities held in good faith in a fiduciary capacity 
(other than as provided in paragraphs (e)(2)(ii) and (iii) of this 
section) without sole discretionary voting authority, or as otherwise 
exempted under section 2(a)(5)(A) of the BHC Act;
    (ii) Voting securities acquired and held only for a reasonable 
period of time in connection with the underwriting of securities, as 
provided in section 2(a)(5)(B) of the BHC Act;
    (iii) Voting rights to voting securities acquired for the sole 
purpose and in the course of participating in a proxy solicitation, as 
provided in section 2(a)(5)(C) of the BHC Act;

[[Page 116]]

    (iv) Voting securities acquired in satisfaction of debts previously 
contracted in good faith, as provided in section 2(a)(5)(D) of the BHC 
Act, if the securities are divested within two years of acquisition (or 
such later period as the Board may permit by order); or
    (v) Voting securities of certain institutions owned by a thrift 
institution or a trust company, as provided in sections 2(a)(5)(E) and 
(F) of the BHC Act.
    (2) Except for the purposes of Sec. 225.4(b) of this subpart and 
subpart E of this part, or as otherwise provided in this regulation, 
bank holding company includes a foreign banking organization. For the 
purposes of subpart B of this part, bank holding company includes a 
foreign banking organization only if it owns or controls a bank in the 
United States.
    (d)(1) Company includes any bank, corporation, general or limited 
partnership, association or similar organization, business trust, or any 
other trust unless by its terms it must terminate either within 25 
years, or within 21 years and 10 months after the death of individuals 
living on the effective date of the trust.
    (2) Company does not include any organization, the majority of the 
voting securities of which are owned by the United States or any state.
    (3) Testamentary trusts exempt. Unless the Board finds that the 
trust is being operated as a business trust or company, a trust is 
presumed not to be a company if the trust:
    (i) Terminates within 21 years and 10 months after the death of 
grantors or beneficiaries of the trust living on the effective date of 
the trust or within 25 years;
    (ii) Is a testamentary or inter vivos trust established by an 
individual or individuals for the benefit of natural persons (or trusts 
for the benefit of natural persons) who are related by blood, marriage 
or adoption;
    (iii) Contains only assets previously owned by the individual or 
individuals who established the trust;
    (iv) Is not a Massachusetts business trust; and
    (v) Does not issue shares, certificates, or any other evidence of 
ownership.
    (4) Qualified limited partnerships exempt. Company does not include 
a qualified limited partnership, as defined in section 2(o)(10) of the 
BHC Act.
    (e)(1) Control of a bank or other company means (except for the 
purposes of subpart E of this part):
    (i) Ownership, control, or power to vote 25 percent or more of the 
outstanding shares of any class of voting securities of the bank or 
other company, directly or indirectly or acting through one or more 
other persons;
    (ii) Control in any manner over the election of a majority of the 
directors, trustees, or general partners (or individuals exercising 
similar functions) of the bank or other company;
    (iii) The power to exercise, directly or indirectly, a controlling 
influence over the management or policies of the bank or other company, 
as determined by the Board after notice and opportunity for hearing in 
accordance with Sec. 225.31 of subpart D of this part; or
    (iv) Conditioning in any manner the transfer of 25 percent or more 
of the outstanding shares of any class of voting securities of a bank or 
other company upon the transfer of 25 percent or more of the outstanding 
shares of any class of voting securities of another bank or other 
company.
    (2) A bank or other company is deemed to control voting securities 
or assets owned, controlled, or held, directly or indirectly:
    (i) By any subsidiary of the bank or other company;
    (ii) In a fiduciary capacity (including by pension and profit-
sharing trusts) for the benefit of the shareholders, members, or 
employees (or individuals serving in similar capacities) of the bank or 
other company or any of its subsidiaries; or
    (iii) In a fiduciary capacity for the benefit of the bank or other 
company or any of its subsidiaries.
    (f) Foreign banking organization and qualifying foreign banking 
organization have the same meanings as provided in Sec. 211.21(n) and 
Sec. 211.23 of the Board's Regulation K (12 CFR 211.21(n) and 211.23).
    (g) Insured depository institution includes an insured bank as 
defined in

[[Page 117]]

section 3(h) of the Federal Deposit Insurance Act (12 U.S.C. 1813(h)) 
and a savings association.
    (h) Lead insured depository institution means the largest insured 
depository institution controlled by the bank holding company as of the 
quarter ending immediately prior to the proposed filing, based on a 
comparison of the average total risk-weighted assets controlled during 
the previous 12-month period by each insured depository institution 
subsidiary of the holding company.
    (i) Management official means any officer, director (including 
honorary or advisory directors), partner, or trustee of a bank or other 
company, or any employee of the bank or other company with policy-making 
functions.
    (j) Nonbank bank means any institution that:
    (1) Became a bank as a result of enactment of the Competitive 
Equality Amendments of 1987 (Pub. L. 100-86), on the date of enactment 
(August 10, 1987); and
    (2) Was not controlled by a bank holding company on the day before 
the enactment of the Competitive Equality Amendments of 1987 (August 9, 
1987).
    (k) Outstanding shares means any voting securities, but does not 
include securities owned by the United States or by a company wholly 
owned by the United States.
    (l) Person includes an individual, bank, corporation, partnership, 
trust, association, joint venture, pool, syndicate, sole proprietorship, 
unincorporated organization, or any other form of entity.
    (m) Savings association means:
    (1) Any federal savings association or federal savings bank;
    (2) Any building and loan association, savings and loan association, 
homestead association, or cooperative bank if such association or 
cooperative bank is a member of the Savings Association Insurance Fund; 
and
    (3) Any savings bank or cooperative that is deemed by the director 
of the Office of Thrift Supervision to be a savings association under 
section 10(l) of the Home Owners Loan Act.
    (n) Shareholder--(1) Controlling shareholder means a person that 
owns or controls, directly or indirectly, 25 percent or more of any 
class of voting securities of a bank or other company.
    (2) Principal shareholder means a person that owns or controls, 
directly or indirectly, 10 percent or more of any class of voting 
securities of a bank or other company, or any person that the Board 
determines has the power, directly or indirectly, to exercise a 
controlling influence over the management or policies of a bank or other 
company.
    (o) Subsidiary means a bank or other company that is controlled by 
another company, and refers to a direct or indirect subsidiary of a bank 
holding company. An indirect subsidiary is a bank or other company that 
is controlled by a subsidiary of the bank holding company.
    (p) United States means the United States and includes any state of 
the United States, the District of Columbia, any territory of the United 
States, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
    (q)(1) Voting securities means shares of common or preferred stock, 
general or limited partnership shares or interests, or similar interests 
if the shares or interest, by statute, charter, or in any manner, 
entitle the holder:
    (i) To vote for or to select directors, trustees, or partners (or 
persons exercising similar functions of the issuing company); or
    (ii) To vote on or to direct the conduct of the operations or other 
significant policies of the issuing company.
    (2) Nonvoting shares. Preferred shares, limited partnership shares 
or interests, or similar interests are not voting securities if:
    (i) Any voting rights associated with the shares or interest are 
limited solely to the type customarily provided by statute with regard 
to matters that would significantly and adversely affect the rights or 
preference of the security or other interest, such as the issuance of 
additional amounts or classes of senior securities, the modification of 
the terms of the security or interest, the dissolution of the issuing 
company, or the payment of dividends by the issuing company when 
preferred dividends are in arrears;

[[Page 118]]

    (ii) The shares or interest represent an essentially passive 
investment or financing device and do not otherwise provide the holder 
with control over the issuing company; and
    (iii) The shares or interest do not entitle the holder, by statute, 
charter, or in any manner, to select or to vote for the selection of 
directors, trustees, or partners (or persons exercising similar 
functions) of the issuing company.
    (3) Class of voting shares. Shares of stock issued by a single 
issuer are deemed to be the same class of voting shares, regardless of 
differences in dividend rights or liquidation preference, if the shares 
are voted together as a single class on all matters for which the shares 
have voting rights other than matters described in paragraph (o)(2)(i) 
of this section that affect solely the rights or preferences of the 
shares.
    (r) Well-capitalized--(1) Bank holding company. In the case of a 
bank holding company,\2\ well-capitalized means that:
---------------------------------------------------------------------------

    \2\ For purposes of this subpart and subparts B and C of this part, 
a bank holding company with consolidated assets of less than $500 
million that is subject to the Small Bank Holding Company Policy 
Statement in appendix C of this part will be deemed to be ``well-
capitalized'' if the bank holding company meets the requirements for 
expedited/waived processing in appendix C.
---------------------------------------------------------------------------

    (i) On a consolidated basis, the bank holding company maintains a 
total risk-based capital ratio of 10.0 percent or greater, as defined in 
appendix A of this part;
    (ii) On a consolidated basis, the bank holding company maintains a 
Tier 1 risk-based capital ratio of 6.0 percent or greater, as defined in 
appendix A of this part; and
    (iii) The bank holding company is not subject to any written 
agreement, order, capital directive, or prompt corrective action 
directive issued by the Board to meet and maintain a specific capital 
level for any capital measure.
    (2) Insured and uninsured depository institution--(i) Insured 
depository institution. In the case of an insured depository 
institution, ``well capitalized'' means that the institution has and 
maintains at least the capital levels required to be well capitalized 
under the capital adequacy regulations or guidelines applicable to the 
institution that have been adopted by the appropriate Federal banking 
agency for the institution under section 38 of the Federal Deposit 
Insurance Act (12 U.S.C. 1831o).
    (ii) Uninsured depository institution. In the case of a depository 
institution the deposits of which are not insured by the Federal Deposit 
Insurance Corporation, ``well capitalized'' means that the institution 
has and maintains at least the capital levels required for an insured 
depository institution to be well capitalized.
    (3) Foreign banks--(i) Standards applied. For purposes of 
determining whether a foreign banking organization qualifies under 
paragraph (r)(1) of this section:
    (A) A foreign banking organization whose home country supervisor, as 
defined in Sec. 211.21 of the Board's Regulation K (12 CFR 211.21), has 
adopted capital standards consistent in all respects with the Capital 
Accord of the Basle Committee on Banking Supervision (Basle Accord) may 
calculate its capital ratios under the home country standard; and
    (B) A foreign banking organization whose home country supervisor has 
not adopted capital standards consistent in all respects with the Basle 
Accord shall obtain a determination from the Board that its capital is 
equivalent to the capital that would be required of a U.S. banking 
organization under paragraph (r)(1) of this section.
    (ii) Branches and agencies. For purposes of determining, under 
paragraph (r)(1) of this section, whether a branch or agency of a 
foreign banking organization is well-capitalized, the branch or agency 
shall be deemed to have the same capital ratios as the foreign banking 
organization.
    (s) Well managed--(1) In general. Except as otherwise provided in 
this part, a company or depository institution is well managed if:
    (i) At its most recent inspection or examination or subsequent 
review by the appropriate Federal banking agency for the company or 
institution (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)), the company or institution received:

[[Page 119]]

    (A) At least a satisfactory composite rating; and
    (B) At least a satisfactory rating for management, if such rating is 
given.
    (ii) In the case of a company or depository institution that has not 
received an inspection or examination rating, the Board has determined, 
after a review of the managerial and other resources of the company or 
depository institution and after consulting with the appropriate Federal 
and state banking agencies, as applicable, for the company or 
institution, that the company or institution is well managed.
    (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 
shall be considered to be well managed unless the Board determines 
otherwise after consulting with the appropriate Federal and state 
banking agencies, as applicable, for each depository institution 
involved in the merger.
    (ii) Merger involving a poorly rated institution. A depository 
institution that results from the merger of a depository institution 
that is well managed with one or more depository institutions that are 
not well managed or have not been examined shall be considered to be 
well managed if the Board determines, after a review of the managerial 
and other resources of the resulting depository institution and after 
consulting with the appropriate Federal and state banking agencies for 
the institutions involved in the merger, as applicable, that the 
resulting institution is well managed.
    (3) Foreign banking organizations. Except as otherwise provided in 
this part, a foreign banking organization is considered well managed if 
the combined operations of the foreign banking organization in the 
United States have received at least a satisfactory composite rating at 
the most recent annual assessment.
    (t) Depository institution. For purposes of this part, the term 
``depository institution'' has the same meaning as in section 3(c) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 65 FR 3791, Jan. 25, 
2000; 65 FR 15055, Mar. 21, 2000; 66 FR 414, Jan. 3, 2001; 71 FR 9901, 
Feb. 28, 2006]



Sec. 225.3  Administration.

    (a) Delegation of authority. Designated Board members and officers 
and the Federal Reserve Banks are authorized by the Board to exercise 
various functions prescribed in this regulation and in the Board's Rules 
Regarding Delegation of Authority (12 CFR part 265) and the Board's 
Rules of Procedure (12 CFR part 262).
    (b) Appropriate Federal Reserve Bank. In administering this 
regulation, unless a different Federal Reserve Bank is designated by the 
Board, the appropriate Federal Reserve Bank is as follows:
    (1) For a bank holding company (or a company applying to become a 
bank holding company): the Reserve Bank of the Federal Reserve district 
in which the company's banking operations are principally conducted, as 
measured by total domestic deposits in its subsidiary banks on the date 
it became (or will become) a bank holding company;
    (2) For a foreign banking organization that has no subsidiary bank 
and is not subject to paragraph (b)(1) of this section: the Reserve Bank 
of the Federal Reserve district in which the total assets of the 
organization's United States branches, agencies, and commercial lending 
companies are the largest as of the later of January 1, 1980, or the 
date it becomes a foreign banking organization;
    (3) For an individual or company submitting a notice under subpart E 
of this part: The Reserve Bank of the Federal Reserve district in which 
the banking operations of the bank holding company or state member bank 
to be acquired are principally conducted, as measured by total domestic 
deposits on the date the notice is filed.



Sec. 225.4  Corporate practices.

    (a) Bank holding company policy and operations. (1) A bank holding 
company shall serve as a source of financial and managerial strength to 
its subsidiary

[[Page 120]]

banks and shall not conduct its operations in an unsafe or unsound 
manner.
    (2) Whenever the Board believes an activity of a bank holding 
company or control of a nonbank subsidiary (other than a nonbank 
subsidiary of a bank) constitutes a serious risk to the financial 
safety, soundness, or stability of a subsidiary bank of the bank holding 
company and is inconsistent with sound banking principles or the 
purposes of the BHC Act or the Financial Institutions Supervisory Act of 
1966, as amended (12 U.S.C. 1818(b) et seq.), the Board may require the 
bank holding company to terminate the activity or to terminate control 
of the subsidiary, as provided in section 5(e) of the BHC Act.
    (b) Purchase or redemption by bank holding company of its own 
securities--(1) Filing notice. Except as provided in paragraph (b)(6) of 
this section, a bank holding company shall give the Board prior written 
notice before purchasing or redeeming its equity securities if the gross 
consideration for the purchase or redemption, when aggregated with the 
net consideration paid by the company for all such purchases or 
redemptions during the preceding 12 months, is equal to 10 percent or 
more of the company's consolidated net worth. For the purposes of this 
section, ``net consideration'' is the gross consideration paid by the 
company for all of its equity securities purchased or redeemed during 
the period minus the gross consideration received for all of its equity 
securities sold during the period.
    (2) Contents of notice. Any notice under this section shall be filed 
with the appropriate Reserve Bank and shall contain the following 
information:
    (i) The purpose of the transaction, a description of the securities 
to be purchased or redeemed, the total number of each class outstanding, 
the gross consideration to be paid, and the terms and sources of funding 
for the transaction;
    (ii) A description of all equity securities redeemed within the 
preceding 12 months, the net consideration paid, and the terms of any 
debt incurred in connection with those transactions; and
    (iii) (A) If the bank holding company has consolidated assets of 
$500 million or more, consolidated pro forma risk-based capital and 
leverage ratio calculations for the bank holding company as of the most 
recent quarter, and, if the redemption is to be debt funded, a parent-
only pro forma balance sheet as of the most recent quarter; or
    (B) If the bank holding company has consolidated assets of less than 
$500 million, a pro forma parent-only balance sheet as of the most 
recent quarter, and, if the redemption is to be debt funded, one-year 
income statement and cash flow projections.
    (3) Acting on notice. Within 15 calendar days of receipt of a notice 
under this section, the appropriate Reserve Bank shall either approve 
the transaction proposed in the notice or refer the notice to the Board 
for decision. If the notice is referred to the Board for decision, the 
Board shall act on the notice within 30 calendar days after the Reserve 
Bank receives the notice.
    (4) Factors considered in acting on notice. (i) The Board may 
disapprove a proposed purchase or redemption if it finds that the 
proposal would constitute an unsafe or unsound practice, or would 
violate any law, regulation, Board order, directive, or any condition 
imposed by, or written agreement with, the Board.
    (ii) In determining whether a proposal constitutes an unsafe or 
unsound practice, the Board shall consider whether the bank holding 
company's financial condition, after giving effect to the proposed 
purchase or redemption, meets the financial standards applied by the 
Board under section 3 of the BHC Act, including the Board's Capital 
Adequacy Guidelines (appendix A of this part) and the Board's Policy 
Statement for Small Bank Holding Companies (appendix C of this part).
    (5) Disapproval and hearing. (i) The Board shall notify the bank 
holding company in writing of the reasons for a decision to disapprove 
any proposed purchase or redemption. Within 10 calendar days of receipt 
of a notice of disapproval by the Board, the bank holding company may 
submit a written request for a hearing.
    (ii) The Board shall order a hearing within 10 calendar days of 
receipt of

[[Page 121]]

the request if it finds that material facts are in dispute, or if it 
otherwise appears appropriate. Any hearing conducted under this 
paragraph shall be held in accordance with the Board's Rules of Practice 
for Formal Hearings (12 CFR part 263).
    (iii) At the conclusion of the hearing, the Board shall by order 
approve or disapprove the proposed purchase or redemption on the basis 
of the record of the hearing.
    (6) Exception for well-capitalized bank holding companies. A bank 
holding company is not required to obtain prior Board approval for the 
redemption or purchase of its equity securities under this section 
provided:
    (i) Both before and immediately after the redemption, the bank 
holding company is well-capitalized;
    (ii) The bank holding company is well-managed; and
    (iii) The bank holding company is not the subject of any unresolved 
supervisory issues.
    (c) Deposit insurance. Every bank that is a bank holding company or 
a subsidiary of a bank holding company shall obtain Federal Deposit 
Insurance and shall remain an insured bank as defined in section 3(h) of 
the Federal Deposit Insurance Act (12 U.S.C. 1813(h)).
    (d) Acting as transfer agent or clearing agent. A bank holding 
company or any nonbanking subsidiary that is a ``bank,'' as defined in 
section 3(a)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(6)), and that is a transfer agent of securities, a clearing 
agency, or a participant in a clearing agency (as those terms are 
defined in section 3(a) of the Securities Exchange Act (15 U.S.C. 
78c(a)), shall be subject to Sec. Sec. 208.31-208.33 of the Board's 
Regulation H (12 CFR 208.31-208.33) as if it were a state member bank.
    (e) Reporting requirement for credit secured by certain bank holding 
company stock. Each executive officer or director of a bank holding 
company the shares of which are not publicly traded shall report 
annually to the board of directors of the bank holding company the 
outstanding amount of any credit that was extended to the executive 
officer or director and that is secured by shares of the bank holding 
company. For purposes of this paragraph, the terms ``executive officer'' 
and ``director'' shall have the meaning given in Sec. 215.2 of 
Regulation O (12 CFR 215.2).
    (f) Suspicious activity report. A bank holding company or any 
nonbank subsidiary thereof, or a foreign bank that is subject to the BHC 
Act or any nonbank subsidiary of such foreign bank operating in the 
United States, shall file a suspicious activity report in accordance 
with the provisions of Sec. 208.62 of the Board's Regulation H (12 CFR 
208.62).
    (g) Requirements for financial holding companies engaged in 
securities underwriting, dealing, or market-making activities. (1) Any 
intra-day extension of credit by a bank or thrift, or U.S. branch or 
agency of a foreign bank to an affiliated company engaged in 
underwriting, dealing in, or making a market in securities pursuant to 
section 4(k)(4)(E) of the Bank Holding Company Act (12 U.S.C. 
1843(k)(4)(E)) must be on market terms consistent with section 23B of 
the Federal Reserve Act. (12 U.S.C. 371c-1).
    (2) A foreign bank that is or is treated as a financial holding 
company under this part shall ensure that:
    (i) Any extension of credit by any U.S. branch or agency of such 
foreign bank to an affiliated company engaged in underwriting, dealing 
in, or making a market in securities pursuant to section 4(k)(4)(E) of 
the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(E)), conforms to 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c and 
371c-1) as if the branch or agency were a member bank;
    (ii) Any purchase by any U.S. branch or agency of such foreign bank, 
as principal or fiduciary, of securities for which a securities 
affiliate described in paragraph (g)(2)(i) of this section is a 
principal underwriter conforms to sections 23A and 23B of the Federal 
Reserve Act (12 U.S.C. 371c and 371c-1) as if the branch or agency were 
a member bank; and
    (iii) Its U.S. branches and agencies not advertise or suggest that 
they are responsible for the obligations of a securities affiliate 
described in paragraph (g)(2)(i) of this section, consistent with 
section 23B(c) of the Federal Reserve Act (12 U.S.C. 371c-1(c)) as

[[Page 122]]

if the branches or agencies were member banks.
    (h) Protection of customer information and consumer information. A 
bank holding company shall comply with the Interagency Guidelines 
Establishing Information Security Standards, as set forth in appendix F 
of this part, prescribed pursuant to sections 501 and 505 of the Gramm-
Leach-Bliley Act (15 U.S.C. 6801 and 6805). A bank holding company shall 
properly dispose of consumer information in accordance with the rules 
set forth at 16 CFR part 682.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 63 FR 58621, Nov. 2, 
1998; 65 FR 14442, Mar. 17, 2000; 66 FR 8636, Feb. 1, 2001; 69 FR 77618, 
Dec. 28, 2004; 71 FR 9901, Feb. 28, 2006]



Sec. 225.5  Registration, reports, and inspections.

    (a) Registration of bank holding companies. Each company shall 
register within 180 days after becoming a bank holding company by 
furnishing information in the manner and form prescribed by the Board. A 
company that receives the Board's prior approval under subpart B of this 
part to become a bank holding company may complete this registration 
requirement through submission of its first annual report to the Board 
as required by paragraph (b) of this section.
    (b) Reports of bank holding companies. Each bank holding company 
shall furnish, in the manner and form prescribed by the Board, an annual 
report of the company's operations for the fiscal year in which it 
becomes a bank holding company, and for each fiscal year during which it 
remains a bank holding company. Additional information and reports shall 
be furnished as the Board may require.
    (c) Examinations and inspections. The Board may examine or inspect 
any bank holding company and each of its subsidiaries and prepare a 
report of their operations and activities. With respect to a foreign 
banking organization, the Board may also examine any branch or agency of 
a foreign bank in any state of the United States and may examine or 
inspect each of the organization's subsidiaries in the United States and 
prepare reports of their operations and activities. The Board shall 
rely, as far as possible, on the reports of examination made by the 
primary federal or state supervisor of the subsidiary bank of the bank 
holding company or of the branch or agency of the foreign bank.



Sec. 225.6  Penalties for violations.

    (a) Criminal and civil penalties. (1) Section 8 of the BHC Act 
provides criminal penalties for willful violation, and civil penalties 
for violation, by any company or individual, of the BHC Act or any 
regulation or order issued under it, or for making a false entry in any 
book, report, or statement of a bank holding company.
    (2) Civil money penalty assessments for violations of the BHC Act 
shall be made in accordance with subpart C of the Board's Rules of 
Practice for Hearings (12 CFR part 263, subpart C). For any willful 
violation of the Bank Control Act or any regulation or order issued 
under it, the Board may assess a civil penalty as provided in 12 U.S.C. 
1817(j)(15).
    (b) Cease-and-desist proceedings. For any violation of the BHC Act, 
the Bank Control Act, this regulation, or any order or notice issued 
thereunder, the Board may institute a cease-and-desist proceeding in 
accordance with the Financial Institutions Supervisory Act of 1966, as 
amended (12 U.S.C. 1818(b) et seq.).



Sec. 225.7  Exceptions to tying restrictions.

    (a) Purpose. This section establishes exceptions to the anti-tying 
restrictions of section 106 of the Bank Holding Company Act Amendments 
of 1970 (12 U.S.C. 1971, 1972(1)). These exceptions are in addition to 
those in section 106. The section also restricts tying of electronic 
benefit transfer services by bank holding companies and their nonbank 
subsidiaries.
    (b) Exceptions to statute. Subject to the limitations of paragraph 
(c) of this section, a bank may:
    (1) Extension to affiliates of statutory exceptions preserving 
traditional banking relationships. Extend credit, lease or sell property 
of any kind, or furnish any service, or fix or vary the consideration 
for any of the foregoing, on the condition or requirement that a 
customer:

[[Page 123]]

    (i) Obtain a loan, discount, deposit, or trust service from an 
affiliate of the bank; or
    (ii) Provide to an affiliate of the bank some additional credit, 
property, or service that the bank could require to be provided to 
itself pursuant to section 106(b)(1)(C) of the Bank Holding Company Act 
Amendments of 1970 (12 U.S.C. 1972(1)(C)).
    (2) Safe harbor for combined-balance discounts. Vary the 
consideration for any product or package of products based on a 
customer's maintaining a combined minimum balance in certain products 
specified by the bank (eligible products), if:
    (i) The bank offers deposits, and all such deposits are eligible 
products; and
    (ii) Balances in deposits count at least as much as nondeposit 
products toward the minimum balance.
    (3) Safe harbor for foreign transactions. Engage in any transaction 
with a customer if that customer is:
    (i) A corporation, business, or other person (other than an 
individual) that:
    (A) Is incorporated, chartered, or otherwise organized outside the 
United States; and
    (B) Has its principal place of business outside the United States; 
or
    (ii) An individual who is a citizen of a foreign country and is not 
resident in the United States.
    (c) Limitations on exceptions. Any exception granted pursuant to 
this section shall terminate upon a finding by the Board that the 
arrangement is resulting in anti-competitive practices. The eligibility 
of a bank to operate under any exception granted pursuant to this 
section shall terminate upon a finding by the Board that its exercise of 
this authority is resulting in anti-competitive practices.
    (d) Extension of statute to electronic benefit transfer services. A 
bank holding company or nonbank subsidiary of a bank holding company 
that provides electronic benefit transfer services shall be subject to 
the anti-tying restrictions applicable to such services set forth in 
section 7(i)(11) of the Food Stamp Act of 1977 (7 U.S.C. 2016(i)(11)).
    (e) For purposes of this section, bank has the meaning given that 
term in section 106(a) of the Bank Holding Company Act Amendments of 
1970 (12 U.S.C. 1971), but shall also include a United States branch, 
agency, or commercial lending company subsidiary of a foreign bank that 
is subject to section 106 pursuant to section 8(d) of the International 
Banking Act of 1978 (12 U.S.C. 3106(d)), and any company made subject to 
section 106 by section 4(f)(9) or 4(h) of the BHC Act.



           Subpart B_Acquisition of Bank Securities or Assets

    Source: Reg. Y, 62 FR 9324, Feb. 28, 1997, unless otherwise noted.



Sec. 225.11  Transactions requiring Board approval.

    The following transactions require the Board's prior approval under 
section 3 of the Bank Holding Company Act except as exempted under Sec. 
225.12 or as otherwise covered by Sec. 225.17 of this subpart:
    (a) Formation of bank holding company. Any action that causes a bank 
or other company to become a bank holding company.
    (b) Acquisition of subsidiary bank. Any action that causes a bank to 
become a subsidiary of a bank holding company.
    (c) Acquisition of control of bank or bank holding company 
securities. (1) The acquisition by a bank holding company of direct or 
indirect ownership or control of any voting securities of a bank or bank 
holding company, if the acquisition results in the company's control of 
more than 5 percent of the outstanding shares of any class of voting 
securities of the bank or bank holding company.
    (2) An acquisition includes the purchase of additional securities 
through the exercise of preemptive rights, but does not include 
securities received in a stock dividend or stock split that does not 
alter the bank holding company's proportional share of any class of 
voting securities.
    (d) Acquisition of bank assets. The acquisition by a bank holding 
company or by a subsidiary thereof (other than a bank) of all or 
substantially all of the assets of a bank.
    (e) Merger of bank holding companies. The merger or consolidation of 
bank holding companies, including a merger

[[Page 124]]

through the purchase of assets and assumption of liabilities.
    (f) Transactions by foreign banking organization. Any transaction 
described in paragraphs (a) through (e) of this section by a foreign 
banking organization that involves the acquisition of an interest in a 
U.S. bank or in a bank holding company for which application would be 
required if the foreign banking organization were a bank holding 
company.



Sec. 225.12  Transactions not requiring Board approval.

    The following transactions do not require the Board's approval under 
Sec. 225.11 of this subpart:
    (a) Acquisition of securities in fiduciary capacity. The acquisition 
by a bank or other company (other than a trust that is a company) of 
control of voting securities of a bank or bank holding company in good 
faith in a fiduciary capacity, unless:
    (1) The acquiring bank or other company has sole discretionary 
authority to vote the securities and retains this authority for more 
than two years; or
    (2) The acquisition is for the benefit of the acquiring bank or 
other company, or its shareholders, employees, or subsidiaries.
    (b) Acquisition of securities in satisfaction of debts previously 
contracted. The acquisition by a bank or other company of control of 
voting securities of a bank or bank holding company in the regular 
course of securing or collecting a debt previously contracted in good 
faith, if the acquiring bank or other company divests the securities 
within two years of acquisition. The Board or Reserve Bank may grant 
requests for up to three one-year extensions.
    (c) Acquisition of securities by bank holding company with majority 
control. The acquisition by a bank holding company of additional voting 
securities of a bank or bank holding company if more than 50 percent of 
the outstanding voting securities of the bank or bank holding company is 
lawfully controlled by the acquiring bank holding company prior to the 
acquisition.
    (d) Acquisitions involving bank mergers and internal corporate 
reorganizations--(1) Transactions subject to Bank Merger Act. The merger 
or consolidation of a subsidiary bank of a bank holding company with 
another bank, or the purchase of assets by the subsidiary bank, or a 
similar transaction involving subsidiary banks of a bank holding 
company, if the transaction requires the prior approval of a federal 
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c)) and 
does not involve the acquisition of shares of a bank. This exception 
does not include:
    (i) The merger of a nonsubsidiary bank and a nonoperating subsidiary 
bank formed by a company for the purpose of acquiring the nonsubsidiary 
bank; or
    (ii) Any transaction requiring the Board's prior approval under 
Sec. 225.11(e) of this subpart.
    The Board may require an application under this subpart if it 
determines that the merger or consolidation would have a significant 
adverse impact on the financial condition of the bank holding company, 
or otherwise requires approval under section 3 of the BHC Act.
    (2) Certain acquisitions subject to Bank Merger Act. The acquisition 
by a bank holding company of shares of a bank or company controlling a 
bank or the merger of a company controlling a bank with the bank holding 
company, if the transaction is part of the merger or consolidation of 
the bank with a subsidiary bank (other than a nonoperating subsidiary 
bank) of the acquiring bank holding company, or is part of the purchase 
of substantially all of the assets of the bank by a subsidiary bank 
(other than a nonoperating subsidiary bank) of the acquiring bank 
holding company, and if:
    (i) The bank merger, consolidation, or asset purchase occurs 
simultaneously with the acquisition of the shares of the bank or bank 
holding company or the merger of holding companies, and the bank is not 
operated by the acquiring bank holding company as a separate entity 
other than as the survivor of the merger, consolidation, or asset 
purchase;
    (ii) The transaction requires the prior approval of a federal 
supervisory agency under the Bank Merger Act (12 U.S.C. 1828(c));

[[Page 125]]

    (iii) The transaction does not involve the acquisition of any 
nonbank company that would require prior approval under section 4 of the 
BHC Act (12 U.S.C. 1843);
    (iv) Both before and after the transaction, the acquiring bank 
holding company meets the Board's Capital Adequacy Guidelines 
(appendices A, B, C, D, and E of this part);
    (v) At least 10 days prior to the transaction, the acquiring bank 
holding company has provided to the Reserve Bank written notice of the 
transaction that contains:
    (A) A copy of the filing made to the appropriate federal banking 
agency under the Bank Merger Act; and
    (B) A description of the holding company's involvement in the 
transaction, the purchase price, and the source of funding for the 
purchase price; and
    (vi) Prior to expiration of the period provided in paragraph 
(d)(2)(v) of this section, the Reserve Bank has not informed the bank 
holding company that an application under Sec. 225.11 is required.
    (3) Internal corporate reorganizations. (i) Subject to paragraph 
(d)(3)(ii) of this section, any of the following transactions performed 
in the United States by a bank holding company:
    (A) The merger of holding companies that are subsidiaries of the 
bank holding company;
    (B) The formation of a subsidiary holding company; \1\
---------------------------------------------------------------------------

    \1\ In the case of a transaction that results in the formation or 
designation of a new bank holding company, the new bank holding company 
must complete the registration requirements described in Sec. 225.5.
---------------------------------------------------------------------------

    (C) The transfer of control or ownership of a subsidiary bank or a 
subsidiary holding company between one subsidiary holding company and 
another subsidiary holding company or the bank holding company.
    (ii) A transaction described in paragraph (d)(3)(i) of this section 
qualifies for this exception if:
    (A) The transaction represents solely a corporate reorganization 
involving companies and insured depository institutions that, both 
preceding and following the transaction, are lawfully controlled and 
operated by the bank holding company;
    (B) The transaction does not involve the acquisition of additional 
voting shares of an insured depository institution that, prior to the 
transaction, was less than majority owned by the bank holding company;
    (C) The bank holding company is not organized in mutual form; and
    (D) Both before and after the transaction, the bank holding company 
meets the Board's Capital Adequacy Guidelines (appendices A, B, C, D, 
and E of this part).
    (e) Holding securities in escrow. The holding of any voting 
securities of a bank or bank holding company in an escrow arrangement 
for the benefit of an applicant pending the Board's action on an 
application for approval of the proposed acquisition, if title to the 
securities and the voting rights remain with the seller and payment for 
the securities has not been made to the seller.
    (f) Acquisition of foreign banking organization. The acquisition of 
a foreign banking organization where the foreign banking organization 
does not directly or indirectly own or control a bank in the United 
States, unless the acquisition is also by a foreign banking organization 
and otherwise subject to Sec. 225.11(f) of this subpart.



Sec. 225.13  Factors considered in acting on bank acquisition proposals.

    (a) Factors requiring denial. As specified in section 3(c) of the 
BHC Act, the Board may not approve any application under this subpart 
if:
    (1) The transaction would result in a monopoly or would further any 
combination or conspiracy to monopolize, or to attempt to monopolize, 
the business of banking in any part of the United States;
    (2) The effect of the transaction may be substantially to lessen 
competition in any section of the country, tend to create a monopoly, or 
in any other manner be in restraint of trade, unless the Board finds 
that the transaction's anti-competitive effects are clearly outweighed 
by its probable effect in meeting the convenience and needs of the 
community;
    (3) The applicant has failed to provide the Board with adequate 
assurances that it will make available such

[[Page 126]]

information on its operations or activities, and the operations or 
activities of any affiliate of the applicant, that the Board deems 
appropriate to determine and enforce compliance with the BHC Act and 
other applicable federal banking statutes, and any regulations 
thereunder; or
    (4) In the case of an application involving a foreign banking 
organization, the foreign banking organization is not subject to 
comprehensive supervision or regulation on a consolidated basis by the 
appropriate authorities in its home country, as provided in Sec. 
211.24(c)(1)(ii) of the Board's Regulation K (12 CFR 211.24(c)(1)(ii)).
    (b) Other factors. In deciding applications under this subpart, the 
Board also considers the following factors with respect to the 
applicant, its subsidiaries, any banks related to the applicant through 
common ownership or management, and the bank or banks to be acquired:
    (1) Financial condition. Their financial condition and future 
prospects, including whether current and projected capital positions and 
levels of indebtedness conform to standards and policies established by 
the Board.
    (2) Managerial resources. The competence, experience, and integrity 
of the officers, directors, and principal shareholders of the applicant, 
its subsidiaries, and the banks and bank holding companies concerned; 
their record of compliance with laws and regulations; and the record of 
the applicant and its affiliates of fulfilling any commitments to, and 
any conditions imposed by, the Board in connection with prior 
applications.
    (3) Convenience and needs of community. The convenience and needs of 
the communities to be served, including the record of performance under 
the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.) and 
regulations issued thereunder, including the Board's Regulation BB (12 
CFR part 228).
    (c) Interstate transactions. The Board may approve any application 
or notice under this subpart by a bank holding company to acquire 
control of all or substantially all of the assets of a bank located in a 
state other than the home state of the bank holding company, without 
regard to whether the transaction is prohibited under the law of any 
state, if the transaction complies with the requirements of section 3(d) 
of the BHC Act (12 U.S.C. 1842(d)).
    (d) Conditional approvals. The Board may impose conditions on any 
approval, including conditions to address competitive, financial, 
managerial, safety and soundness, convenience and needs, compliance or 
other concerns, to ensure that approval is consistent with the relevant 
statutory factors and other provisions of the BHC Act.



Sec. 225.14  Expedited action for certain bank acquisitions by well-run bank 

holding companies.

    (a) Filing of notice--(1) Information required and public notice. As 
an alternative to the procedure provided in Sec. 225.15, a bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the prior approval requirements of Sec. 225.11 in connection 
with the acquisition of shares, assets or control of a bank, or a merger 
or consolidation between bank holding companies, by providing the 
appropriate Reserve Bank with a written notice containing the following:
    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies and insured depository institutions involved in the 
transaction \2\ and identification of each banking market affected by 
the transaction;
---------------------------------------------------------------------------

    \2\ If, in connection with a transaction under this subpart, any 
person or group of persons proposes to acquire control of the acquiring 
bank holding company for purposes of the Bank Control Act or Sec. 
225.41, the person or group of persons may fulfill the notice 
requirements of the Bank Control Act and Sec. 225.43 by providing, as 
part of the submission by the acquiring bank holding company under this 
subpart, identifying and biographical information required in paragraph 
(6)(A) of the Bank Control Act (12 U.S.C. 1817(j)(6)(A)), as well as any 
financial or other information requested by the Reserve Bank under Sec. 
225.43.
---------------------------------------------------------------------------

    (iii) A description of the effect of the transaction on the 
convenience and needs of the communities to be served and of the actions 
being taken by the bank holding company to improve the

[[Page 127]]

CRA performance of any insured depository institution subsidiary that 
does not have at least a satisfactory CRA performance rating at the time 
of the transaction;
    (iv) Evidence that notice of the proposal has been published in 
accordance with Sec. 225.16(b)(1);
    (v)(A) If the bank holding company has consolidated assets of $500 
million or more, an abbreviated consolidated pro forma balance sheet as 
of the most recent quarter showing credit and debit adjustments that 
reflect the proposed transaction, consolidated pro forma risk-based 
capital ratios for the acquiring bank holding company as of the most 
recent quarter, and a description of the purchase price and the terms 
and sources of funding for the transaction;
    (B) If the bank holding company has consolidated assets of less than 
$500 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, and a description of the purchase price, the terms 
and sources of funding for the transaction, and the sources and schedule 
for retiring any debt incurred in the transaction;
    (vi) If the bank holding company has consolidated assets of less 
than $300 million, a list of and biographical information regarding any 
directors or senior executive officers of the resulting bank holding 
company that are not directors or senior executive officers of the 
acquiring bank holding company or of a company or institution to be 
acquired;
    (vii) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (viii) The market indexes for each relevant banking market 
reflecting the pro forma effect of the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraph (a)(1)(v) through (viii) of 
this section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section or notify the bank holding company that the transaction is 
subject to the procedure in Sec. 225.15 within 5 business days after 
the close of the public comment period. The Board and the Reserve Bank 
shall not approve any proposal under this section prior to the third 
business day following the close of the public comment period, unless an 
emergency exists that requires expedited or immediate action. The Board 
may extend the period for action under this section for up to 5 business 
days.
    (2) Acceptance of notice in event expedited procedure not available. 
In the event that the Board or the Reserve Bank determines after the 
filing of a notice under this section that a bank holding company may 
not use the procedure in this section and must file an application under 
Sec. 225.15, the application shall be deemed accepted for purposes of 
Sec. 225.15 as of the date that the notice was filed under this 
section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the proposed transaction:
    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (2) Well managed organization--(i) Satisfactory examination ratings. 
At the time of the transaction, the acquiring bank holding company, its 
lead insured depository institution, and insured depository institutions 
that control at least 80 percent of the total risk-weighted assets of 
insured depository institutions controlled by the holding company are 
well managed and have

[[Page 128]]

received at least a satisfactory rating for compliance at their most 
recent examination if such rating was given;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution;
    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if :
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Convenience and needs criteria--(i) Effect on the community. The 
record indicates that the proposed transaction would meet the 
convenience and needs of the community standard in the BHC Act; and
    (ii) Established CRA performance record. At the time of the 
transaction, the lead insured depository institution of the acquiring 
bank holding company and insured depository institutions that control at 
least 80 percent of the total risk-weighted assets of insured 
institutions controlled by the holding company have received a 
satisfactory or better composite rating at the most recent examination 
under the Community Reinvestment Act;
    (4) Public comment. No comment that is timely and substantive as 
provided in Sec. 225.16 is received by the Board or the appropriate 
Reserve Bank other than a comment that supports approval of the 
proposal;
    (5) Competitive criteria--(i) Competitive screen. Without regard to 
any divestitures proposed by the acquiring bank holding company, the 
acquisition does not cause:
    (A) Insured depository institutions controlled by the acquiring bank 
holding company to control in excess of 35 percent of market deposits in 
any relevant banking market; or
    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant banking market with a post-acquisition index of 
at least 1800; and
    (ii) Department of Justice. The Department of Justice has not 
indicated to the Board that consummation of the transaction is likely to 
have a significantly adverse effect on competition in any relevant 
banking market;
    (6) Size of acquisition--(i) In general--(A) Limited Growth. Except 
as provided in paragraph (c)(6)(ii) of this section, the sum of the 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk- weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph other qualifying transactions 
means any transaction approved under this section or Sec. 225.23 during 
the 12 months prior to filing the notice under this section; and
    (B) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(6)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;
    (7) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement action, is or

[[Page 129]]

was outstanding against the bank holding company or any insured 
depository institution subsidiary of the holding company, and no formal 
administrative enforcement proceeding involving any such enforcement 
action, order, or directive is or was pending;
    (8) Interstate acquisitions. Board-approval of the transaction is 
not prohibited under section 3(d) of the BHC Act;
    (9) Other supervisory considerations. Board approval of the 
transaction is not prohibited under the informational sufficiency or 
comprehensive home country supervision standards set forth in section 
3(c)(3) of the BHC Act; and
    (10) Notification. The acquiring bank holding company has not been 
notified by the Board, in its discretion, prior to the expiration of the 
period in paragraph (b)(1) of this section that an application under 
Sec. 225.15 is required in order to permit closer review of any 
financial, managerial, competitive, convenience and needs or other 
matter related to the factors that must be considered under this part.
    (d) Comment by primary banking supervisor--(1) Notice. Upon receipt 
of a notice under this section, the appropriate Reserve Bank shall 
promptly furnish notice of the proposal and a copy of the information 
filed pursuant to paragraph (a) of this section to the primary banking 
supervisor of the insured depository institutions to be acquired.
    (2) Comment period. The primary banking supervisor shall have 30 
calendar days (or such shorter time as agreed to by the primary banking 
supervisor) from the date of the letter giving notice in which to submit 
its views and recommendations to the Board.
    (3) Action subject to supervisor's comment. Action by the Board or 
the Reserve Bank on a proposal under this section is subject to the 
condition that the primary banking supervisor not recommend in writing 
to the Board disapproval of the proposal prior to the expiration of the 
comment period described in paragraph (d)(2) of this section. In such 
event, any approval given under this section shall be revoked and, if 
required by section 3(b) of the BHC Act, the Board shall order a hearing 
on the proposal.
    (4) Emergencies. Notwithstanding paragraphs (d)(2) and (d)(3) of 
this section, the Board may provide the primary banking supervisor with 
10 calendar days' notice of a proposal under this section if the Board 
finds that an emergency exists requiring expeditious action, and may act 
during the notice period or without providing notice to the primary 
banking supervisor if the Board finds that it must act immediately to 
prevent probable failure.
    (5) Primary banking supervisor. For purposes of this section and 
Sec. 225.15(b), the primary banking supervisor for an institution is:
    (i) The Office of the Comptroller of the Currency, in the case of a 
national banking association or District bank;
    (ii) The appropriate supervisory authority for the State in which 
the bank is chartered, in the case of a State bank;
    (iii) The Director of the Office of Thrift Supervision, in the case 
of a savings association.
    (e) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution. A U.S. branch or agency of a foreign banking organization 
shall be subject to paragraph (c)(3)(ii) of this section only to the 
extent it is insured by the Federal Deposit Insurance Corporation in 
accordance with section 6 of the International Banking Act of 1978 (12 
U.S.C. 3104).

[Reg. Y, 62 FR 9324, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001; 71 FR 9901, Feb. 28, 2006]



Sec. 225.15  Procedures for other bank acquisition proposals.

    (a) Filing application. Except as provided in Sec. 225.14, an 
application for the Board's prior approval under this subpart shall be 
governed by the provisions of this section and shall be filed with the 
appropriate Reserve Bank on the designated form.
    (b) Notice to primary banking supervisor. Upon receipt of an 
application under this subpart, the Reserve Bank shall promptly furnish 
notice and a copy of the application to the primary banking supervisor 
of each bank to be acquired. The primary supervisor shall

[[Page 130]]

have 30 calendar days from the date of the letter giving notice in which 
to submit its views and recommendations to the Board.
    (c) Accepting application for processing. Within 7 calendar days 
after the Reserve Bank receives an application under this section, the 
Reserve Bank shall accept it for processing as of the date the 
application was filed or return the application if it is substantially 
incomplete. Upon accepting an application, the Reserve Bank shall 
immediately send copies to the Board. The Reserve Bank or the Board may 
request additional information necessary to complete the record of an 
application at any time after accepting the application for processing.
    (d) Action on applications--(1) Action under delegated authority. 
The Reserve Bank shall approve an application under this section within 
30 calendar days after the acceptance date for the application, unless 
the Reserve Bank, upon notice to the applicant, refers the application 
to the Board for decision because action under delegated authority is 
not appropriate.
    (2) Board action. The Board shall act on an application under this 
subpart that is referred to it for decision within 60 calendar days 
after the acceptance date for the application, unless the Board notifies 
the applicant that the 60-day period is being extended for a specified 
period and states the reasons for the extension. In no event may the 
extension exceed the 91-day period provided in Sec. 225.16(f). The 
Board may, at any time, request additional information that it believes 
is necessary for its decision.



Sec. 225.16  Public notice, comments, hearings, and other provisions governing 

applications and notices.

    (a) In general. The provisions of this section apply to all notices 
and applications filed under Sec. 225.14 and Sec. 225.15.
    (b) Public notice--(1) Newspaper publication--(i) Location of 
publication. In the case of each notice or application submitted under 
Sec. 225.14 or Sec. 225.15, the applicant shall publish a 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. A newspaper notice under this paragraph 
shall provide an opportunity for interested persons to comment on the 
proposal for a period of at least 30 calendar days;
    (iii) Timing of publication. Each newspaper notice published in 
connection with a proposal under this paragraph shall be published no 
more than 15 calendar days before and no later than 7 calendar days 
following the date that a notice or application is filed with the 
appropriate Reserve Bank.
    (2) Federal Register notice. (i) Publication by Board. Upon receipt 
of a notice or application under Sec. 225.14 or Sec. 225.15, the Board 
shall promptly publish notice of the proposal in the Federal Register 
and shall provide an opportunity for interested persons to comment on 
the proposal for a period of no more than 30 days;
    (ii) Request for advance publication. A bank holding company may 
request that, during the 15-day period prior to filing a notice or 
application under Sec. 225.14 or Sec. 225.15, the Board publish notice 
of a proposal in the Federal Register. A request for advance Federal 
Register publication shall be made in writing to the appropriate Reserve 
Bank and shall contain the identifying information prescribed by the 
Board for Federal Register publication;
    (3) Waiver or shortening of notice. The Board may waive or shorten 
the required notice periods under this section if the Board determines 
that an emergency exists requiring expeditious action on the proposal, 
or if the Board finds that immediate action is necessary to prevent the 
probable failure of an insured depository institution.
    (c) Public comment--(1) Timely comments. Interested persons may 
submit information and comments regarding a proposal filed under this 
subpart. 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 
and received by the Board or the appropriate Reserve Bank prior to the 
expiration of the latest public comment period provided in paragraph (b) 
of this section.

[[Page 131]]

    (2) Extension of comment period--(i) In general. The Board may, in 
its discretion, extend the public comment period regarding any proposal 
submitted under this subpart.
    (ii) Requests in connection with obtaining application or notice. In 
the event that an interested person has requested a copy of a notice or 
application submitted under this subpart, 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.
    (iii) Joint requests by interested person and acquiring company. The 
Board will grant a joint request by an interested person and the 
acquiring bank holding company for an extension of the comment period 
for a reasonable period for a purpose related to the statutory factors 
the Board must consider under this subpart.
    (3) Substantive comment. A comment will be considered substantive 
for purposes of this subpart unless it involves individual complaints, 
or raises frivolous, previously-considered or wholly unsubstantiated 
claims or irrelevant issues.
    (d) Notice to Attorney General. The Board or Reserve Bank shall 
immediately notify the United States Attorney General of approval of any 
notice or application under Sec. 225.14 or Sec. 225.15.
    (e) Hearings. As provided in section 3(b) of the BHC Act, the Board 
shall order a hearing on any application or notice under Sec. 225.15 if 
the Board receives from the primary supervisor of the bank to be 
acquired, within the 30-day period specified in Sec. 225.15(b), a 
written recommendation of disapproval of an application. The Board may 
order a formal or informal hearing or other proceeding on the 
application or notice, as provided in Sec. 262.3(i)(2) of the Board's 
Rules of Procedure. Any request for a hearing (other than from the 
primary supervisor) shall comply with Sec. 262.3(e) of the Rules of 
Procedure (12 CFR 262.3(e)).
    (f) Approval through failure to act--(1) Ninety-one day rule. An 
application or notice under Sec. 225.14 or Sec. 225.15 shall be deemed 
approved if the Board fails to act on the application or notice within 
91 calendar days after the date of submission to the Board of the 
complete record on the application. For this purpose, the Board acts 
when it issues an order stating that the Board has approved or denied 
the application or notice, reflecting the votes of the members of the 
Board, and indicating that a statement of the reasons for the decision 
will follow promptly.
    (2) Complete record. For the purpose of computing the commencement 
of the 91-day period, the record is complete on the latest of:
    (i) The date of receipt by the Board of an application or notice 
that has been accepted by the Reserve Bank;
    (ii) The last day provided in any notice for receipt of comments and 
hearing requests on the application or notice;
    (iii) The date of receipt by the Board of the last relevant material 
regarding the application or notice that is needed for the Board's 
decision, if the material is received from a source outside of the 
Federal Reserve System; or
    (iv) The date of completion of any hearing or other proceeding.
    (g) Exceptions to notice and hearing requirements--(1) Probable bank 
failure. If the Board finds it must act immediately on an application or 
notice in order to prevent the probable failure of a bank or bank 
holding company, the Board may modify or dispense with the notice and 
hearing requirements of this section.
    (2) Emergency. If the Board finds that, although immediate action on 
an application or notice is not necessary, an emergency exists requiring 
expeditious action, the Board shall provide the primary supervisor 10 
days to submit its recommendation. The Board may act on such an 
application or notice without a hearing and may modify or dispense with 
the other notice and hearing requirements of this section.
    (h) Waiting period. A transaction approved under Sec. 225.14 or 
Sec. 225.15 shall not be consummated until 30 days after the date of 
approval of the application, except that a transaction may be 
consummated:
    (1) Immediately upon approval, if the Board has determined under 
paragraph (g) of this section that the application or notice involves a 
probable bank failure;

[[Page 132]]

    (2) On or after the 5th calendar day following the date of approval, 
if the Board has determined under paragraph (g) of this section that an 
emergency exists requiring expeditious action; or
    (3) On or after the 15th calendar day following the date of 
approval, if the Board has not received any adverse comments from the 
United States Attorney General relating to the competitive factors and 
the Attorney General has consented to the shorter waiting period.



Sec. 225.17  Notice procedure for one-bank holding company formations.

    (a) Transactions that qualify under this section. An acquisition by 
a company of control of a bank may be consummated 30 days after 
providing notice to the appropriate Reserve Bank in accordance with 
paragraph (b) of this section, provided that all of the following 
conditions are met:
    (1) The shareholder or shareholders who control at least 67 percent 
of the shares of the bank will control, immediately after the 
reorganization, at least 67 percent of the shares of the holding company 
in substantially the same proportion, except for changes in 
shareholders' interests resulting from the exercise of dissenting 
shareholders' rights under state or federal law; \3\
---------------------------------------------------------------------------

    \3\ A shareholder of a bank in reorganization will be considered to 
have the same proportional interest in the holding company if the 
shareholder interest increases, on a pro rata basis, as a result of 
either the redemption of shares from dissenting shareholders by the bank 
or bank holding company, or the acquisition of shares of dissenting 
shareholders by the remaining shareholders.
---------------------------------------------------------------------------

    (2) No shareholder, or group of shareholders acting in concert, 
will, following the reorganization, own or control 10 percent or more of 
any class of voting shares of the bank holding company, unless that 
shareholder or group of shareholders was authorized, after review under 
the Change in Bank Control Act of 1978 (12 U.S.C. 1817(j)) by the 
appropriate federal banking agency for the bank, to own or control 10 
percent or more of any class of voting shares of the bank; \4\
---------------------------------------------------------------------------

    \4\ This procedure is not available in cases in which the exercise 
of dissenting shareholders' rights would cause a company that is not a 
bank holding company (other than the company in formation) to be 
required to register as a bank holding company. This procedure also is 
not available for the formation of a bank holding company organized in 
mutual form.
---------------------------------------------------------------------------

    (3) The bank is adequately capitalized (as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o));
    (4) The bank received at least a composite ``satisfactory'' rating 
at its most recent examination, in the event that the bank was examined;
    (5) At the time of the reorganization, neither the bank nor any of 
its officers, directors, or principal shareholders is involved in any 
unresolved supervisory or enforcement matters with any appropriate 
federal banking agency;
    (6) The company demonstrates that any debt that it incurs at the 
time of the reorganization, and the proposed means of retiring this 
debt, will not place undue burden on the holding company or its 
subsidiary on a pro forma basis; \5\
---------------------------------------------------------------------------

    \5\ For a banking organization with consolidated assets, on a pro 
forma basis, of less than $500 million (other than a banking 
organization that will control a de novo bank), this requirement is 
satisfied if the proposal complies with the Board's Small Bank Holding 
Company Policy Statement (appendix C of this part).
---------------------------------------------------------------------------

    (7) The holding company will not, as a result of the reorganization, 
acquire control of any additional bank or engage in any activities other 
than those of managing and controlling banks; and
    (8) During this period, neither the appropriate Reserve Bank nor the 
Board objected to the proposal or required the filing of an application 
under Sec. 225.15 of this subpart.
    (b) Contents of notice. A notice filed under this paragraph shall 
include:
    (1) Certification by the notificant's board of directors that the 
requirements of 12 U.S.C. 1842(a)(C) and this section are met by the 
proposal;
    (2) A list identifying all principal shareholders of the bank prior 
to the reorganization and of the holding company following the 
reorganization, and specifying the percentage of shares held by each 
principal shareholder in the bank and proposed to be held in the new 
holding company;

[[Page 133]]

    (3) A description of the resulting management of the proposed bank 
holding company and its subsidiary bank, including:
    (i) Biographical information regarding any senior officers and 
directors of the resulting bank holding company who were not senior 
officers or directors of the bank prior to the reorganization; and
    (ii) A detailed history of the involvement of any officer, director, 
or principal shareholder of the resulting bank holding company in any 
administrative or criminal proceeding; and
    (4) Pro forma financial statements for the holding company, and a 
description of the amount, source, and terms of debt, if any, that the 
bank holding company proposes to incur, and information regarding the 
sources and timing for debt service and retirement.
    (c) Acknowledgment of notice. Within 7 calendar days following 
receipt of a notice under this section, the Reserve Bank shall provide 
the notificant with a written acknowledgment of receipt of the notice. 
This written acknowledgment shall indicate that the transaction 
described in the notice may be consummated on the 30th calendar day 
after the date of receipt of the notice if the Reserve Bank or the Board 
has not objected to the proposal during that time.
    (d) Application required upon objection. The Reserve Bank or the 
Board may object to a proposal during the notice period by providing the 
bank holding company with a written explanation of the reasons for the 
objection. In such case, the bank holding company may file an 
application for prior approval of the proposal pursuant to Sec. 225.15 
of this subpart.

[Reg. Y, 62 FR 9319, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 
2006]



    Subpart C_Nonbanking Activities and Acquisitions by Bank Holding 
                                Companies

    Source: Reg. Y, 62 FR 9329, Feb. 28, 1997, unless otherwise noted.



Sec. 225.21  Prohibited nonbanking activities and acquisitions; exempt bank 

holding companies.

    (a) Prohibited nonbanking activities and acquisitions. Except as 
provided in Sec. 225.22 of this subpart, a bank holding company or a 
subsidiary may not engage in, or acquire or control, directly or 
indirectly, voting securities or assets of a company engaged in, any 
activity other than:
    (1) Banking or managing or controlling banks and other subsidiaries 
authorized under the BHC Act; and
    (2) An activity that the Board determines to be so closely related 
to banking, or managing or controlling banks as to be a proper incident 
thereto, including any incidental activities that are necessary to carry 
on such an activity, if the bank holding company has obtained the prior 
approval of the Board for that activity in accordance with the 
requirements of this regulation.
    (b) Exempt bank holding companies. The following bank holding 
companies are exempt from the provisions of this subpart:
    (1) Family-owned companies. Any company that is a ``company covered 
in 1970'' (as defined in section 2(b) of the BHC Act), more than 85 
percent of the voting securities of which was collectively owned on June 
30, 1968, and continuously thereafter, by members of the same family (or 
their spouses) who are lineal descendants of common ancestors.
    (2) Labor, agricultural, and horticultural organizations. Any 
company that was on January 4, 1977, both a bank holding company and a 
labor, agricultural, or horticultural organization exempt from taxation 
under section 501 of the Internal Revenue Code (26 U.S.C. 501(c)).
    (3) Companies granted hardship exemption. Any bank holding company 
that has controlled only one bank since before July 1, 1968, and that 
has been granted an exemption by the Board under section 4(d) of the BHC 
Act, subject to any conditions imposed by the Board.
    (4) Companies granted exemption on other grounds. Any company that 
acquired control of a bank before December 10, 1982, without the Board's 
prior

[[Page 134]]

approval under section 3 of the BHC Act, on the basis of a narrow 
interpretation of the term demand deposit or commercial loan, if the 
Board has determined that:
    (i) Coverage of the company as a bank holding company under this 
subpart would be unfair or represent an unreasonable hardship; and
    (ii) Exclusion of the company from coverage under this part is 
consistent with the purposes of the BHC Act and section 106 of the Bank 
Holding Company Act Amendments of 1970 (12 U.S.C. 1971, 1972(1)). The 
provisions of Sec. 225.4 of subpart A of this part do not apply to a 
company exempt under this paragraph.



Sec. 225.22  Exempt nonbanking activities and acquisitions.

    (a) Certain de novo activities. A bank holding company may, either 
directly or indirectly, engage de novo in any nonbanking activity listed 
in Sec. 225.28(b) (other than operation of an insured depository 
institution) without obtaining the Board's prior approval if the bank 
holding company:
    (1) Meets the requirements of paragraphs (c) (1), (2), and (6) of 
Sec. 225.23;
    (2) Conducts the activity in compliance with all Board orders and 
regulations governing the activity; and
    (3) Within 10 business days after commencing the activity, provides 
written notice to the appropriate Reserve Bank describing the activity, 
identifying the company or companies engaged in the activity, and 
certifying that the activity will be conducted in accordance with the 
Board's orders and regulations and that the bank holding company meets 
the requirements of paragraphs (c) (1), (2), and (6) of Sec. 225.23.
    (b) Servicing activities. A bank holding company may, without the 
Board's prior approval under this subpart, furnish services to or 
perform services for, or establish or acquire a company that engages 
solely in servicing activities for:
    (1) The bank holding company or its subsidiaries in connection with 
their activities as authorized by law, including services that are 
necessary to fulfill commitments entered into by the subsidiaries with 
third parties, if the bank holding company or servicing company complies 
with the Board's published interpretations and does not act as principal 
in dealing with third parties; and
    (2) The internal operations of the bank holding company or its 
subsidiaries. Services for the internal operations of the bank holding 
company or its subsidiaries include, but are not limited to:
    (i) Accounting, auditing, and appraising;
    (ii) Advertising and public relations;
    (iii) Data processing and data transmission services, data bases, or 
facilities;
    (iv) Personnel services;
    (v) Courier services;
    (vi) Holding or operating property used wholly or substantially by a 
subsidiary in its operations or for its future use;
    (vii) Liquidating property acquired from a subsidiary;
    (viii) Liquidating property acquired from any sources either prior 
to May 9, 1956, or the date on which the company became a bank holding 
company, whichever is later; and
    (ix) Selling, purchasing, or underwriting insurance, such as blanket 
bond insurance, group insurance for employees, and property and casualty 
insurance.
    (c) Safe deposit business. A bank holding company or nonbank 
subsidiary may, without the Board's prior approval, conduct a safe 
deposit business, or acquire voting securities of a company that 
conducts such a business.
    (d) Nonbanking acquisitions not requiring prior Board approval. The 
Board's prior approval is not required under this subpart for the 
following acquisitions:
    (1) DPC acquisitions. (i) Voting securities or assets, acquired by 
foreclosure or otherwise, in the ordinary course of collecting a debt 
previously contracted (DPC property) in good faith, if the DPC property 
is divested within two years of acquisition.
    (ii) The Board may, upon request, extend this two-year period for up 
to three additional years. The Board may permit additional extensions 
for up to 5 years (for a total of 10 years), for shares, real estate or 
other assets

[[Page 135]]

where the holding company demonstrates that each extension would not be 
detrimental to the public interest and either the bank holding company 
has made good faith attempts to dispose of such shares, real estate or 
other assets or disposal of the shares, real estate or other assets 
during the initial period would have been detrimental to the company.
    (iii) Transfers of DPC property within the bank holding company 
system do not extend any period for divestiture of the property.
    (2) Securities or assets required to be divested by subsidiary. 
Voting securities or assets required to be divested by a subsidiary at 
the request of an examining federal or state authority (except by the 
Board under the BHC Act or this regulation), if the bank holding company 
divests the securities or assets within two years from the date acquired 
from the subsidiary.
    (3) Fiduciary investments. Voting securities or assets acquired by a 
bank or other company (other than a trust that is a company) in good 
faith in a fiduciary capacity, if the voting securities or assets are:
    (i) Held in the ordinary course of business; and
    (ii) Not acquired for the benefit of the company or its 
shareholders, employees, or subsidiaries.
    (4) Securities eligible for investment by national bank. Voting 
securities of the kinds and amounts explicitly eligible by federal 
statute (other than section 4 of the Bank Service Corporation Act, 12 
U.S.C. 1864) for investment by a national bank, and voting securities 
acquired prior to June 30, 1971, in reliance on section 4(c)(5) of the 
BHC Act and interpretations of the Comptroller of the Currency under 
section 5136 of the Revised Statutes (12 U.S.C. 24(7)).
    (5) Securities or property representing 5 percent or less of a 
company. Voting securities of a company or property that, in the 
aggregate, represent 5 percent or less of the outstanding shares of any 
class of voting securities of a company, or that represent a 5 percent 
interest or less in the property, subject to the provisions of 12 CFR 
225.137.
    (6) Securities of investment company. Voting securities of an 
investment company that is solely engaged in investing in securities and 
that does not own or control more than 5 percent of the outstanding 
shares of any class of voting securities of any company.
    (7) Assets acquired in ordinary course of business. Assets of a 
company acquired in the ordinary course of business, subject to the 
provisions of 12 CFR 225.132, if the assets relate to activities in 
which the acquiring company has previously received Board approval under 
this regulation to engage.
    (8) Asset acquisitions by lending company or industrial bank. Assets 
of an office(s) of a company, all or substantially all of which relate 
to making, acquiring, or servicing loans if:
    (i) The acquiring company has previously received Board approval 
under this regulation or is not required to obtain prior Board approval 
under this regulation to engage in lending activities or industrial 
banking activities;
    (ii) The assets acquired during any 12-month period do not represent 
more than 50 percent of the risk-weighted assets (on a consolidated 
basis) of the acquiring lending company or industrial bank, or more than 
$100 million, whichever amount is less;
    (iii) The assets acquired do not represent more than 50 percent of 
the selling company's consolidated assets that are devoted to lending 
activities or industrial banking business;
    (iv) The acquiring company notifies the Reserve Bank of the 
acquisition within 30 days after the acquisition; and
    (v) The acquiring company, after giving effect to the transaction, 
meets the Board's Capital Adequacy Guidelines (appendix A of this part), 
and the Board has not previously notified the acquiring company that it 
may not acquire assets under the exemption in this paragraph.
    (e) Acquisition of securities by subsidiary banks--(1) National 
bank. A national bank or its subsidiary may, without the Board's 
approval under this subpart, acquire or retain securities on the basis 
of section 4(c)(5) of the BHC Act in accordance with the regulations of 
the Comptroller of the Currency.
    (2) State bank. A state-chartered bank or its subsidiary may, 
insofar as federal law is concerned, and without the

[[Page 136]]

Board's prior approval under this subpart:
    (i) Acquire or retain securities, on the basis of section 4(c)(5) of 
the BHC Act, of the kinds and amounts explicitly eligible by federal 
statute for investment by a national bank; or
    (ii) Acquire or retain all (but, except for directors' qualifying 
shares, not less than all) of the securities of a company that engages 
solely in activities in which the parent bank may engage, at locations 
at which the bank may engage in the activity, and subject to the same 
limitations as if the bank were engaging in the activity directly.
    (f) Activities and securities of new bank holding companies. A 
company that becomes a bank holding company may, for a period of two 
years, engage in nonbanking activities and control voting securities or 
assets of a nonbank subsidiary, if the bank holding company engaged in 
such activities or controlled such voting securities or assets on the 
date it became a bank holding company. The Board may grant requests for 
up to three one-year extensions of the two-year period.
    (g) Grandfathered activities and securities. Unless the Board orders 
divestiture or termination under section 4(a)(2) of the BHC Act, a 
``company covered in 1970,'' as defined in section 2(b) of the BHC Act, 
may:
    (1) Retain voting securities or assets and engage in activities that 
it has lawfully held or engaged in continuously since June 30, 1968; and
    (2) Acquire voting securities of any newly formed company to engage 
in such activities.
    (h) Securities or activities exempt under Regulation K. A bank 
holding company may acquire voting securities or assets and engage in 
activities as authorized in Regulation K (12 CFR part 211).



Sec. 225.23  Expedited action for certain nonbanking proposals by well-run 

bank holding companies.

    (a) Filing of notice--(1) Information required. A bank holding 
company that meets the requirements of paragraph (c) of this section may 
satisfy the notice requirement of this subpart in connection with the 
acquisition of voting securities or assets of a company engaged in 
nonbanking activities that the Board has permitted by order or 
regulation (other than an insured depository institution),\1\ or a 
proposal to engage de novo, either directly or indirectly, in a 
nonbanking activity that the Board has permitted by order or by 
regulation, by providing the appropriate Reserve Bank with a written 
notice containing the following:
---------------------------------------------------------------------------

    \1\ A bank holding company may acquire voting securities or assets 
of a savings association or other insured depository institution that is 
not a bank by using the procedures in Sec. 225.14 of subpart B if the 
bank holding company and the proposal qualify under that section as if 
the savings association or other institution were a bank for purposes of 
that section.
---------------------------------------------------------------------------

    (i) A certification that all of the criteria in paragraph (c) of 
this section are met;
    (ii) A description of the transaction that includes identification 
of the companies involved in the transaction, the activities to be 
conducted, and a commitment to conduct the proposed activities in 
conformity with the Board's regulations and orders governing the conduct 
of the proposed activity;
    (iii) If the proposal involves an acquisition of a going concern:
    (A) If the bank holding company has consolidated assets of $500 
million or more, an abbreviated consolidated pro forma balance sheet for 
the acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction, 
consolidated pro forma risk-based capital ratios for the acquiring bank 
holding company as of the most recent quarter, a description of the 
purchase price and the terms and sources of funding for the transaction, 
and the total revenue and net income of the company to be acquired;
    (B) If the bank holding company has consolidated assets of less than 
$500 million, a pro forma parent-only balance sheet as of the most 
recent quarter showing credit and debit adjustments that reflect the 
proposed transaction, a description of the purchase price and the terms 
and sources of funding for the transaction and the sources and schedule 
for retiring any debt incurred in the transaction, and the total assets, 
off-balance sheet

[[Page 137]]

items, revenue and net income of the company to be acquired;
    (C) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis;
    (iv) Identification of the geographic markets in which competition 
would be affected by the proposal, a description of the effect of the 
proposal on competition in the relevant markets, a list of the major 
competitors in that market in the proposed activity if the affected 
market is local in nature, and, if requested, the market indexes for the 
relevant market; and
    (v) A description of the public benefits that can reasonably be 
expected to result from the transaction.
    (2) Waiver of unnecessary information. The Reserve Bank may reduce 
the information requirements in paragraphs (a)(1) (iii) and (iv) of this 
section as appropriate.
    (b)(1) Action on proposals under this section. The Board or the 
appropriate Reserve Bank shall act on a proposal submitted under this 
section, or notify the bank holding company that the transaction is 
subject to the procedure in Sec. 225.24, within 12 business days 
following the filing of all of the information required in paragraph (a) 
of this section.
    (2) Acceptance of notice if expedited procedure not available. If 
the Board or the Reserve Bank determines, after the filing of a notice 
under this section, that a bank holding company may not use the 
procedure in this section and must file a notice under Sec. 225.24, the 
notice shall be deemed accepted for purposes of Sec. 225.24 as of the 
date that the notice was filed under this section.
    (c) Criteria for use of expedited procedure. The procedure in this 
section is available only if:
    (1) Well-capitalized organization--(i) Bank holding company. Both at 
the time of and immediately after the proposed transaction, the 
acquiring bank holding company is well-capitalized;
    (ii) Insured depository institutions. Both at the time of and 
immediately after the transaction:
    (A) The lead insured depository institution of the acquiring bank 
holding company is well-capitalized;
    (B) Well-capitalized insured depository institutions control at 
least 80 percent of the total risk-weighted assets of insured depository 
institutions controlled by the acquiring bank holding company; and
    (C) No insured depository institution controlled by the acquiring 
bank holding company is undercapitalized;
    (2) Well managed organization--(i) Satisfactory examination ratings. 
At the time of the transaction, the acquiring bank holding company, its 
lead insured depository institution, and insured depository institutions 
that control at least 80 percent of the total risk-weighted assets of 
insured depository institutions controlled by the holding company are 
well managed and have received at least a satisfactory rating for 
compliance at their most recent examination if such rating was given;
    (ii) No poorly managed institutions. No insured depository 
institution controlled by the acquiring bank holding company has 
received 1 of the 2 lowest composite ratings at the later of the 
institution's most recent examination or subsequent review by the 
appropriate federal banking agency for the institution.
    (iii) Recently acquired institutions excluded. Any insured 
depository institution that has been acquired by the bank holding 
company during the 12-month period preceding the date on which written 
notice is filed under paragraph (a) of this section may be excluded for 
purposes of paragraph (c)(2)(ii) of this section if:
    (A) The bank holding company has developed a plan acceptable to the 
appropriate federal banking agency for the institution to restore the 
capital and management of the institution; and
    (B) All insured depository institutions excluded under this 
paragraph represent, in the aggregate, less than 10 percent of the 
aggregate total risk-weighted assets of all insured depository 
institutions controlled by the bank holding company;
    (3) Permissible activity. (i) The Board has determined by regulation 
or order

[[Page 138]]

that each activity proposed to be conducted is so closely related to 
banking, or managing or controlling banks, as to be a proper incident 
thereto; and
    (ii) The Board has not indicated that proposals to engage in the 
activity are subject to the notice procedure provided in Sec. 225.24;
    (4) Competitive criteria--(i) Competitive screen. In the case of the 
acquisition of a going concern, the acquisition, without regard to any 
divestitures proposed by the acquiring bank holding company, does not 
cause:
    (A) The acquiring bank holding company to control in excess of 35 
percent of the market share in any relevant market; or
    (B) The Herfindahl-Hirschman index to increase by more than 200 
points in any relevant market with a post-acquisition index of at least 
1800; and
    (ii) Other competitive factors. The Board has not indicated that the 
transaction is subject to close scrutiny on competitive grounds;
    (5) Size of acquisition--(i) In general--(A) Limited growth. Except 
as provided in paragraph (c)(5)(ii) of this section, the sum of 
aggregate risk-weighted assets to be acquired in the proposal and the 
aggregate risk-weighted assets acquired by the acquiring bank holding 
company in all other qualifying transactions does not exceed 35 percent 
of the consolidated risk-weighted assets of the acquiring bank holding 
company. For purposes of this paragraph, ``other qualifying 
transactions'' means any transaction approved under this section or 
Sec. 225.14 during the 12 months prior to filing the notice under this 
section;
    (B) Consideration paid. The gross consideration to be paid by the 
acquiring bank holding company in the proposal does not exceed 15 
percent of the consolidated Tier 1 capital of the acquiring bank holding 
company; and
    (C) Individual size limitation. The total risk-weighted assets to be 
acquired do not exceed $7.5 billion;
    (ii) Small bank holding companies. Paragraph (c)(5)(i)(A) of this 
section shall not apply if, immediately following consummation of the 
proposed transaction, the consolidated risk-weighted assets of the 
acquiring bank holding company are less than $300 million;
    (6) Supervisory actions. During the 12-month period ending on the 
date on which the bank holding company proposes to consummate the 
proposed transaction, no formal administrative order, including a 
written agreement, cease and desist order, capital directive, prompt 
corrective action directive, asset maintenance agreement, or other 
formal enforcement order is or was outstanding against the bank holding 
company or any insured depository institution subsidiary of the holding 
company, and no formal administrative enforcement proceeding involving 
any such enforcement action, order, or directive is or was pending; and
    (7) Notification. The bank holding company has not been notified by 
the Board, in its discretion, prior to the expiration of the period in 
paragraph (b) of this section that a notice under Sec. 225.24 is 
required in order to permit closer review of any potential adverse 
effect or other matter related to the factors that must be considered 
under this part.
    (d) Branches and agencies of foreign banking organizations. For 
purposes of this section, a U.S. branch or agency of a foreign banking 
organization shall be considered to be an insured depository 
institution.

[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 66 FR 415, Jan. 3, 
2001; 71 FR 9902, Feb. 28, 2006]



Sec. 225.24  Procedures for other nonbanking proposals.

    (a) Notice required for nonbanking activities. Except as provided in 
Sec. 225.22 and Sec. 225.23, a notice for the Board's prior approval 
under Sec. 225.21(a) to engage in or acquire a company engaged in a 
nonbanking activity shall be filed by a bank holding company (including 
a company seeking to become a bank holding company) with the appropriate 
Reserve Bank in accordance with this section and the Board's Rules of 
Procedure (12 CFR 262.3).
    (1) Engaging de novo in listed activities. A bank holding company 
seeking to commence or to engage de novo, either directly or through a 
subsidiary, in a nonbanking activity listed in Sec. 225.28

[[Page 139]]

shall file a notice containing a description of the activities to be 
conducted and the identity of the company that will conduct the 
activity.
    (2) Acquiring company engaged in listed activities. A bank holding 
company seeking to acquire or control voting securities or assets of a 
company engaged in a nonbanking activity listed in Sec. 225.28 shall 
file a notice containing the following:
    (i) A description of the proposal, including a description of each 
proposed activity, and the effect of the proposal on competition among 
entities engaging in each proposed activity in each relevant market with 
relevant market indexes;
    (ii) The identity of any entity involved in the proposal, and, if 
the notificant proposes to conduct the activity through an existing 
subsidiary, a description of the existing activities of the subsidiary;
    (iii) A statement of the public benefits that can reasonably be 
expected to result from the proposal;
    (iv) If the bank holding company has consolidated assets of $150 
million or more:
    (A) Parent company and consolidated pro forma balance sheets for the 
acquiring bank holding company as of the most recent quarter showing 
credit and debit adjustments that reflect the proposed transaction;
    (B) Consolidated pro forma risk-based capital and leverage ratio 
calculations for the acquiring bank holding company as of the most 
recent quarter; and
    (C) A description of the purchase price and the terms and sources of 
funding for the transaction;
    (v) If the bank holding company has consolidated assets of less than 
$150 million:
    (A) A pro forma parent-only balance sheet as of the most recent 
quarter showing credit and debit adjustments that reflect the proposed 
transaction; and
    (B) A description of the purchase price and the terms and sources of 
funding for the transaction and, if the transaction is debt funded, one-
year income statement and cash flow projections for the parent company, 
and the sources and schedule for retiring any debt incurred in the 
transaction;
    (vi) For each insured depository institution whose Tier 1 capital, 
total capital, total assets or risk-weighted assets change as a result 
of the transaction, the total risk-weighted assets, total assets, Tier 1 
capital and total capital of the institution on a pro forma basis; and
    (vii) A description of the management expertise, internal controls 
and risk management systems that will be utilized in the conduct of the 
proposed activities; and
    (viii) A copy of the purchase agreements, and balance sheet and 
income statements for the most recent quarter and year-end for any 
company to be acquired.
    (b) Notice provided to Board. The Reserve Bank shall immediately 
send to the Board a copy of any notice received under paragraphs (a)(2) 
or (a)(3) of this section.
    (c) Notice to public--(1) Listed activities and activities approved 
by order--(i) In a case involving an activity listed in Sec. 225.28 or 
previously approved by the Board by order, the Reserve Bank shall notify 
the Board for publication in the Federal Register immediately upon 
receipt by the Reserve Bank of:
    (A) A notice under this section; or
    (B) A written request that notice of a proposal under this section 
or Sec. 225.23 be published in the Federal Register. Such a request may 
request that Federal Register publication occur up to 15 calendar days 
prior to submission of a notice under this subpart.
    (ii) The Federal Register notice published under this paragraph 
shall invite public comment on the proposal, generally for a period of 
15 days.
    (2) New activities--(i) In general. In the case of a notice under 
this subpart involving an activity that is not listed in Sec. 225.28 
and that has not been previously approved by the Board by order, the 
Board shall send notice of the proposal to the Federal Register for 
publication, unless the Board determines that the notificant has not 
demonstrated that the activity is so closely related to banking or to 
managing or controlling banks as to be a proper incident thereto. The 
Federal Register notice shall invite public comment on the proposal for 
a reasonable period of time, generally for 30 days.

[[Page 140]]

    (ii) Time for publication. The Board shall send the notice required 
under this paragraph to the Federal Register within 10 business days of 
acceptance by the Reserve Bank. The Board may extend the 10-day period 
for an additional 30 calendar days upon notice to the notificant. In the 
event notice of a proposal is not published for comment, the Board shall 
inform the notificant of the reasons for the decision.
    (d) Action on notices--(1) Reserve Bank action--(i) In general. 
Within 30 calendar days after receipt by the Reserve Bank of a notice 
filed pursuant to paragraphs (a)(1) or (a)(2) of this section, the 
Reserve Banks shall:
    (A) Approve the notice; or
    (B) Refer the notice to the Board for decision because action under 
delegated authority is not appropriate.
    (ii) Return of incomplete notice. Within 7 calendar days of receipt, 
the Reserve Bank may return any notice as informationally incomplete 
that does not contain all of the information required by this subpart. 
The return of such a notice shall be deemed action on the notice.
    (iii) Notice of action. The Reserve Bank shall promptly notify the 
bank holding company of any action or referral under this paragraph.
    (iv) Close of public comment period. The Reserve Bank shall not 
approve any notice under this paragraph (d)(1) of this section prior to 
the third business day after the close of the public comment period, 
unless an emergency exists that requires expedited or immediate action.
    (2) Board action; internal schedule. The Board seeks to act on every 
notice referred to it for decision within 60 days of the date that the 
notice is filed with the Reserve Bank. If the Board is unable to act 
within this period, the Board shall notify the notificant and explain 
the reasons and the date by which the Board expects to act.
    (3)(i) Required time limit for System action. The Board or the 
Reserve Bank shall act on any notice under this section within 60 days 
after the submission of a complete notice.
    (ii) Extension of required period for action (A) In general.--The 
Board may extend the 60-day period required for Board action under 
paragraph (d)(3)(i) of this section for an additional 30 days upon 
notice to the notificant.
    (B) Unlisted activities. If a notice involves a proposal to engage 
in an activity that is not listed in Sec. 225.28, the Board may extend 
the period required for Board action under paragraph (d)(3)(i) of this 
section for an additional 90 days. This 90-day extension is in addition 
to the 30-day extension period provided in paragraph (d)(3)(ii)(A) of 
this section. The Board shall notify the notificant that the notice 
period has been extended and explain the reasons for the extension.
    (4) Requests for additional information. The Board or the Reserve 
Bank may modify the information requirements under this section or at 
any time request any additional information that either believes is 
needed for a decision on any notice under this section.
    (5) Tolling of period. The Board or the Reserve Bank may at any time 
extend or toll the time period for action on a notice for any period 
with the consent of the notificant.

[Reg. Y, 62 FR 9332, Feb. 28, 1997, as amended at 62 FR 60640, Nov. 12, 
1997; 65 FR 14438, Mar. 17, 2000]



Sec. 225.25  Hearings, alteration of activities, and other matters.

    (a) Hearings--(1) Procedure to request hearing. Any request for a 
hearing on a notice under this subpart shall comply with the provisions 
of 12 CFR 262.3(e).
    (2) Determination to hold hearing. The Board may order a formal or 
informal hearing or other proceeding on a notice as provided in 12 CFR 
262.3(i)(2). The Board shall order a hearing only if there are disputed 
issues of material fact that cannot be resolved in some other manner.
    (3) Extension of period for hearing. The Board may extend the time 
for action on any notice for such time as is reasonably necessary to 
conduct a hearing and evaluate the hearing record. Such extension shall 
not exceed 91 calendar days after the date of submission to the Board of 
the complete record on the notice. The procedures for computation of the 
91-day rule as set forth in Sec. 225.16(f) apply to notices under this 
subpart that involve hearings.

[[Page 141]]

    (b) Approval through failure to act. (1) Except as provided in 
paragraph (a) of this section or Sec. 225.24(d)(5), a notice under this 
subpart shall be deemed to be approved at the conclusion of the period 
that begins on the date the complete notice is received by the Reserve 
Bank or the Board and that ends 60 calendar days plus any applicable 
extension and tolling period thereafter.
    (2) Complete notice. For purposes of paragraph (b)(1) of this 
section, a notice shall be deemed complete at such time as it contains 
all information required by this subpart and all other information 
requested by the Board or the Reserve Bank.
    (c) Notice to expand or alter nonbanking activities--(1) De novo 
expansion. A notice under this subpart is required to open a new office 
or to form a subsidiary to engage in, or to relocate an existing office 
engaged in, a nonbanking activity that the Board has previously approved 
for the bank holding company under this regulation, only if:
    (i) The Board's prior approval was limited geographically;
    (ii) The activity is to be conducted in a country outside of the 
United States and the bank holding company has not previously received 
prior Board approval under this regulation to engage in the activity in 
that country; or
    (iii) The Board or appropriate Reserve Bank has notified the company 
that a notice under this subpart is required.
    (2) Activities outside United States. With respect to activities to 
be engaged in outside the United States that require approval under this 
subpart, the procedures of this section apply only to activities to be 
engaged in directly by a bank holding company that is not a qualifying 
foreign banking organization, or by a nonbank subsidiary of a bank 
holding company approved under this subpart. Regulation K (12 CFR part 
211) governs other international operations of bank holding companies.
    (3) Alteration of nonbanking activity. Unless otherwise permitted by 
the Board, a notice under this subpart is required to alter a nonbanking 
activity in any material respect from that considered by the Board in 
acting on the application or notice to engage in the activity.
    (d) Emergency savings association acquisitions. In the case of a 
notice to acquire a savings association, the Board may modify or 
dispense with the public notice and hearing requirements of this subpart 
if the Board finds that an emergency exists that requires the Board to 
act immediately and the primary federal regulator of the institution 
concurs.

[Reg. Y, 62 FR 9333, Feb. 28, 1997, as amended by Reg. Y, 62 FR 60640, 
Nov. 12, 1997]



Sec. 225.26  Factors considered in acting on nonbanking proposals.

    (a) In general. In evaluating a notice under Sec. 225.23 or Sec. 
225.24, the Board shall consider whether the notificant's performance of 
the activities can reasonably be expected to produce benefits to the 
public (such as greater convenience, increased competition, and gains in 
efficiency) that outweigh possible adverse effects (such as undue 
concentration of resources, decreased or unfair competition, conflicts 
of interest, and unsound banking practices).
    (b) Financial and managerial resources. Consideration of the factors 
in paragraph (a) of this section includes an evaluation of the financial 
and managerial resources of the notificant, including its subsidiaries 
and any company to be acquired, the effect of the proposed transaction 
on those resources, and the management expertise, internal control and 
risk-management systems, and capital of the entity conducting the 
activity.
    (c) Competitive effect of de novo proposals. Unless the record 
demonstrates otherwise, the commencement or expansion of a nonbanking 
activity de novo is presumed to result in benefits to the public through 
increased competition.
    (d) Denial for lack of information. The Board may deny any notice 
submitted under this subpart if the notificant neglects, fails, or 
refuses to furnish all information required by the Board.
    (e) Conditional approvals. The Board may impose conditions on any 
approval, including conditions to address permissibility, financial, 
managerial, safety and soundness, competitive, compliance, conflicts of 
interest, or

[[Page 142]]

other concerns to ensure that approval is consistent with the relevant 
statutory factors and other provisions of the BHC Act.



Sec. 225.27  Procedures for determining scope of nonbanking activities.

    (a) Advisory opinions regarding scope of previously approved 
nonbanking activities--(1) Request for advisory opinion. Any person may 
submit a request to the Board for an advisory opinion regarding the 
scope of any permissible nonbanking activity. The request shall be 
submitted in writing to the Board and shall identify the proposed 
parameters of the activity, or describe the service or product that will 
be provided, and contain an explanation supporting an interpretation 
regarding the scope of the permissible nonbanking activity.
    (2) Response to request. The Board shall provide an advisory opinion 
within 45 days of receiving a written request under this paragraph.
    (b) Procedure for consideration of new activities--(1) Initiation of 
proceeding. The Board may, at any time, on its own initiative or in 
response to a written request from any person, initiate a proceeding to 
determine whether any activity is so closely related to banking or 
managing or controlling banks as to be a proper incident thereto.
    (2) Requests for determination. Any request for a Board 
determination that an activity is so closely related to banking or 
managing or controlling banks as to be a proper incident thereto, shall 
be submitted to the Board in writing, and shall contain evidence that 
the proposed activity is so closely related to banking or managing or 
controlling banks as to be a proper incident thereto.
    (3) Publication. The Board shall publish in the Federal Register 
notice that it is considering the permissibility of a new activity and 
invite public comment for a period of at least 30 calendar days. In the 
case of a request submitted under paragraph (b) of this section, the 
Board may determine not to publish notice of the request if the Board 
determines that the requester has provided no reasonable basis for a 
determination that the activity is so closely related to banking, or 
managing or controlling banks as to be a proper incident thereto, and 
notifies the requester of the determination.
    (4) Comments and hearing requests. Any comment and any request for a 
hearing regarding a proposal under this section shall comply with the 
provisions of Sec. 262.3(e) of the Board's Rules of Procedure (12 CFR 
262.3(e)).



Sec. 225.28  List of permissible nonbanking activities.

    (a) Closely related nonbanking activities. The activities listed in 
paragraph (b) of this section are so closely related to banking or 
managing or controlling banks as to be a proper incident thereto, and 
may be engaged in by a bank holding company or its subsidiary in 
accordance with the requirements of this regulation.
    (b) Activities determined by regulation to be permissible--(1) 
Extending credit and servicing loans. Making, acquiring, brokering, or 
servicing loans or other extensions of credit (including factoring, 
issuing letters of credit and accepting drafts) for the company's 
account or for the account of others.
    (2) Activities related to extending credit. Any activity usual in 
connection with making, acquiring, brokering or servicing loans or other 
extensions of credit, as determined by the Board. The Board has 
determined that the following activities are usual in connection with 
making, acquiring, brokering or servicing loans or other extensions of 
credit:
    (i) Real estate and personal property appraising. Performing 
appraisals of real estate and tangible and intangible personal property, 
including securities.
    (ii) Arranging commercial real estate equity financing. Acting as 
intermediary for the financing of commercial or industrial income-
producing real estate by arranging for the transfer of the title, 
control, and risk of such a real estate project to one or more 
investors, if the bank holding company and its affiliates do not have an 
interest in, or participate in managing or developing, a real estate 
project for which it arranges equity financing, and do not promote or 
sponsor the development of the property.
    (iii) Check-guaranty services. Authorizing a subscribing merchant to 
accept

[[Page 143]]

personal checks tendered by the merchant's customers in payment for 
goods and services, and purchasing from the merchant validly authorized 
checks that are subsequently dishonored.
    (iv) Collection agency services. Collecting overdue accounts 
receivable, either retail or commercial.
    (v) Credit bureau services. Maintaining information related to the 
credit history of consumers and providing the information to a credit 
grantor who is considering a borrower's application for credit or who 
has extended credit to the borrower.
    (vi) Asset management, servicing, and collection activities. 
Engaging under contract with a third party in asset management, 
servicing, and collection \2\ of assets of a type that an insured 
depository institution may originate and own, if the company does not 
engage in real property management or real estate brokerage services as 
part of these services.
---------------------------------------------------------------------------

    \2\ Asset management services include acting as agent in the 
liquidation or sale of loans and collateral for loans, including real 
estate and other assets acquired through foreclosure or in satisfaction 
of debts previously contracted.
---------------------------------------------------------------------------

    (vii) Acquiring debt in default. Acquiring debt that is in default 
at the time of acquisition, if the company:
    (A) Divests shares or assets securing debt in default that are not 
permissible investments for bank holding companies, within the time 
period required for divestiture of property acquired in satisfaction of 
a debt previously contracted under Sec. 225.12(b); \3\
---------------------------------------------------------------------------

    \3\ For this purpose, the divestiture period for property begins on 
the date that the debt is acquired, regardless of when legal title to 
the property is acquired.
---------------------------------------------------------------------------

    (B) Stands only in the position of a creditor and does not purchase 
equity of obligors of debt in default (other than equity that may be 
collateral for such debt); and
    (C) Does not acquire debt in default secured by shares of a bank or 
bank holding company.
    (viii) Real estate settlement servicing. Providing real estate 
settlement services.\4\
---------------------------------------------------------------------------

    \4\ For purposes of this section, real estate settlement services do 
not include providing title insurance as principal, agent, or broker.
---------------------------------------------------------------------------

    (3) Leasing personal or real property. Leasing personal or real 
property or acting as agent, broker, or adviser in leasing such property 
if:
    (i) The lease is on a nonoperating basis; \5\
---------------------------------------------------------------------------

    \5\ The requirement that the lease be on a nonoperating basis means 
that the bank holding company may not, directly or indirectly, engage in 
operating, servicing, maintaining, or repairing leased property during 
the lease term. For purposes of the leasing of automobiles, the 
requirement that the lease be on a nonoperating basis means that the 
bank holding company may not, directly or indirectly: (1) Provide 
servicing, repair, or maintenance of the leased vehicle during the lease 
term; (2) purchase parts and accessories in bulk or for an individual 
vehicle after the lessee has taken delivery of the vehicle; (3) provide 
the loan of an automobile during servicing of the leased vehicle; (4) 
purchase insurance for the lessee; or (5) provide for the renewal of the 
vehicle's license merely as a service to the lessee where the lessee 
could renew the license without authorization from the lessor. The bank 
holding company may arrange for a third party to provide these services 
or products.
---------------------------------------------------------------------------

    (ii) The initial term of the lease is at least 90 days;
    (iii) In the case of leases involving real property:
    (A) At the inception of the initial lease, the effect of the 
transaction will yield a return that will compensate the lessor for not 
less than the lessor's full investment in the property plus the 
estimated total cost of financing the property over the term of the 
lease from rental payments, estimated tax benefits, and the estimated 
residual value of the property at the expiration of the initial lease; 
and
    (B) The estimated residual value of property for purposes of 
paragraph (b)(3)(iii)(A) of this section shall not exceed 25 percent of 
the acquisition cost of the property to the lessor.
    (4) Operating nonbank depository institutions--(i) Industrial 
banking. Owning, controlling, or operating an industrial bank, Morris 
Plan bank, or industrial loan company, so long as the institution is not 
a bank.
    (ii) Operating savings association. Owning, controlling, or 
operating a savings association, if the savings association engages only 
in deposit-taking activities, lending, and other activities that

[[Page 144]]

are permissible for bank holding companies under this subpart C.
    (5) Trust company functions. Performing functions or activities that 
may be performed by a trust company (including activities of a 
fiduciary, agency, or custodial nature), in the manner authorized by 
federal or state law, so long as the company is not a bank for purposes 
of section 2(c) of the Bank Holding Company Act.
    (6) Financial and investment advisory activities. Acting as 
investment or financial advisor to any person, including (without, in 
any way, limiting the foregoing):
    (i) Serving as investment adviser (as defined in section 2(a)(20) of 
the Investment Company Act of 1940, 15 U.S.C. 80a-2(a)(20)), to an 
investment company registered under that act, including sponsoring, 
organizing, and managing a closed-end investment company;
    (ii) Furnishing general economic information and advice, general 
economic statistical forecasting services, and industry studies;
    (iii) Providing advice in connection with mergers, acquisitions, 
divestitures, investments, joint ventures, leveraged buyouts, 
recapitalizations, capital structurings, financing transactions and 
similar transactions, and conducting financial feasibility studies;\6\
---------------------------------------------------------------------------

    \6\ Feasibility studies do not include assisting management with the 
planning or marketing for a given project or providing general 
operational or management advice.
---------------------------------------------------------------------------

    (iv) Providing information, statistical forecasting, and advice with 
respect to any transaction in foreign exchange, swaps, and similar 
transactions, commodities, and any forward contract, option, future, 
option on a future, and similar instruments;
    (v) Providing educational courses, and instructional materials to 
consumers on individual financial management matters; and
    (vi) Providing tax-planning and tax-preparation services to any 
person.
    (7) Agency transactional services for customer investments--(i) 
Securities brokerage. Providing securities brokerage services (including 
securities clearing and/or securities execution services on an 
exchange), whether alone or in combination with investment advisory 
services, and incidental activities (including related securities credit 
activities and custodial services), if the securities brokerage services 
are restricted to buying and selling securities solely as agent for the 
account of customers and do not include securities underwriting or 
dealing.
    (ii) Riskless principal transactions. Buying and selling in the 
secondary market all types of securities on the order of customers as a 
``riskless principal'' to the extent of engaging in a transaction in 
which the company, after receiving an order to buy (or sell) a security 
from a customer, purchases (or sells) the security for its own account 
to offset a contemporaneous sale to (or purchase from) the customer. 
This does not include:
    (A) Selling bank-ineligible securities \7\ at the order of a 
customer that is the issuer of the securities, or selling bank-
ineligible securities in any transaction where the company has a 
contractual agreement to place the securities as agent of the issuer; or
---------------------------------------------------------------------------

    \7\ A bank-ineligible security is any security that a State member 
bank is not permitted to underwrite or deal in under 12 U.S.C. 24 and 
335.
---------------------------------------------------------------------------

    (B) Acting as a riskless principal in any transaction involving a 
bank-ineligible security for which the company or any of its affiliates 
acts as underwriter (during the period of the underwriting or for 30 
days thereafter) or dealer.\8\
---------------------------------------------------------------------------

    \8\ A company or its affiliates may not enter quotes for specific 
bank-ineligible securities in any dealer quotation system in connection 
with the company's riskless principal transactions; except that the 
company or its affiliates may enter ``bid'' or ``ask'' quotations, or 
publish ``offering wanted'' or ``bid wanted'' notices on trading systems 
other than NASDAQ or an exchange, if the company or its affiliate does 
not enter price quotations on different sides of the market for a 
particular security during any two-day period.
---------------------------------------------------------------------------

    (iii) Private placement services. Acting as agent for the private 
placement of securities in accordance with the requirements of the 
Securities Act of 1933 (1933 Act) and the rules of the Securities and 
Exchange Commission, if the company engaged in the activity does not 
purchase or repurchase for its own account the securities being placed, 
or

[[Page 145]]

hold in inventory unsold portions of issues of these securities.
    (iv) Futures commission merchant. Acting as a futures commission 
merchant (FCM) for unaffiliated persons in the execution, clearance, or 
execution and clearance of any futures contract and option on a futures 
contract traded on an exchange in the United States or abroad if:
    (A) The activity is conducted through a separately incorporated 
subsidiary of the bank holding company, which may engage in activities 
other than FCM activities (including, but not limited to, permissible 
advisory and trading activities); and
    (B) The parent bank holding company does not provide a guarantee or 
otherwise become liable to the exchange or clearing association other 
than for those trades conducted by the subsidiary for its own account or 
for the account of any affiliate.
    (v) Other transactional services. Providing to customers as agent 
transactional services with respect to swaps and similar transactions, 
any transaction described in paragraph (b)(8) of this section, any 
transaction that is permissible for a state member bank, and any other 
transaction involving a forward contract, option, futures, option on a 
futures or similar contract (whether traded on an exchange or not) 
relating to a commodity that is traded on an exchange.
    (8) Investment transactions as principal--(i) Underwriting and 
dealing in government obligations and money market instruments. 
Underwriting and dealing in obligations of the United States, general 
obligations of states and their political subdivisions, and other 
obligations that state member banks of the Federal Reserve System may be 
authorized to underwrite and deal in under 12 U.S.C. 24 and 335, 
including banker's acceptances and certificates of deposit, under the 
same limitations as would be applicable if the activity were performed 
by the bank holding company's subsidiary member banks or its subsidiary 
nonmember banks as if they were member banks.
    (ii) Investing and trading activities. Engaging as principal in:
    (A) Foreign exchange;
    (B) Forward contracts, options, futures, options on futures, swaps, 
and similar contracts, whether traded on exchanges or not, based on any 
rate, price, financial asset (including gold, silver, platinum, 
palladium, copper, or any other metal approved by the Board), 
nonfinancial asset, or group of assets, other than a bank-ineligible 
security,\9\ if:
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    \9\ A bank-ineligible security is any security that a state member 
bank is not permitted to underwrite or deal in under 12 U.S.C. 24 and 
335.
---------------------------------------------------------------------------

    (1) A state member bank is authorized to invest in the asset 
underlying the contract;
    (2) The contract requires cash settlement;
    (3) The contract allows for assignment, termination, or offset prior 
to delivery or expiration, and the company--
    (i) Makes every reasonable effort to avoid taking or making delivery 
of the asset underlying the contract; or
    (ii) Receives and instantaneously transfers title to the underlying 
asset, by operation of contract and without taking or making physical 
delivery of the asset; or
    (4) The contract does not allow for assignment, termination, or 
offset prior to delivery or expiration and is based on an asset for 
which futures contracts or options on futures contracts have been 
approved for trading on a U.S. contract market by the Commodity Futures 
Trading Commission, and the company--
    (i) Makes every reasonable effort to avoid taking or making delivery 
of the asset underlying the contract; or
    (ii) Receives and instantaneously transfers title to the underlying 
asset, by operation of contract and without taking or making physical 
delivery of the asset.
    (C) Forward contracts, options,\10\ futures, options on futures, 
swaps, and

[[Page 146]]

similar contracts, whether traded on exchanges or not, based on an index 
of a rate, a price, or the value of any financial asset, nonfinancial 
asset, or group of assets, if the contract requires cash settlement.
---------------------------------------------------------------------------

    \10\ This reference does not include acting as a dealer in options 
based on indices of bank-ineligible securities when the options are 
traded on securities exchanges. These options are securities for 
purposes of the federal securities laws and bank-ineligible securities 
for purposes of section 20 of the Glass-Steagall Act, 12 U.S.C. 337. 
Similarly, this reference does not include acting as a dealer in any 
other instrument that is a bank-ineligible security for purposes of 
section 20. A bank holding company may deal in these instruments in 
accordance with the Board's orders on dealing in bank-ineligible 
securities.
---------------------------------------------------------------------------

    (iii) Buying and selling bullion, and related activities. Buying, 
selling and storing bars, rounds, bullion, and coins of gold, silver, 
platinum, palladium, copper, and any other metal approved by the Board, 
for the company's own account and the account of others, and providing 
incidental services such as arranging for storage, safe custody, 
assaying, and shipment.
    (9) Management consulting and counseling activities--(i) Management 
consulting. (A) Providing management consulting advice: \11\
---------------------------------------------------------------------------

    \11\ In performing this activity, bank holding companies are not 
authorized to perform tasks or operations or provide services to client 
institutions either on a daily or continuing basis, except as necessary 
to instruct the client institution on how to perform such services for 
itself. See also the Board's interpretation of bank management 
consulting advice (12 CFR 225.131).
---------------------------------------------------------------------------

    (1) On any matter to unaffiliated depository institutions, including 
commercial banks, savings and loan associations, savings banks, credit 
unions, industrial banks, Morris Plan banks, cooperative banks, 
industrial loan companies, trust companies, and branches or agencies of 
foreign banks;
    (2) On any financial, economic, accounting, or audit matter to any 
other company.
    (B) A company conducting management consulting activities under this 
subparagraph and any affiliate of such company may not:
    (1) Own or control, directly or indirectly, more than 5 percent of 
the voting securities of the client institution; and
    (2) Allow a management official, as defined in 12 CFR 212.2(h), of 
the company or any of its affiliates to serve as a management official 
of the client institution, except where such interlocking relationship 
is permitted pursuant to an exemption granted under 12 CFR 212.4(b) or 
otherwise permitted by the Board.
    (C) A company conducting management consulting activities may 
provide management consulting services to customers not described in 
paragraph (b)(9)(i)(A)(1) of this section or regarding matters not 
described in paragraph (b)(9)(i)(A)(2) of this section, if the total 
annual revenue derived from those management consulting services does 
not exceed 30 percent of the company's total annual revenue derived from 
management consulting activities.
    (ii) Employee benefits consulting services. Providing consulting 
services to employee benefit, compensation and insurance plans, 
including designing plans, assisting in the implementation of plans, 
providing administrative services to plans, and developing employee 
communication programs for plans.
    (iii) Career counseling services. Providing career counseling 
services to:
    (A) A financial organization \12\ and individuals currently employed 
by, or recently displaced from, a financial organization;
---------------------------------------------------------------------------

    \12\ Financial organization refers to insured depository institution 
holding companies and their subsidiaries, other than nonbanking 
affiliates of diversified savings and loan holding companies that engage 
in activities not permissible under section 4(c)(8) of the Bank Holding 
Company Act (12 U.S.C. 1842(c)(8)).
---------------------------------------------------------------------------

    (B) Individuals who are seeking employment at a financial 
organization; and
    (C) Individuals who are currently employed in or who seek positions 
in the finance, accounting, and audit departments of any company.
    (10) Support services--(i) Courier services. Providing courier 
services for:
    (A) Checks, commercial papers, documents, and written instruments 
(excluding currency or bearer-type negotiable instruments) that are 
exchanged among banks and financial institutions; and
    (B) Audit and accounting media of a banking or financial nature and 
other business records and documents used in processing such media.\13\
---------------------------------------------------------------------------

    \13\ See also the Board's interpretation on courier activities (12 
CFR 225.129), which sets forth conditions for bank holding company entry 
into the activity.

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[[Page 147]]

    (ii) Printing and selling MICR-encoded items. Printing and selling 
checks and related documents, including corporate image checks, cash 
tickets, voucher checks, deposit slips, savings withdrawal packages, and 
other forms that require Magnetic Ink Character Recognition (MICR) 
encoding.
    (11) Insurance agency and underwriting--(i) Credit insurance. Acting 
as principal, agent, or broker for insurance (including home mortgage 
redemption insurance) that is:
    (A) Directly related to an extension of credit by the bank holding 
company or any of its subsidiaries; and
    (B) Limited to ensuring the repayment of the outstanding balance due 
on the extension of credit \14\ in the event of the death, disability, 
or involuntary unemployment of the debtor.
---------------------------------------------------------------------------

    \14\ Extension of credit includes direct loans to borrowers, loans 
purchased from other lenders, and leases of real or personal property so 
long as the leases are nonoperating and full-payout leases that meet the 
requirements of paragraph (b)(3) of this section.
---------------------------------------------------------------------------

    (ii) Finance company subsidiary. Acting as agent or broker for 
insurance directly related to an extension of credit by a finance 
company \15\ that is a subsidiary of a bank holding company, if:
---------------------------------------------------------------------------

    \15\ Finance company includes all non-deposit-taking financial 
institutions that engage in a significant degree of consumer lending 
(excluding lending secured by first mortgages) and all financial 
institutions specifically defined by individual states as finance 
companies and that engage in a significant degree of consumer lending.
---------------------------------------------------------------------------

    (A) The insurance is limited to ensuring repayment of the 
outstanding balance on such extension of credit in the event of loss or 
damage to any property used as collateral for the extension of credit; 
and
    (B) The extension of credit is not more than $10,000, or $25,000 if 
it is to finance the purchase of a residential manufactured home \16\ 
and the credit is secured by the home; and
---------------------------------------------------------------------------

    \16\ These limitations increase at the end of each calendar year, 
beginning with 1982, by the percentage increase in the Consumer Price 
Index for Urban Wage Earners and Clerical Workers published by the 
Bureau of Labor Statistics.
---------------------------------------------------------------------------

    (C) The applicant commits to notify borrowers in writing that:
    (1) They are not required to purchase such insurance from the 
applicant;
    (2) Such insurance does not insure any interest of the borrower in 
the collateral; and
    (3) The applicant will accept more comprehensive property insurance 
in place of such single-interest insurance.
    (iii) Insurance in small towns. Engaging in any insurance agency 
activity in a place where the bank holding company or a subsidiary of 
the bank holding company has a lending office and that:
    (A) Has a population not exceeding 5,000 (as shown in the preceding 
decennial census); or
    (B) Has inadequate insurance agency facilities, as determined by the 
Board, after notice and opportunity for hearing.
    (iv) Insurance-agency activities conducted on May 1, 1982. Engaging 
in any specific insurance-agency activity \17\ if the bank holding 
company, or subsidiary conducting the specific activity, conducted such 
activity on May 1, 1982, or received Board approval to conduct such 
activity on or before May 1, 1982.\18\ A bank holding company or 
subsidiary engaging in a specific insurance agency activity under this 
clause may:
---------------------------------------------------------------------------

    \17\ Nothing contained in this provision shall preclude a bank 
holding company subsidiary that is authorized to engage in a specific 
insurance-agency activity under this clause from continuing to engage in 
the particular activity after merger with an affiliate, if the merger is 
for legitimate business purposes and prior notice has been provided to 
the Board.
    \18\ For the purposes of this paragraph, activities engaged in on 
May 1, 1982, include activities carried on subsequently as the result of 
an application to engage in such activities pending before the Board on 
May 1, 1982, and approved subsequently by the Board or as the result of 
the acquisition by such company pursuant to a binding written contract 
entered into on or before May 1, 1982, of another company engaged in 
such activities at the time of the acquisition.
---------------------------------------------------------------------------

    (A) Engage in such specific insurance agency activity only at 
locations:
    (1) In the state in which the bank holding company has its principal 
place of business (as defined in 12 U.S.C. 1842(d));
    (2) In any state or states immediately adjacent to such state; and

[[Page 148]]

    (3) In any state in which the specific insurance-agency activity was 
conducted (or was approved to be conducted) by such bank holding company 
or subsidiary thereof or by any other subsidiary of such bank holding 
company on May 1, 1982; and
    (B) Provide other insurance coverages that may become available 
after May 1, 1982, so long as those coverages insure against the types 
of risks as (or are otherwise functionally equivalent to) coverages sold 
or approved to be sold on May 1, 1982, by the bank holding company or 
subsidiary.
    (v) Supervision of retail insurance agents. Supervising on behalf of 
insurance underwriters the activities of retail insurance agents who 
sell:
    (A) Fidelity insurance and property and casualty insurance on the 
real and personal property used in the operations of the bank holding 
company or its subsidiaries; and
    (B) Group insurance that protects the employees of the bank holding 
company or its subsidiaries.
    (vi) Small bank holding companies. Engaging in any insurance-agency 
activity if the bank holding company has total consolidated assets of 
$50 million or less. A bank holding company performing insurance-agency 
activities under this paragraph may not engage in the sale of life 
insurance or annuities except as provided in paragraphs (b)(11) (i) and 
(iii) of this section, and it may not continue to engage in insurance-
agency activities pursuant to this provision more than 90 days after the 
end of the quarterly reporting period in which total assets of the 
holding company and its subsidiaries exceed $50 million.
    (vii) Insurance-agency activities conducted before 1971. Engaging in 
any insurance-agency activity performed at any location in the United 
States directly or indirectly by a bank holding company that was engaged 
in insurance-agency activities prior to January 1, 1971, as a 
consequence of approval by the Board prior to January 1, 1971.
    (12) Community development activities--(i) Financing and investment 
activities. Making equity and debt investments in corporations or 
projects designed primarily to promote community welfare, such as the 
economic rehabilitation and development of low-income areas by providing 
housing, services, or jobs for residents.
    (ii) Advisory activities. Providing advisory and related services 
for programs designed primarily to promote community welfare.
    (13) Money orders, savings bonds, and traveler's checks. The 
issuance and sale at retail of money orders and similar consumer-type 
payment instruments; the sale of U.S. savings bonds; and the issuance 
and sale of traveler's checks.
    (14) Data processing. (i) Providing data processing, data storage 
and data transmission services, facilities (including data processing, 
data storage and data transmission hardware, software, documentation, or 
operating personnel), databases, advice, and access to such services, 
facilities, or data-bases by any technological means, if:
    (A) The data to be processed, stored or furnished are financial, 
banking or economic; and
    (B) The hardware provided in connection therewith is offered only in 
conjunction with software designed and marketed for the processing, 
storage and transmission of financial, banking, or economic data, and 
where the general purpose hardware does not constitute more than 30 
percent of the cost of any packaged offering.
    (ii) A company conducting data processing, data storage, and data 
transmission activities may conduct data processing, data storage, and 
data transmission activities not described in paragraph (b)(14)(i) of 
this section if the total annual revenue derived from those activities 
does not exceed 49 percent of the company's total annual revenues 
derived from data processing, data storage and data transmission 
activities.

[Reg. Y, 62 FR 9329, Feb. 28, 1997, as amended at 68 FR 39810, July 3, 
2003; 68 FR 41901, July 16, 2003; 68 FR 68499, Dec. 9, 2003]



              Subpart D_Control and Divestiture Proceedings



Sec. 225.31  Control proceedings.

    (a) Preliminary determination of control. (1) The Board may issue a 
preliminary determination of control under the procedures set forth in 
this section in any case in which:

[[Page 149]]

    (i) Any of the presumptions of control set forth in paragraph (d) of 
this section is present; or
    (ii) It otherwise appears that a company has the power to exercise a 
controlling influence over the management or policies of a bank or other 
company.
    (2) If the Board makes a preliminary determination of control under 
this section, the Board shall send notice to the controlling company 
containing a statement of the facts upon which the preliminary 
determination is based.
    (b) Response to preliminary determination of control. Within 30 
calendar days of issuance by the Board of a preliminary determination of 
control or such longer period permitted by the Board, the company 
against whom the determination has been made shall:
    (1) Submit for the Board's approval a specific plan for the prompt 
termination of the control relationship;
    (2) File an application under subpart B or C of this regulation to 
retain the control relationship; or
    (3) Contest the preliminary determination by filing a response, 
setting forth the facts and circumstances in support of its position 
that no control exists, and, if desired, requesting a hearing or other 
proceeding.
    (c) Hearing and final determination. (1) The Board shall order a 
formal hearing or other appropriate proceeding upon the request of a 
company that contests a preliminary determination that the company has 
the power to exercise a controlling influence over the management or 
policies of a bank or other company, if the Board finds that material 
facts are in dispute. The Board may also in its discretion order a 
formal hearing or other proceeding with respect to a preliminary 
determination that the company controls voting securities of the bank or 
other company under the presumptions in paragraph (d)(1) of this 
section.
    (2) At a hearing or other proceeding, any applicable presumptions 
established by paragraph (d) of this section shall be considered in 
accordance with the Federal Rules of Evidence and the Board's Rules of 
Practice for Formal Hearings (12 CFR part 263).
    (3) After considering the submissions of the company and other 
evidence, including the record of any hearing or other proceeding, the 
Board shall issue a final order determining whether the company controls 
voting securities, or has the power to exercise a controlling influence 
over the management or policies, of the bank or other company. If a 
control relationship is found, the Board may direct the company to 
terminate the control relationship or to file an application for the 
Board's approval to retain the control relationship under subpart B or C 
of this regulation.
    (d) Rebuttable presumptions of control. The following rebuttable 
presumptions shall be used in any proceeding under this section:
    (1) Control of voting securities--(i) Securities convertible into 
voting securities. A company that owns, controls, or holds securities 
that are immediately convertible, at the option of the holder or owner, 
into voting securities of a bank or other company, controls the voting 
securities.
    (ii) Option or restriction on voting securities. A company that 
enters into an agreement or understanding under which the rights of a 
holder of voting securities of a bank or other company are restricted in 
any manner controls the securities. This presumption does not apply 
where the agreement or understanding:
    (A) Is a mutual agreement among shareholders granting to each other 
a right of first refusal with respect to their shares;
    (B) Is incident to a bona fide loan transaction; or
    (C) Relates to restrictions on transferability and continues only 
for the time necessary to obtain approval from the appropriate Federal 
supervisory authority with respect to acquisition by the company of the 
securities.
    (2) Control over company--(i) Management agreement. A company that 
enters into any agreement or understanding with a bank or other company 
(other than an investment advisory agreement), such as a management 
contract, under which the first company or any of its subsidiaries 
directs or exercises significant influence over the general management 
or overall operations of the bank or other company controls the bank or 
other company.

[[Page 150]]

    (ii) Shares controlled by company and associated individuals. A 
company that, together with its management officials or controlling 
shareholders (including members of the immediate families of either), 
owns, controls, or holds with power to vote 25 percent or more of the 
outstanding shares of any class of voting securities of a bank or other 
company controls the bank or other company, if the first company owns, 
controls, or holds with power to vote more than 5 percent of the 
outstanding shares of any class of voting securities of the bank or 
other company.
    (iii) Common management officials. A company that has one or more 
management officials in common with a bank or other company controls the 
bank or other company, if the first company owns, controls or holds with 
power to vote more than 5 percent of the outstanding shares of any class 
of voting securities of the bank or other company, and no other person 
controls as much as 5 percent of the outstanding shares of any class of 
voting securities of the bank or other company.
    (iv) Shares held as fiduciary. The presumptions in paragraphs (d)(2) 
(ii) and (iii) of this section do not apply if the securities are held 
by the company in a fiduciary capacity without sole discretionary 
authority to exercise the voting rights.
    (e) Presumption of non-control--(1) In any proceeding under this 
section, there is a presumption that any company that directly or 
indirectly owns, controls, or has power to vote less than 5 percent of 
the outstanding shares of any class of voting securities of a bank or 
other company does not have control over that bank or other company.
    (2) In any proceeding under this section, or judicial proceeding 
under the BHC Act, other than a proceeding in which the Board has made a 
preliminary determination that a company has the power to exercise a 
controlling influence over the management or policies of the bank or 
other company, a company may not be held to have had control over the 
bank or other company at any given time, unless that company, at the 
time in question, directly or indirectly owned, controlled, or had power 
to vote 5 percent or more of the outstanding shares of any class of 
voting securities of the bank or other company, or had already been 
found to have control on the basis of the existence of a controlling 
influence relationship.

[Reg. Y, 49 FR 818, Jan. 5, 1984, as amended at 58 FR 474, Jan. 6, 1993; 
Reg. Y, 62 FR 9338, Feb. 28, 1997]



                    Subpart E_Change in Bank Control

    Source: Reg. Y, 62 FR 9338, Feb. 28, 1997, unless otherwise noted.



Sec. 225.41  Transactions requiring prior notice.

    (a) Prior notice requirement. Any person acting directly or 
indirectly, or through or in concert with one or more persons, shall 
give the Board 60 days' written notice, as specified in Sec. 225.43 of 
this subpart, before acquiring control of a state member bank or bank 
holding company, unless the acquisition is exempt under Sec. 225.42.
    (b) Definitions. For purposes of this subpart:
    (1) Acquisition includes a purchase, assignment, transfer, or pledge 
of voting securities, or an increase in percentage ownership of a state 
member bank or a bank holding company resulting from a redemption of 
voting securities.
    (2) Acting in concert includes knowing participation in a joint 
activity or parallel action towards a common goal of acquiring control 
of a state member bank or bank holding company whether or not pursuant 
to an express agreement.
    (3) Immediate family includes a person's father, mother, stepfather, 
stepmother, brother, sister, stepbrother, stepsister, son, daughter, 
stepson, stepdaughter, grandparent, grandson, granddaughter, father-in-
law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-
in-law, the spouse of any of the foregoing, and the person's spouse.
    (c) Acquisitions requiring prior notice--(1) Acquisition of control. 
The acquisition of voting securities of a state member bank or bank 
holding company constitutes the acquisition of control under the Bank 
Control Act, requiring

[[Page 151]]

prior notice to the Board, if, immediately after the transaction, the 
acquiring person (or persons acting in concert) will own, control, or 
hold with power to vote 25 percent or more of any class of voting 
securities of the institution.
    (2) Rebuttable presumption of control. The Board presumes that an 
acquisition of voting securities of a state member bank or bank holding 
company constitutes the acquisition of control under the Bank Control 
Act, requiring prior notice to the Board, if, immediately after the 
transaction, the acquiring person (or persons acting in concert) will 
own, control, or hold with power to vote 10 percent or more of any class 
of voting securities of the institution, and if:
    (i) The institution has registered securities under section 12 of 
the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
    (ii) No other person will own, control, or hold the power to vote a 
greater percentage of that class of voting securities immediately after 
the transaction.\1\
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    \1\ If two or more persons, not acting in concert, each propose to 
acquire simultaneously equal percentages of 10 percent or more of a 
class of voting securities of the state member bank or bank holding 
company, each person must file prior notice to the Board.
---------------------------------------------------------------------------

    (d) Rebuttable presumption of concerted action. The following 
persons shall be presumed to be acting in concert for purposes of this 
subpart:
    (1) A company and any controlling shareholder, partner, trustee, or 
management official of the company, if both the company and the person 
own voting securities of the state member bank or bank holding company;
    (2) An individual and the individual's immediate family;
    (3) Companies under common control;
    (4) Persons that are parties to any agreement, contract, 
understanding, relationship, or other arrangement, whether written or 
otherwise, regarding the acquisition, voting, or transfer of control of 
voting securities of a state member bank or bank holding company, other 
than through a revocable proxy as described in Sec. 225.42(a)(5) of 
this subpart;
    (5) Persons that have made, or propose to make, a joint filing under 
sections 13 or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m 
or 78n), and the rules promulgated thereunder by the Securities and 
Exchange Commission; and
    (6) A person and any trust for which the person serves as trustee.
    (e) Acquisitions of loans in default. The Board presumes an 
acquisition of a loan in default that is secured by voting securities of 
a state member bank or bank holding company to be an acquisition of the 
underlying securities for purposes of this section.
    (f) Other transactions. Transactions other than those set forth in 
paragraph (c) of this section resulting in a person's control of less 
than 25 percent of a class of voting securities of a state member bank 
or bank holding company are not deemed by the Board to constitute 
control for purposes of the Bank Control Act.
    (g) Rebuttal of presumptions. Prior notice to the Board is not 
required for any acquisition of voting securities under the presumption 
of control set forth in this section, if the Board finds that the 
acquisition will not result in control. The Board shall afford any 
person seeking to rebut a presumption in this section an opportunity to 
present views in writing or, if appropriate, orally before its 
designated representatives at an informal conference.



Sec. 225.42  Transactions not requiring prior notice.

    (a) Exempt transactions. The following transactions do not require 
notice to the Board under this subpart:
    (1) Existing control relationships. The acquisition of additional 
voting securities of a state member bank or bank holding company by a 
person who:
    (i) Continuously since March 9, 1979 (or since the institution 
commenced business, if later), held power to vote 25 percent or more of 
any class of voting securities of the institution; or
    (ii) Is presumed, under Sec. 225.41(c)(2) of this subpart, to have 
controlled the institution continuously since March 9, 1979, if the 
aggregate amount of voting securities held does not exceed 25 percent or 
more of any class of voting securities of the institution or, in other

[[Page 152]]

cases, where the Board determines that the person has controlled the 
bank continuously since March 9, 1979;
    (2) Increase of previously authorized acquisitions. Unless the Board 
or the Reserve Bank otherwise provides in writing, the acquisition of 
additional shares of a class of voting securities of a state member bank 
or bank holding company by any person (or persons acting in concert) who 
has lawfully acquired and maintained control of the institution (for 
purposes of Sec. 225.41(c) of this subpart), after complying with the 
procedures and receiving approval to acquire voting securities of the 
institution under this subpart, or in connection with an application 
approved under section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of 
subpart B of this part) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c));
    (3) Acquisitions subject to approval under BHC Act or Bank Merger 
Act. Any acquisition of voting securities subject to approval under 
section 3 of the BHC Act (12 U.S.C. 1842; Sec. 225.11 of subpart B of 
this part), or section 18(c) of the Federal Deposit Insurance Act (Bank 
Merger Act, 12 U.S.C. 1828(c));
    (4) Transactions exempt under BHC Act. Any transaction described in 
sections 2(a)(5), 3(a)(A), or 3(a)(B) of the BHC Act (12 U.S.C. 
1841(a)(5), 1842(a)(A), and 1842(a)(B)), by a person described in those 
provisions;
    (5) Proxy solicitation. The acquisition of the power to vote 
securities of a state member bank or bank holding company through 
receipt of a revocable proxy in connection with a proxy solicitation for 
the purposes of conducting business at a regular or special meeting of 
the institution, if the proxy terminates within a reasonable period 
after the meeting;
    (6) Stock dividends. The receipt of voting securities of a state 
member bank or bank holding company through a stock dividend or stock 
split if the proportional interest of the recipient in the institution 
remains substantially the same; and
    (7) Acquisition of foreign banking organization. The acquisition of 
voting securities of a qualifying foreign banking organization. (This 
exemption does not extend to the reports and information required under 
paragraphs 9, 10, and 12 of the Bank Control Act (12 U.S.C. 1817(j) (9), 
(10), and (12)) and Sec. 225.44 of this subpart.)
    (b) Prior notice exemption. (1) The following acquisitions of voting 
securities of a state member bank or bank holding company, which would 
otherwise require prior notice under this subpart, are not subject to 
the prior notice requirements if the acquiring person notifies the 
appropriate Reserve Bank within 90 calendar days after the acquisition 
and provides any relevant information requested by the Reserve Bank:
    (i) Acquisition of voting securities through inheritance;
    (ii) Acquisition of voting securities as a bona fide gift; and
    (iii) Acquisition of voting securities in satisfaction of a debt 
previously contracted (DPC) in good faith.
    (2) The following acquisitions of voting securities of a state 
member bank or bank holding company, which would otherwise require prior 
notice under this subpart, are not subject to the prior notice 
requirements if the acquiring person does not reasonably have advance 
knowledge of the transaction, and provides the written notice required 
under section 225.43 to the appropriate Reserve Bank within 90 calendar 
days after the transaction occurs:
    (i) Acquisition of voting securities resulting from a redemption of 
voting securities by the issuing bank or bank holding company; and
    (ii) Acquisition of voting securities as a result of actions 
(including the sale of securities) by any third party that is not within 
the control of the acquiror.
    (3) Nothing in paragraphs (b)(1) or (b)(2) of this section limits 
the authority of the Board to disapprove a notice pursuant to Sec. 
225.43(h) of this subpart.



Sec. 225.43  Procedures for filing, processing, publishing, and acting on 

notices.

    (a) Filing notice. (1) A notice required under this subpart shall be 
filed with the appropriate Reserve Bank and shall contain all the 
information required by paragraph 6 of the Bank Control Act (12 U.S.C. 
1817(j)(6)), or prescribed in the designated Board form.

[[Page 153]]

    (2) The Board may waive any of the informational requirements of the 
notice if the Board determines that it is in the public interest.
    (3) A notificant shall notify the appropriate Reserve Bank or the 
Board immediately of any material changes in a notice submitted to the 
Reserve Bank, including changes in financial or other conditions.
    (4) When the acquiring person is an individual, or group of 
individuals acting in concert, the requirement to provide personal 
financial data may be satisfied by a current statement of assets and 
liabilities and an income summary, as required in the designated Board 
form, together with a statement of any material changes since the date 
of the statement or summary. The Reserve Bank or the Board, 
nevertheless, may request additional information, if appropriate.
    (b) Acceptance of notice. The 60-day notice period specified in 
Sec. 225.41 of this subpart begins on the date of receipt of a complete 
notice. The Reserve Bank shall notify the person or persons submitting a 
notice under this subpart in writing of the date the notice is or was 
complete and thereby accepted for processing. The Reserve Bank or the 
Board may request additional relevant information at any time after the 
date of acceptance.
    (c) Publication--(1) Newspaper Announcement. Any person(s) filing a 
notice under this subpart shall publish, in a form prescribed by the 
Board, an announcement soliciting public comment on the proposed 
acquisition. The announcement shall be published in a newspaper of 
general circulation in the community in which the head office of the 
state member bank to be acquired is located or, in the case of a 
proposed acquisition of a bank holding company, in the community in 
which its head office is located and in the community in which the head 
office of each of its subsidiary banks is located. The announcement 
shall be published no earlier than 15 calendar days before the filing of 
the notice with the appropriate Reserve Bank and no later than 10 
calendar days after the filing date; and the publisher's affidavit of a 
publication shall be provided to the appropriate Reserve Bank.
    (2) Contents of newspaper announcement. The newspaper announcement 
shall state:
    (i) The name of each person identified in the notice as a proposed 
acquiror of the bank or bank holding company;
    (ii) The name of the bank or bank holding company to be acquired, 
including the name of each of the bank holding company's subsidiary 
banks; and
    (iii) A statement that interested persons may submit comments on the 
notice to the Board or the appropriate Reserve Bank for a period of 20 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section.
    (3) Federal Register announcement. The Board shall, upon filing of a 
notice under this subpart, publish announcement in the Federal Register 
of receipt of the notice. The Federal Register announcement shall 
contain the information required under paragraphs (c)(2)(i) and 
(c)(2)(ii) of this section and a statement that interested persons may 
submit comments on the proposed acquisition for a period of 15 calendar 
days, or such shorter period as may be provided, pursuant to paragraph 
(c)(5) of this section. The Board may waive publication in the Federal 
Register, if the Board determines that such action is appropriate.
    (4) Delay of publication. The Board may permit delay in the 
publication required under paragraphs (c)(1) and (c)(3) of this section 
if the Board determines, for good cause shown, that it is in the public 
interest to grant such delay. Requests for delay of publication may be 
submitted to the appropriate Reserve Bank.
    (5) Shortening or waiving notice. The Board may shorten or waive the 
public comment or newspaper publication requirements of this paragraph, 
or act on a notice before the expiration of a public comment period, if 
it determines in writing that an emergency exists, or that disclosure of 
the notice, solicitation of public comment, or delay until expiration of 
the public comment period would seriously threaten the safety or 
soundness of the bank or bank holding company to be acquired.

[[Page 154]]

    (6) Consideration of public comments. In acting upon a notice filed 
under this subpart, the Board shall consider all public comments 
received in writing within the period specified in the newspaper or 
Federal Register announcement, whichever is later. At the Board's 
option, comments received after this period may, but need not, be 
considered.
    (7) Standing. No person (other than the acquiring person) who 
submits comments or information on a notice filed under this subpart 
shall thereby become a party to the proceeding or acquire any standing 
or right to participate in the Board's consideration of the notice or to 
appeal or otherwise contest the notice or the Board's action regarding 
the notice.
    (d) Time period for Board action--(1) Consummation of acquisition--
(i) The notificant(s) may consummate the proposed acquisition 60 days 
after submission to the Reserve Bank of a complete notice under 
paragraph (a) of this section, unless within that period the Board 
disapproves the proposed acquisition or extends the 60-day period, as 
provided under paragraph (d)(2) of this section.
    (ii) The notificant(s) may consummate the proposed transaction 
before the expiration of the 60-day period if the Board notifies the 
notificant(s) in writing of the Board's intention not to disapprove the 
acquisition.
    (2) Extensions of time period. (i) The Board may extend the 60-day 
period in paragraph (d)(1) of this section for an additional 30 days by 
notifying the acquiring person(s).
    (ii) The Board may further extend the period during which it may 
disapprove a notice for two additional periods of not more than 45 days 
each, if the Board determines that:
    (A) Any acquiring person has not furnished all the information 
required under paragraph (a) of this section;
    (B) Any material information submitted is substantially inaccurate;
    (C) The Board is unable to complete the investigation of an 
acquiring person because of inadequate cooperation or delay by that 
person; or
    (D) Additional time is needed to investigate and determine that no 
acquiring person has a record of failing to comply with the requirements 
of the Bank Secrecy Act, subchapter II of Chapter 53 of Title 31, United 
States Code.
    (iii) If the Board extends the time period under this paragraph, it 
shall notify the acquiring person(s) of the reasons therefor and shall 
include a statement of the information, if any, deemed incomplete or 
inaccurate.
    (e) Advice to bank supervisory agencies. (1) Upon accepting a notice 
relating to acquisition of securities of a state member bank, the 
Reserve Bank shall send a copy of the notice to the appropriate state 
bank supervisor, which shall have 30 calendar days from the date the 
notice is sent in which to submit its views and recommendations to the 
Board. The Reserve Bank also shall send a copy of any notice to the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
and the Office of Thrift Supervision.
    (2) If the Board finds that it must act immediately in order to 
prevent the probable failure of the bank or bank holding company 
involved, the Board may dispense with or modify the requirements for 
notice to the state supervisor.
    (f) Investigation and report. (1) After receiving a notice under 
this subpart, the Board or the appropriate Reserve Bank shall conduct an 
investigation of the competence, experience, integrity, and financial 
ability of each person by and for whom an acquisition is to be made. The 
Board shall also make an independent determination of the accuracy and 
completeness of any information required to be contained in a notice 
under paragraph (a) of this section. In investigating any notice 
accepted under this subpart, the Board or Reserve Bank may solicit 
information or views from any person, including any bank or bank holding 
company involved in the notice, and any appropriate state, federal, or 
foreign governmental authority.
    (2) The Board or the appropriate Reserve Bank shall prepare a 
written report of its investigation, which shall contain, at a minimum, 
a summary of the results of the investigation.
    (g) Factors considered in acting on notices. In reviewing a notice 
filed under this subpart, the Board shall consider

[[Page 155]]

the information in the record, the views and recommendations of the 
appropriate bank supervisor, and any other relevant information obtained 
during any investigation of the notice.
    (h) Disapproval and hearing--(1) Disapproval of notice. The Board 
may disapprove an acquisition if it finds adverse effects with respect 
to any of the factors set forth in paragraph 7 of the Bank Control Act 
(12 U.S.C. 1817(j)(7)) (i.e., competitive, financial, managerial, 
banking, or incompleteness of information).
    (2) Disapproval notification. Within three days after its decision 
to issue a notice of intent to disapprove any proposed acquisition, the 
Board shall notify the acquiring person in writing of the reasons for 
the action.
    (3) Hearing. Within 10 calendar days of receipt of the notice of the 
Board's intent to disapprove, the acquiring person may submit a written 
request for a hearing. Any hearing conducted under this paragraph shall 
be in accordance with the Rules of Practice for Formal Hearings (12 CFR 
part 263). At the conclusion of the hearing, the Board shall, by order, 
approve or disapprove the proposed acquisition on the basis of the 
record of the hearing. If the acquiring person does not request a 
hearing, the notice of intent to disapprove becomes final and 
unappealable.



Sec. 225.44  Reporting of stock loans.

    (a) Requirements. (1) Any foreign bank or affiliate of a foreign 
bank that has credit outstanding to any person or group of persons, in 
the aggregate, which is secured, directly or indirectly, by 25 percent 
or more of any class of voting securities of a state member bank, shall 
file a consolidated report with the appropriate Reserve Bank for the 
state member bank.
    (2) The foreign bank or its affiliate also shall file a copy of the 
report with its appropriate Federal banking agency.
    (3) Any shares of the state member bank held by the foreign bank or 
any affiliate of the foreign bank as principal must be included in the 
calculation of the number of shares in which the foreign bank or its 
affiliate has a security interest for purposes of paragraph (a) of this 
section.
    (b) Definitions. For purposes of paragraph (a) of this section:
    (1) Foreign bank shall have the same meaning as in section 1(b) of 
the International Banking Act of 1978 (12 U.S.C. 3101).
    (2) Credit outstanding includes any loan or extension of credit; the 
issuance of a guarantee, acceptance, or letter of credit, including an 
endorsement or standby letter of credit; and any other type of 
transaction that extends credit or financing to the person or group of 
persons.
    (3) Group of persons includes any number of persons that the foreign 
bank or any affiliate of a foreign bank has reason to believe:
    (i) Are acting together, in concert, or with one another to acquire 
or control shares of the same insured depository institution, including 
an acquisition of shares of the same depository institution at 
approximately the same time under substantially the same terms; or
    (ii) Have made, or propose to make, a joint filing under section 13 
or 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78n), and 
the rules promulgated thereunder by the Securities and Exchange 
Commission regarding ownership of the shares of the same insured 
depository institution.
    (c) Exceptions. Compliance with paragraph (a) of this section is not 
required if:
    (1) The person or group of persons referred to in that paragraph has 
disclosed the amount borrowed and the security interest therein to the 
Board or appropriate Reserve Bank in connection with a notice filed 
under Sec. 225.41 of this subpart, or another application filed with 
the Board or Reserve Bank as a substitute for a notice under Sec. 
225.41 of this subpart, including an application filed under section 3 
of the BHC Act (12 U.S.C. 1842) or section 18(c) of the Federal Deposit 
Insurance Act (Bank Merger Act, 12 U.S.C. 1828(c)), or an application 
for membership in the Federal Reserve System; or
    (2) The transaction involves a person or group of persons that has 
been the owner or owners of record of the stock for a period of one year 
or more; or, if the transaction involves stock issued by a newly 
chartered bank, before the bank is opened for business.

[[Page 156]]

    (d) Report requirements. (1) The consolidated report shall indicate 
the number and percentage of shares securing each applicable extension 
of credit, the identity of the borrower, and the number of shares held 
as principal by the foreign bank and any affiliate thereof.
    (2) A foreign bank, or any affiliate of a foreign bank, shall file 
the consolidated report in writing within 30 days of the date on which 
the foreign bank or affiliate first believes that the security for any 
outstanding credit consists of 25 percent or more of any class of voting 
securities of a state member bank.
    (e) Other reporting requirements. A foreign bank, or any affiliate 
thereof, that is supervised by the System and is required to report 
credit outstanding that is secured by the shares of an insured 
depository institution to another Federal banking agency also shall file 
a copy of the report with the appropriate Reserve Bank.



                 Subpart F_Limitations on Nonbank Banks



Sec. 225.52  Limitation on overdrafts.

    (a) Definitions. For purposes of this section--
    (1) Account means a reserve account, clearing account, or deposit 
account as defined in the Board's Regulation D (12 CFR 204.2(a)(1)(i)), 
that is maintained at a Federal Reserve Bank or nonbank bank.
    (2) Cash item means (i) a check other than a check classified as a 
noncash item; or (ii) any other item payable on demand and collectible 
at par that the Federal Reserve Bank of the district in which the item 
is payable is willing to accept as a cash item.
    (3) Discount window loan means any credit extended by a Federal 
Reserve Bank to a nonbank bank or industrial bank pursuant to the 
provisions of the Board's Regulation A (12 CFR part 201).
    (4) Industrial bank means an institution as defined in section 
2(c)(2)(H) of the BHC Act (12 U.S.C. 1841(c)(2)(H)).
    (5) Noncash item means an item handled by a Reserve Bank as a 
noncash item under the Reserve Bank's ``Collection of Noncash Items 
Operating Circular'' (e.g., a maturing bankers' acceptance or a maturing 
security, or a demand item, such as a check, with special instructions 
or an item that has not been preprinted or post-encoded).
    (6) Other nonelectronic transactions include all other transactions 
not included as funds transfers, book-entry securities transfers, cash 
items, noncash items, automated clearing house transactions, net 
settlement entries, and discount window loans (e.g., original issue of 
securities or redemption of securities).
    (7) An overdraft in an account occurs whenever the Federal Reserve 
Bank, nonbank bank, or industrial bank holding an account posts a 
transaction to the account of the nonbank bank, industrial bank, or 
affiliate that exceeds the aggregate balance of the accounts of the 
nonbank bank, industrial bank, or affiliate, as determined by the 
posting rules set forth in paragraphs (d) and (e) of this section and 
continues until the aggregate balance of the account is zero or greater.
    (8) Transfer item means an item as defined in subpart B of 
Regulation J (12 CFR 210.25 et seq).
    (b) Restriction on overdrafts--(1) Affiliates. Neither a nonbank 
bank nor an industrial bank shall permit any affiliate to incur any 
overdraft in its account with the nonbank bank or industrial bank.
    (2) Nonbank banks or industrial banks. (i) No nonbank bank or 
industrial bank shall incur any overdraft in its account at a Federal 
Reserve Bank on behalf of an affiliate.
    (ii) An overdraft by a nonbank bank or industrial bank in its 
account at a Federal Reserve Bank shall be deemed to be on behalf of an 
affiliate whenever:
    (A) A nonbank bank or industrial bank holds an account for an 
affiliate from which third-party payments can be made; and
    (B) When the posting of an affiliate's transaction to the nonbank 
bank's or industrial bank's account at a Reserve Bank creates an 
overdraft in its account at a Federal Reserve Bank or increases the 
amount of an existing overdraft in its account at a Federal Reserve 
Bank.

[[Page 157]]

    (c) Permissible overdrafts. The following are permissible overdrafts 
not subject to paragraph (b) of this section:
    (1) Inadvertent error. An overdraft in its account by a nonbank bank 
or its affiliate, or an industrial bank or its affiliate, that results 
from an inadvertent computer error or inadvertent accounting error, that 
was not reasonably forseeable or could not have been prevented through 
the maintenance of procedures reasonably adopted by the nonbank bank or 
affiliate to avoid such overdraft; and
    (2) Fully secured primary dealer affiliate overdrafts. (i) An 
overdraft incurred by an affiliate of a nonbank bank, which affiliate is 
recognized as a primary dealer by the Federal Reserve Bank of New York, 
in the affiliate's account at the nonbank bank, or an overdraft incurred 
by a nonbank bank on behalf of its primary dealer affiliate in the 
nonbank bank's account at a Federal Reserve Bank; provided: the 
overdraft is fully secured by bonds, notes, or other obligations which 
are direct obligations of the United States or on which the principal 
and interest are fully guaranteed by the United States or by securities 
and obligations eligible for settlement on the Federal Reserve book-
entry system.
    (ii) An overdraft by a nonbank bank in its account at a Federal 
Reserve Bank that is on behalf of a primary dealer affiliate is fully 
secured when that portion of its overdraft at the Federal Reserve Bank 
that corresponds to the transaction posted for an affiliate that caused 
or increased the nonbank bank's overdraft is fully secured in accordance 
with paragraph (c)(2)(iii) of this section.
    (iii) An overdraft is fully secured under paragraph (c)(2)(i) when 
the nonbank bank can demonstrate that the overdraft is secured, at all 
times, by a perfected security interest in specific, identified 
obligations described in paragraph (c)(2)(i) with a market value that, 
in the judgment of the Reserve Bank holding the nonbank bank's account, 
is sufficiently in excess of the amount of the overdraft to provide a 
margin of protection in a volatile market or in the event the securities 
need to be liquidated quickly.
    (d) Posting by Federal Reserve Banks. For purposes of determining 
the balance of an account under this section, payments and transfers by 
nonbank banks and industrial banks processed by the Federal Reserve 
Banks shall be considered posted to their accounts at Federal Reserve 
Banks as follows:
    (1) Funds transfers. Transfer items shall be posted:
    (i) To the transferor's account at the time the transfer is actually 
made by the transferor's Federal Reserve Bank; and
    (ii) To the transferee's account at the time the transferee's 
Reserve Bank sends the transfer item or sends or telephones the advice 
of credit for the item to the transferee, whichever occurs first.
    (2) Book-entry securities transfers against payment. A book-entry 
securities transfer against payment shall be posted: (i) to the 
transferor's account at the time the entry is made by the transferor's 
Reserve Bank; and (ii) to the transferee's account at the time the entry 
is made by the transferee's Reserve Bank.
    (3) Discount window loans. Credit for a discount window loan shall 
be posted to the account of a nonbank bank or industrial bank at the 
close of business on the day that it is made or such earlier time as may 
be specifically agreed to by the Federal Reserve Bank and the nonbank 
bank under the terms of the loan. Debit for repayment of a discount 
window loan shall be posted to the account of the nonbank bank or 
industrial bank as of the close of business on the day of maturity of 
the loan or such earlier time as may be agreed to by the Federal Reserve 
Bank and the nonbank bank or required by the Federal Reserve Bank under 
the terms of the loan.
    (4) Other transactions. Total aggregate credits for automated 
clearing house transfers, cash items, noncash items, net settlement 
entries, and other nonelectronic transactions shall be posted to the 
account of a nonbank bank or industrial bank as of the opening of 
business on settlement day. Total aggregate debits for these 
transactions and entries shall be posted to the account of a nonbank 
bank or industrial

[[Page 158]]

bank as of the close of business on settlement day.
    (e) Posting by nonbank banks and industrial banks. For purposes of 
determining the balance of an affiliate's account under this section, 
payments and transfers through an affiliate's account at a nonbank bank 
or industrial bank shall be posted as follows:
    (1) Funds transfers. (i) Fedwire transfer items shall be posted:
    (A) To the transferor affiliate's account no later than the time the 
transfer is actually made by the transferor's Federal Reserve Bank; and
    (B) To the transferee affiliate's account no earlier than the time 
the transferee's Reserve Bank sends the transfer item, or sends or 
telephones the advice of credit for the item to the transferee, 
whichever occurs first.
    (ii) For funds transfers not sent or received through Federal 
Reserve Banks, debits shall be posted to the transferor affiliate's 
account not later than the time the nonbank bank or industrial bank 
becomes obligated on the transfer. Credits shall not be posted to the 
transferee affiliate's account before the nonbank bank or industrial 
bank has received actually and finally collected funds for the transfer.
    (2) Book-entry securities transfers against payment. (i) A book-
entry securities transfer against payment shall be posted:
    (A) To the transferor affiliate's account not earlier than the time 
the entry is made by the transferor's Reserve Bank; and
    (B) To the transferee affiliate's account not later than the time 
the entry is made by the transferee's Reserve Bank.
    (ii) For book-entry securities transfers against payment that are 
not sent or received through Federal Reserve Banks, entries shall be 
posted:
    (A) To the buyer-affiliate's account not later than the time the 
nonbank bank or industrial bank becomes obligated on the transfer; and
    (B) To the seller-affiliate's account not before the nonbank bank or 
industrial bank has received actually and finally collected funds for 
the transfer.
    (3) Other transactions--(i) Credits. Except as otherwise provided in 
this paragraph, credits for cash items, noncash items, ACH transfers, 
net settlement entries, and all other nonelectronic transactions shall 
be posted to an affiliate's account on the day of the transaction (i.e., 
settlement day for ACH transactions or the day of credit for check 
transactions), but no earlier than the Federal Reserve Bank's opening of 
business on that day. Credit for cash items that are required by federal 
or state statute or regulation to be made available to the depositor for 
withdrawal prior to the posting time set forth in the preceding 
paragraph shall be posted as of the required availability time.
    (ii) Debits. Debits for cash items, noncash items, ACH transfers, 
net settlement entries, and all other nonelectronic transactions shall 
be posted to an affiliate's account on the day of the transaction (e.g., 
settlement day for ACH transactions or the day of presentment for check 
transactions), but no later than the Federal Reserve Bank's close of 
business on that day. If a check drawn on an affiliate's account or an 
ACH debit transfer received by an affiliate is returned timely by the 
nonbank bank or industrial bank in accordance with applicable law and 
agreements, no entry need to be posted to the affiliate's account for 
such item.

[Reg. Y, 53 FR 37744, Sept. 28, 1988]



    Subpart G_Appraisal Standards for Federally Related Transactions

    Source: Reg. Y, 55 FR 27771, July 5, 1990, unless otherwise noted.



Sec. 225.61  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board of Governors of 
the Federal Reserve System (the Board) under title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FlRREA) 
(Pub. L. No. 101-73, 103 Stat. 183 (1989)), 12 U.S.C. 3310, 3331-3351, 
and section 5(b) of the Bank Holding Company Act, 12 U.S.C. 1844(b).
    (b) Purpose and scope. (1) Title XI provides protection for federal 
financial and public policy interests in real estate related 
transactions by requiring real estate appraisals used in connection with 
federally related transactions

[[Page 159]]

to be performed in writing, in accordance with uniform standards, by 
appraisers whose competency has been demonstrated and whose professional 
conduct will be subject to effective supervision. This subpart 
implements the requirements of title XI, and applies to all federally 
related transactions entered into by the Board or by institutions 
regulated by the Board (regulated institutions).
    (2) This subpart:
    (i) Identifies which real estate-related financial transactions 
require the services of an appraiser;
    (ii) Prescribes which categories of federally related transactions 
shall be appraised by a State certified appraiser and which by a State 
licensed appraiser; and
    (iii) Prescribes minimum standards for the performance of real 
estate appraisals in connection with federally related transactions 
under the jurisdiction of the Board.



Sec. 225.62  Definitions.

    (a) Appraisal means a written statement independently and 
impartially prepared by a qualified appraiser setting forth an opinion 
as to the market value of an adequately described property as of a 
specific date(s), supported by the presentation and analysis of relevant 
market information.
    (b) Appraisal Foundation means the Appraisal Foundation established 
on November 30, 1987, as a not-for-profit corporation under the laws of 
Illinois.
    (c) Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business entity.
    (e) Complex 1-to-4 family residential property appraisal means one 
in which the property to be appraised, the form of ownership, or market 
conditions are atypical.
    (f) Federally related transaction means any real estate-related 
financial transaction entered into on or after August 9, 1990, that:
    (1) The Board or any regulated institution engages in or contracts 
for; and
    (2) Requires the services of an appraiser.
    (g) Market value means the most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently and 
knowledgeably, and assuming the price is not affected by undue stimulus. 
Implicit in this definition is the consummation of a sale as of a 
specified date and the passing of title from seller to buyer under 
conditions whereby:
    (1) Buyer and seller are typically motivated;
    (2) Both parties are well informed or well advised, and acting in 
what they consider their own best interests;
    (3) A reasonable time is allowed for exposure in the open market;
    (4) Payment is made in terms of cash in U.S. dollars or in terms of 
financial arrangements comparable thereto; and
    (5) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or sales concessions 
granted by anyone associated with the sale.
    (h) Real estate or real property means an identified parcel or tract 
of land, with improvements, and includes easements, rights of way, 
undivided or future interests, or similar rights in a tract of land, but 
does not include mineral rights, timber rights, growing crops, water 
rights, or similar interests severable from the land when the 
transaction does not involve the associated parcel or tract of land.
    (i) Real estate-related financial transaction means any transaction 
involving:
    (1) The sale, lease, purchase, investment in or exchange of real 
property, including interests in property, or the financing thereof; or
    (2) The refinancing of real property or interests in real property; 
or
    (3) The use of real property or interests in property as security 
for a loan or investment, including mortgage-backed securities.
    (j) State certified appraiser means any individual who has satisfied 
the requirements for certification in a State

[[Page 160]]

or territory whose criteria for certification as a real estate appraiser 
currently meet or exceed the minimum criteria for certification issued 
by the Appraiser Qualifications Board of the Appraisal Foundation. No 
individual shall be a State certified appraiser unless such individual 
has achieved a passing grade upon a suitable examination administered by 
a State or territory that is consistent with and equivalent to the 
Uniform State Certification Examination issued or endorsed by the 
Appraiser Qualifications Board of the Appraisal Foundation. In addition, 
the Appraisal Subcommittee must not have issued a finding that the 
policies, practices, or procedures of the State or territory are 
inconsistent with title XI of FIRREA. The Board may, from time to time, 
impose additional qualification criteria for certified appraisers 
performing appraisals in connection with federally related transactions 
within its jurisdiction.
    (k) State licensed appraiser means any individual who has satisfied 
the requirements for licensing in a State or territory where the 
licensing procedures comply with title XI of FIRREA and where the 
Appraisal Subcommittee has not issued a finding that the policies, 
practices, or procedures of the State or territory are inconsistent with 
title XI. The Board may, from time to time, impose additional 
qualification criteria for licensed appraisers performing appraisals in 
connection with federally related transactions within the Board's 
jurisdiction.
    (l) Tract development means a project of five units or more that is 
constructed or is to be constructed as a single development.
    (m) Transaction value means:
    (1) For loans or other extensions of credit, the amount of the loan 
or extension of credit;
    (2) For sales, leases, purchases, and investments in or exchanges of 
real property, the market value of the real property interest involved; 
and
    (3) For the pooling of loans or interests in real property for 
resale or purchase, the amount of the loan or the market value of the 
real property calculated with respect to each such loan or interest in 
real property.

[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29500, June 7, 
1994]



Sec. 225.63  Appraisals required; transactions requiring a State certified or 

licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State certified 
or licensed appraiser is required for all real estate-related financial 
transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than the 
real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived from, 
real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met Board regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a

[[Page 161]]

United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable to 
that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity and 
is not required to obtain an appraisal under other law;
    (12) The transaction involves underwriting or dealing in mortgage-
backed securities; or
    (13) The Board determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is consistent 
with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The Board 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
    (d) Transactions requiring a State certified appraiser--(1) All 
transactions of $1,000,000 or more. All federally related transactions 
having a transaction value of $1,000,000 or more shall require an 
appraisal prepared by a State certified appraiser.
    (2) Nonresidential transactions of $250,000 or more. All federally 
related transactions having a transaction value of $250,000 or more, 
other than those involving appraisals of 1-to-4 family residential 
properties, shall require an appraisal prepared by a State certified 
appraiser.
    (3) Complex residential transactions of $250,000 or more. All 
complex 1-to-4 family residential property appraisals rendered in 
connection with federally related transactions shall require a State 
certified appraiser if the transaction value is $250,000 or more. A 
regulated institution may presume that appraisals of 1-to-4 family 
residential properties are not complex, unless the institution has 
readily available information that a given appraisal will be complex. 
The regulated institution shall be responsible for making the final 
determination of whether the appraisal is complex. If during the course 
of the appraisal a licensed appraiser identifies factors that would 
result in the property, form of ownership, or market conditions being 
considered atypical, then either:
    (i) The regulated institution may ask the licensed appraiser to 
complete the appraisal and have a certified appraiser approve and co-
sign the appraisal; or
    (ii) The institution may engage a certified appraiser to complete 
the appraisal.
    (e) Transactions requiring either a State certified or licensed 
appraiser. All appraisals for federally related transactions not 
requiring the services of a State certified appraiser shall be prepared 
by either a State certified appraiser or a State licensed appraiser.

[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 58 FR 15077, Mar. 19, 
1993; 59 FR 29500, June 7, 1994; 63 FR 65532, Nov. 27, 1998]



Sec. 225.64  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice promulgated 
by the Appraisal Standards Board of the Appraisal Foundation, 1029 
Vermont Ave., NW., Washington, DC 20005, unless principles of safe and 
sound banking require compliance with stricter standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially

[[Page 162]]

leased buildings, non-market lease terms, and tract developments with 
unsold units;
    (d) Be based upon the definition of market value as set forth in 
this subpart; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.

[Reg. Y, 59 FR 29501, June 7, 1994]



Sec. 225.65  Appraiser independence.

    (a) Staff appraisers. If an appraisal is prepared by a staff 
appraiser, that appraiser must be independent of the lending, 
investment, and collection functions and not involved, except as an 
appraiser, in the federally related transaction, and have no direct or 
indirect interest, financial or otherwise, in the property. If the only 
qualified persons available to perform an appraisal are involved in the 
lending, investment, or collection functions of the regulated 
institution, the regulated institution shall take appropriate steps to 
ensure that the appraisers exercise independent judgment and that the 
appraisal is adequate. Such steps include, but are not limited to, 
prohibiting an individual from performing appraisals in connection with 
federally related transactions in which the appraiser is otherwise 
involved and prohibiting directors and officers from participating in 
any vote or approval involving assets on which they performed an 
appraisal.
    (b) Fee appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the regulated 
institution or its agent, and have no direct or indirect interest, 
financial or otherwise, in the property or the transaction.
    (2) A regulated institution also may accept an appraisal that was 
prepared by an appraiser engaged directly by another financial services 
institution, if:
    (i) The appraiser has no direct or indirect interest, financial or 
otherwise, in the property or the transaction; and
    (ii) The regulated institution determines that the appraisal 
conforms to the requirements of this subpart and is otherwise 
acceptable.

[Reg. Y, 55 FR 27771, July 5, 1990, as amended at 59 FR 29501, June 7, 
1994]



Sec. 225.66  Professional association membership; competency.

    (a) Membership in appraisal organizations. A State certified 
appraiser or a State licensed appraiser may not be excluded from 
consideration for an assignment for a federally related transaction 
solely by virtue of membership or lack of membership in any particular 
appraisal organization.
    (b) Competency. All staff and fee appraisers performing appraisals 
in connection with federally related transactions must be State 
certified or licensed, as appropriate. However, a State certified or 
licensed appraiser may not be considered competent solely by virtue of 
being certified or licensed. Any determination of competency shall be 
based upon the individual's experience and educational background as 
they relate to the particular appraisal assignment for which he or she 
is being considered.



Sec. 225.67  Enforcement.

    Institutions and institution-affiliated parties, including staff 
appraisers and fee appraisers, may be subject to removal and/or 
prohibition orders, cease and desist orders, and the imposition of civil 
money penalties pursuant to the Federal Deposit Insurance Act, 12 U.S.C 
1811 et seq., as amended, or other applicable law.



Subpart H_Notice of Addition or Change of Directors and Senior Executive 
                                Officers

    Source: Reg. Y, 62 FR 9341, Feb. 28, 1997, unless otherwise noted.



Sec. 225.71  Definitions.

    (a) Director means a person who serves on the board of directors of 
a regulated institution, except that this term does not include an 
advisory director who:
    (1) Is not elected by the shareholders of the regulated institution;
    (2) Is not authorized to vote on any matters before the board of 
directors or any committee thereof;
    (3) Solely provides general policy advice to the board of directors 
and any committee thereof; and

[[Page 163]]

    (4) Has not been identified by the Board or Reserve Bank as a person 
who performs the functions of a director for purposes of this subpart.
    (b) Regulated institution means a state member bank or a bank 
holding company.
    (c) Senior executive officer means a person who holds the title or, 
without regard to title, salary, or compensation, performs the function 
of one or more of the following positions: president, chief executive 
officer, chief operating officer, chief financial officer, chief lending 
officer, or chief investment officer. Senior executive officer also 
includes any other person identified by the Board or Reserve Bank, 
whether or not hired as an employee, with significant influence over, or 
who participates in, major policymaking decisions of the regulated 
institution.
    (d) Troubled condition for a regulated institution means an 
institution that:
    (1) Has a composite rating, as determined in its most recent report 
of examination or inspection, of 4 or 5 under the Uniform Financial 
Institutions Rating System or under the Federal Reserve Bank Holding 
Company Rating System;
    (2) Is subject to a cease-and-desist order or formal written 
agreement that requires action to improve the financial condition of the 
institution, unless otherwise informed in writing by the Board or 
Reserve Bank; or
    (3) Is informed in writing by the Board or Reserve Bank that it is 
in troubled condition for purposes of the requirements of this subpart 
on the basis of the institution's most recent report of condition or 
report of examination or inspection, or other information available to 
the Board or Reserve Bank.



Sec. 225.72  Director and officer appointments; prior notice requirement.

    (a) Prior notice by regulated institution. A regulated institution 
shall give the Board 30 days' written notice, as specified in Sec. 
225.73, before adding or replacing any member of its board of directors, 
employing any person as a senior executive officer of the institution, 
or changing the responsibilities of any senior executive officer so that 
the person would assume a different senior executive officer position, 
if:
    (1) The regulated institution is not in compliance with all minimum 
capital requirements applicable to the institution as determined on the 
basis of the institution's most recent report of condition or report of 
examination or inspection;
    (2) The regulated institution is in troubled condition; or
    (3) The Board determines, in connection with its review of a capital 
restoration plan required under section 38 of the Federal Deposit 
Insurance Act or subpart B of the Board's Regulation H, or otherwise, 
that such notice is appropriate.
    (b) Prior notice by individual. The prior notice required by 
paragraph (a) of this section may be provided by an individual seeking 
election to the board of directors of a regulated institution.



Sec. 225.73  Procedures for filing, processing, and acting on notices; 

standards for disapproval; waiver of notice.

    (a) Filing notice--(1) Content. The notice required in Sec. 225.72 
shall be filed with the appropriate Reserve Bank and shall contain:
    (i) The information required by paragraph 6(A) of the Change in Bank 
Control Act (12 U.S.C. 1817(j)(6)(A)) as may be prescribed in the 
designated Board form;
    (ii) Additional information consistent with the Federal Financial 
Institutions Examination Council's Joint Statement of Guidelines on 
Conducting Background Checks and Change in Control Investigations, as 
set forth in the designated Board form; and
    (iii) Such other information as may be required by the Board or 
Reserve Bank.
    (2) Modification. The Reserve Bank may modify or accept other 
information in place of the requirements of Sec. 225.73(a)(1) for a 
notice filed under this subpart.
    (3) Acceptance and processing of notice. The 30-day notice period 
specified in Sec. 225.72 shall begin on the date all information 
required to be submitted by the notificant pursuant to Sec. 
225.73(a)(1) is received by the appropriate Reserve

[[Page 164]]

Bank. The Reserve Bank shall notify the regulated institution or 
individual submitting the notice of the date on which all required 
information is received and the notice is accepted for processing, and 
of the date on which the 30-day notice period will expire. The Board or 
Reserve Bank may extend the 30-day notice period for an additional 
period of not more than 60 days by notifying the regulated institution 
or individual filing the notice that the period has been extended and 
stating the reason for not processing the notice within the 30-day 
notice period.
    (b) Commencement of service--(1) At expiration of period. A proposed 
director or senior executive officer may begin service after the end of 
the 30-day period and any extension as provided under paragraph (a)(3) 
of this section, unless the Board or Reserve Bank disapproves the notice 
before the end of the period.
    (2) Prior to expiration of period. A proposed director or senior 
executive officer may begin service before the end of the 30-day period 
and any extension as provided under paragraph (a)(3) of this section, if 
the Board or the Reserve Bank notifies in writing the regulated 
institution or individual submitting the notice of the Board's or 
Reserve Bank's intention not to disapprove the notice.
    (c) Notice of disapproval. The Board or Reserve Bank shall 
disapprove a notice under Sec. 225.72 if the Board or Reserve Bank 
finds that the competence, experience, character, or integrity of the 
individual with respect to whom the notice is submitted indicates that 
it would not be in the best interests of the depositors of the regulated 
institution or in the best interests of the public to permit the 
individual to be employed by, or associated with, the regulated 
institution. The notice of disapproval shall contain a statement of the 
basis for disapproval and shall be sent to the regulated institution and 
the disapproved individual.
    (d) Appeal of a notice of disapproval. (1) A disapproved individual 
or a regulated institution that has submitted a notice that is 
disapproved under this section may appeal the disapproval to the Board 
within 15 days of the effective date of the notice of disapproval. An 
appeal shall be in writing and explain the reasons for the appeal and 
include all facts, documents, and arguments that the appealing party 
wishes to be considered in the appeal, and state whether the appealing 
party is requesting an informal hearing.
    (2) Written notice of the final decision of the Board shall be sent 
to the appealing party within 60 days of the receipt of an appeal, 
unless the appealing party's request for an informal hearing is granted.
    (3) The disapproved individual may not serve as a director or senior 
executive officer of the state member bank or bank holding company while 
the appeal is pending.
    (e) Informal hearing. (1) An individual or regulated institution 
whose notice under this section has been disapproved may request an 
informal hearing on the notice. A request for an informal hearing shall 
be in writing and shall be submitted within 15 days of a notice of 
disapproval. The Board may, in its sole discretion, order an informal 
hearing if the Board finds that oral argument is appropriate or 
necessary to resolve disputes regarding material issues of fact.
    (2) An informal hearing shall be held within 30 days of a request, 
if granted, unless the requesting party agrees to a later date.
    (3) Written notice of the final decision of the Board shall be given 
to the individual and the regulated institution within 60 days of the 
conclusion of any informal hearing ordered by the Board, unless the 
requesting party agrees to a later date.
    (f) Waiver of notice--(1) Waiver requests. The Board or Reserve Bank 
may permit an individual to serve as a senior executive officer or 
director before the notice required under this subpart is provided, if 
the Board or Reserve Bank finds that:
    (i) Delay would threaten the safety or soundness of the regulated 
institution or a bank controlled by a bank holding company;
    (ii) Delay would not be in the public interest; or
    (iii) Other extraordinary circumstances exist that justify waiver of 
prior notice.
    (2) Automatic waiver. An individual may serve as a director upon 
election

[[Page 165]]

to the board of directors of a regulated institution before the notice 
required under this subpart is provided if the individual:
    (i) Is not proposed by the management of the regulated institution;
    (ii) Is elected as a new member of the board of directors at a 
meeting of the regulated institution; and
    (iii) Provides to the appropriate Reserve Bank all the information 
required in Sec. 225.73(a) within two (2) business days after the 
individual's election.
    (3) Effect on disapproval authority. A waiver shall not affect the 
authority of the Board or Reserve Bank to disapprove a notice within 30 
days after a waiver is granted under paragraph (f)(1) of this section or 
the election of an individual who has filed a notice and is serving 
pursuant to an automatic waiver under paragraph (f)(2) of this section.



                  Subpart I_Financial Holding Companies

    Source: Reg. Y, 66 FR 415, Jan. 3, 2001, unless otherwise noted.



Sec. 225.81  What is a financial holding company?

    (a) Definition. A financial holding company is a bank holding 
company that meets the requirements of this section.
    (b) Requirements to be a financial holding company. In order to be a 
financial holding company:
    (1) All depository institutions controlled by the bank holding 
company must be and remain well capitalized;
    (2) All depository institutions controlled by the bank holding 
company must be and remain well managed; and
    (3) The bank holding company must have made an effective election to 
become a financial holding company.
    (c) Requirements for foreign banks that are or are owned by bank 
holding companies--(1) Foreign banks with U.S. branches or agencies that 
also own U.S. banks. A foreign bank that is a bank holding company and 
that operates a branch or agency or owns or controls a commercial 
lending company in the United States must comply with the requirements 
of this section, Sec. 225.82, and Sec. Sec. 225.90 through 225.92 in 
order to be a financial holding company. After it becomes a financial 
holding company, a foreign bank described in this paragraph will be 
subject to the provisions of Sec. Sec. 225.83, 225.84, 225.93, and 
225.94.
    (2) Bank holding companies that own foreign banks with U.S. branches 
or agencies. A bank holding company that owns a foreign bank that 
operates a branch or agency or owns or controls a commercial lending 
company in the United States must comply with the requirements of this 
section, Sec. 225.82, and Sec. Sec. 225.90 through 225.92 in order to 
be a financial holding company. After it becomes a financial holding 
company, a bank holding company described in this paragraph will be 
subject to the provisions of Sec. Sec. 225.83, 225.84, 225.93, and 
225.94.



Sec. 225.82  How does a bank holding company elect to become a financial 

holding company?

    (a) Filing requirement. A bank holding company may elect to become a 
financial holding company by filing a written declaration with the 
appropriate Reserve Bank. A declaration by a bank holding company is 
considered to be filed on the date that all information required by 
paragraph (b) of this section is received by the appropriate Reserve 
Bank.
    (b) Contents of declaration. To be deemed complete, a declaration 
must:
    (1) State that the bank holding company elects to be a financial 
holding company;
    (2) Provide the name and head office address of the bank holding 
company and of each depository institution controlled by the bank 
holding company;
    (3) Certify that each depository institution controlled by the bank 
holding company is well capitalized as of the date the bank holding 
company submits its declaration;
    (4) Provide the capital ratios as of the close of the previous 
quarter for all relevant capital measures, as defined in section 38 of 
the Federal Deposit Insurance Act (12 U.S.C. 1831o), for each depository 
institution controlled by the company on the date the company submits 
its declaration; and

[[Page 166]]

    (5) Certify that each depository institution controlled by the 
company is well managed as of the date the company submits its 
declaration.
    (c) Effectiveness of election. An election by a bank holding company 
to become a financial holding company shall not be effective if, during 
the period provided in paragraph (e) of this section, the Board finds 
that, as of the date the declaration was filed with the appropriate 
Reserve Bank:
    (1) Any insured depository institution controlled by the bank 
holding company (except an institution excluded under paragraph (d) of 
this section) has not achieved at least a rating of ``satisfactory 
record of meeting community credit needs'' under the Community 
Reinvestment Act at the institution's most recent examination; or
    (2) Any depository institution controlled by the bank holding 
company is not both well capitalized and well managed.
    (d) Consideration of the CRA performance of a recently acquired 
insured depository institution. Except as provided in paragraph (f) of 
this section, an insured depository institution will be excluded for 
purposes of the review of the Community Reinvestment Act rating 
provisions of paragraph (c)(1) of this section if:
    (1) The bank holding company acquired the insured depository 
institution during the 12-month period preceding the filing of an 
election under paragraph (a) of this section;
    (2) The bank holding company has submitted an affirmative plan to 
the appropriate Federal banking agency for the institution to take 
actions necessary for the institution to achieve at least a rating of 
``satisfactory record of meeting community credit needs'' under the 
Community Reinvestment Act at the next examination of the institution; 
and
    (3) The appropriate Federal banking agency for the institution has 
accepted the plan described in paragraph (d)(2) of this section.
    (e) Effective date of election--(1) In general. An election filed by 
a bank holding company under paragraph (a) of this section is effective 
on the 31st calendar day after the date that a complete declaration was 
filed with the appropriate Reserve Bank, unless the Board notifies the 
bank holding company prior to that time that the election is 
ineffective.
    (2) Earlier notification that an election is effective. The Board or 
the appropriate Reserve Bank may notify a bank holding company that its 
election to become a financial holding company is effective prior to the 
31st day after the date that a complete declaration was filed with the 
appropriate Reserve Bank. Such a notification must be in writing.
    (f) Requests to become a financial holding company submitted as part 
of an application to become a bank holding company--(1) In general. A 
company that is not a bank holding company and has applied for the 
Board's approval to become a bank holding company under section 3(a)(1) 
of the BHC Act (12 U.S.C. 1842(a)(1)) may as part of that application 
submit a request to become a financial holding company.
    (2) Contents of request. A request to become a financial holding 
company submitted as part of an application to become a bank holding 
company must:
    (i) State that the company seeks to become a financial holding 
company on consummation of its proposal to become a bank holding 
company; and
    (ii) Certify that each depository institution that would be 
controlled by the company on consummation of its proposal to become a 
bank holding company will be both well capitalized and well managed as 
of the date the company consummates the proposal.
    (3) Request becomes a declaration and an effective election on date 
of consummation of bank holding company proposal. A complete request 
submitted by a company under this paragraph (f) becomes a complete 
declaration by a bank holding company for purposes of section 4(l) of 
the BHC Act (12 U.S.C. 1843(l)) and becomes an effective election for 
purposes of Sec. 225.81(b) on the date that the company lawfully 
consummates its proposal under section 3 of the BHC Act (12 U.S.C. 
1842), unless the Board notifies the company at any time prior to 
consummation of the proposal and that:
    (i) Any depository institution that would be controlled by the 
company on consummation of the proposal will not

[[Page 167]]

be both well capitalized and well managed on the date of consummation; 
or
    (ii) Any insured depository institution that would be controlled by 
the company on consummation of the proposal has not achieved at least a 
rating of ``satisfactory record of meeting community credit needs'' 
under the Community Reinvestment Act at the institution's most recent 
examination.
    (4) Limited exclusion for recently acquired institutions not 
available. Unless the Board determines otherwise, an insured depository 
institution that is controlled or would be controlled by the company as 
part of its proposal to become a bank holding company may not be 
excluded for purposes of evaluating the Community Reinvestment Act 
criterion described in this paragraph or in paragraph (d) of this 
section.
    (g) Board's authority to exercise supervisory authority over a 
financial holding company. An effective election to become a financial 
holding company does not in any way limit the Board's statutory 
authority under the BHC Act, the Federal Deposit Insurance Act, or any 
other relevant Federal statute to take appropriate action, including 
imposing supervisory limitations, restrictions, or prohibitions on the 
activities and acquisitions of a bank holding company that has elected 
to become a financial holding company, or enforcing compliance with 
applicable law.



Sec. 225.83  What are the consequences of failing to continue to meet 

applicable capital and management requirements?

    (a) Notice by the Board. If the Board finds that a financial holding 
company controls any depository institution that is not well capitalized 
or well managed, the Board will notify the company in writing that it is 
not in compliance with the applicable requirement(s) for a financial 
holding company and identify the area(s) of noncompliance. The Board may 
provide this notice at any time before or after receiving notice from 
the financial holding company under paragraph (b) of this section.
    (b) Notification by a financial holding company required--(1) Notice 
to Board. A financial holding company must notify the Board in writing 
within 15 calendar days of becoming aware that any depository 
institution controlled by the company has ceased to be well capitalized 
or well managed. This notification must identify the depository 
institution involved and the area(s) of noncompliance.
    (2) Triggering events for notice to the Board--(i) Well capitalized. 
A company becomes aware that a depository institution it controls is no 
longer well capitalized upon the occurrence of any material event that 
would change the category assigned to the institution for purposes of 
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o). See 
12 CFR 6.3(b)-(c), 208.42(b)-(c), and 325.102(b)-(c).
    (ii) Well managed. A company becomes aware that a depository 
institution it controls is no longer well managed at the time the 
depository institution receives written notice from the appropriate 
Federal or state banking agency that either its composite rating or its 
rating for management is not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice from the 
Board under paragraph (a) of this section, the company must execute an 
agreement acceptable to the Board to comply with all applicable capital 
and management requirements.
    (2) Extension of time for executing agreement. Upon request by a 
company, the Board may extend the 45-day period under paragraph (c)(1) 
of this section if the Board determines that granting additional time is 
appropriate under the circumstances. A request by a company for 
additional time must include an explanation of why an extension is 
necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1) of this section to correct a capital or management deficiency 
must:
    (i) Explain the specific actions that the company will take to 
correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.

[[Page 168]]

    (d) Limitations during period of noncompliance--Until the Board 
determines that a company has corrected the conditions described in a 
notice under paragraph (a) of this section:
    (1) The Board may impose any limitations or conditions on the 
conduct or activities of the company or any of its affiliates as the 
Board finds to be appropriate and consistent with the purposes of the 
BHC Act; and
    (2) The company and its affiliates may not commence any additional 
activity or acquire control or shares of any company under section 4(k) 
of the BHC Act without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Divestiture of depository institutions. If a company does not 
correct the conditions described in a notice under paragraph (a) of this 
section within 180 days of receipt of the notice or such additional time 
as the Board may permit, the Board may order the company to divest 
ownership or control of any depository institution owned or controlled 
by the company. Such divestiture must be done in accordance with the 
terms and conditions established by the Board.
    (2) Alternative method of complying with a divestiture order. A 
company may comply with an order issued under paragraph (e)(1) of this 
section by ceasing to engage (both directly and through any subsidiary 
that is not a depository institution or a subsidiary of a depository 
institution) in any activity that may be conducted only under section 
4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n), or (o)). The 
termination of activities must be completed within the time period 
referred to in paragraph (e)(1) of this section and in accordance with 
the terms and conditions acceptable to the Board.
    (f) Consultation with other agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and state 
regulatory authorities.



Sec. 225.84  What are the consequences of failing to maintain a satisfactory 

or better rating under the Community Reinvestment Act at all insured 

depository institution subsidiaries?

    (a) Limitations on activities--(1) In general. Upon receiving a 
notice regarding performance under the Community Reinvestment Act in 
accordance with paragraph (a)(2) of this section, a financial holding 
company may not:
    (i) Commence any additional activity under section 4(k) or 4(n) of 
the BHC Act (12 U.S.C. 1843(k) or (n)); or
    (ii) Directly or indirectly acquire control, including all or 
substantially all of the assets, of a company engaged in any activity 
under section 4(k) or 4(n) of the BHC Act (12 U.S.C. 1843(k) or (n)).
    (2) Notification. A financial holding company receives notice for 
purposes of this paragraph at the time that the appropriate Federal 
banking agency for any insured depository institution controlled by the 
company or the Board provides notice to the institution or company that 
the institution has received a rating of ``needs to improve record of 
meeting community credit needs'' or ``substantial noncompliance in 
meeting community credit needs'' in the institution's most recent 
examination under the Community Reinvestment Act.
    (b) Exceptions for certain activities--(1) Continuation of 
investment activities. The prohibition in paragraph (a) of this section 
does not prevent a financial holding company from continuing to make 
investments in the ordinary course of conducting merchant banking 
activities under section 4(k)(4)(H) of the BHC Act (12 U.S.C. 
1843(k)(4)(H)) or insurance company investment activities under section 
4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I))if:
    (i) The financial holding company lawfully was a financial holding 
company and commenced the merchant banking activity under section 
4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)) or the insurance 
company investment activity under section 4(k)(4)(I) of the BHC Act (12 
U.S.C. 1843(k)(4)(I)) prior to the time that an insured depository 
institution controlled by the financial holding company received a 
rating below ``satisfactory record of meeting community credit needs'' 
under the Community Reinvestment Act; and
    (ii) The Board has not, in the exercise of its supervisory 
authority, advised the financial holding company that these activities 
must be restricted.

[[Page 169]]

    (2) Activities that are closely related to banking. The prohibition 
in paragraph (a) of this section does not prevent a financial holding 
company from commencing any additional activity or acquiring control of 
a company engaged in any activity under section 4(c) of the BHC Act (12 
U.S.C. 1843(c)), if the company complies with the notice, approval, and 
other requirements of that section and section 4(j) of the BHC Act (12 
U.S.C. 1843(j)).
    (c) Duration of prohibitions. The prohibitions described in 
paragraph (a) of this section shall continue in effect until such time 
as each insured depository institution controlled by the financial 
holding company has achieved at least a rating of ``satisfactory record 
of meeting community credit needs'' under the Community Reinvestment Act 
at the most recent examination of the institution.



Sec. 225.85  Is notice to or approval from the Board required prior to 

engaging in a financial activity?

    (a) No prior approval required generally--(1) In general. A 
financial holding company and any subsidiary (other than a depository 
institution or subsidiary of a depository institution) of the financial 
holding company may engage in any activity listed in Sec. 225.86, or 
acquire shares or control of a company engaged exclusively in activities 
listed in Sec. 225.86, without providing prior notice to or obtaining 
prior approval from the Board unless required under paragraph (c) of 
this section.
    (2) Acquisitions by a financial holding company of a company engaged 
in other permissible activities. In addition to the activities listed in 
Sec. 225.86, a company acquired or to be acquired by a financial 
holding company under paragraph (a)(1) of this section may engage in 
activities otherwise permissible for a financial holding company under 
this part in accordance with any applicable notice, approval, or other 
requirement.
    (3) Acquisition by a financial holding company of a company engaged 
in limited nonfinancial activities--(i) Mixed acquisitions generally 
permitted. A financial holding company may under this subpart acquire 
more than 5 percent of the outstanding shares of any class of voting 
securities or control of a company that is not engaged exclusively in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding company 
under section 4(c) of the BHC Act (12 U.S.C. 1843(c)) if:
    (A) The company to be acquired is substantially engaged in 
activities that are financial in nature, incidental to a financial 
activity, or otherwise permissible for the financial holding company 
under section 4(c) of the BHC Act (12 U.S.C. 1843(c));
    (B) The financial holding company complies with the notice 
requirements of Sec. 225.87, if applicable; and
    (C) The company conforms, terminates, or divests, within 2 years of 
the date the financial holding company acquires shares or control of the 
company, all activities that are not financial in nature, incidental to 
a financial activity, or otherwise permissible for the financial holding 
company under section 4(c) (12 U.S.C. 1843(c))of the BHC Act.
    (ii) Definition of ``substantially engaged.'' Unless the Board 
determines otherwise, a company will be considered to be ``substantially 
engaged'' in activities permissible for a financial holding company for 
purposes of paragraph (a)(3)(A) of this section if at least 85 percent 
of the company's consolidated total annual gross revenues is derived 
from and at least 85 percent of the company's consolidated total assets 
is attributable to the conduct of activities that are financial in 
nature, incidental to a financial activity, or otherwise permissible for 
a financial holding company under section 4(c) of the BHC Act (12 U.S.C. 
1843(c)).
    (b) Locations in which a financial holding company may conduct 
financial activities. A financial holding company may conduct any 
activity listed in Sec. 225.86 at any location in the United States or 
at any location outside of the United States subject to the laws of the 
jurisdiction in which the activity is conducted.
    (c) Circumstances under which prior notice to the Board is 
required--(1) Acquisition of more than 5 percent of the shares of a 
savings association. A financial holding company must obtain Board 
approval in accordance with section 4(j) of the BHC Act (12 U.S.C. 
1843(j))

[[Page 170]]

and either Sec. 225.14 or Sec. 225.24, as appropriate, prior to 
acquiring control or more than 5 percent of the outstanding shares of 
any class of voting securities of a savings association or of a company 
that owns, operates, or controls a savings association.
    (2) Supervisory actions. The Board may, if appropriate in the 
exercise of its supervisory or other authority, including under Sec. 
225.82(g) or Sec. 225.83(d) or other relevant authority, require a 
financial holding company to provide notice to or obtain approval from 
the Board prior to engaging in any activity or acquiring shares or 
control of any company.



Sec. 225.86  What activities are permissible for any financial holding 

company?

    The following activities are financial in nature or incidental to a 
financial activity:
    (a) Activities determined to be closely related to banking. (1) Any 
activity that the Board had determined by regulation prior to November 
12, 1999, to be so closely related to banking as to be a proper incident 
thereto, subject to the terms and conditions contained in this part, 
unless modified by the Board. These activities are listed in Sec. 
225.28.
    (2) Any activity that the Board had determined by an order that was 
in effect on November 12, 1999, to be so closely related to banking as 
to be a proper incident thereto, subject to the terms and conditions 
contained in this part and those in the authorizing orders. These 
activities are:
    (i) Providing administrative and other services to mutual funds 
(Societe Generale, 84 Federal Reserve Bulletin 680 (1998));
    (ii) Owning shares of a securities exchange (J.P. Morgan & Co, Inc., 
and UBS AG, 86 Federal Reserve Bulletin 61 (2000));
    (iii) Acting as a certification authority for digital signatures and 
authenticating the identity of persons conducting financial and 
nonfinancial transactions (Bayerische Hypo- und Vereinsbank AG, et al., 
86 Federal Reserve Bulletin 56 (2000));
    (iv) Providing employment histories to third parties for use in 
making credit decisions and to depository institutions and their 
affiliates for use in the ordinary course of business (Norwest 
Corporation, 81 Federal Reserve Bulletin 732 (1995));
    (v) Check cashing and wire transmission services (Midland Bank, PLC, 
76 Federal Reserve Bulletin 860 (1990) (check cashing); Norwest 
Corporation, 81 Federal Reserve Bulletin 1130 (1995) (money 
transmission));
    (vi) In connection with offering banking services, providing notary 
public services, selling postage stamps and postage-paid envelopes, 
providing vehicle registration services, and selling public 
transportation tickets and tokens (Popular, Inc., 84 Federal Reserve 
Bulletin 481 (1998)); and
    (vii) Real estate title abstracting (The First National Company, 81 
Federal Reserve Bulletin 805 (1995)).
    (b) Activities determined to be usual in connection with the 
transaction of banking abroad. Any activity that the Board had 
determined by regulation in effect on November 11, 1999, to be usual in 
connection with the transaction of banking or other financial operations 
abroad (see Sec. 211.5(d) of this chapter), subject to the terms and 
conditions in part 211 and Board interpretations in effect on that date 
regarding the scope and conduct of the activity. In addition to the 
activities listed in paragraphs (a) and (c) of this section, these 
activities are:
    (1) Providing management consulting services, including to any 
person with respect to nonfinancial matters, so long as the management 
consulting services are advisory and do not allow the financial holding 
company to control the person to which the services are provided;
    (2) Operating a travel agency in connection with financial services 
offered by the financial holding company or others; and
    (3) Organizing, sponsoring, and managing a mutual fund, so long as:
    (i) The fund does not exercise managerial control over the entities 
in which the fund invests; and
    (ii) The financial holding company reduces its ownership in the 
fund, if any, to less than 25 percent of the equity of the fund within 
one year of sponsoring the fund or such additional period as the Board 
permits.

[[Page 171]]

    (c) Activities permitted under section 4(k)(4) of the BHC Act (12 
U.S.C. 1843(k)(4)). Any activity defined to be financial in nature under 
sections 4(k)(4)(A) through (E), (H) and (I) of the BHC Act (12 U.S.C. 
1843(k)(4)(A) through (E), (H) and (I)).
    (d) Activities determined to be financial in nature or incidental to 
financial activities by the Board--(1) Acting as a finder--Acting as a 
finder in bringing together one or more buyers and sellers of any 
product or service for transactions that the parties themselves 
negotiate and consummate.
    (i) What is the scope of finder activities? Acting as a finder 
includes providing any or all of the following services through any 
means--
    (A) Identifying potential parties, making inquiries as to interest, 
introducing and referring potential parties to each other, and arranging 
contacts between and meetings of interested parties;
    (B) Conveying between interested parties expressions of interest, 
bids, offers, orders and confirmations relating to a transaction; and
    (C) Transmitting information concerning products and services to 
potential parties in connection with the activities described in 
paragraphs (d)(1)(i)(A) and (B) of this section.
    (ii) What are some examples of finder services? The following are 
examples of the services that may be provided by a finder when done in 
accordance with paragraphs (d)(1)(iii) and (iv) of this section. These 
examples are not exclusive.
    (A) Hosting an electronic marketplace on the financial holding 
company's Internet web site by providing hypertext or similar links to 
the web sites of third party buyers or sellers.
    (B) Hosting on the financial holding company's servers the Internet 
web site of--
    (1) A buyer (or seller) that provides information concerning the 
buyer (or seller) and the products or services it seeks to buy (or sell) 
and allows sellers (or buyers) to submit expressions of interest, bids, 
offers, orders and confirmations relating to such products or services; 
or
    (2) A government or government agency that provides information 
concerning the services or benefits made available by the government or 
government agency, assists persons in completing applications to receive 
such services or benefits from the government or agency, and allows 
persons to transmit their applications for services or benefits to the 
government or agency.
    (C) Operating an Internet web site that allows multiple buyers and 
sellers to exchange information concerning the products and services 
that they are willing to purchase or sell, locate potential 
counterparties for transactions, aggregate orders for goods or services 
with those made by other parties, and enter into transactions between 
themselves.
    (D) Operating a telephone call center that provides permissible 
finder services.
    (iii) What limitations are applicable to a financial holding company 
acting as a finder? (A) A finder may act only as an intermediary between 
a buyer and a seller.
    (B) A finder may not bind any buyer or seller to the terms of a 
specific transaction or negotiate the terms of a specific transaction on 
behalf of a buyer or seller, except that a finder may--
    (1) Arrange for buyers to receive preferred terms from sellers so 
long as the terms are not negotiated as part of any individual 
transaction, are provided generally to customers or broad categories of 
customers, and are made available by the seller (and not by the 
financial holding company); and
    (2) Establish rules of general applicability governing the use and 
operation of the finder service, including rules that--
    (i) Govern the submission of bids and offers by buyers and sellers 
that use the finder service and the circumstances under which the finder 
service will match bids and offers submitted by buyers and sellers; and
    (ii) Govern the manner in which buyers and sellers may bind 
themselves to the terms of a specific transaction.
    (C) A finder may not--
    (1) Take title to or acquire or hold an ownership interest in any 
product or service offered or sold through the finder service;

[[Page 172]]

    (2) Provide distribution services for physical products or services 
offered or sold through the finder service;
    (3) Own or operate any real or personal property that is used for 
the purpose of manufacturing, storing, transporting, or assembling 
physical products offered or sold by third parties; or
    (4) Own or operate any real or personal property that serves as a 
physical location for the physical purchase, sale or distribution of 
products or services offered or sold by third parties.
    (D) A finder may not engage in any activity that would require the 
company to register or obtain a license as a real estate agent or broker 
under applicable law.
    (iv) What disclosures are required? A finder must distinguish the 
products and services offered by the financial holding company from 
those offered by a third party through the finder service.
    (2) [Reserved]
    (e) Activities permitted under section 4(k)(5) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(5)). (1) The following types of 
activities are financial in nature or incidental to a financial activity 
when conducted pursuant to a determination by the Board under paragraph 
(e)(2) of this section:
    (i) Lending, exchanging, transferring, investing for others, or 
safeguarding financial assets other than money or securities;
    (ii) Providing any device or other instrumentality for transferring 
money or other financial assets; and
    (iii) Arranging, effecting, or facilitating financial transactions 
for the account of third parties.
    (2) Review of specific activities--(i) Is a specific request 
required? A financial holding company that wishes to engage on the basis 
of paragraph (e)(1) of this section in an activity that is not otherwise 
permissible for a financial holding company must obtain a determination 
from the Board that the activity is permitted under paragraph (e)(1).
    (ii) Consultation with the Secretary of the Treasury. After 
receiving a request under this section, the Board will provide the 
Secretary of the Treasury with a copy of the request and consult with 
the Secretary in accordance with section 4(k)(2)(A) of the Bank Holding 
Company Act (12 U.S.C. 1843(k)(2)(A)).
    (iii) Board action on requests. After consultation with the 
Secretary, the Board will promptly make a written determination 
regarding whether the specific activity described in the request is 
included in an activity category listed in paragraph (e)(1) of this 
section and is therefore either financial in nature or incidental to a 
financial activity.
    (3) What factors will the Board consider? In evaluating a request 
made under this section, the Board will take into account the factors 
listed in section 4(k)(3) of the BHC Act (12 U.S.C. 1843(k)(3)) that it 
must consider when determining whether an activity is financial in 
nature or incidental to a financial activity.
    (4) What information must the request contain? Any request by a 
financial holding company under this section must be in writing and 
must:
    (i) Identify and define the activity for which the determination is 
sought, specifically describing what the activity would involve and how 
the activity would be conducted; and
    (ii) Provide information supporting the requested determination, 
including information regarding how the proposed activity falls into one 
of the categories listed in paragraph (e)(1) of this section, and any 
other information required by the Board concerning the proposed 
activity.

[Reg. Y, 66 FR 415, Jan. 3, 2001, as amended at 66 FR 19081, Apr. 13, 
2001]



Sec. 225.87  Is notice to the Board required after engaging in a financial 

activity?

    (a) Post-transaction notice generally required to engage in a 
financial activity. A financial holding company that commences an 
activity or acquires shares of a company engaged in an activity listed 
in Sec. 225.86 must notify the appropriate Reserve Bank in writing 
within 30 calendar days after commencing the activity or consummating 
the acquisition by using the appropriate form.
    (b) Cases in which notice to the Board is not required--(1) 
Acquisitions that do not involve control of a company. A notice under 
paragraph (a) of this section is not required in connection with the

[[Page 173]]

acquisition of shares of a company if, following the acquisition, the 
financial holding company does not control the company.
    (2) No additional notice required to engage de novo in an activity 
for which a financial holding company already has provided notice. After 
a financial holding company provides the appropriate Reserve Bank with 
notice that the company is engaged in an activity listed in Sec. 
225.86, a financial holding company may, unless otherwise notified by 
the Board, commence the activity de novo through any subsidiary that the 
financial holding company is authorized to control without providing 
additional notice under paragraph (a) of this section.
    (3) Conduct of certain investment activities. Unless required by 
paragraph (b)(4) of this section, a financial holding company is not 
required to provide notice under paragraph (a) of this section of any 
individual acquisition of shares of a company as part of the conduct by 
a financial holding company of securities underwriting, dealing, or 
market making activities as described in section 4(k)(4)(E) of the BHC 
Act (12 U.S.C. 1843(k)(4)(E)), merchant banking activities conducted 
pursuant to section 4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), 
or insurance company investment activities conducted pursuant to section 
4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), if the financial 
holding company previously has notified the Board under paragraph (a) of 
this section that the company has commenced the relevant securities, 
merchant banking, or insurance company investment activities, as 
relevant.
    (4) Notice of large merchant banking or insurance company 
investments. Notwithstanding paragraph (b)(1) or (b)(3) of this section, 
a financial holding company must provide notice under paragraph (a) of 
the section if:
    (i) As part of a merchant banking activity conducted under section 
4(k)(4)(H) of the BHC Act (12 U.S.C. 1843(k)(4)(H)), the financial 
holding company acquires more than 5 percent of the shares, assets, or 
ownership interests of any company at a total cost that exceeds the 
lesser of 5 percent of the financial holding company's Tier 1 capital or 
$200 million;
    (ii) As part of an insurance company investment activity conducted 
under section 4(k)(4)(I) of the BHC Act (12 U.S.C. 1843(k)(4)(I)), the 
financial holding company acquires more than 5 percent of the shares, 
assets, or ownership interests of any company at a total cost that 
exceeds the lesser of 5 percent of the financial holding company's Tier 
1 capital or $200 million; or
    (iii) The Board in the exercise of its supervisory authority 
notifies the financial holding company that a notice is necessary.



Sec. 225.88  How to request the Board to determine that an activity is 

financial in nature or incidental to a financial activity?

    (a) Requests regarding activities that may be financial in nature or 
incidental to a financial activity. A financial holding company or other 
interested party may request a determination from the Board that an 
activity not listed in Sec. 225.86 is financial in nature or incidental 
to a financial activity.
    (b) Required information. A request submitted under this section 
must be in writing and must:
    (1) Identify and define the activity for which the determination is 
sought, specifically describing what the activity would involve and how 
the activity would be conducted;
    (2) Explain in detail why the activity should be considered 
financial in nature or incidental to a financial activity; and
    (3) Provide information supporting the requested determination and 
any other information required by the Board concerning the proposed 
activity.
    (c) Board procedures for reviewing requests--(1) Consultation with 
the Secretary of the Treasury. Upon receipt of the request, the Board 
will provide the Secretary of the Treasury a copy of the request and 
consult with the Secretary in accordance with section 4(k)(2)(A) of the 
BHC Act (12 U.S.C. 1843(k)(2)(A)).
    (2) Public notice. The Board may, as appropriate and after 
consultation with the Secretary, publish a description of the proposal 
in the Federal

[[Page 174]]

Register with a request for public comment.
    (d) Board action. The Board will endeavor to make a decision on any 
request filed under paragraph (a) of this section within 60 calendar 
days following the completion of both the consultative process described 
in paragraph (c)(1) of this section and the public comment period, if 
any.
    (e) Advisory opinions regarding scope of financial activities--(1) 
Written request. A financial holding company or other interested party 
may request an advisory opinion from the Board about whether a specific 
proposed activity falls within the scope of an activity listed in Sec. 
225.86 as financial in nature or incidental to a financial activity. The 
request must be submitted in writing and must contain:
    (i) A detailed description of the particular activity in which the 
company proposes to engage or the product or service the company 
proposes to provide;
    (ii) An explanation supporting an interpretation regarding the scope 
of the permissible financial activity; and
    (iii) Any additional information requested by the Board regarding 
the activity.
    (2) Board response. The Board will provide an advisory opinion 
within 45 calendar days of receiving a complete written request under 
paragraph (e)(1) of this section.



Sec. 225.89  How to request approval to engage in an activity that is 

complementary to a financial activity?

    (a) Prior Board approval is required. A financial holding company 
that seeks to engage in or acquire more than 5 percent of the 
outstanding shares of any class of voting securities of a company 
engaged in an activity that the financial holding company believes is 
complementary to a financial activity must obtain prior approval from 
the Board in accordance with section 4(j) of the BHC Act (12 U.S.C. 
1843(j)). The notice must be in writing and must:
    (1) Identify and define the proposed complementary activity, 
specifically describing what the activity would involve and how the 
activity would be conducted;
    (2) Identify the financial activity for which the proposed activity 
would be complementary and provide detailed information sufficient to 
support a finding that the proposed activity should be considered 
complementary to the identified financial activity;
    (3) Describe the scope and relative size of the proposed activity, 
as measured by the percentage of the projected financial holding company 
revenues expected to be derived from and assets associated with 
conducting the activity;
    (4) Discuss the risks that conducting the activity may reasonably be 
expected to pose to the safety and soundness of the subsidiary 
depository institutions of the financial holding company and to the 
financial system generally;
    (5) Describe the potential adverse effects, including potential 
conflicts of interest, decreased or unfair competition, or other risks, 
that conducting the activity could raise, and explain the measures the 
financial holding company proposes to take to address those potential 
effects;
    (6) Describe the potential benefits to the public, such as greater 
convenience, increased competition, or gains in efficiency, that the 
proposal reasonably can be expected to produce; and
    (7) Provide any information about the financial and managerial 
resources of the financial holding company and any other information 
requested by the Board.
    (b) Factors for consideration by the Board. In evaluating a notice 
to engage in a complementary activity, the Board must consider whether:
    (1) The proposed activity is complementary to a financial activity;
    (2) The proposed activity would pose a substantial risk to the 
safety or soundness of depository institutions or the financial system 
generally; and
    (3) The proposal could be expected to produce benefits to the public 
that outweigh possible adverse effects.
    (c) Board action. The Board will inform the financial holding 
company in writing of the Board's determination regarding the proposed 
activity within the period described in section 4(j) of the BHC Act (12 
U.S.C. 1843(j)).

[[Page 175]]



Sec. 225.90  What are the requirements for a foreign bank to be treated as a 

financial holding company?

    (a) Foreign banks as financial holding companies. A foreign bank 
that operates a branch or agency or owns or controls a commercial 
lending company in the United States, and any company that owns or 
controls such a foreign bank, will be treated as a financial holding 
company if:
    (1) The foreign bank, any other foreign bank that maintains a U.S. 
branch, agency, or commercial lending company and is controlled by the 
foreign bank or company, and any U.S. depository institution subsidiary 
that is owned or controlled by the foreign bank or company, is and 
remains well capitalized and well managed; and
    (2) The foreign bank, and any company that owns or controls the 
foreign bank, has made an effective election to be treated as a 
financial holding company under this subpart.
    (b) Standards for ``well capitalized.'' A foreign bank will be 
considered ``well capitalized'' if either:
    (1)(i) Its home country supervisor, as defined in Sec. 211.21 of 
the Board's Regulation K (12 CFR 211.21), has adopted risk-based capital 
standards consistent with the Capital Accord of the Basel Committee on 
Banking Supervision (Basel Accord);
    (ii) The foreign bank maintains a Tier 1 capital to total risk-based 
assets ratio of 6 percent and a total capital to total risk-based assets 
ratio of 10 percent, as calculated under its home country standard; and
    (iii) The foreign bank's capital is comparable to the capital 
required for a U.S. bank owned by a financial holding company; or
    (2) The foreign bank has obtained a determination from the Board 
under Sec. 225.91(c) that the foreign bank's capital is otherwise 
comparable to the capital that would be required of a U.S. bank owned by 
a financial holding company.
    (c) Standards for ``well managed.'' A foreign bank will be 
considered ``well managed'' if:
    (1) The foreign bank has received at least a satisfactory composite 
rating of its U.S. branch, agency, and commercial lending company 
operations at its most recent assessment;
    (2) The home country supervisor of the foreign bank consents to the 
foreign bank expanding its activities in the United States to include 
activities permissible for a financial holding company; and
    (3) The management of the foreign bank meets standards comparable to 
those required of a U.S. bank owned by a financial holding company.



Sec. 225.91  How may a foreign bank elect to be treated as a financial holding 

company?

    (a) Filing requirement. A foreign bank that operates a branch or 
agency or owns or controls a commercial lending company in the United 
States, or a company that owns or controls such a foreign bank, may 
elect to be treated as a financial holding company by filing a written 
declaration with the appropriate Reserve Bank.
    (b) Contents of declaration. The declaration must:
    (1) State that the foreign bank or the company elects to be treated 
as a financial holding company;
    (2) Provide the risk-based capital ratios and amount of Tier 1 
capital and total assets of the foreign bank, and of each foreign bank 
that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, as of the close of the 
most recent quarter and as of the close of the most recent audited 
reporting period;
    (3) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, meets the standards of well 
capitalized set out in Sec. 225.90(b)(1)(i) and (ii) or Sec. 
225.90(b)(2) as of the date the foreign bank or company files its 
election;
    (4) Certify that the foreign bank, and each foreign bank that 
maintains a U.S. branch, agency, or commercial lending company and is 
controlled by the foreign bank or company, is well managed as defined in 
Sec. 225.90(c)(1) as of the date the foreign bank or company files its 
election;
    (5) Certify that all U.S. depository institution subsidiaries of the 
foreign

[[Page 176]]

bank or company are well capitalized and well managed as of the date the 
foreign bank or company files its election; and
    (6) Provide the capital ratios for all relevant capital measures (as 
defined in section 38 of the Federal Deposit Insurance Act (12 U.S.C. 
1831(o))) as of the close of the previous quarter for each U.S. 
depository institution subsidiary of the foreign bank or company.
    (c) Pre-clearance process. Before filing an election to be treated 
as a financial holding company, a foreign bank or company may file a 
request for review of its qualifications to be treated as a financial 
holding company. The Board will endeavor to make a determination on such 
requests within 30 days of receipt. A foreign bank that has not been 
found, or that is chartered in a country where no bank from that country 
has been found, by the Board under the Bank Holding Company Act or the 
International Banking Act to be subject to comprehensive supervision or 
regulation on a consolidated basis by its home country supervisor is 
required to use this process.



Sec. 225.92  How does an election by a foreign bank become effective?

    (a) In general. An election described in Sec. 225.91 is effective 
on the 31st day after the date that an election was received by the 
appropriate Federal Reserve Bank, unless the Board notifies the foreign 
bank or company prior to that time that:
    (1) The election is ineffective; or
    (2) The period is extended with the consent of the foreign bank or 
company making the election.
    (b) Earlier notification that an election is effective. The Board or 
the appropriate Federal Reserve Bank may notify a foreign bank or 
company that its election to be treated as a financial holding company 
is effective prior to the 31st day after the election was filed with the 
appropriate Federal Reserve Bank. Such notification must be in writing.
    (c) Under what circumstances will the Board find an election to be 
ineffective? An election to be treated as a financial holding company 
shall not be effective if, during the period provided in paragraph (a) 
of this section, the Board finds that:
    (1) The foreign bank certificant, or any foreign bank that operates 
a branch or agency or owns or controls a commercial lending company in 
the United States and is controlled by a foreign bank or company 
certificant, is not both well capitalized and well managed;
    (2) Any U.S. insured depository institution subsidiary of the 
foreign bank or company (except an institution excluded under paragraph 
(d) of this section) or any U.S. branch of a foreign bank that is 
insured by the Federal Deposit Insurance Corporation has not achieved at 
least a rating of ``satisfactory record of meeting community needs'' 
under the Community Reinvestment Act at the institution's most recent 
examination;
    (3) Any U.S. depository institution subsidiary of the foreign bank 
or company is not both well capitalized and well managed; or
    (4) The Board does not have sufficient information to assess whether 
the foreign bank or company making the election meets the requirements 
of this subpart.
    (d) How is CRA performance of recently acquired insured depository 
institutions considered? An insured depository institution will be 
excluded for purposes of the review of CRA ratings described in 
paragraph (c)(2) of this section consistent with the provisions of Sec. 
225.82(d).
    (e) Factors used in the Board's determination regarding 
comparability of capital and management--(1) In general. In determining 
whether a foreign bank is well capitalized and well managed in 
accordance with comparable capital and management standards, the Board 
will give due regard to national treatment and equality of competitive 
opportunity. In this regard, the Board may take into account the foreign 
bank's composition of capital, Tier 1 capital to total assets leverage 
ratio, accounting standards, long-term debt ratings, reliance on 
government support to meet capital requirements, the foreign bank's 
anti-money laundering procedures, whether the foreign bank is subject to 
comprehensive supervision or regulation on a consolidated basis,

[[Page 177]]

and other factors that may affect analysis of capital and management. 
The Board will consult with the home country supervisor for the foreign 
bank as appropriate.
    (2) Assessment of consolidated supervision. A foreign bank that is 
not subject to comprehensive supervision on a consolidated basis by its 
home country authorities may not be considered well capitalized and well 
managed unless:
    (i) The home country has made significant progress in establishing 
arrangements for comprehensive supervision on a consolidated basis; and
    (ii) The foreign bank is in strong financial condition as 
demonstrated, for example, by capital levels that significantly exceed 
the minimum levels that are required for a well capitalized 
determination and strong asset quality.



Sec. 225.93  What are the consequences of a foreign bank failing to continue 

to meet applicable capital and management requirements?

    (a) Notice by the Board. If a foreign bank or company has made an 
effective election to be treated as a financial holding company under 
this subpart and the Board finds that the foreign bank, any foreign bank 
that maintains a U.S. branch, agency, or commercial lending company and 
is controlled by the foreign bank or company, or any U.S. depository 
institution subsidiary controlled by the foreign bank or company, ceases 
to be well capitalized or well managed, the Board will notify the 
foreign bank and company, if any, in writing that it is not in 
compliance with the applicable requirement(s) for a financial holding 
company and identify the areas of noncompliance.
    (b) Notification by a financial holding company required--(1) Notice 
to Board. Promptly upon becoming aware that the foreign bank, any 
foreign bank that maintains a U.S. branch, agency, or commercial lending 
company and is controlled by the foreign bank or company, or any U.S. 
depository institution subsidiary of the foreign bank or company, has 
ceased to be well capitalized or well managed, the foreign bank and 
company, if any, must notify the Board and identify the area of 
noncompliance.
    (2) Triggering events for notice to the Board--(i) Well capitalized. 
A foreign bank becomes aware that it is no longer well capitalized at 
the time that the foreign bank or company is required to file a report 
of condition (or similar supervisory report) with its home country 
supervisor or the appropriate Federal Reserve Bank that indicates that 
the foreign bank no longer meets the well capitalized standards.
    (ii) Well managed. A foreign bank becomes aware that it is no longer 
well managed at the time that the foreign bank receives written notice 
from the appropriate Federal Reserve Bank that the composite rating of 
its U.S. branch, agency, and commercial lending company operations is 
not at least satisfactory.
    (c) Execution of agreement acceptable to the Board--(1) Agreement 
required; time period. Within 45 days after receiving a notice under 
paragraph (a) of this section, the foreign bank or company must execute 
an agreement acceptable to the Board to comply with all applicable 
capital and management requirements.
    (2) Extension of time for executing agreement. Upon request by the 
foreign bank or company, the Board may extend the 45-day period under 
paragraph (c)(1) of this section if the Board determines that granting 
additional time is appropriate under the circumstances. A request by a 
foreign bank or company for additional time must include an explanation 
of why an extension is necessary.
    (3) Agreement requirements. An agreement required by paragraph 
(c)(1) of this section to correct a capital or management deficiency 
must:
    (i) Explain the specific actions that the foreign bank or company 
will take to correct all areas of noncompliance;
    (ii) Provide a schedule within which each action will be taken;
    (iii) Provide any other information that the Board may require; and
    (iv) Be acceptable to the Board.
    (d) Limitations during period of noncompliance--Until the Board 
determines that a foreign bank or company has corrected the conditions 
described in a notice under paragraph (a) of this section:

[[Page 178]]

    (1) The Board may impose any limitations or conditions on the 
conduct or the U.S. activities of the foreign bank or company or any of 
its affiliates as the Board finds to be appropriate and consistent with 
the purposes of the Bank Holding Company Act; and
    (2) The foreign bank or company and its affiliates may not commence 
any additional activity in the United States or acquire control or 
shares of any company under section 4(k) of the Bank Holding Company Act 
(12 U.S.C. 1843(k)) without prior approval from the Board.
    (e) Consequences of failure to correct conditions within 180 days--
(1) Termination of Offices and Divestiture. If a foreign bank or company 
does not correct the conditions described in a notice under paragraph 
(a) of this section within 180 days of receipt of the notice or such 
additional time as the Board may permit, the Board may order the foreign 
bank or company to terminate the foreign bank's U.S. branches and 
agencies and divest any commercial lending companies owned or controlled 
by the foreign bank or company. Such divestiture must be done in 
accordance with the terms and conditions established by the Board.
    (2) Alternative method of complying with a divestiture order. A 
foreign bank or company may comply with an order issued under paragraph 
(e)(1) of this section by ceasing to engage (both directly and through 
any subsidiary that is not a depository institution or a subsidiary of a 
depository institution) in any activity that may be conducted only under 
section 4(k), (n), or (o) of the BHC Act (12 U.S.C. 1843(k), (n) and 
(o)). The termination of activities must be completed within the time 
period referred to in paragraph (e)(1) of this section and subject to 
terms and conditions acceptable to the Board.
    (f) Consultation with Other Agencies. In taking any action under 
this section, the Board will consult with the relevant Federal and state 
regulatory authorities and the appropriate home country supervisor(s) of 
the foreign bank.



Sec. 225.94  What are the consequences of an insured branch or depository 

institution failing to maintain a satisfactory or better rating under the 

Community Reinvestment Act?

    (a) Insured branch as an ``insured depository institution.'' A U.S. 
branch of a foreign bank that is insured by the Federal Deposit 
Insurance Corporation shall be treated as an ``insured depository 
institution'' for purposes of Sec. 225.84.
    (b) Applicability. The provisions of Sec. 225.84, with the 
modifications contained in this section, shall apply to a foreign bank 
that operates an insured branch referred to in paragraph (a) of this 
section or an insured depository institution in the United States, and 
any company that owns or controls such a foreign bank, that has made an 
effective election under Sec. 225.92 in the same manner and to the same 
extent as they apply to a financial holding company.

                             Interpretations



Sec. 225.101  Bank holding company's subsidiary banks owning shares of 

nonbanking companies.

    (a) The Board's opinion has been requested on the following related 
matters under the Bank Holding Company Act of 1956.
    (b) The question is raised as to whether shares in a nonbanking 
company which were acquired by a banking subsidiary of the bank holding 
company many years ago when their acquisition was lawful and are now 
held as investments, and which do not include more than 5 percent of the 
outstanding voting securities of such nonbanking company and do not have 
a value greater than 5 percent of the value of the bank holding 
company's total assets, are exempted from the divestment requirements of 
the Act by the provisions of section 4(c)(5) of the Act.
    (c) In the Board's opinion, this exemption is as applicable to such 
shares when held by a banking subsidiary of a bank holding company as 
when held directly by the bank holding company itself. While the 
exemption specifically refers only to shares held or acquired by the 
bank holding company, the prohibition of the Act against retention of

[[Page 179]]

nonbanking interests applies to indirect as well as direct ownership of 
shares of a nonbanking company, and, in the absence of a clear mandate 
to the contrary, any exception to this prohibition should be given equal 
breadth with the prohibition. Any other interpretation would lead to 
unwarranted results.
    (d) Although certain of the other exemptions in section 4(c) of the 
Act specifically refer to shares held or acquired by banking 
subsidiaries, an analysis of those exemptions suggests that such 
specific reference to banking subsidiaries was for the purpose of 
excluding nonbanking subsidiaries from such exemptions, rather than for 
the purpose of providing an inclusionary emphasis on banking 
subsidiaries.
    (e) It should be noted that the Board's view as to this question 
should not be interpreted as meaning that each banking subsidiary could 
own up to 5 percent of the stock of the same nonbanking organization. In 
the Board's opinion the limitations set forth in section 4(c)(5) apply 
to the aggregate amount of stock held in a particular organization by 
the bank holding company itself and by all of its subsidiaries.
    (f) Secondly, question is raised as to whether shares in a 
nonbanking company acquired in satisfaction of debts previously 
contracted (d.p.c.) by a banking subsidiary of the bank holding company 
may be retained if such shares meet the conditions contained in section 
4(c)(5) as to value and amount, notwithstanding the requirement of 
section 4(c)(2) that shares acquired d.p.c. be disposed of within two 
years after the date of their acquisition or the date of the Act, 
whichever is later. In the Board's opinion, the 5 percent exemption 
provided by section 4(c)(5) covers any shares, including shares acquired 
d.p.c., that meet the conditions set forth in that exemption, and, 
consequently, d.p.c. shares held by a banking subsidiary of a bank 
holding company which meet such conditions are not subject to the two-
year disposition requirement prescribed by section 4(c)(2), although any 
such shares would, of course, continue to be subject to such requirement 
for disposition as may be prescribed by provisions of any applicable 
banking laws or by the appropriate bank supervisory authorities.
    (g) Finally, question is raised as to whether shares held by banking 
subsidiaries of the bank holding company in companies holding bank 
premises of such subsidiaries are exempted from the divestment 
requirements by section 4(c)(1) of the Act. It is the Board's view that 
section 4(c)(1), exempting shares owned or acquired by a bank holding 
company in any company engaged solely in holding or operating properties 
used wholly or substantially by any subsidiary bank, is to be read and 
interpreted, like section 4(c)(5), as applying to shares owned 
indirectly by a bank holding company through a banking subsidiary as 
well as to shares held directly by the bank holding company. A contrary 
interpretation would impair the right that member banks controlled by 
bank holding companies would otherwise have to invest, subject to the 
limitations of section 24A of the Federal Reserve Act, in stock of 
companies holding their bank premises; and such a result was not, in the 
Board's opinion, intended by the Bank Holding Company Act.

[21 FR 10472, Dec. 29, 1956. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.102  Bank holding company indirectly owning nonbanking company 

through subsidiaries.

    (a) The Board of Governors has been requested for an opinion 
regarding the exemptions contained in section 4(c)(5) of the Bank 
Holding Company Act of 1956. It is stated that Y Company is an 
investment company which is not a bank holding company and which is not 
engaged in any business other than investing in securities, which 
securities do not include more than 5 per centum of the outstanding 
voting securities of any company and do not include any asset having a 
value greater than 5 per centum of the value of the total assets of X 
Corporation, a bank holding company. It is stated that direct ownership 
by X Corporation of voting shares of Y Company would be exempt by reason 
of section 4(c)(5) from the prohibition of section 4 of the Act against 
ownership by bank holding companies of nonbanking assets.

[[Page 180]]

    (b) It was asked whether it makes any difference that the shares of 
Y Company are not owned directly by X Corporation but instead are owned 
through Subsidiaries A and B. X Corporation owns all the voting shares 
of Subsidiary A, which owns one-half of the voting shares of Subsidiary 
B. Subsidiaries A and B each own one-third of the voting shares of Y 
Company.
    (c) Section 4(c)(5) is divided into two parts. The first part 
exempts the ownership of securities of nonbanking companies when the 
securities do not include more than 5 percent of the voting securities 
of the nonbanking company and do not have a value greater than 5 percent 
of the value of the total assets of the bank holding company. The second 
part exempts the ownership of securities of an investment company which 
is not a bank holding company and is not engaged in any business other 
than investing in securities, provided the securities held by the 
investment company meet the 5 percent tests mentioned above.
    (d) In Sec. 225.101, the Board expressed the opinion that the first 
exemption in section 4(c)(5):

    * * * is as applicable to such shares when held by a banking 
subsidiary of a bank holding company as when held directly by the bank 
holding company itself. While the exemption specifically refers only to 
shares held or acquired by the bank holding company, the prohibition of 
the Act against retention of nonbanking interests applies to indirect as 
well as direct ownership of shares of a nonbanking company, and, in the 
absence of a clear mandate to the contrary, any exception to this 
prohibition should be given equal breadth with the prohibition. Any 
other interpretation would lead to unwarranted results.

    (e) The Board is of the view that the principles stated in that 
opinion are also applicable to the second exemption in section 4(c)(5), 
and that they apply whether or not the subsidiary owning the shares is a 
banking subsidiary. Accordingly, on the basis of the facts presented, 
the Board is of the opinion that the second exemption in section 4(c)(5) 
applies to the indirect ownership by X Corporation of shares of Y 
Company through Subsidiaries A and B.

[22 FR 2533, Apr. 13, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.103  Bank holding company acquiring stock by dividends, stock splits 

or exercise of rights.

    (a) The Board of Governors has been asked whether a bank holding 
company may receive bank stock dividends or participate in bank stock 
splits without the Board's prior approval, and whether such a company 
may exercise, without the Board's prior approval, rights to subscribe to 
new stock issued by banks in which the holding company already owns 
stock.
    (b) Neither a stock dividend nor a stock split results in any change 
in a stockholder's proportional interest in the issuing company or any 
increase in the assets of that company. Such a transaction would have no 
effect upon the extent of a holding company's control of the bank 
involved; and none of the five factors required by the Bank Holding 
Company Act to be considered by the Board in approving a stock 
acquisition would seem to have any application. In view of the 
objectives and purposes of the act, the word ``acquire'' would not seem 
reasonably to include transactions of this kind.
    (c) On the other hand, the exercise by a bank holding company of the 
right to subscribe to an issue of additional stock of a bank could 
result in an increase in the holding company's proportional interest in 
the bank. The holding company would voluntarily pay additional funds for 
the extra shares and would ``acquire'' the additional stock even under a 
narrow meaning of that term. Moreover, the exercise of such rights would 
cause the assets of the issuing company to be increased and in a sense, 
therefore, the ``size or extent'' of the bank holding company system 
would be expanded.
    (d) In the circumstances, it is the Board's opinion that receipt of 
bank stock by means of a stock dividend or stock split, assuming no 
change in the class of stock, does not require the Board's prior 
approval under the act, but that purchase of bank stock by a bank 
holding company through the exercise of rights does require the Board's 
prior approval, unless one of the exceptions set forth in section 3(a) 
is applicable.

[22 FR 7461, Sept. 19, 1957. Redesignated at 36 FR 21666, Nov. 12, 1971]

[[Page 181]]



Sec. 225.104  ``Services'' under section 4(c)(1) of Bank Holding Company Act.

    (a) Section 4(c)(1) of the Bank Holding Company Act, among other 
things, exempts from the nonbanking divestment requirements of section 
4(a) of the Act shares of a company engaged ``solely in the business of 
furnishing services to or performing services for'' its bank holding 
company or subsidiary banks thereof.
    (b) The Board of Governors has had occasion to express opinions as 
to whether this section of law applies to the following two sets of 
facts:
    (1) In the first case, Corporation X, a nonbanking subsidiary of a 
bank holding company (Holding Company A), was engaged in the business of 
purchasing installment paper suitable for investment by banking 
subsidiaries of Holding Company A. All installment paper purchased by 
Corporation X was sold by it to a bank which is a subsidiary of Holding 
Company A, without recourse, at a price equal to the cost of the 
installment paper to Corporation X, and with compensation to the latter 
based on the earnings from such paper remaining after certain reserves, 
expenses and charges. The subsidiary bank sold participations in such 
installment paper to the other affiliated banks of Holding Company A 
which desired to participate. Purchases by Corporation X consisted 
mainly of paper insured under Title I of the National Housing Act and, 
in addition, Corporation X purchased time payment contracts covering 
sales of appliances by dealers under contractual arrangements with 
utilities, as well as paper covering home improvements which was not 
insured. Pursuant to certain service agreements, Corporation X made all 
collections, enforced guaranties, filed claims under Title I insurance 
and performed other services for the affiliated banks. Also Corporation 
X rendered to banking subsidiaries of Holding Company A various 
accounting, statistical and advisory services such as payroll, life 
insurance and budget loan installment account.
    (2) In the second case, Corporation Y, a nonbanking subsidiary of a 
bank holding company (Holding Company B, which was also a bank), 
solicited business on behalf of Holding Company B from dealers, 
throughout several adjoining or contiguous States, who made time sales 
and desired to convert their time sales paper into cash; but Corporation 
Y made no loans or purchases of sales contracts and did not discount or 
advance money for time sales obligations. Corporation Y investigated 
credit standings of purchasers obligated on time sale contracts to be 
acquired by Holding Company B, Corporation Y received from dealers the 
papers offered by them and inspected such papers to see that they were 
in order, and transmitted to Holding Company B for its determination to 
purchase, including, in some cases, issuance of drafts in favor of 
dealers in order to facilitate their prompt receipt of payment for 
installment paper purchased by Holding Company B. Corporation Y made 
collections of delinquent paper or delinquent installments, which 
sometimes involved repossession and resale of the automobile or other 
property which secured the paper. Also, upon request of purchasers 
obligated on paper held by Holding Company B, Corporation Y transmitted 
installment payments to Holding Company B. Holding Company B reimbursed 
Corporation Y for its actual costs and expenses in performing the 
services mentioned above, including the salaries and wages of all 
Corporation Y officers and employees.
    (c) While the term ``services'' is sometimes used in a broad and 
general sense, the legislative history of the Bank Holding Company Act 
indicates that in section 4(c)(1) the word was meant to be somewhat more 
limited in its application. An early version of the bill specifically 
exempted companies engaged in serving the bank holding company and its 
subsidiary banks in ``auditing, appraising, investment counseling''. The 
statute as finally enacted does not expressly mention any specific type 
of servicing activity for exemption. In recommending the change, the 
Senate Banking and Currency Committee stated that the types of services 
contemplated are ``in the fields of advertising, public relations, 
developing new business, organizations,

[[Page 182]]

operations, preparing tax returns, personnel, and many others'', which 
indicates that latitude should be given to the range of activities 
contemplated by this section beyond those specifically set forth in the 
early draft of the bill. (84th Cong., 2d Sess., Senate Report 1095, Part 
2, p. 3.) It nevertheless seems evident that Congress intended such 
services to be types of activities generally comparable to those 
mentioned above from the early bill (``auditing, appraising, investment 
counseling'') and in the excerpt from the Committee Report on the later 
bill (``advertising, public relations, developing new business, 
organization, operations, preparing tax returns, personnel, and many 
others''). This legislative history and the context in which the term 
``services'' is used in section 4(c)(1) seem to suggest that the term 
was in general intended to refer to servicing operations which a bank 
could carry on itself, but which the bank or its holding company chooses 
to have done through another organization. Moreover, the report of the 
Senate Banking and Currency Committee indicated that the types of 
servicing permitted under section 4(c)(1) are to be distinguished from 
activities of a ``financial, fiduciary, or insurance nature'', such as 
those which might be considered for possible exemption under section 
4(c)(6) of the Act.
    (d) With respect to the first set of facts, the Board expressed the 
opinion that certain of the activities of Corporation X, such as the 
accounting, statistical and advisory services referred to above, may be 
within the range of servicing activities contemplated by section 
4(c)(1), but that this would not appear to be the case with the main 
activity of Corporation X, which was the purchase of installment paper 
and the resale of such paper at cost, without recourse, to banking 
subsidiaries of Holding Company A. This latter and basic activity of 
Corporation X appeared to involve essentially a financial relationship 
between it and the banking subsidiaries of Holding Company A and 
appeared beyond the category of servicing exemptions contemplated by 
section 4(c)(1) of the Act. Accordingly, it was the Board's view that 
Corporation X could not be regarded as qualifying under section 4 (c)(1) 
as a company engaged ``solely in the business of furnishing services to 
or performing services for'' Holding Company A or subsidiary banks 
thereof.
    (e) With respect to the second set of facts, the Board expressed the 
opinion that some of the activities engaged in by Corporation Y were 
clearly within the range of servicing activities contemplated by section 
4(c)(1). There was some question as to whether or not some of the other 
activities of Corporation Y mentioned above could meet the test, but on 
balance, it seemed that all such activities probably were activities in 
which Holding Company B, which as already indicated was a bank, could 
itself engage, at the present locations of Corporation Y, without being 
engaged in the operation of bank branches at those locations. In the 
circumstances, while the question was not free from doubt, the Board 
expressed the opinion that the activities of Corporation Y were those of 
a company engaged ``solely in the business of furnishing services to or 
performing services for'' Holding Company B within the meaning of 
section 4(c)(1) of the Act, and that, accordingly, the control by 
Holding Company B of shares in Corporation Y was exempted under that 
section.

[23 FR 2675, May 23, 1958. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.107  Acquisition of stock in small business investment company.

    (a) A registered bank holding company requested an opinion by the 
Board of Governors with respect to whether that company and its banking 
subsidiaries may acquire stock in a small business investment company 
organized pursuant to the Small Business Investment Act of 1958.
    (b) It is understood that the bank holding company and its 
subsidiary banks propose to organize and subscribe for stock in a small 
business investment company which would be chartered pursuant to the 
Small Business Investment Act of 1958 which provides for long-term 
credit and equity financing for small business concerns.

[[Page 183]]

    (c) Section 302(b) of the Small Business Investment Act authorizes 
national banks, as well as other member banks and nonmember insured 
banks to the extent permitted by applicable State law, to invest capital 
in small business investment companies not exceeding one percent of the 
capital and surplus of such banks. Section 4(c)(4) of the Bank Holding 
Company Act exempts from the prohibitions of section 4 of the Act 
``shares which are of the kinds and amounts eligible for investment by 
National banking associations under the provisions of section 5136 of 
the Revised Statutes''. Section 5136 of the Revised Statutes (paragraph 
``Seventh'') in turn provides, in part, as follows:

Except as hereinafter provided or otherwise permitted by law nothing 
herein contained shall authorize the purchase by the association for its 
own account of any shares of stock of any corporation.


Since the shares of a small business investment company are of a kind 
and amount expressly made eligible for investment by a national bank 
under the Small Business Investment Act of 1958, it follows, therefore, 
that the ownership or control of such shares by a bank holding company 
would be exempt from the prohibitions of section 4 of the Bank Holding 
Company Act by virtue of the provisions of section 4(c)(4) of that Act. 
Accordingly, the ownership or control of such shares by the bank holding 
company would be exempt from the prohibitions of section 4 of the Bank 
Holding Company Act.
    (d) An additional question is presented, however, as to whether 
section 6 of the Bank Holding Company Act prohibits banking subsidiaries 
of the bank holding company from purchasing stock in a small business 
investment company where the latter is a ``subsidiary'' under that Act.
    (e) Section 6(a)(1) of the Act makes it unlawful for a bank to 
invest any of its funds in the capital stock of any other subsidiary of 
the bank holding company. However, section 6(a)(1) was, in effect, 
amended by section 302(b) of the Small Business Investment Act (15 
U.S.C. 682) as amended by the Act of June 11, 1960 (Pub. L. 86-502) so 
as to nullify this prohibition when the ``subsidiary'' is a small 
business investment company.
    (f) Accordingly, section 6 of the Bank Holding Company Act does not 
prohibit banking subsidiaries of the bank holding company from 
purchasing stock in a small business investment company organized 
pursuant to the Small Business Investment Act of 1958, where that 
company is or will be a subsidiary of the bank holding company.

[25 FR 7485, Aug. 9, 1960. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.109  ``Services'' under section 4(c)(1) of Bank Holding Company Act.

    (a) The Board of Governors has been requested by a bank holding 
company for an interpretation under section 4(c)(1) of the Bank Holding 
Company Act which, among other things, exempts from the nonbanking 
divestment requirements of section 4(a) of the Act, shares of a company 
engaged ``solely in the business of furnishing services to or performing 
services for'' its bank holding company or subsidiary banks thereof.
    (b) It is understood that a nonbanking subsidiary of the holding 
company engages in writing comprehensive automobile insurance (fire, 
theft, and collision) which is sold only to customers of a subsidiary 
bank of the holding company in connection with the bank's retail 
installment loans; that when payment is made on a loan secured by a lien 
on a motor vehicle, renewal policies are not issued by the insurance 
company; and that the insurance company receives the usual agency 
commissions on all comprehensive automobile insurance written for 
customers of the bank.
    (c) It is also understood that the insurance company writes credit 
life insurance for the benefit of the bank and its installment-loan 
customers; that each insured debtor is covered for an amount equal to 
the unpaid balance of his note to the bank, not to exceed $5,000; that 
as the note is reduced by regular monthly payments, the amount of 
insurance is correspondingly reduced so that at all times the debtor is 
insured for the unpaid balance of his note; that each insurance contract 
provides for payment in full of the entire

[[Page 184]]

loan balance upon the death or permanent disability of the insured 
borrower; and that this credit life insurance is written only at the 
request of, and solely for, the bank's borrowing customers. It is 
further understood that the insurance company engages in no other 
activity.
    (d) As indicated in Sec. 225.104 (23 FR 2675), the term 
``services,'' while sometimes used in a broad and general sense, appears 
to be somewhat more limited in its application in section 4(c)(1) of the 
Bank Holding Company Act. Unlike an early version of the Senate bill (S. 
2577, before amendment), the act as finally enacted does not expressly 
mention any type of servicing activity for exemption. The legislative 
history of the Act, however, as indicated in the relevant portion of the 
record of the Senate Banking and Currency Committee on amended S. 2577 
(84th Cong., 2d Sess., Senate Report 1095, Part 2, p. 3) makes it 
evident that Congress had in mind the exemption of services comparable 
to the types of activities mentioned expressly in the early Senate bill 
(``auditing, appraising, investment counseling'') and in the Committee 
Report on the later bill (``advertising, public relations, developing 
new business, organization, operations, preparing tax returns, 
personnel, and many others''). Furthermore, this Committee Report 
expressly stated that the provision of section 4(c)(1) with respect to 
``furnishing services to or performing services for'' was not intended 
to supplant the exemption contained under section 4 (c)(6) of the Act.
    (e) The only activity of the insurance company (writing 
comprehensive automobile insurance and credit life insurance) appears to 
involve an insurance relationship between it and a banking subsidiary of 
the holding company which the legislative history clearly indicates does 
not come within the meaning of the phrase ``furnishing services to or 
performing services for'' a bank holding company or its banking 
subsidiaries.
    (f) Accordingly, it is the Board's view that the insurance company 
could not be regarded as qualifying as a company engaged ``solely in the 
business of furnishing services to or performing services for'' the bank 
holding company or banks with respect to which the latter is a bank 
holding company.

[23 FR 9017, Nov. 20, 1958. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.111  Limit on investment by bank holding company system in stock of 

small business investment companies.

    (a) Under the provisions of section 4(c)(5) of the Bank Holding 
Company Act, as amended (12 U.S.C. 1843), a bank holding company may 
acquire shares of nonbank companies ``which are of the kinds and amounts 
eligible for investment'' by national banks. Pursuant to section 302(b) 
of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)), as 
amended by Title II of the Small Business Act Amendments of 1967 (Pub. 
L. 90-104, 81 Stat. 268, 270), a national bank may invest in stock of 
small business investment companies (SBICs) subject to certain 
restrictions.
    (b) On the basis of the foregoing statutory provisions, it is the 
position of the Board that a bank holding company may acquire direct or 
indirect ownership or control of stock of an SBIC subject to the 
following limits:
    (1) The total direct and indirect investments of a bank holding 
company in stock of SBICs may not exceed:
    (i) With respect to all stock of SBICs owned or controlled directly 
or indirectly by a subsidiary bank, 5 percent of that bank's capital and 
surplus;
    (ii) With respect to all stock of SBICs owned directly by a bank 
holding company that is a bank, 5 percent of that bank's capital and 
surplus; and
    (iii) With respect to all stock of SBICs otherwise owned or 
controlled directly or indirectly by a bank holding company, 5 percent 
of its proportionate interest in the capital and surplus of each 
subsidiary bank (that is, the holding company's percentage of that 
bank's stock times that bank's capital and surplus) less that bank's 
investment in stock of SBICs; and
    (2) A bank holding company may not acquire direct or indirect 
ownership or control of 50 percent or more of the shares of any class of 
equity securities of an SBIC that have actual or potential voting 
rights.

[[Page 185]]

    (c) A bank holding company or a bank subsidiary that acquired direct 
or indirect ownership or control of 50 percent or more of any such class 
of equity securities prior to January 9, 1968, is not required to divest 
to a level below 50 percent. A bank that acquired 50 percent or more 
prior to January 9, 1968, may become a subsidiary in a holding company 
system without any necessity for divesting to a level below 50 percent: 
Provided, That such action does not result in the bank holding company 
acquiring control of a percentage greater than that controlled by such 
bank.

(12 U.S.C. 248. Interprets 12 U.S.C. 1843, 15 U.S.C. 682)

[33 FR 6967, May 9, 1968. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.112  Indirect control of small business concern through convertible 

debentures held by small business investment company.

    (a) A question has been raised concerning the applicability of 
provisions of the Bank Holding Company Act of 1956 to the acquisition by 
a bank holding company of stock of a small business investment company 
(``SBIC'') organized pursuant to the Small Business Investment Act of 
1958 (``SBI Act'').
    (b) As indicated in the interpretation of the Board (Sec. 225.107) 
published at 23 FR 7813, it is the Board's opinion that, since stock of 
an SBIC is eligible for purchase by national banks and since section 
4(c)(4) of the Holding Company Act exempts stock eligible for investment 
by national banks from the prohibitions of section 4 of that Act, a bank 
holding company may lawfully acquire stock in such an SBIC.
    (c) However, section 304 of the SBI Act provides that debentures of 
a small business concern purchased by a small business investment 
company may be converted at the option of such company into stock of the 
small business concern. The question therefore arises as to whether, in 
the event of such conversion, the parent bank holding company would be 
regarded as having acquired ``direct or indirect ownership or control'' 
of stock of the small business concern in violation of section 4(a) of 
the Holding Company Act.
    (d) The Small Business Investment Act clearly contemplates that one 
of the primary purposes of that Act was to enable SBICs to provide 
needed equity capital to small business concerns through the purchase of 
debentures convertible into stock. Thus, to the extent that a 
stockholder in an SBIC might acquire indirect control of stock of a 
small business concern, such control appears to be a natural and 
contemplated incident of ownership of stock of the SBIC. The Office of 
the Comptroller of the Currency has informally indicated concurrence 
with this interpretation insofar as it affects investments by national 
banks in stock of an SBIC.
    (e) Since the exception as to stock eligible for investment by 
national banks contained in section 4(c)(4) of the Holding Company Act 
was apparently intended to permit a bank holding company to acquire any 
stock that would be eligible for purchase by a national bank, it is the 
Board's view that section 4(a)(1) of the Act does not prohibit a bank 
holding company from acquiring stock of an SBIC, even though ownership 
of such stock may result in the acquisition of indirect ownership or 
control of stock of a small business concern which would not itself be 
eligible for purchase directly by a national bank or a bank holding 
company.

[24 FR 1584, Mar. 4, 1959. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.113  Services under section 4(a) of Bank Holding Company Act.

    (a) The Board of Governors has been requested for an opinion as to 
whether the performance of certain functions by a bank holding company 
for four banks of which it owns less than 25 percent of the voting 
shares is in violation of section 4(a) of the Bank Holding Company Act.
    (b) It is claimed that the holding company is engaged in 
``managing'' four nonsubsidiary banks, for which services it receives 
``management fees.'' Specifically, the company engages in the following 
activities for the four nonsubsidiary banks: (1) Establishment and 
supervision of loaning policies; (2) direction of the purchase and sale 
of investment securities; (3)

[[Page 186]]

selection and training of officer personnel; (4) establishment and 
enforcement of operating policies; and (5) general supervision over all 
policies and practices.
    (c) The question raised is whether these activities are prohibited 
by section 4(a)(2) of the Bank Holding Company Act, which permits a bank 
holding company to engage in only three categories of business: (1) 
Banking; (2) managing or controlling banks; and (3) furnishing services 
to or performing services for any bank of which the holding company owns 
or controls 25 percent or more of the voting shares.
    (d) Clearly, the activities of the company with respect to the four 
nonsubsidiary banks do not constitute ``banking.'' With respect to the 
business of ``managing or controlling'' banks, it is the Board's view 
that such business, within the purview of section 4(a)(2), is 
essentially the exercise of a broad governing influence of the sort 
usually exercised by bank stockholders, as distinguished from direct or 
active participation in the establishment or carrying out of particular 
policies or operations. The latter kinds of activities fall within the 
third category of businesses in which a bank holding company is 
permitted to engage. In the Board's view, the activities enumerated 
above fall in substantial part within that third category.
    (e) Section 4(a)(2), like all other sections of the Holding Company 
Act, must be interpreted in the light of all of its provisions, as well 
as in the light of other sections of the Act. The expression ``managing 
* * * banks,'' if it could be taken by itself, might appear to include 
activities of the sort enumerated. However, such an interpretation of 
those words would virtually nullify the last portion of section 4(a)(2), 
which permits a holding company to furnish services to or perform 
services for ``any bank of which it owns or controls 25 per centum or 
more of the voting shares.''
    (f) Since Congress explicitly authorized the performance of services 
for banks that are at least 25 percent owned by a holding company, it 
obviously intended that the holding company should not perform services 
for banks in which it owns less than 25 percent of the voting shares. 
However, if the second category--``managing or controlling banks''--were 
interpreted to permit the holding company to perform services for any 
bank, including a bank in which it held less than 25 percent of the 
stock (or no stock whatsoever), the last clause of section 4(a)(2) would 
be meaningless.
    (g) It is principally for this reason--that is, to give effective 
meaning to the final clause of section 4(a)(2)--that the Board 
interprets ``managing or controlling banks'' in that provision as 
referring to the exercise of a stockholder's management or control of 
banks, rather than direct and active participation in their operations. 
To repeat, such active participation in operations falls within the 
third category (``furnishing services to or performing services for any 
bank'') and consequently may be engaged in only with respect to banks in 
which the holding company ``owns or controls 25 per centum or more of 
the voting shares.''
    (h) Accordingly, it is the Board's conclusion that, in performing 
the services enumerated, the bank holding company is ``furnishing 
services to or performing services for'' the four banks referred to. 
Under the Act such furnishing or performing of services is permissible 
only if the holding company owns or controls 25 percent of the voting 
shares of each bank receiving such services, and, since the company owns 
less than 25 percent of the voting shares of these banks, it follows 
that these activities are prohibited by section 4(a)(2).
    (i) While this conclusion is required, in the Board's opinion, by 
the language of the statute, it may be noted further that any other 
conclusion would make it possible for bank holding company or any other 
corporation, through arrangements for the ``managing'' of banks in the 
manner here involved, to acquire effective control of banks without 
acquiring bank stocks and thus to evade the underlying objectives of 
section 3 of the Act.

[25 FR 281, Jan. 14, 1960. Redesignated at 36 FR 21666, Nov. 12, 1971]

[[Page 187]]



Sec. 225.115  Applicability of Bank Service Corporation Act in certain bank 

holding company situations.

    (a) Questions have been presented to the Board of Governors 
regarding the applicability of the recently enacted Bank Service 
Corporation Act (Pub. L. 87-856, approved October 23, 1962) in cases 
involving service corporations that are subsidiaries of bank holding 
companies under the Bank Holding Company Act of 1956. In addition to 
being charged with the administration of the latter Act, the Board is 
named in the Bank Service Corporation Act as the Federal supervisory 
agency with respect to the performance of bank services for State member 
banks.
    (b) Holding company-owned corporation serving only subsidiary banks. 
(1) One question is whether the Bank Service Corporation Act is 
applicable in the case of a corporation, wholly owned by a bank holding 
company, which is engaged in performing ``bank services'', as defined in 
section 1(b) of the Act, exclusively for subsidiary banks of the holding 
company.
    (2) Except as noted below with respect to section 5 thereof, the 
Bank Service Corporation Act is not applicable in this case. This is 
true because none of the stock of the corporation performing the 
services is owned by any bank and the corporation, therefore, is not a 
``bank service corporation'' as defined in section 1(c) of the Act. A 
corporation cannot meet that definition unless part of its stock is 
owned by two or more banks. The situation clearly is unaffected by 
section 2(b) of the Act which permits a corporation that fell within the 
definition initially to continue to function as a bank service 
corporation although subsequently only one of the banks remains as a 
stockholder in the corporation.
    (3) However, although it is not a bank service corporation, the 
corporation in question and each of the banks for which it performs bank 
services are subject to section 5 of the Bank Service Corporation Act. 
That section, which requires the furnishing of certain assurances to the 
appropriate Federal supervisory agency in connection with the 
performance of bank services for a bank, is applicable whether such 
services are performed by a bank service corporation or by others.
    (4) Section 4(a)(1) of the Bank Holding Company Act prohibits the 
acquisition by a bank holding company of ``direct or indirect ownership 
or control'' of shares of a nonbanking company, subject to certain 
exceptions. Section 4(c)(1) of the Act exempts from section 4(a)(1) 
shares of a company engaged ``solely in the business of furnishing 
services to or performing services for'' its bank holding company or 
subsidiary banks thereof. Assuming that the bank services performed by 
the corporation in question are ``services'' of the kinds contemplated 
by section 4(c)(1) of the Bank Holding Company Act (as would be true, 
for example, of the electronic data processing of deposit accounts), the 
holding company's ownership of the corporation's shares in the situation 
described above clearly is permissible under that section of the Act.
    (c) Bank service corporation owned by holding company subsidiaries 
and serving also other banks. (1) The other question concerns the 
applicability of the Bank Service Corporation Act and the Bank Holding 
Company Act in the case of a corporation, all the stock of which is 
owned either by a bank holding company and its subsidiary banks together 
or by the subsidiary banks alone, which is engaged in performing ``bank 
services'', as defined in section 1(b) of the Bank Service Corporation 
Act, for the subsidiary banks and for other banks, as well.
    (2) In contrast to the situation under paragraph (b) of this 
section, the corporation in this case is a ``bank service corporation'' 
within the meaning of section 1(c) of the Bank Service Corporation Act 
because of the ownership by each of the subsidiary banks of a part of 
the corporation's stock. This stock ownership is one of the important 
facts differentiating this case from the first one. Being a bank service 
corporation, the corporation in question is subject to section 3 of the 
Act concerning applications to bank service corporations by competitive 
banks for bank services, and to section 4 forbidding a bank service 
corporation from engaging in any activity other than the performance of 
bank services

[[Page 188]]

for banks. Section 5, mentioned previously and relating to 
``assurances'', also is applicable in this case.
    (3) The other important difference between this case and the 
situation in paragraph (b) of this section is that here the bank service 
corporation performs services for nonsubsidiary banks, as well as for 
subsidiary banks. This is permissible because section 2(a) of the Bank 
Service Corporation Act, which authorizes any two or more banks to 
invest limited amounts in a bank service corporation, removes all 
limitations and prohibitions of Federal law exclusively relating to 
banks that otherwise would prevent any such investment. From the 
legislative history of section 2(a), it is clear that section 6 of the 
Bank Holding Company Act is among the limitations and prohibitions so 
removed. But for such removal, section 6(a)(1) of that Act would make it 
unlawful for any of the subsidiary banks of the bank holding company in 
question to own stock in the bank service corporation subsidiary of the 
holding company, as the exemption in section 6(b)(1) would not apply 
because of the servicing by the bank service corporation of 
nonsubsidiary banks.
    (4) Because the bank service corporation referred to in the question 
is serving banks other than the subsidiary banks, the bank holding 
company is not exempt under section 4(c)(1) of the Bank Holding Company 
Act from the prohibition of acquisition of nonbanking interests in 
section 4(a)(1) of that Act. The bank holding company, however, is 
entitled to the benefit of the exemption in section 4(c)(4) of the Act. 
That section exempts from section 4(a) ``shares which are of the kinds 
and amounts eligible for investment by National banking associations 
under the provisions of section 5136 of the Revised Statutes''. Section 
5136 provides, in part, that: ``Except as hereinafter provided or 
otherwise permitted by law, nothing herein contained shall authorize the 
purchase by the association for its own account of any shares of stock 
of any corporation.'' As the provisions of section 2(a) of the Bank 
Service Corporation Act and its legislative history make it clear that 
shares of a bank service corporation are of a kind eligible for 
investment by national banks under section 5136, it follows that the 
direct or indirect ownership on control of such shares by a bank holding 
company are permissible within the amount limitation discussed in 
paragraph (d) of this section.
    (d) Limit on investment by bank holding company system in stock of 
bank service corporation. (1) In the situation presented by paragraph 
(c) the bank holding company clearly owns or controls, directly or 
indirectly, all of the stock of the bank service corporation. The 
remaining question, therefore, is whether the total direct and indirect 
investment of the bank holding company in the bank service corporation 
exceeds the amount permissible under the Bank Holding Company Act.
    (2) The effect of sections 4(a)(1) and 4(c)(4) of the Bank Holding 
Company Act is to limit the amount of shares of a bank service 
corporation that a bank holding company may own or control, directly or 
indirectly, to the amount eligible for investment by a national bank, as 
previously indicated. Under section 2(a) of the Bank Service Corporation 
Act, the amount of shares of a bank service corporation eligible for 
investment by a national bank may not exceed ``10 per centum [of the 
bank's] * * * paid-in and unimpaired capital and unimpaired surplus''.
    (3) The Board's view is that this aspect of the matter should be 
determined in accordance with the principles set forth in Sec. 225.111, 
as revised (27 FR 12671), involving the application of sections 4(a)(1) 
and 4(c)(4) of the Bank Holding Company Act in the light of section 
302(b) of the Small Business Investment Act limiting the amount eligible 
for investment by a national bank in the shares of a small business 
investment company to two percent of the bank's ``capital and surplus''.
    (4) Except for the differences in the percentage figures, the 
investment limitation in section 302(b) of the Small Business Investment 
Act is essentially the same as the investment limitation in section 2(a) 
of the Bank Service Corporation Act since, as an accounting matter and 
for the purposes under consideration, ``capital and surplus'' may be 
regarded as equivalent in meaning to ``paid-in and unimpaired capital 
and

[[Page 189]]

unimpaired surplus.'' Accordingly, the maximum permissible investment by 
a bank holding company system in the stock of a bank service corporation 
should be determined in accordance with the formula prescribed in Sec. 
222.111.

[27 FR 12918, Dec. 29, 1962. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.118  Computer services for customers of subsidiary banks.

    (a) The question has been presented to the Board of Governors 
whether a wholly-owned nonbanking subsidiary (``service company'') of a 
bank holding company, which is now exempt from the prohibitions of 
section 4 of the Bank Holding Company Act of 1956 (``the Act'') because 
its sole business is the providing of services for the holding company 
and the latter's subsidiary banks, would lose its exempt status if it 
should provide data processing services for customers of the subsidiary 
banks.
    (b) The Board understood from the facts presented that the service 
company owns a computer which it utilizes to furnish data processing 
services for the subsidiary banks of its parent holding company. 
Customers of these banks have requested that the banks provide for them 
computerized billing, accounting, and financial records maintenance 
services. The banks wish to utilize the computer services of the service 
company in providing these and other services of a similar nature. It is 
proposed that, in each instance where a subsidiary bank undertakes to 
provide such services, the bank will enter into a contract directly with 
the customer and then arrange to have the service company perform the 
services for it, the bank. In no case will the service company provide 
services for anyone other than its affiliated banks. Moreover, it will 
not hold itself out as, nor will its parent corporation or affiliated 
banks represent it to be, authorized or willing to provide services for 
others.
    (c) Section 4(c)(1) of the Act permits a holding company to own 
shares in ``any company engaged solely * * * in the business of 
furnishing services to or performing services for such holding company 
and banks with respect to which it is a bank holding company * * *.'' 
The Board has ruled heretofore that the term ``services'' as used in 
section 4(c)(1) is to be read as relating to those services (excluding 
``closely related'' activities of ``a financial, fiduciary, or insurance 
nature'' within the meaning of section 4(c)(6)) which a bank itself can 
provide for its customers (Sec. 225.104). A determination as to whether 
a particular service may legitimately be rendered or performed by a bank 
for its customers must be made in the light of applicable Federal or 
State statutory or regulatory provisions. In the case of a State-
chartered bank, the laws of the State in which the bank operates, 
together with any interpretations thereunder rendered by appropriate 
bank authorities, would govern the right of the bank to provide a 
particular service. In the case of a national bank, a similar 
determination would require reference to provisions of Federal law 
relating to the establishment and operation of national banks, as well 
as to pertinent rulings or interpretations promulgated thereunder.
    (d) Accordingly, on the assumption that all of the services to be 
performed are of the kinds that the holding company's subsidiary banks 
may render for their customers under applicable Federal or State law, 
the Board concluded that the rendition of such services by the service 
company for its affiliated banks would not adversely affect its exempt 
status under section 4(c)(1) of the Act.
    (e) In arriving at the above conclusion, the Board emphasized that 
its views were premised explicitly upon the facts presented to it, and 
particularly its understanding that banks are permitted, under 
applicable Federal or State law to provide the proposed computer 
services. The Board emphasized also that in respect to the service 
company's operations, there continues in effect the requirement under 
section 4(c)(1) that the service company engage solely in the business 
of furnishing services to or performing services for the bank holding 
company and its subsidiary banks. The Board added that any substantial 
change in the facts that had been presented might require re-examination 
of the service company's status under section 4(c)(1).

[29 FR 12361, Aug. 28, 1964. Redesignated at 36 FR 21666, Nov. 12, 1971]

[[Page 190]]



Sec. 225.121  Acquisition of Edge corporation affiliate by State member banks 

of registered bank holding company.

    (a) The Board has been asked whether it is permissible for the 
commercial banking affiliates of a bank holding company registered under 
the Bank Holding Company Act of 1956, as amended, to acquire and hold 
the shares of the holding company's Edge corporation subsidiary 
organized under section 25(a) of the Federal Reserve Act.
    (b) Section 9 of the Bank Holding Company Act amendments of 1966 
(Pub. L. 89-485, approved July 1, 1966) repealed section 6 of the Bank 
Holding Company Act of 1956. That rendered obsolete the Board's 
interpretation of section 6 that was published in the March 1966 Federal 
Reserve Bulletin, page 339 (Sec. 225.120). Thus, so far as Federal 
Banking law applicable to State member banks is concerned, the answer to 
the foregoing question depends on the provisions of section 23A of the 
Federal Reserve Act, as amended by the 1966 amendments to the Bank 
Holding Company Act. By its specific terms, the provisions of section 
23A do not apply to an affiliate organized under section 25(a) of the 
Federal Reserve Act.
    (c) Accordingly, the Board concludes that, except for such 
restrictions as may exist under applicable State law, it would be 
legally permissible by virtue of paragraph 20 of section 9 of the 
Federal Reserve Act for any or all of the State member banks that are 
affiliates of a registered bank holding company to acquire and hold 
shares of the Edge corporation subsidiary of the bank holding company 
within the amount limitation in the last sentence of paragraph 12 of 
section 25(a) of the Federal Reserve Act.

(12 U.S.C. 24, 248, 335, 371c, 611, 618)

[31 FR 10263, July 29, 1966. Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.122  Bank holding company ownership of mortgage companies.

    (a) The Board of Governors recently considered whether a bank 
holding may acquire, either directly or through a subsidiary, the stock 
of a so-called ``mortgage company'' that would be operated on the 
following basis: The company would solicit mortgage loans on behalf of a 
bank in the holding company system, assemble credit information, make 
property inspections and appraisals, and secure title information. The 
company would also participate in the preparation of applications for 
mortgage loans, which it would submit, together with recommendations 
with respect to action thereon, to the bank, which alone would decide 
whether to make any or all of the loans requested. The company would in 
addition solicit investors to purchase mortgage loans from the bank and 
would seek to have such investors contract with the bank for the 
servicing of such loans.
    (b) Under section 4 of the Bank Holding Company Act (12 U.S.C. 
1843), a bank holding company is generally prohibited from acquiring 
``direct or indirect ownership'' of stock of nonbanking corporations. 
The two exceptions principally involved in the question presented are 
with respect to (1) stock that is eligible for investment by a national 
bank (section 4(c)(5) of the Act) and (2) shares of a company 
``furnishing services to or performing services for such bank holding 
company or its banking subsidiaries'' (section 4(c)(1)(C) of the Act).
    (c) The Board has previously indicated its view that a national bank 
is forbidden by the so-called ``stock-purchase prohibition'' of 
paragraph ``Seventh'' of section 5136 of the Revised Statutes (12 U.S.C. 
24) to purchase ``for its own account * * * any shares of stock of any 
corporation'' except (1) to the extent permitted by specific provisions 
of Federal law or (2) as comprised within the concept of ``such 
incidental powers as shall be necessary to carry on the business of 
banking'' referred to in the first sentence of said paragraph 
``Seventh''. There is no specific statutory provision authorizing a 
national bank to purchase stock in a mortgage company, and in the 
Board's view such purchase may not properly be regarded as authorized 
under the ``incidental powers'' clause. (See 1966 Federal Reserve 
Bulletin 1151; 12 CFR 208.119.) Accordingly, a bank holding company may 
not acquire stock in a mortgage

[[Page 191]]

company on the basis of the section 4(c)(5) exemption.
    (d) However, the Board does not believe that such conclusion 
prejudices consideration of the question whether such a company is 
within the section 4(c)(1)(C) ``servicing exemption''. The basic purpose 
of section 4 of the Act is to confine a bank holding company's 
activities to the management and control of banks. In determining 
whether an activity in which a bank could itself engage is within the 
servicing exemption, the question is simply whether such activity may 
appropriately be considered as ``furnishing services to or performing 
services for'' a bank.
    (e) As indicated in the Board's interpretation published in the 1958 
Federal Reserve Bulletin at page 431 (12 CFR 225.104), the legislative 
history of the servicing exemption indicates that it includes the 
following activities: ``auditing, appraising, investment counseling'' 
and ``advertising, public relations, developing new business, 
organization, operations, preparing tax returns, and personnel''. The 
legislative history further indicates that some other activities also 
are within the scope of the exemption. However, the types of servicing 
permitted under such exemption must be distinguished from activities of 
a ``financial fiduciary, or insurance nature'', such as those that might 
be considered for possible exemption under section 4(c)(8) of the Act.
    (f) In considering the interrelation of these exemptions in the 
light of the purpose of the prohibition against bank holding company 
interests in nonbanking organizations, the Board has concluded that the 
appropriate test for determining whether a mortgage company may be 
considered as within the servicing exemption is whether the company will 
perform as principal any banking activities--such as receiving deposits, 
paying checks, extending credit, conducting a trust department, and the 
like. In other words, if the mortgage company is to act merely as an 
adjunct to a bank for the purpose of facilitating the banks operations, 
the company may appropriately be considered as within the scope of the 
servicing exemption.\1\
---------------------------------------------------------------------------

    \1\ Insofar as the 1958 interpretation referred to above suggested 
that the branch banking laws are an appropriate general test for 
determining the scope of the servicing exemption, such interpretation is 
hereby modified. In view of the different purposes to be served by the 
branch banking laws and by section 4 of the Bank Holding Company Act, 
the Board has concluded that basing determinations under the latter 
solely on the basis of determinations under the former is inappropriate.
---------------------------------------------------------------------------

    (g) On this basis the Board concluded that, insofar as the Bank 
Holding Company Act is concerned, a bank holding company may acquire, 
either directly or through a subsidiary, the stock of a mortgage company 
whose functions are as described in the question presented. On the other 
hand, in the Board's view, a bank holding company may not acquire, on 
the basis of the servicing exemption, a mortgage company whose functions 
include such activities as extending credit for its own account, 
arranging interim financing, entering into mortgage service contracts on 
a fee basis, or otherwise performing functions other than solely on 
behalf of a bank.

(12 U.S.C. 248)

[32 FR 15004, Oct. 3, 1967, as amended at 35 FR 19662, Dec. 29, 1970. 
Redesignated at 36 FR 21666, Nov. 12, 1971]



Sec. 225.123  Activities closely related to banking.

    (a) Effective June 15, 1971, the Board of Governors has amended 
Sec. 225.4(a) of Regulation Y to implement its regulatory authority 
under section 4(c)(8) of the Bank Holding Company Act. In some respects 
activities determined by the Board to be closely related to banking are 
described in general terms that will require interpretation from time to 
time. The Board's views on some questions that have arisen are set forth 
below.
    (b) Section 225.4(a) states that a company whose ownership by a bank 
holding company is authorized on the basis of that section may engage 
solely in specified activities. That limitation refers only to 
activities the authority for which depends on section 4(c)(8) of the 
Act. It does not prevent a holding company from establishing one 
subsidiary

[[Page 192]]

to engage, for example, in activities specified in Sec. 225.4(a) and 
also in activities that fall within the scope of section 4(c)(1)(C) of 
the Act--the ``servicing'' exemption.
    (c) The amendments to Sec. 225.4(a) do not apply to restrict the 
activities of a company previously approved by the Board on the basis of 
section 4(c)(8) of the Act. Activities of a company authorized on the 
basis of section 4(c)(8) either before the 1970 Amendments or pursuant 
to the amended Sec. 225.4(a) may be shifted in a corporate 
reorganization to another company within the holding company system 
without complying with the procedures of Sec. 225.4(b), as long as all 
the activities of such company are permissible under one of the 
exemptions in section 4 of the Act.
    (d) Under the procedures in Sec. 225.4(a)(c), a holding company 
that wishes to change the location at which it engages in activities 
authorized pursuant to Sec. 225.4(a) must publish notice in a newspaper 
of general circulation in the community to be served. The Board does not 
regard minor changes in location as within the coverage of that 
requirement. A move from one site to another within a 1-mile radius 
would constitute such a minor change if the new site is in the same 
State.
    (e) Data processing. In providing packaged data processing and 
transmission services for banking, financial and economic data for 
installation on the premises of the customer, as authorized by Sec. 
225.4(a)(8)(ii), a bank holding company should limit its activities to 
providing facilities that perform banking functions, such as check 
collection, or other similar functions for customers that are depository 
or other similar institutions, such as mortgage companies. In addition, 
the Board regards the following as incidental activities necessary to 
carry on the permissible activities in this area:
    (1) Providing excess capacity, not limited to the processing or 
transmission of banking, financial or economic data on data processing 
or transmission equipment or facilities used in connection with 
permissible data processing and data transmission activities, where:
    (A) Equipment is not purchased solely for the purpose of creating 
excess capacity;
    (B) Hardware is not offered in connection therewith; and
    (C) Facilities for the use of the excess capacity do not include the 
provision of any software, other than systems software (including 
language), network communications support, and the operating personnel 
and documentation necessary for the maintenance and use of these 
facilities.
    (2) Providing by-products of permissible data processing and data 
transmission activities, where not designed, or appreciably enhanced, 
for the purpose of marketability.
    (3) Furnishing any data processing service upon request of a 
customer if such data processing service is not otherwise reasonably 
available in the relevant market area; and

In order to eliminate or reduce to an insignificant degree any 
possibility of unfair competition where services, facilities, by-
products or excess capacity are provided by a bank holding company's 
nonbank subsidiary or related entity, the entity providing the services, 
facilities, by-products and/or excess capacity should have separate 
books and financial statements, and should provide these books and 
statements to any new or renewal customer requesting financial data. 
Consolidated or other financial statements of the bank holding company 
should not be provided unless specifically requested by the customer.

(Interprets and applies 12 U.S.C. 1843 (c)(8))

[36 FR 10778, June 3, 1971, as amended at 36 FR 11806, June 19, 1971. 
Redesignated at 36 FR 21666, Nov. 12, 1971 and amended at 40 FR 13477, 
Mar. 27, 1975; 47 FR 37372, Aug. 26, 1982; 52 FR 45161, Nov. 25, 1987]



Sec. 225.124  Foreign bank holding companies.

    (a) Effective December 1, 1971, the Board of Governors has added a 
new Sec. 225.4(g) to Regulation Y implementing its authority under 
section 4(c)(9) of the Bank Holding Company Act. The Board's views on 
some questions that have arisen in connection with the meaning of terms 
used in Sec. 225.4(g) are set forth in paragraphs (b) through (g) of 
this section.

[[Page 193]]

    (b) The term ``activities'' refers to nonbanking activities and does 
not include the banking activities that foreign banks conduct in the 
United States through branches or agencies licensed under the banking 
laws of any State of the United States or the District of Columbia.
    (c) A company (including a bank holding company) will not be deemed 
to be engaged in ``activities'' in the United States merely because it 
exports (or imports) products to (or from) the United States, or 
furnishes services or finances goods or services in the United States, 
from locations outside the United States. A company is engaged in 
``activities'' in the United States if it owns, leases, maintains, 
operates, or controls any of the following types of facilities in the 
United States:
    (1) A factory,
    (2) A wholesale distributor or purchasing agency,
    (3) A distribution center,
    (4) A retail sales or service outlet,
    (5) A network of franchised dealers,
    (6) A financing agency, or
    (7) Similar facility for the manufacture, distribution, purchasing, 
furnishing, or financing of goods or services locally in the United 
States.

A company will not be considered to be engaged in ``activities'' in the 
United States if its products are sold to independent importers, or are 
distributed through independent warehouses, that are not controlled or 
franchised by it.
    (d) In the Board's opinion, section 4 (a)(1) of the Bank Holding 
Company Act applies to ownership or control of shares of stock as an 
investment and does not apply to ownership or control of shares of stock 
in the capacity of an underwriter or dealer in securities. Underwriting 
or dealing in shares of stock are nonbanking activities prohibited to 
bank holding companies by section 4(a)(2) of the Act, unless otherwise 
exempted. Under Sec. 225.4(g) of Regulation Y, foreign bank holding 
companies are exempt from the prohibitions of section 4 of the Act with 
respect to their activities outside the United States; thus foreign bank 
holding companies may underwrite or deal in shares of stock (including 
shares of United States issuers) to be distributed outside the United 
States, provided that shares so acquired are disposed of within a 
reasonable time.
    (e) A foreign bank holding company does not ``indirectly'' own 
voting shares by reason of the ownership or control of such voting 
shares by any company in which it has a noncontrolling interest. A 
foreign bank holding company may, however, ``indirectly'' control such 
voting shares if its noncontrolling interest in such company is 
accompanied by other arrangements that, in the Board's judgment, result 
in control of such shares by the bank holding company. The Board has 
made one exception to this general approach. A foreign bank holding 
company will be considered to indirectly own or control voting shares of 
a bank if that bank holding company acquires more than 5 percent of any 
class of voting shares of another bank holding company. A bank holding 
company may make such an acquisition only with prior approval of the 
Board.
    (f) A company is ``indirectly'' engaged in activities in the United 
States if any of its subsidiaries (whether or not incorporated under the 
laws of this country) is engaged in such activities. A company is not 
``indirectly'' engaged in activities in the United States by reason of a 
noncontrolling interest in a company engaged in such activities.
    (g) Under the foregoing rules, a foreign bank holding company may 
have a noncontrolling interest in a foreign company that has a U.S. 
subsidiary (but is not engaged in the securities business in the United 
States) if more than half of the foreign company's consolidated assets 
and revenues are located and derived outside the United States. For the 
purpose of such determination, the assets and revenues of the United 
States subsidiary would be counted among the consolidated assets and 
revenues of the foreign company to the extent required or permitted by 
generally accepted accounting principles in the United States. The 
foreign bank holding company would not, however, be permitted to 
``indirectly'' control voting shares of the said U.S. subsidiary, as 
might be the case if there are other arrangements accompanying its 
noncontrolling interest in the foreign parent company that, in the 
Board's judgment, result in control of

[[Page 194]]

such shares by the bank holding company.

(Interprets and applies 12 U.S.C. 1843 (a) (1), (2), and (c)(9))

[36 FR 21808, Nov. 16, 1971]



Sec. 225.125  Investment adviser activities.

    (a) Effective February 1, 1972, the Board of Governors amended Sec. 
225.4(a) of Regulation Y to add ``serving as investment adviser, as 
defined in section 2(a)(20) of the Investment Company Act of 1940, to an 
investment company registered under that Act'' to the list of activities 
it has determined to be so closely related to banking or managing or 
controlling banks as to be a proper incident thereto. During the course 
of the Board's consideration of this amendment several questions arose 
as to the scope of such activity, particularly in view of certain 
restrictions imposed by sections 16, 20, 21, and 32 of the Banking Act 
of 1933 (12 U.S.C. 24, 377, 378, 78) (sometimes referred to hereinafter 
as the ``Glass-Steagall Act provisions'') and the U.S. Supreme Court's 
decision in Investment Company Institute v. Camp, 401 U.S. 617 (1971). 
The Board's views with respect to some of these questions are set forth 
below.
    (b) It is clear from the legislative history of the Bank Holding 
Company Act Amendments of 1970 (84 Stat. 1760) that the Glass-Steagall 
Act provisions were not intended to be affected thereby. Accordingly, 
the Board regards the Glass-Steagall Act provisions and the Board's 
prior interpretations thereof as applicable to a holding company's 
activities as an investment adviser. Consistently with the spirit and 
purpose of the Glass-Steagall Act, this interpretation applies to all 
bank holding companies registered under the Bank Holding Company Act 
irrespective of whether they have subsidiaries that are member banks.
    (c) Under Sec. 225.4(a)(5), as amended, bank holding companies 
(which term, as used herein, includes both their bank and nonbank 
subsidiaries) may, in accordance with the provisions of Sec. 225.4 (b), 
act as investment advisers to various types of investment companies, 
such as ``open-end'' investment companies (commonly referred to as 
``mutual funds'') and ``closed-end'' investment companies. Briefly, a 
mutual fund is an investment company which, typically, is continuously 
engaged in the issuance of its shares and stands ready at any time to 
redeem the securities as to which it is the issuer; a closed-end 
investment company typically does not issue shares after its initial 
organization except at infrequent intervals and does not stand ready to 
redeem its shares.
    (d) The Board intends that a bank holding company may exercise all 
functions that are permitted to be exercised by an ``investment 
adviser'' under the Investment Company Act of 1940, except to the extent 
limited by the Glass-Steagall Act provisions, as described, in part, 
hereinafter.
    (e) The Board recognizes that presently most mutual funds are 
organized, sponsored and managed by investment advisers with which they 
are affiliated and that their securities are distributed to the public 
by such affiliated investment advisers, or subsidiaries or affiliates 
thereof. However, the Board believes that (1) The Glass-Steagall Act 
provisions do not permit a bank holding company to perform all such 
functions, and (2) It is not necessary for a bank holding company to 
perform all such functions in order to engage effectively in the 
described activity.
    (f) In the Board's opinion, the Glass-Steagall Act provisions, as 
interpreted by the U.S. Supreme Court, forbid a bank holding company to 
sponsor, organize, or control a mutual fund. However, the Board does not 
believe that such restrictions apply to closed-end investment companies 
as long as such companies are not primarily or frequently engaged in the 
issuance, sale, and distribution of securities. A bank holding company 
should not act as investment adviser to an investment company that has a 
name similar to the name of the holding company or any of its subsidiary 
banks, unless the prospectus of the investment company contains the 
disclosures required in paragraph (h) of this section. In no case should 
a bank holding company act as investment adviser to an investment 
company that has either the same

[[Page 195]]

name as the name of the holding company or any of its subsidiary banks, 
or a name that contains the word ``bank.''
    (g) In view of the potential conflicts of interests that may exist, 
a bank holding company and its bank and nonbank subsidiaries should not 
purchase in their sole discretion, in a fiduciary capacity (including as 
managing agent), securities of any investment company for which the bank 
holding company acts as investment adviser unless, the purchase is 
specifically authorized by the terms of the instrument creating the 
fiduciary relationship, by court order, or by the law of the 
jurisdiction under which the trust is administered.
    (h) Under section 20 of the Glass-Steagall Act, a member bank is 
prohibited from being affiliated with a company that directly, or 
through a subsidiary, engages principally in the issue, flotation, 
underwriting, public sale, or distribution of securities. A bank holding 
company or its nonbank subsidiary may not engage, directly or 
indirectly, in the underwriting, public sale or distribution of 
securities of any investment company for which the holding company or 
any nonbank subsidiary provides investment advice except in compliance 
with the terms of section 20, and only after obtaining the Board's 
approval under section 4 of the Bank Holding Company Act and subject to 
the limitations and disclosures required by the Board in those cases. 
The Board has determined, however, that the conduct of securities 
brokerage activities by a bank holding company or its nonbank 
subsidiaries, when conducted individually or in combination with 
investment advisory activities, is not deemed to be the underwriting, 
public sale, or distribution of securities prohibited by the Glass-
Steagall Act, and the U.S. Supreme Court has upheld that determination. 
See Securities Industry Ass'n v. Board of Governors, 468 U.S. 207 
(1984); see also Securities Industry Ass'n v. Board of Governors, 821 
F.2d 810 (D.C. Cir. 1987), cert. denied, 484 U.S. 1005 (1988). 
Accordingly, the Board believes that a bank holding company or any of 
its nonbank subsidiaries that has been authorized by the Board under the 
Bank Holding Company Act to conduct securities brokerage activities 
(either separately or in combination with investment advisory 
activities) may act as agent, upon the order and for the account of 
customers of the holding company or its nonbank subsidiary, to purchase 
or sell shares of an investment company for which the bank holding 
company or any of its subsidiaries acts as an investment adviser. In 
addition, a bank holding company or any of its nonbank subsidiaries that 
has been authorized by the Board under the Bank Holding Company Act to 
provide investment advice to third parties generally (either separately 
or in combination with securities brokerage services) may provide 
investment advice to customers with respect to the purchase or sale of 
shares of an investment company for which the holding company or any of 
its subsidiaries acts as an investment adviser. In the event that a bank 
holding company or any of its nonbank subsidiaries provides brokerage or 
investment advisory services (either separately or in combination) to 
customers in the situations described above, at the time the service is 
provided the bank holding company should instruct its officers and 
employees to caution customers to read the prospectus of the investment 
company before investing and must advise customers in writing that the 
investment company's shares are not insured by the Federal Deposit 
Insurance Corporation, and are not deposits, obligations of, or endorsed 
or guaranteed in any way by, any bank, unless that happens to be the 
case. The holding company or nonbank subsidiary must also disclose in 
writing to the customer the role of the company or affiliate as adviser 
to the investment company. These disclosures may be made orally so long 
as written disclosure is provided to the customer immediately 
thereafter. To the extent that a bank owned by a bank holding company 
engages in providing advisory or brokerage services to bank customers in 
connection with an investment company advised by the bank holding 
company or a nonbank affiliate, but is not required by the bank's 
primary regulator to make disclosures comparable to the disclosures 
required to be made by bank holding companies providing such services, 
the bank holding company should require

[[Page 196]]

its subsidiary bank to make the disclosures required in this paragraph 
to be made by a bank holding company that provides such advisory or 
brokerage services.
    (i) Acting in such capacities as registrar, transfer agent, or 
custodian for an investment company is not a selling activity and is 
permitted under Sec. 225.4(a)(4) of Regulation Y. However, in view of 
potential conflicts of interests, a bank holding company which acts both 
as custodian and investment adviser for an investment company should 
exercise care to maintain at a minimal level demand deposit accounts of 
the investment company which are placed with a bank affiliate and should 
not invest cash funds of the investment company in time deposit accounts 
(including certificates of deposit) of any bank affiliate.

[37 FR 1464, Jan. 29, 1972, as amended by Reg. Y, 57 FR 30391, July 9, 
1992; 61 FR 45875, Aug. 30, 1996; Reg. Y, 62 FR 9343, Feb. 28, 1997]



Sec. 225.126  Activities not closely related to banking.

    Pursuant to section 4(c)(8) of the Bank Holding Company Act and 
Sec. 225.4(a) of Regulation Y, the Board of Governors has determined 
that the following activities are not so closely related to banking or 
managing or controlling banks as to be a proper incident thereto:
    (a) Insurance premium funding--that is, the combined sale of mutual 
funds and insurance.
    (b) Underwriting life insurance that is not sold in connection with 
a credit transaction by a bank holding company, or a subsidiary thereof.
    (c) Real estate brokerage (see 1972 Fed. Res. Bulletin 428).
    (d) Land development (see 1972 Fed. Res. Bulletin 429).
    (e) Real estate syndication.
    (f) Management consulting (see 1972 Fed. Res. Bulletin 571).
    (g) Property management (see 1972 Fed. Res. Bulletin 652).

[Reg. Y, 37 FR 20329, Sept. 29, 1972; 37 FR 21938, Oct. 17, 1972, as 
amended at 54 FR 37302, Sept. 8, 1989]



Sec. 225.127  Investment in corporations or projects designed primarily to 

promote community welfare.

    (a) Under Sec. 225.25(b)(6) of Regulation Y, a bank holding company 
may, in accordance with the provisions of Sec. 225.23, engage in 
``making equity and debt investments in corporations or projects 
designed primarily to promote community welfare, such as the economic 
rehabilitation and development of low-income areas.'' The Board included 
that activity among those the Board has determined to be so closely 
related to banking or managing or controlling banks as be a proper 
incident thereto, in order to permit bank holding companies to fulfill 
their civic responsibilities. As indicated hereinafter in this 
interpretation, the Board intends Sec. 225.25(b)(6) to enable bank 
holding companies to take an active role in the quest for solutions to 
the Nation's social problems. Although the interpretation primarily 
focuses on low- and moderate-income housing, it is not intended to limit 
projects under Sec. 225.25(b)(6) to that area. Other investments 
primarily designed to promote community welfare are considered 
permissible, but have not been defined in order to provide bank holding 
companies flexibility in approaching community problems. For example, 
bank holding companies may utilize this flexibility to provide new and 
creative approaches to the promotion of employment opportunities for 
low-income persons. Bank holding companies possess a unique combination 
of financial and managerial resources making them particularly suited 
for a meaningful and substantial role in remedying our social ills. 
Section 225.25(b)(6) is intended to provide an opportunity for them to 
assume such a role.
    (b) Under the authority of Sec. 225.25(b)(6), a bank holding 
company may invest in community development corporations established 
pursuant to Federal or State law. A bank holding company may also 
participate in other civic projects, such as a municipal parking 
facility sponsored by a local civic organization as a means to promote 
greater public use of the community's facilities.
    (c) Within the category of permissible investments under Sec. 
225.25(b)(6)

[[Page 197]]

are investments in projects to construct or rehabilitate multifamily 
low- or moderate-income housing with respect to which a mortgage is 
insured under section 221(d)(3), 221(d)(4), or 236 of the National 
Housing Act (12 U.S.C. 1701) and investments in projects to construct or 
rehabilitate low- or moderate-income housing which is financed or 
assisted by direct loan, tax abatement, or insurance under provisions of 
State or local law, similar to the aforementioned Federal programs, 
provided that, with respect to all such projects the owner is, by 
statute, regulation, or regulatory authority, limited as to the rate of 
return on his investment in the project, as to rentals or occupancy 
charges for units in the project, and in such other respects as would be 
a ``limited dividend corporation'' (as defined by the Secretary of 
Housing and Urban Development).
    (d) Investments in other projects that may be considered to be 
designed primarily to promote community welfare include but are not 
limited to: (1) Projects for the construction or rehabilitation of 
housing for the benefit of persons of low- or moderate-income, (2) 
projects for the construction or rehabilitation of ancillary local 
commercial facilities necessary to provide goods or services principally 
to persons residing in low- or moderate-income housing, and (3) projects 
designed explicitly to create improved job opportunities for low- or 
moderate-income groups (for example, minority equity investments, on a 
temporary basis, in small or medium-sized locally-controlled businesses 
in low-income urban or other economically depressed areas). In the case 
of de novo projects, the copy of the notice with respect to such other 
projects which is to be furnished to Reserve Banks in accordance with 
the provisions of Sec. 225.23 should be accompanied by a memorandum 
which demonstrates that such projects meet the objectives of Sec. 
225.25(b)(6).
    (e) Investments in corporations or projects organized to build or 
rehabilitate high-income housing, or commercial, office, or industrial 
facilities that are not designed explicitly to create improved job 
opportunities for low-income persons shall be presumed not to be 
designed primarily to promote community welfare, unless there is 
substantial evidence to the contrary, even though to some extent the 
investment may benefit the community.
    (f) Section 6 of the Depository Institutions Disaster Relief Act of 
1992 permits state member banks (12 U.S.C. 338a) and national banks (12 
U.S.C. 24 (Eleventh)) to invest in the stock of community development 
corporations that are designed primarily to promote the public welfare 
of low- and moderate-income communities and persons in the areas of 
housing, services and employment. The Board and the Office of the 
Comptroller of the Currency have adopted rules that permit state member 
banks and national banks to make certain investments without prior 
approval. The Board believes that these rules are consistent with the 
Board's interpretation of, and decisions regarding, the scope of 
community welfare activities permissible for bank holding companies. 
Accordingly, approval received by a bank holding company to conduct 
activities designed to promote the community welfare under section 
4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1843(c)(8)) and Sec. 
225.25(b)(6) of the Board's Regulation Y (12 CFR 225.25(b)(6)) includes 
approval to engage, either directly or through a subsidiary, in the 
following activities, up to five percent of the bank holding company's 
total consolidated capital stock and surplus, without additional Board 
or Reserve Bank approval:
    (1) Invest in and provide financing to a corporation or project or 
class of corporations or projects that the Board previously has 
determined is a public welfare project pursuant to paragraph 23 of 
section 9 of the Federal Reserve Act (12 U.S.C. 338a);
    (2) Invest in and provide financing to a corporation or project that 
the Office of the Comptroller of the Currency previously has determined, 
by order or regulation, is a public welfare investment pursuant to 
section 5136 of the Revised Statutes (12 U.S.C. 24 (Eleventh));
    (3) Invest in and provide financing to a community development 
financial institution pursuant to section 103(5) of the Community 
Development Banking

[[Page 198]]

and Financial Institutions Act of 1994 (12 U.S.C. 4702(5));
    (4) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent 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));
    (5) Invest in, provide financing to, develop, rehabilitate, manage, 
sell, and rent nonresidential real property or other assets located in a 
low- or moderate-income area provided the property is used primarily for 
low- and moderate-income persons;
    (6) Invest in and provide financing to one or more small businesses 
located in a low- or moderate-income area to stimulate economic 
development;
    (7) Invest in, provide financing to, develop, and otherwise assist 
job training or placement facilities or programs designed primarily for 
low- and moderate-income persons;
    (8) Invest in and provide financing to an entity located in a low- 
or moderate-income area if that 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
    (9) Provide 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.
    (g) For purposes of paragraph (f) of this section, low- and 
moderate-income persons or areas means individuals and communities whose 
incomes do not exceed 80 percent of the median income of the area 
involved, as determined by the U.S. Department of Housing and Urban 
Development. Small businesses are businesses that are smaller than the 
maximum size eligibility standards established by the Small Business 
Administration (SBA) for the Small Business Investment Company and 
Development Company Programs or the SBA section 7A loan program; and 
specifically include those businesses that are majority-owned by members 
of minority groups or by women.
    (h) For purposes of paragraph (f) of this section, five percent of 
the total consolidated capital stock and surplus of a bank holding 
company includes its total investment in projects described in paragraph 
(f) of this section, when aggregated with similar types of investments 
made by depository institutions controlled by the bank holding company. 
The term total consolidated capital stock and surplus of the bank 
holding company means total equity capital and the allowance for loan 
and lease losses. For bank holding companies that file the FR Y-9C 
(Consolidated Financial Statements for Bank Holding Companies), these 
items are readily ascertained from Schedule HC--Consolidated Balance 
Sheet (total equity capital (line 27h) and allowance for loan and lease 
losses (line 4b)). For bank holding companies filing the FR Y-SP (Parent 
Company Only Financial Statements for Small Bank Holding Companies), an 
approximation of these items is ascertained from the Balance Sheet 
(total equity capital (line 16e)) and allowance for loan and lease 
losses (line 3b)) and from the Report of Condition for Insured Banks 
(Schedule RC--Balance Sheet (line 4b)).

[37 FR 11316, June 7, 1972; 37 FR 13336, July 7, 1972, as amended at 
Reg. Y, 59 FR 63713, Dec. 9, 1994]



Sec. 225.129  Activities closely related to banking.

    Courier activities. The Board's amendment of Sec. 225.4(a), which 
adds courier services to the list of closely related activities is 
intended to permit holding companies to transport time critical 
materials of limited intrinsic value of the types utilized by banks and 
bank-related firms in performing their business activities. Such 
transportation activities are of particular importance in the check 
clearing process of the banking system, but are also important to the 
performance of other activities, including the processing of 
financially-related economic data. The authority is not intended to 
permit holding companies to engage generally in the provision of 
transportation services.
    During the course of the Board's proceedings pertaining to courier 
services,

[[Page 199]]

objections were made that courier activities were not a proper incident 
to banking because of the possibility that holding companies would or 
had engaged in unfair competitive practices. The Board believes that 
adherence to the following principles will eliminate or reduce to an 
insignificant degree any possibility of unfair competition:
    a. A holding company courier subsidiary established under section 
4(c)(8) should be a separate, independent corporate entity, not merely a 
servicing arm of a bank.
    b. As such, the subsidiary should exist as a separate, profit-
oriented operation and should not be subsidized by the holding company 
system.
    c. Services performed should be explicitly priced, and shall not be 
paid for indirectly, for example, on the basis of deposits maintained at 
or loan arrangements with affiliated banks.

Accordingly, entry of holding companies into courier activities on the 
basis of section 4(c)(8) will be conditioned as follows:
    1. The courier subsidiary shall perform services on an explicit fee 
basis and shall be structured as an individual profit center designed to 
be operated on a profitable basis. The Board may regard operating losses 
sustained over an extended period as being inconsistent with continued 
authority to engage in courier activities.
    2. Courier services performed on behalf of an affiliate's customer 
(such as the carriage of incoming cash letters) shall be paid for by the 
customer. Such payments shall not be made indirectly, for example, on 
the basis of imputed earnings on deposits maintained at or of loan 
arrangements with subsidiaries of the holding company. Concern has also 
been expressed that bank-affiliated courier services will be utilized to 
gain a competitive advantage over firms competing with other holding 
company affiliates. To reduce the possibility that courier affiliates 
might be so employed, the Board will impose the following third 
condition:
    3. The courier subsidiary shall, when requested by any bank or any 
data processing firm providing financially-related data processing 
services which firm competes with a banking or data processing 
subsidiary of Applicant, furnish comparable service at comparable rates, 
unless compliance with such request would be beyond the courier 
subsidiary's practical capacity. In this regard, the courier subsidiary 
should make known to the public its minimum rate schedule for services 
and its general pricing policies thereto. The courier subsidiary is also 
expected to maintain for a reasonable period of time (not less than two 
years) each request denied with the reasons for such denial.

[38 FR 32126, Nov. 21, 1973, as amended at 40 FR 36309, Aug. 20, 1975]



Sec. 225.130  Issuance and sale of short-term debt obligations by bank holding 

companies.

    For text of interpretation, see Sec. 250.221 of this chapter.

[38 FR 35231, Dec. 26, 1973]



Sec. 225.131  Activities closely related to banking.

    (a) Bank management consulting advice. The Board's amendment of 
Sec. 225.4(a), which adds bank management consulting advice to the list 
of closely related activities, described in general terms the nature of 
such activity. This interpretation is intended to explain in greater 
detail certain of the terms in the amendment.
    (b) It is expected that bank management consulting advice would 
include, but not be limited to, advice concerning: Bank operations, 
systems and procedures; computer operations and mechanization; 
implementation of electronic funds transfer systems; site planning and 
evaluation; bank mergers and the establishment of new branches; 
operation and management of a trust department; international banking; 
foreign exchange transactions; purchasing policies and practices; cost 
analysis, capital adequacy and planning; auditing; accounting 
procedures; tax planning; investment advice (as authorized in Sec. 
225.4(a)(5)); credit policies and administration, including credit 
documentation, evaluation, and debt collection; product development, 
including specialized lending provisions; marketing operations, 
including research, market development and advertising programs; 
personnel operations,

[[Page 200]]

including recruiting, training, evaluation and compensation; and 
security measures and procedures.
    (c) In permitting bank holding companies to provide management 
consulting advice to nonaffiliated ``banks'', the Board intends such 
advice to be given only to an institution that both accepts deposits 
that the depositor has a legal right to withdraw on demand and engages 
in the business of making commercial loans. It is also intended that 
such management consulting advice may be provided to the ``operations 
subsidiaries'' of a bank, since such subsidiaries perform functions that 
a bank is empowered to perform directly at locations at which the bank 
is authorized to engage in business (Sec. 250.141 of this chapter).
    (d) Although a bank holding company providing management consulting 
advice is prohibited by the regulation from owning or controlling, 
directly or indirectly, any equity securities in a client bank, this 
limitation does not apply to shares of a client bank acquired, directly 
or indirectly, as a result of a default on a debt previously contracted. 
This limitation is also inapplicable to shares of a client bank acquired 
by a bank holding company, directly or indirectly, in a fiduciary 
capacity: Provided, That the bank holding company or its subsidiary does 
not have sole discretionary authority to vote such shares or shares held 
with sole voting rights constitute not more than five percent of the 
outstanding voting shares of a client bank.

[39 FR 8318, Mar. 5, 1974; 39 FR 21120, June 19, 1974]



Sec. 225.132  Acquisition of assets.

    (a) From time to time questions have arisen as to whether and under 
what circumstances a bank holding company engaged in nonbank activities, 
directly or indirectly through a subsidiary, pursuant to section 4(c)(8) 
of the Bank Holding Company Act of 1956, as amended (12 U.S.C. 
1843(c)(3)), may acquire the assets and employees of another company, 
without first obtaining Board approval pursuant to section 4(c) (8) and 
the Board's Regulation Y (12 CFR 225.4(b)).
    (b) In determining whether Board approval is required in connection 
with the acquisition of assets, it is necessary to determine (a) whether 
the acquisition is made in the ordinary course of business \1\ or (b) 
whether it constitutes the acquisition, in whole or in part, of a going 
concern.\2\
---------------------------------------------------------------------------

    \1\ Section 225.4(c)(3) of the Board's Regulation Y (12 CFR 
225.4(c)(3)) generally prohibits a bank holding company or its 
subsidiary engaged in activities pursuant to authority of section 
4(c)(8) of the Act from being a party to any merger ``or acquisition of 
assets other than in the ordinary course of business'' without prior 
Board approval.
    \2\ In accordance with the provisions of section 4(c)(8) of the Act 
and Sec. 225.4(b) of Regulation Y, the acquisition of a going concern 
requires prior Board approval.
---------------------------------------------------------------------------

    (c) The following examples illustrate transactions where prior Board 
approval will generally be required:
    (1) The transaction involves the acquisition of all or substantially 
all of the assets of a company, or a subsidiary, division, department or 
office thereof.
    (2) The transaction involves the acquisition of less than 
``substantially all'' of the assets of a company, or a subsidiary, 
division, department or office thereof, the operations of which are 
being terminated or substantially discontinued by the seller, but such 
asset acquisition is significant in relation to the size of the same 
line of nonbank activity of the holding company (e.g., consumer finance 
mortgage banking, data processing). For purposes of this interpretation, 
an acquisition would generally be presumed to be significant if the book 
value of the nonbank assets being acquired exceeds 50 percent of the 
book value of the nonbank assets of the holding company or nonbank 
subsidiary comprising the same line of activity.
    (3) The transaction involves the acquisition of assets for resale 
and the sale of such assets is not a normal business activity of the 
acquiring holding company.
    (4) The transaction involves the acquisition of the assets of a 
company, or a subsidiary, division, department or office thereof, and a 
major purpose of the transaction is to hire some of the seller's 
principal employees who are expert, skilled and experienced in the

[[Page 201]]

business of the company being acquired.
    (d) In some cases it may be difficult, due to the wide variety of 
circumstances involving possible acquisition of assets, to determine 
whether such acquisitions require prior Board approval. Bank holding 
companies are encouraged to contact their local Reserve Bank for 
guidance where doubt exists as to whether such an acquisition is in the 
ordinary course of business or an acquisition, in whole or in part, of a 
going concern.

[39 FR 35128, Sept. 30, 1974, as amended at Reg. Y, 57 FR 28779, June 
29, 1992]



Sec. 225.133  Computation of amount invested in foreign corporations under 

general consent procedures.

    For text of this interpretation, see Sec. 211.111 of this 
subchapter.

[40 FR 43199, Sept. 19, 1975]



Sec. 225.134  Escrow arrangements involving bank stock resulting in a 

violation of the Bank Holding Company Act.

    (a) In connection with a recent application to become a bank holding 
company, the Board considered a situation in which shares of a bank were 
acquired and then placed in escrow by the applicant prior to the Board's 
approval of the application. The facts indicated that the applicant 
company had incurred debt for the purpose of acquiring bank shares and 
immediately after the purchase the shares were transferred to an 
unaffiliated escrow agent with instructions to retain possession of the 
shares pending Board action on the company's application to become a 
bank holding company. The escrow agreement provided that, if the 
application were approved by the Board, the escrow agent was to return 
the shares to the applicant company; and, if the application were 
denied, the escrow agent was to deliver the shares to the applicant 
company's shareholders upon their assumption of debt originally incurred 
by the applicant in the acquisition of the bank shares. In addition, the 
escrow agreement provided that, while the shares were held in escrow, 
the applicant could not exercise voting or any other ownership rights 
with respect to those shares.
    (b) On the basis of the above facts, the Board concluded that the 
company had violated the prior approval provisions of section 3 of the 
Bank Holding Company Act (``Act'') at the time that it made the initial 
acquisition of bank shares and that, for purposes of the Act, the 
company continued to control those shares in violation of the Act. In 
view of these findings, individuals and bank holding companies should 
not enter into escrow arrangements of the type described herein, or any 
similar arrangement, without securing the prior approval of the Board, 
since such action could constitute a violation of the Act.
    (c) While the above represents the Board's conclusion with respect 
to the particular escrow arrangement involved in the proposal presented, 
the Board does not believe that the use of an escrow arrangement would 
always result in a violation of the Act. For example, it appears that a 
transaction whereby bank shares are placed in escrow pending Board 
action on an application would not involve a violation of the Act so 
long as title to such shares remains with the seller during the pendency 
of the application; there are no other indicia that the applicant 
controls the shares held in escrow; and, in the event of a Board denial 
of the application, the escrow agreement provides that the shares would 
be returned to the seller.

[41 FR 9859, Mar. 8, 1976. Correctly designated at 41 FR 12009, Mar. 23, 
1976]



Sec. 225.136  Utilization of foreign subsidiaries to sell long-term debt 

obligations in foreign markets and to transfer the proceeds to their United 

States parent(s) for domestic purposes.

    For text of this interpretation, see Sec. 211.112 of this 
subchapter.

[42 FR 752, Jan. 4, 1977]



Sec. 225.137  Acquisitions of shares pursuant to section 4(c)(6) of the Bank 

Holding Company Act.

    (a) The Board has received a request for an interpretation of 
section 4(c)(6) of the Bank Holding Company Act

[[Page 202]]

(``Act'') \1\ in connection with a proposal under which a number of bank 
holding companies would purchase interests in an insurance company to be 
formed for the purpose of underwriting or reinsuring credit life and 
credit accident and health insurance sold in connection with extensions 
of credit by the stockholder bank holding companies and their 
affiliates.
---------------------------------------------------------------------------

    \1\ It should be noted that every Board Order granting approval 
under section 4(c)(8) of the Act contains the following paragraph:
    ``This determination is subject . . . to the Board's authority to 
require such modification or termination of the activities of a holding 
company or any of its subsidiaries as the Board finds necessary to 
assure compliance with the provisions and purposes of the Act and the 
Board's regulations and orders issued thereunder, or to prevent evasion 
thereof.''
    The Board believes that, even apart from this Interpretation, this 
language preserves the authority of the Board to require the revisions 
contemplated in this Interpretation.
---------------------------------------------------------------------------

    (b) Each participating holding company would own no more than 5 
percent of the outstanding voting shares of the company. However, the 
investment of each holding company would be represented by a separate 
class of voting security, so that each stockholder would own 100 percent 
of its respective class. The participating companies would execute a 
formal ``Agreement Among Stockholders'' under which each would agree to 
use its best efforts at all times to direct or recommend to customers 
and clients the placement of their life, accident and health insurance 
directly or indirectly with the company. Such credit-related insurance 
placed with the company would be identified in the records of the 
company as having been originated by the respective stockholder. A 
separate capital account would be maintained for each stockholder 
consisting of the original capital contribution increased or decreased 
from time to time by the net profit or loss resulting from the insurance 
business attributable to each stockholder. Thus, each stockholder would 
receive a return on its investment based upon the claims experience and 
profitability of the insurance business that it had itself generated. 
Dividends declared by the board of directors of the company would be 
payable to each stockholder only out of the earned surplus reflected in 
the respective stockholder's capital account.
    (c) It has been requested that the Board issue an interpretation 
that section 4(c)(6) of the Act provides an exemption under which 
participating bank holding companies may acquire such interests in the 
company without prior approval of the Board.
    (d) On the basis of a careful review of the documents submitted, in 
light of the purposes and provisions of the Act, the Board has concluded 
that section 4(c)(6) of the Act is inapplicable to this proposal and 
that a bank holding company must obtain the approval of the Board before 
participating in such a proposal in the manner described. The Board's 
conclusion is based upon the following considerations:
    (1) Section 2(a)(2)(A) of the Act provides that a company is deemed 
to have control over a second company if it owns or controls ``25 per 
centum or more of any class of voting securities'' of the second 
company. In the case presented, the stock interest of each participant 
would be evidenced by a different class of stock and each would 
accordingly, own 100 percent of a class of voting securities of the 
company. Thus, each of the stockholders would be deemed to ``control'' 
the company and prior Board approval would be required for each 
stockholder's acquisition of stock in the company.

The Board believes that this application of section 2(a)(2)(A) of the 
Act is particularly appropriate on the facts presented here. The company 
is, in practical effect, a conglomeration of separate business ventures 
each owned 100 percent by a stockholder the value of whose economic 
interest in the company is determined by reference to the profits and 
losses attributable to its respective class of stock. Furthermore, it is 
the Board's opinion that this application of section 2(a)(2)(A) is not 
inconsistent with section 4(c)(6). Even assuming that section (4)(c)(6) 
is intended to refer to all outstanding voting shares, and not merely 
the outstanding shares of a particular class of securities, section 
4(c)(6) must be viewed as permitting ownership of 5 percent of a 
company's voting stock only when that ownership does not

[[Page 203]]

constitute ``control'' as otherwise defined in the Act. For example, it 
is entirely possible that a company could exercise a controlling 
influence over the management and policies of a second company, and thus 
``control'' that company under the Act's definitions, even though it 
held less than 5 percent of the voting stock of the second company. To 
view section 4(c)(6) as an unqualified exemption for holdings of less 
than 5 percent would thus create a serious gap in the coverage of the 
Act.
    (2) The Board believes that section 4(c)(6) should properly be 
interpreted as creating an exemption from the general prohibitions in 
section 4 on ownership of stock in nonbank companies only for passive 
investments amounting to not more than 5 percent of a company's 
outstanding stock, and that the exemption was not intended to allow a 
group of holding companies, through concerted action, to engage in an 
activity as entrepreneurs. Section 4 of the Act, of course, prohibits 
not only owning stock in nonbank companies, but engaging in activities 
other than banking or those activities permitted by the Board under 
section 4(c)(8) as being closely related to banking. Thus, if a holding 
company may be deemed to be engaging in an activity through the medium 
of a company in which it owns less than 5 percent of the voting stock it 
may nevertheless require Board approval, despite the section 4(c)(6) 
exemption.
    (e) To accept the argument that section 4(c)(6) is an unqualified 
grant of permission to a bank holding company to own 5 percent of the 
shares of any nonbanking company irrespective of the nature or extent of 
the holding company's participation in the affairs of the nonbanking 
company would, in the Board's view, create the potential for serious and 
widespread evasion of the Act's controls over nonbanking activities. 
Such a construction would allow a group of 20 bank holding companies--or 
even a single bank holding company and one or more nonbank companies--to 
engage in entrepreneurial joint ventures in businesses prohibited to 
bank holding companies, a result the Board believes to be contrary to 
the intent of Congress.
    (f) In this proposal, each of the participating stockholders must be 
viewed as engaging in the business of insurance underwriting. Each 
stockholder would agree to channel to the company the insurance business 
it generates, and the value of the interest of each stockholder would be 
determined by reference to the profitability of the business generated 
by that stockholder itself. There is no sharing or pooling among 
stockholders of underwriting risks assumed by the company, and profit or 
loss from investments is allocated on the basis of each bank holding 
company's allocable underwriting profit or loss. The interest of each 
stockholder is thus clearly that of an entrepreneur rather than that of 
an investor.
    (g) Accordingly, on the basis of the factual situation before the 
Board, and for the reasons summarized above, the Board has concluded 
that section 4(c)(6) of the Act cannot be interpreted to exempt the 
ownership of 5 percent of the voting stock of a company under the 
circumstances described, and that a bank holding company wishing to 
become a stockholder in a company under this proposal would be required 
to obtain the Board's approval to do so.

[42 FR 1263, Jan. 6, 1977; 42 FR 2951, Jan. 14, 1977]



Sec. 225.138  Statement of policy concerning divestitures by bank holding 

companies.

    (a) From time to time the Board of Governors receives requests from 
companies subject to the Bank Holding Company Act, or other laws 
administered by the Board, to extend time periods specified either by 
statute or by Board order for the divestiture of assets held or 
activities engaged in by such companies. Such divestiture requirements 
may arise in a number of ways. For example, divestiture may be ordered 
by the Board in connection with an acquisition found to have been made 
in violation of law. In other cases the divestiture may be pursuant to a 
statutory requirement imposed at the time and amendment to the Act was 
adopted, or it may be required as a result of a foreclosure upon 
collateral

[[Page 204]]

held by the company or a bank subsidiary in connection with a debt 
previously contracted in good faith. Certain divestiture periods may be 
extended in the discretion of the Board, but in other cases the Board 
may be without statutory authority, or may have only limited authority, 
to extend a specified divestiture period.
    (b) In the past, divestitures have taken many different forms, and 
the Board has followed a variety of procedures in enforcing divestiture 
requirements. Because divestitures may occur under widely disparate 
factual circumstances, and because such forced dispositions may have the 
potential for causing a serious adverse economic impact upon the 
divesting company, the Board believes it is important to maintain a 
large measure of flexibility in dealing with divestitures. For these 
reasons, there can be no fixed rule as to the type of divestiture that 
will be appropriate in all situations. For example, where divestiture 
has been ordered to terminate a control relationship created or 
maintained in violation of the Act, it may be necessary to impose 
conditions that will assure that the unlawful relationship has been 
fully terminated and that it will not arise in the future. In other 
circumstances, however, less stringent conditions may be appropriate.
    (1) Avoidance of delays in divestitures. Where a specific time 
period has been fixed for accomplishing divestiture, the affected 
company should endeavor and should be encouraged to complete the 
divestiture as early as possible during the specific period. There will 
generally be substantial advantages to divesting companies in taking 
steps to plan for and accomplish divestitures well before the end of the 
divestiture period. For example, delays may impair the ability of the 
company to realize full value for the divested assets, for as the end of 
the divestiture period approaches the ``forced sale'' aspect of the 
divestiture may lead potential buyers to withhold firm offers and to 
bargain for lower prices. In addition, because some prospective 
purchasers may themselves require regulatory approval to acquire the 
divested property, delay by the divesting company may--by leaving 
insufficient time to obtain such approvals--have the effect of narrowing 
the range of prospective purchases. Thus, delay in planning for 
divestiture may increase the likelihood that the company will seek an 
extension of the time for divestiture if difficulty is encountered in 
securing a purchaser, and in certain situations, of course, the Board 
may be without statutory authority to grant extensions.
    (2) Submissions and approval of divestiture plans. When a 
divestiture requirement is imposed, the company affected should 
generally be asked to submit a divestiture plan promptly for review and 
approval by the Reserve Bank or the Board. Such a requirement may be 
imposed pursuant to the Board's authority under section 5(b) of the Bank 
Holding Company Act to issue such orders as may be necessary to enable 
the Board to administer and carry out the purposes of the Act and 
prevent evasions thereof. A divestiture plan should be as specific as 
possible, and should indicate the manner in which divestiture will be 
accomplished--for example, by a bulk sale of the assets to a third 
party, by ``spinoff'' or distribution of shares to the shareholders of 
the divesting company, or by termination of prohibited activities. In 
addition, the plan should specify the steps the company expects to take 
in effecting the divestiture and assuring its completeness, and should 
indicate the time schedule for taking such steps. In appropriate 
circumstances, the divestiture plan should make provision for assuring 
that ``controlling influence'' relationships, such as management or 
financial interlocks, will not continue to exist.
    (3) Periodic progress reports. A company subject to a divestiture 
requirement should generally be required to submit regular periodic 
reports detailing the steps it has taken to effect divestiture. Such a 
requirement may be imposed pursuant to the Board's authority under 
section 5(b) of the Bank Holding Company Act, referred to above, as well 
as its authority under section 5(c) of the Act to require reports for 
the purpose of keeping the Board informed as to whether the Act and 
Board regulations and order thereunder are being complied with. Reports 
should set forth in detail such matters

[[Page 205]]

as the identities of potential buyers who have been approached by the 
company, the dates of discussions with potential buyers and the 
identities of the individuals involved in such discussions, the terms of 
any offers received, and the reasons for rejecting any offers. In 
addition, the reports should indicate whether the company has employed 
brokers, investment bankers or others to assist in the divestiture, or 
its reasons for not doing so, and should describe other efforts by the 
company to seek out possible purchasers. The purpose of requiring such 
reports is to insure that substantial and good faith efforts being made 
by the company to satisfy its divestiture obligations. The frequency of 
such reports may vary depending upon the nature of the divestiture and 
the period specified for divestiture. However, such reports should 
generally not be required less frequently than every three months, and 
may in appropriate cases be required on a monthly or even more frequent 
basis. Progress reports as well as divestiture plans should be afforded 
confidential treatment.
    (4) Extensions of divestiture periods. Certain divestiture periods--
such as December 31, 1980 deadline for divestitures required by the 1970 
Amendments to the Bank Holding Company Act--are not extendable. In such 
cases it is imperative that divestiture be accomplished in a timely 
manner. In certain other cases, the Board may have discretion to extend 
a statutorily prescribed divestiture period within specified limits. For 
example, under section 4(c)(2) of the Act the Board may extend for three 
one-year periods the two-year period in which a bank subsidiary of a 
holding company is otherwise required to divest shares acquired in 
satisfaction of a debt previously contracted in good faith. In such 
cases, however, when the permissible extensions expire the Board no 
longer has discretion to grant further extensions. In still other cases, 
where a divestiture period is prescribed by the Board, in the exercise 
of its regulatory judgment, the Board may have broader discretion to 
grant extensions. Where extensions of specified divestiture periods are 
permitted by law, extensions should not be granted except under 
compelling circumstances. Neither unfavorable market conditions, nor the 
possibility that the company may incur some loss, should alone be viewed 
as constituting such circumstances--particularly if the company has 
failed to take earlier steps to accomplish a divestiture under more 
favorable circumstances. Normally, a request for an extension will not 
be considered unless the company has established that it has made 
substantial and continued good faith efforts to accomplish the 
divestiture within the prescribed period. Furthermore, requests for 
extensions of divestiture periods must be made sufficiently in advance 
of the expiration of the prescribed period both to enable the Board to 
consider the request in an orderly manner and to enable the company to 
effect a timely divestiture in the event the request for extension is 
denied. Companies subject to divestiture requirements should be aware 
that a failure to accomplish a divestiture within the prescribed period 
may in and of itself be viewed as a separate violation of the Act.
    (5) Use of trustees. In appropriate cases a company subject to a 
divestiture requirement may be required to place the assets subject to 
divestiture with an independent trustee under instructions to accomplish 
a sale by a specified date, by public auction if necessary. Such a 
trustee may be given the responsibility for exercising the voting rights 
with respect to shares being divested. The use of such a trustee may be 
particularly appropriate where the divestiture is intended to terminate 
a control relationship established or maintained in violation of law, or 
where the divesting company has demonstrated an inability or 
unwillingness to take timely steps to effect a divestiture.
    (6) Presumptions of control. Bank holding companies contemplating a 
divestiture should be mindful of section 2(g)(3) of the Bank Holding 
Company Act, which creates a presumption of continued control over the 
transferred assets where the transferee is indebted to the transferor, 
or where certain interlocks exist, as well as Sec. 225.2 of Regulation 
Y, which sets forth certain additional control presumptions. Where one 
of these presumptions has

[[Page 206]]

arisen with respect to divested assets, the divestiture will not be 
considered as complete until the presumption has been overcome. It 
should be understood that the inquiry into the termination of control 
relationships is not limited by the statutory and regulatory 
presumptions of control, and that the Board may conclude that a control 
relationship still exists even though the presumptions do not apply.
    (7) Role of the Reserve Banks. The Reserve Banks have a 
responsibility for supervising and enforcing divestitures. Specifically, 
in coordination with Board staff they should review divestiture plans to 
assure that proposed divestitures will result in the termination of 
control relationships and will not create unsafe or unsound conditions 
in any bank or bank holding company; they should monitor periodic 
progress reports to assure that timely steps are being taken to effect 
divestitures; and they should prompt companies to take such steps when 
it appears that progress is not being made. Where Reserve Banks have 
delegated authority to extend divestiture periods, that authority should 
be exercised consistently with this policy statement.

[42 FR 10969, Feb. 25, 1977]



Sec. 225.139  Presumption of continued control under section 2(g)(3) of the 

Bank Holding Company Act.

    (a) Section 2(g)(3) of the Bank Holding Company Act (the ``Act'') 
establishes a statutory presumption that where certain specified 
relationships exist between a transferor and transferee of shares, the 
transferor (if it is a bank holding company, or a company that would be 
such but for the transfer) continues to own or control indirectly the 
transferred shares.\1\ This presumption arises by operation of law, as 
of the date of the transfer, without the need for any order or 
determination by the Board. Operation of the presumption may be 
terminated only by the issuance of a Board determination, after 
opportunity for hearing, ``that the transferor is not in fact capable of 
controlling the transferee.'' \2\
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    \1\ The presumption arises where the transferee ``is indebted to the 
transferor, or has one or more officers, directors, trustees, or 
beneficiaries in common with or subject to control by the transferor.''
    \2\ The Board has delegated to its General Counsel the authority to 
issue such determinations, 12 CFR 265.2(b)(1).
---------------------------------------------------------------------------

    (b) The purpose of section 2(g)(3) is to provide the Board an 
opportunity to assess the effectiveness of divestitures in certain 
situations in which there may be a risk that the divestiture will not 
result in the complete termination of a control relationship. By 
presuming control to continue as a matter of law, section 2(g)(3) 
operates to allow the effectiveness of the divestiture to be assessed 
before the divesting company is permitted to act on the assumption that 
the divestiture is complete. Thus, for example, if a holding company 
divests its banking interest under circumstances where the presumption 
of continued control arises, the divesting company must continue to 
consider itself bound by the Act until an appropriate order is entered 
by the Board dispelling the presumption. Section 2(g)(3) does not 
establish a substantive rule that invalidates transfers to which it 
applies, and in a great many cases the Board has acted favorably on 
applications to have the presumption dispelled. It merely provides a 
procedural opportunity for Board consideration of the effect of such 
transfers in advance of their being deemed effective. Whether or not the 
statutory presumption arises, the substantive test for assessing the 
effectiveness of a divestiture is the same--that is, the Board must be 
assured that all control relationships between the transferor and the 
transferred property have been terminated and will not be 
reestablished.\3\
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    \3\ It should be noted, however, that the Board will require 
termination of any interlocking management relationships between the 
divesting company and the transferee or the divested company as a 
precondition of finding that a divestiture is complete. Similarly, the 
retention of an economic interest in the divested company that would 
create an incentive for the divesting company to attempt to influence 
the management of the divested company will preclude a finding that the 
divestiture is complete. (See the Board's Order in the matter of 
``International Bank'', 1977 Federal Reserve Bulletin 1106, 1113.)

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[[Page 207]]

    (c) In the course of administering section 2(g)(3) the Board has had 
several occasions to consider the scope of that section. In addition, 
questions have been raised by and with the Board's staff as to coverage 
of the section. Accordingly, the Board believes it would be useful to 
set forth the following interpretations of section 2(g)(3):
    (1) The terms transferor and transferee, as used in section 2(g)(3), 
include parents and subsidiaries of each. Thus, for example, where a 
transferee is indebted to a subsidiary of the transferor, or where a 
specified interlocking relationship exists between the transferor or 
transferee and a subsidiary of the other (or between subsidiaries of 
each), the presumption arises. Similarly, if a parent of the transferee 
is indebted to a parent of the transferor, the presumption arises. The 
presumption of continued control also arises where an interlock or debt 
relationship is retained between the divesting company and the company 
being divested, since the divested company will be or may be viewed as a 
subsidiary of the transferee or group of transferees.
    (2) The terms officers, directors, and trustees, as used in section 
2(g)(3), include persons performing functions normally associated with 
such positions (including general partners in a partnership and limited 
partners having a right to participate in the management of the affairs 
of the partnership) as well as persons holding such positions in an 
advisory or honorary capacity. The presumption arises not only where the 
transferee or transferred company has an officer, director or trustee in 
common with the transferor, but where the transferee himself holds such 
a position with the transferor. \4\ It should be noted that where a 
transfer takes the form of a pro-rata distribution, or spin-off, of 
shares to a company's shareholders, officers and directors of the 
transferor company are likely to receive a portion of such shares. The 
presumption of continued control would, of course, attach to any shares 
transferred to officers and directors of the divesting company, whether 
by spinoff or outright sale. However, the presumption will be of legal 
significance--and will thus require an application under section 
2(g)(3)--only where the total number of shares subject to the 
presumption exceeds one of the applicable thresholds in the Act. For 
example, where officers and directors of a one-bank holding company 
receive in the aggregate 25 percent or more of the stock of a bank 
subsidiary being divested by the holding company, the holding company 
would be presumed to continue to control the divested bank. In such a 
case it would be necessary for the divesting company to demonstrate that 
it no longer controls either the divested bank or the officer/director 
transferees. However, if officers and directors were to receive in the 
aggregate less than 25 percent of the bank's stock (and no other shares 
were subject to the presumption), section 2(g)(3) would not have the 
legal effect of presuming continued control of the bank.\5\ In the case 
of a divestiture of nonbank shares, an application under section 2(g)(3) 
would be required whenever officers and directors of the divesting 
company received in the aggregate more than 5 percent of the shares of 
the company being divested.
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    \4\ It has been suggested that the words in common with in section 
2(g)(3) evidence an intent to make the presumption applicable only where 
the transferee is a company having an interlock with the transferor. 
Such an interpretation would, in the Board's view, create an unwarranted 
gap in the coverage of section 2(g)(3). Furthermore, because the 
presumption clearly arises where the transferee is an individual who is 
indebted to the transferor such an interpretation would result in an 
illogical internal inconsistency in the statute.
    \5\ Of course, the fact that section 2(g)(3) would not operate to 
presume continued control would not necessarily mean that control had in 
fact been terminated if control could be exercised through other means.
---------------------------------------------------------------------------

    (3) Although section 2(g)(3) refers to transfers of shares it is 
not, in the Board's view, limited to disposition of corporate stock. 
General or limited partnership interests, for example, are included 
within the term shares. Furthermore, the transfer of all or 
substantially all of the assets of a company, or the transfer of such a 
significant volume of assets that the transfer may in effect constitute 
the disposition

[[Page 208]]

of a separate activity of the company, is deemed by the Board to involve 
a transfer of shares of that company.
    (4) The term indebtedness giving rise to the presumption of 
continued control under section 2(g)(3) of the Act is not limited to 
debt incurred in connection with the transfer; it includes any debt 
outstanding at the time of transfer from the transferee to the 
transferor or its subsidiaries. However, the Board believes that not 
every kind of indebtedness was within the contemplation of the Congress 
when section 2(g)(3) was adopted. Routine business credit of limited 
amounts and loans for personal or household purposes are generally not 
the kinds of indebtedness that, standing alone, support a presumption 
that the creditor is able to control the debtor. Accordingly, the Board 
does not regard the presumption of section 2(g)(3) as applicable to the 
following categories of credit, provided the extensions of credit are 
not secured by the transferred property and are made in the ordinary 
course of business of the transferor (or its subsidiary) that is 
regularly engaged in the business of extending credit:
    (i) Consumer credit extended for personal or household use to an 
individual transferee; (ii) student loans made for the education of the 
individual transferee or a spouse or child of the transferee; (iii) a 
home mortgage loan made to an individual transferee for the purchase of 
a residence for the individual's personal use and secured by the 
residence; and (iv) loans made to companies (as defined in section 2(b) 
of the Act) in an aggregate amount not exceeding ten per cent of the 
total purchase price (or if not sold, the fair market value) of the 
transferred property. The amounts and terms of the preceding categories 
of credit should not differ substantially from similar credit extended 
in comparable circumstances to others who are not transferees. It should 
be understood that, while the statutory presumption in situations 
involving these categories of credit may not apply, the Board is not 
precluded in any case from examining the facts of a particular transfer 
and finding that the divestiture of control was ineffective based on the 
facts of record.
    (d) Section 2(g)(3) provides that a Board determination that a 
transferor is not in fact capable of controlling a transferee shall be 
made after opportunity for hearing. It has been the Board's routine 
practice since 1966 to publish notice in the Federal Register of 
applications filed under section 2(g)(3) and to offer interested parties 
an opportunity for a hearing. Virtually without exception no comments 
have been submitted on such applications by parties other than the 
applicant and, with the exception of one case in which the request was 
later withdrawn, no hearings have been requested in such cases. Because 
the Board believes that the hearing provision in section 2(g)(3) was 
intended as a protection for applicants who are seeking to have the 
presumption overcome by a Board order, a hearing would not be of use 
where an application is to be granted. In light of the experience 
indicating that the publication of Federal Register notice of such 
applications has not served a useful purpose, the Board has decided to 
alter its procedures in such cases. In the future, Federal Register 
notice of section 2(g)(3) applications will be published only in cases 
in which the Board's General Counsel, acting under delegated authority, 
has determined not to grant such an application and has referred the 
matter to the Board for decision.\6\
---------------------------------------------------------------------------

    \6\ It should be noted that in the event a third party should take 
exception to a Board order under section 2(g)(3) finding that control 
has been terminated, any rights such party might have would not be 
prejudiced by the order. If such party brought facts to the Board's 
attention indicating that control had not been terminated the Board 
would have ample authority to revoke its order and take necessary 
remedial action.
    Orders issued under section 2(g)(3) are published in the Federal 
Reserve ``Bulletin.''

---------------------------------------------------------------------------
(12 U.S.C. 1841, 1844)

[43 FR 6214, Feb. 14, 1978; 43 FR 15147, Apr. 11, 1978; 43 FR 15321, 
Apr. 12, 1978, as amended at 45 FR 8280, Feb. 7, 1980; 45 FR 11125, Feb. 
20, 1980]



Sec. 225.140  Disposition of property acquired in satisfaction of debts 

previously contracted.

    (a) The Board recently considered the permissibility, under section 
4 of the

[[Page 209]]

Bank Holding Company Act, of a subsidiary of a bank holding company 
acquiring and holding assets acquired in satisfaction of a debt 
previously contracted in good faith (a ``dpc'' acquisition). In the 
situation presented, a lending subsidiary of a bank holding company made 
a ``dpc'' acquisition of assets and transferred them to a wholly-owned 
subsidiary of the bank holding company for the purpose of effecting an 
orderly divestiture. The question presented was whether such ``dpc'' 
assets could be held indefinitely by a bank holding company subsidiary 
as incidental to its permissible lending activity.
    (b) While the Board believes that ``dpc'' acquisitions may be 
regarded as normal, necessary and incidental to the business of lending, 
the Board does not believe that the holding of assets acquired ``dpc'' 
without any time restrictions is appropriate from the standpoint of 
prudent banking and in light of the prohibitions in section 4 of the Act 
against engaging in nonbank activities. If a nonbanking subsidiary of a 
bank holding company were permitted, either directly or through a 
subsidiary, to hold ``dpc'' assets of substantial amount over an 
extended period of time, the holding of such property could result in an 
unsafe or unsound banking practice or in the holding company engaging in 
an impermissible activity in connection with the assets, rather than 
liquidating them.
    (c) The Board notes that section 4(c)(2) of the Bank Holding Company 
Act provides an exemption from the prohibitions of section 4 of the Act 
for bank holding company subsidiaries to acquire shares ``dpc''. It also 
provides that such ``dpc'' shares may be held for a period of two years, 
subject to the Board's authority to grant three one-year extensions up 
to a maximum of five years.\1\ Viewed in light of the Congressional 
policy evidenced by section 4(c)(2), the Board believes that a lending 
subsidiary of a bank holding company or the holding company itself, 
should be permitted, as an incident to permissible lending activities, 
to make acquisitions of ``dpc'' assets. Consistent with the principles 
underlying the provisions of section 4(c)(2) of the Act and as a matter 
of prudent banking practice, such assets may be held for no longer than 
five years from the date of acquisition. Within the divestiture period 
it is expected that the company will make good faith efforts to dispose 
of ``dpc'' shares or assets at the earliest practicable date. While no 
specific authorization is necessary to hold such assets for the five-
year period, after two years from the date of acquisition of such 
assets, the holding company should report annually on its efforts to 
accomplish divestiture to its Reserve Bank. The Reserve Bank will 
monitor the efforts of the company to effect an orderly divestiture, and 
may order divestiture before the end of the five-year period if 
supervisory concerns warrant such action.
---------------------------------------------------------------------------

    \1\ The Board notes that where the dpc shares or other similar 
interests represent less than 5 percent of the total of such interests 
outstanding, they may be retained on the basis of section 4(c)(6), even 
if originally acquired dpc.
---------------------------------------------------------------------------

    (d) The Board recognizes that there are instances where a company 
may encounter particular difficulty in attempting to effect an orderly 
divestiture of ``dpc'' real estate holdings within the divestiture 
period, notwithstanding its persistent good faith efforts to dispose of 
such property. In the Depository Institutions Deregulation and Monetary 
Control Act of 1980, (Pub. L. 96-221) Congress, recognizing that real 
estate possesses unusual characteristics, amended the National Banking 
Act to permit national banks to hold real estate for five years and for 
an additional five-year period subject to certain conditions. Consistent 
with the policy underlying the recent Congressional enactment, and as a 
matter of supervisory policy, a bank holding company may be permitted to 
hold real estate acquired ``dpc'' beyond the initial five-year period 
provided that the value of the real estate on the books of the company 
has been written down to fair market value, the carrying costs are not 
significant in relation to the overall financial position of the 
company, and the company has made good faith efforts to effect 
divestiture. Companies holding real estate for this extended period are 
expected to make active efforts to dispose of it, and should keep the 
Reserve Bank advised

[[Page 210]]

on a regular basis concerning their ongoing efforts. Fair market value 
should be derived from appraisals, comparable sales or some other 
reasonable method. In any case, ``dpc'' real estate would not be 
permitted to be held beyond 10 years from the date of its acquisition.
    (e) With respect to the transfer by a subsidiary of other ``dpc'' 
shares or assets to another company in the holding company system, 
including a section 4(c)(1)(D) liquidating subsidiary, or to the holding 
company itself, such transfers would not alter the original divestiture 
period applicable to such shares or assets at the time of their 
acquisition. Moreover, to ensure that assets are not carried at inflated 
values for extended periods of time, the Board expects, in the case of 
all such intracompany transfers, that the shares or assets will be 
transferred at a value no greater than the fair market value at the time 
of transfer and that the transfer will be made in a normal arms-length 
transaction.
    (f) With regard to ``dpc'' assets acquired by a banking subsidiary 
of a holding company, so long as the assets continue to be held by the 
bank itself, the Board will regard them as being solely within the 
regulatory authority of the primary supervisor of the bank.

(12 U.S.C. 1843 (c)(1)(d), (c)(2), (c)(8), and 1844 (b); 12 U.S.C. 1818)

[45 FR 49905, July 28, 1980]



Sec. 225.141  Operations subsidiaries of a bank holding company.

    In orders approving the retention by a bank holding company of a 
4(c)(8) subsidiary, the Board has stated that it would permit, without 
any specific regulatory approval, the formation of a wholly owned 
subsidiary of an approved 4(c)(8) company to engage in activities that 
such a company could itself engage in directly through a division or 
department. (Northwestern Financial Corporation, 65 Federal Reserve 
Bulletin 566 (1979).) Section 4(a)(2) of the Act provides generally that 
a bank holding company may engage directly in the business of managing 
and controlling banks and permissible nonbank activities, and in 
furnishing services directly to its subsidiaries. Even though section 4 
of the Act generally prohibits the acquisition of shares of nonbanking 
organizations, the Board does not believe that such prohibition should 
apply to the formation by a holding company of a wholly-owned subsidiary 
to engage in activities that it could engage in directly. Accordingly, 
as a general matter, the Board will permit without any regulatory 
approval a bank holding company to form a wholly-owned subsidiary to 
perform servicing activities for subsidiaries that the holding company 
itself could perform directly or through a department or a division 
under section 4(a)(2) of the Act. The Board believes that permitting 
this type of subsidiary is not inconsistent with the nonbanking 
prohibitions of section 4 of the Act, and is consistent with the 
authority in section 4(c)(1)(C) of the Act, which permits a bank holding 
company, without regulatory approval, to form a subsidiary to perform 
services for its banking subsidiaries. The Board notes, however, that a 
servicing subsidiary established by a bank holding company in reliance 
on this interpretation will be an affiliate of the subsidiary bank of 
the holding company for the purposes of the lending restrictions of 
section 23A of the Federal Reserve Act. (12 U.S.C. 371c)

(12 U.S.C. 1843(a)(2) and 1844(b))

[45 FR 54326, July 15, 1980]



Sec. 225.142  Statement of policy concerning bank holding companies engaging 

in futures, forward and options contracts on U.S. Government and agency 

securities and money market instruments.

    (a) Purpose of financial contract positions. In supervising the 
activities of bank holding companies, the Board has adopted and 
continues to follow the principle that bank holding companies should 
serve as a source of strength for their subsidiary banks. Accordingly, 
the Board believes that any positions that bank holding companies or 
their nonbank subsidiaries take in financial contracts should reduce 
risk exposure, that is, not be speculative.
    (b) Establishment of prudent written policies, appropriate 
limitations and internal controls and audit programs. If the parent 
organization or nonbank subsidiary is taking or intends to take 
positions in financial contracts, that

[[Page 211]]

company's board of directors should approve prudent written policies and 
establish appropriate limitations to insure that financial contract 
activities are performed in a safe and sound manner with levels of 
activity reasonably related to the organization's business needs and 
capacity to fulfill obligations. In addition, internal controls and 
internal audit programs to monitor such activity should be established. 
The board of directors, a duly authorized committee thereof or the 
internal auditors should review periodically (at least monthly) all 
financial contract positions to insure conformity with such policies and 
limits. In order to determine the company's exposure, all open positions 
should be reviewed and market values determined at least monthly, or 
more often, depending on volume and magnitude of positions.
    (c) Formulating policies and recording financial contracts. In 
formulating its policies and procedures, the parent holding company may 
consider the interest rate exposure of its nonbank subsidiaries, but not 
that of its bank subsidiaries. As a matter of policy, the Board believes 
that any financial contracts executed to reduce the interest rate 
exposure of a bank affiliate of a holding company should be reflected on 
the books and records of the bank affiliate (to the extent required by 
the bank policy statements), rather than on the books and records of the 
parent company. If a bank has an interest rate exposure that management 
believes requires hedging with financial contracts, the bank should be 
the direct beneficiary of any effort to reduce that exposure. The Board 
also believes that final responsibility for financial contract 
transactions for the account of each affiliated bank should reside with 
the management of that bank.
    (d) Accounting. The joint bank policy statements of March 12, 1980 
include accounting guidelines for banks that engage in financial 
contract activities. Since the Financial Accounting Standards Board is 
presently considering accounting standards for contract activities, no 
specific accounting requirements for financial contracts entered into by 
parent bank holding companies and nonbank subsidiaries are being 
mandated at this time. The Board expects to review further developments 
in this area.
    (e) Board to monitor bank holding company transactions in financial 
contracts. The Board intends to monitor closely bank holding company 
transactions in financial contracts to ensure that any such activity is 
consistent with maintaining a safe and sound banking system. In any 
cases where bank holding companies are found to be engaging in 
speculative practices, the Board is prepared to institute appropriate 
action under the Financial Institutions Supervisory Act of 1966, as 
amended.
    (f) Federal Reserve Bank notification. Bank holding companies should 
furnish written notification to their District Federal Reserve Bank 
within 10 days after financial contract activities are begun by the 
parent or a nonbank subsidiary. Holding companies in which the parent or 
a nonbank subsidiary currently engage in financial contract activity 
should furnish notice by March 31, 1983.

(Secs. 5(b) and 8 of the Bank Holding Company Act (12 U.S.C. 1844 and 
1847); sec. 8(b) of the Financial Institutions Supervisory Act (12 
U.S.C. 1818(b))

[48 FR 7720, Feb. 24, 1983]



Sec. 225.143  Policy statement on nonvoting equity investments by bank holding 

companies.

    (a) Introduction. (1) In recent months, a number of bank holding 
companies have made substantial equity investments in a bank or bank 
holding company (the ``acquiree'') located in states other than the home 
state of the investing company through acquisition of preferred stock or 
nonvoting common shares of the acquiree. Because of the evident interest 
in these types of investments and because they raise substantial 
questions under the Bank Holding Company Act (the ``Act''), the Board 
believes it is appropriate to provide guidance regarding the consistency 
of such arrangements with the Act.
    (2) This statement sets out the Board's concerns with these 
investments, the considerations the Board will take into account in 
determining whether the investments are consistent with the Act, and the 
general scope of

[[Page 212]]

arrangements to be avoided by bank holding companies. The Board 
recognizes that the complexity of legitimate business arrangements 
precludes rigid rules designed to cover all situations and that 
decisions regarding the existence or absence of control in any 
particular case must take into account the effect of the combination of 
provisions and covenants in the agreement as a whole and the particular 
facts and circumstances of each case. Nevertheless, the Board believes 
that the factors outlined in this statement provide a framework for 
guiding bank holding companies in complying with the requirements of the 
Act.
    (b) Statutory and regulatory provisions. (1) Under section 3(a) of 
the Act, a bank holding company may not acquire direct or indirect 
ownership or control of more than 5 per cent of the voting shares of a 
bank without the Board's prior approval. (12 U.S.C. 1842(a)(3)). In 
addition, this section of the Act provides that a bank holding company 
may not, without the Board's prior approval, acquire control of a bank: 
That is, in the words of the statute, ``for any action to be taken that 
causes a bank to become a subsidiary of a bank holding company.'' (12 
U.S.C. 1842(a)(2)). Under the Act, a bank is a subsidiary of a bank 
holding company if:
    (i) The company directly or indirectly owns, controls, or holds with 
power to vote 25 per cent or more of the voting shares of the bank;
    (ii) The company controls in any manner the election of a majority 
of the board of directors of the bank; or
    (iii) The Board determines, after notice and opportunity for 
hearing, that the company has the power, directly or indirectly, to 
exercise a controlling influence over the management or policies of the 
bank. (12 U.S.C. 1841(d)).
    (2) In intrastate situations, the Board may approve bank holding 
company acquisitions of additional banking subsidiaries. However, where 
the acquiree is located outside the home state of the investing bank 
holding company, section 3(d) of the Act prevents the Board from 
approving any application that will permit a bank holding company to 
``acquire, directly or indirectly, any voting shares of, interest in, or 
all or substantially all of the assets of any additional bank.'' (12 
U.S.C. 1842(d)(1)).
    (c) Review of agreements. (1) In apparent expectation of statutory 
changes that might make interstate banking permissible, bank holding 
companies have sought to make substantial equity investments in other 
bank holding companies across state lines, but without obtaining more 
than 5 per cent of the voting shares or control of the acquiree. These 
investments involve a combination of the following arrangements:
    (i) Options on, warrants for, or rights to convert nonvoting shares 
into substantial blocks of voting securities of the acquiree bank 
holding company or its subsidiary bank(s);
    (ii) Merger or asset acquisition agreements with the out-of-state 
bank or bank holding company that are to be consummated in the event 
interstate banking is permitted;
    (iii) Provisions that limit or restrict major policies, operations 
or decisions of the acquiree; and
    (iv) Provisions that make acquisition of the acquiree or its 
subsidiary bank(s) by a third party either impossible or economically 
impracticable.

The various warrants, options, and rights are not exercisable by the 
investing bank holding company unless interstate banking is permitted, 
but may be transferred by the investor either immediately or after the 
passage of a period of time or upon the occurrence of certain events.
    (2) After a careful review of a number of these agreements, the 
Board believes that investments in nonvoting stock, absent other 
arrangements, can be consistent with the Act. Some of the agreements 
reviewed appear consistent with the Act since they are limited to 
investments of relatively moderate size in nonvoting equity that may 
become voting equity only if interstate banking is authorized.
    (3) However, other agreements reviewed by the Board raise 
substantial problems of consistency with the control provisions of the 
Act because the investors, uncertain whether or when interstate banking 
may be authorized, have evidently sought to assure the soundness of 
their investments, prevent takeovers by others, and allow for

[[Page 213]]

sale of their options, warrants, or rights to a person of the investor's 
choice in the event a third party obtains control of the acquiree or the 
investor otherwise becomes dissatisfied with its investment. Since the 
Act precludes the investors from protecting their investments through 
ownership or use of voting shares or other exercise of control, the 
investors have substituted contractual agreements for rights normally 
achieved through voting shares.
    (4) For example, various covenants in certain of the agreements seek 
to assure the continuing soundness of the investment by substantially 
limiting the discretion of the acquiree's management over major policies 
and decisions, including restrictions on entering into new banking 
activities without the investor's approval and requirements for 
extensive consultations with the investor on financial matters. By their 
terms, these covenants suggest control by the investing company over the 
management and policies of the acquiree.
    (5) Similarly, certain of the agreements deprive the acquiree bank 
holding company, by covenant or because of an option, of the right to 
sell, transfer, or encumber a majority or all of the voting shares of 
its subsidiary bank(s) with the aim of maintaining the integrity of the 
investment and preventing takeovers by others. These long-term 
restrictions on voting shares fall within the presumption in the Board's 
Regulation Y that attributes control of shares to any company that 
enters into any agreement placing long-term restrictions on the rights 
of a holder of voting securities. (12 CFR 225.2(b)(4)).
    (6) Finally, investors wish to reserve the right to sell their 
options, warrants or rights to a person of their choice to prevent being 
locked into what may become an unwanted investment. The Board has taken 
the position that the ability to control the ultimate disposition of 
voting shares to a person of the investor's choice and to secure the 
economic benefits therefrom indicates control of the shares under the 
Act.\1\ Moreover, the ability to transfer rights to large blocks of 
voting shares, even if nonvoting in the hands of the investing company, 
may result in such a substantial position of leverage over the 
management of the acquiree as to involve a structure that inevitably 
results in control prohibited by the Act.
---------------------------------------------------------------------------

    \1\ See Board letter dated March 18, 1982, to C. A. Cavendes, 
Sociedad Financiera.
---------------------------------------------------------------------------

    (d) Provisions that avoid control. (1) In the context of any 
particular agreement, provisions of the type described above may be 
acceptable if combined with other provisions that serve to preclude 
control. The Board believes that such agreements will not be consistent 
with the Act unless provisions are included that will preserve 
management's discretion over the policies and decisions of the acquiree 
and avoid control of voting shares.
    (2) As a first step towards avoiding control, covenants in any 
agreement should leave management free to conduct banking and 
permissible nonbanking activities. Another step to avoid control is the 
right of the acquiree to ``call'' the equity investment and options or 
warrants to assure that covenants that may become inhibiting can be 
avoided by the acquiree. This right makes such investments or agreements 
more like a loan in which the borrower has a right to escape covenants 
and avoid the lender's influence by prepaying the loan.
    (3) A measure to avoid problems of control arising through the 
investor's control over the ultimate disposition of rights to 
substantial amounts of voting shares of the acquiree would be a 
provision granting the acquiree a right of first refusal before 
warrants, options or other rights may be sold and requiring a public and 
dispersed distribution of these rights if the right of first refusal is 
not exercised.
    (4) In this connection, the Board believes that agreements that 
involve rights to less than 25 percent of the voting shares, with a 
requirement for a dispersed public distribution in the event of sale, 
have a much greater prospect of achieving consistency with the Act than 
agreements involving a greater percentage. This guideline is drawn by 
analogy from the provision in the Act that ownership of 25 percent or 
more of the voting securities of a bank constitutes control of the bank.

[[Page 214]]

    (5) The Board expects that one effect of this guideline would be to 
hold down the size of the nonvoting equity investment by the investing 
company relative to the acquiree's total equity, thus avoiding the 
potential for control because the investor holds a very large proportion 
of the acquiree's total equity. Observance of the 25 percent guideline 
will also make provisions in agreements providing for a right of first 
refusal or a public and widely dispersed offering of rights to the 
acquiree's shares more practical and realistic.
    (6) Finally, certain arrangements should clearly be avoided 
regardless of other provisions in the agreement that are designed to 
avoid control. These are:
    (i) Agreements that enable the investing bank holding company (or 
its designee) to direct in any manner the voting of more than 5 per cent 
of the voting shares of the acquiree;
    (ii) Agreements whereby the investing company has the right to 
direct the acquiree's use of the proceeds of an equity investment by the 
investing company to effect certain actions, such as the purchase and 
redemption of the acquiree's voting shares; and
    (iii) The acquisition of more than 5 per cent of the voting shares 
of the acquiree that ``simultaneously'' with their acquisition by the 
investing company become nonvoting shares, remain nonvoting shares while 
held by the investor, and revert to voting shares when transferred to a 
third party.
    (e) Review by the Board. This statement does not constitute the 
exclusive scope of the Board's concerns, nor are the considerations with 
respect to control outlined in this statement an exhaustive catalog of 
permissible or impermissible arrangements. The Board has instructed its 
staff to review agreements of the kind discussed in this statement and 
to bring to the Board's attention those that raise problems of 
consistency with the Act. In this regard, companies are requested to 
notify the Board of the terms of such proposed merger or asset 
acquisition agreements or nonvoting equity investments prior to their 
execution or consummation.

[47 FR 30966, July 16, 1982]



Sec. 225.145  Limitations established by the Competitive Equality Banking Act 

of 1987 on the activities and growth of nonbank banks.

    (a) Introduction. Effective August 10, 1987, the Competitive 
Equality Banking Act of 1987 (``CEBA'') redefined the term ``bank'' in 
the Bank Holding Company Act (``BHC Act'' or ``Act'') to include any 
bank the deposits of which are insured by the Federal Deposit Insurance 
Corporation as well as any other institution that accepts demand or 
checkable deposit accounts and is engaged in the business of making 
commercial loans. 12 U.S.C. 1841(c). CEBA also contained a grandfather 
provision for certain companies affected by this redefinition. CEBA 
amended section 4 of the BHC Act to permit a company that on March 5, 
1987, controlled a nonbank bank (an institution that became a bank as a 
result of enactment of CEBA) and that was not a bank holding company on 
August 9, 1987, to retain its nonbank bank and not be treated as a bank 
holding company for purposes of the BHC Act if the company and its 
subsidiary nonbank bank observe certain limitations imposed by CEBA.\1\ 
Certain of these limitations are codified in section 4(f)(3) of the BHC 
Act and generally restrict nonbank banks from commencing new activities 
or certain cross-marketing activities with affiliates after March 5, 
1987, or permitting overdrafts for affiliates or incurring overdrafts on 
behalf of affiliates at a Federal Reserve Bank. 12 U.S.C. 1843(f)(3).\2\ 
The Board's views regarding

[[Page 215]]

the meaning and scope of these limitations are set forth below and in 
provisions of the Board's Regulation Y (12 CFR 225.52).
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 1843(f). Such a company is treated as a bank holding 
company, however, for purposes of the anti-tying provisions in section 
106 of the BHC Act Amendments of 1970 (12 U.S.C. 1971 et seq.) and the 
insider lending limitations of section 22(h) of the Federal Reserve Act 
(12 U.S.C. 375b). The company is also subject to certain examination and 
enforcement provisions to assure compliance with CEBA.
    \2\ CEBA also prohibits, with certain limited exceptions, a company 
controlling a grandfathered nonbank bank from acquiring control of an 
additional bank or thrift institution or acquiring, directly or 
indirectly after March 5, 1987, more than 5 percent of the assets or 
shares of a bank or thrift institution. 12 U.S.C. 1843(f)(2).
---------------------------------------------------------------------------

    (b) Congressional findings. (1) At the outset, the Board notes that 
the scope and application of the Act's limitations on nonbank banks must 
be guided by the Congressional findings set out in section 4(f)(3) of 
the BHC Act. Congress was aware that these nonbank banks had been 
acquired by companies that engage in a wide range of nonbanking 
activities, such as retailing and general securities activities that are 
forbidden to bank holding companies under section 4 of the BHC Act. In 
section 4(f)(3), Congress found that nonbank banks controlled by 
grandfathered nonbanking companies may, because of their relationships 
with affiliates, be involved in conflicts of interest, concentration of 
resources, or other effects adverse to bank safety and soundness. 
Congress also found that nonbank banks may be able to compete unfairly 
against banks controlled by bank holding companies by combining banking 
services with financial services not permissible for bank holding 
companies. Section 4(f)(3) states that the purpose of the nonbank bank 
limitations is to minimize any such potential adverse effects or 
inequities by restricting the activities of nonbank banks until further 
Congressional action in the area of bank powers could be undertaken. 
Similarly, the Senate Report accompanying CEBA states that the 
restrictions CEBA places on nonbank banks ``will help prevent existing 
nonbank banks from changing their basic character * * * while Congress 
considers proposals for comprehensive legislation; from drastically 
eroding the separation of banking and commerce; and from increasing the 
potential for unfair competition, conflicts of interest, undue 
concentration of resources, and other adverse effects.'' S. Rep. No. 
100-19, 100th Cong., 1st Sess. 12 (1987). See also H. Rep. No. 100-261, 
100th Cong., 1st Sess. 124 (1987) (the ``Conference Report'').
    (2) Thus, Congress explicitly recognized in the statute itself that 
nonbanking companies controlling grandfathered nonbank banks, which 
include the many of the nation's largest commercial and financial 
organizations, were being accorded a significant competitive advantage 
that could not be matched by bank holding companies because of the 
general prohibition against nonbanking activities in section 4 of the 
BHC Act. Congress recognized that this inequality in regulatory approach 
could inflict serious competitive harm on regulated bank holding 
companies as the grandfathered entities sought to exploit potential 
synergies between banking and commercial products and services. See 
Conference Report at 125-126. The basic and stated purpose of the 
restrictions on grandfathered nonbank banks is to minimize these 
potential anticompetitive effects.
    (3) The Board believes that the specific CEBA limitations should be 
implemented in light of these Congressional findings and the legislative 
intent reflected in the plain meaning of the terms used in the statute. 
In those instances when the language of the statute did not provide 
clear guidance, legislative materials and the Congressional intent 
manifested in the overall statutory structure were considered. The Board 
also notes that prior precedent requires that grandfather exceptions in 
the BHC Act, such as the nonbank bank limitations and particularly the 
exceptions thereto, are to be interpreted narrowly in order to ensure 
the proper implementation of Congressional intent.\3\
---------------------------------------------------------------------------

    \3\ E.g., Maryland National Corporation, 73 Federal Reserve Bulletin 
310, 313-314 (1987). Cf., Spokane & Inland Empire Railroad Co. v. United 
States, 241 U.S. 344, 350 (1915).
---------------------------------------------------------------------------

    (c) Activity limitation--(1) Scope of activity. (i) The first 
limitation established under section 4(f)(3) provides that a nonbank 
bank shall not ``engage in any activity in which such bank was not 
lawfully engaged as of March 5, 1987.'' The term activity as used in 
this provision of CEBA is not defined. The structure and placement of 
the CEBA activity restriction within section 4 of the BHC Act and its 
legislative history do, however, provide direction as to certain 
transactions that Congress intended to treat as separate activities, 
thereby providing guidance as to the meaning Congress intended to 
ascribe

[[Page 216]]

to the term generally. First, it is clear that the term activity was not 
meant to refer to banking as a single activity. To the contrary, the 
term must be viewed as distinguishing between deposit taking and lending 
activities and treating demand deposit-taking as a separate activity 
from general deposit-taking and commercial lending as separate from the 
general lending category.
    (ii) Under the activity limitation, a nonbank bank may engage only 
in activities in which it was ``lawfully engaged'' as of March 5, 1987. 
As of that date, a nonbank bank could not have been engaged in both 
demand deposit-taking and commercial lending activity without placing it 
and its parent holding company in violation of the BHC Act. Thus, under 
the activity limitations, a nonbank bank could not after March 5, 1987, 
commence the demand deposit-taking or commercial lending activity that 
it did not conduct as of March 5, 1987. The debates and Senate and 
Conference Reports on CEBA confirm that Congress intended the activity 
limitation to prevent a grandfathered nonbank bank from converting 
itself into a full-service bank by both offering demand deposits and 
engaging in the business of making commercial loans.\4\ Thus, these 
types of transactions provide a clear guide as to the type of banking 
transactions that would constitute activities under CEBA and the degree 
of specificity intended by Congress in interpreting that term.
---------------------------------------------------------------------------

    \4\ Conference Report at 124-25; S. Rep. No. 100-19 at 12, 32; H. 
Rep. No. 99-175, 99th Cong., 1st Sess. 3 (1985) (``the activities 
limitation is to prevent an institution engaged in a limited range of 
functions from expanding into new areas and becoming, in essence, a 
full-service bank''); 133 Cong. Rec. S4054 (daily ed. March 27, 1987); 
(Comments of Senator Proxmire).
---------------------------------------------------------------------------

    (iii) It is also clear that the activity limitation was not intended 
simply to prevent a nonbank bank from both accepting demand deposits and 
making commercial loans; it has a broader scope and purpose. If Congress 
had meant the term to refer to just these two activities, it would have 
used the restriction it used in another section of CEBA dealing with 
nonbank banks owned by bank holding companies which has this result, 
i.e., the nonbank bank could not engage in any activity that would have 
caused it to become a bank under the prior bank definition in the Act. 
See 12 U.S.C. 1843(g)(1)(A). Indeed, an earlier version of CEBA under 
consideration by the Senate Banking Committee contained such a provision 
for nonbank banks owned by commercial holding companies, which was 
deleted in favor of the broader activity limitation actually enacted. 
Committee Print No. 1, (Feb. 17, 1987). In this regard, both the Senate 
Report and Conference Report refer to demand deposit-taking and 
commercial lending as examples of activities that could be affected by 
the activity limitation, not as the sole activities to be limited by the 
provision.\5\
---------------------------------------------------------------------------

    \5\ Conference Report at 124-125; S. Rep. No. 100-19 at 32.
---------------------------------------------------------------------------

    (iv) Finally, additional guidance as to the meaning of the term 
activity is provided by the statutory context in which the term appears. 
The activity limitation is contained in section 4 of the BHC Act, which 
regulates the investments and activities of bank holding companies and 
their nonbank subsidiaries. The Board believes it reasonable to conclude 
that by placing the CEBA activity limitation in section 4 of the BHC 
Act, Congress meant that Board and judicial decisions regarding the 
meaning of the term activity in that section be looked to for guidance. 
This is particularly appropriate given the fact that grandfathered 
nonbank banks, whether owned by bank holding companies or unregulated 
holding companies, were treated as nonbank companies and not banks 
before enactment of CEBA.
    (v) This interpretation of the term activity draws support from 
comments by Senator Proxmire during the Senate's consideration of the 
provision that the term was not intended to apply ``on a product-by-
product, customer-by-customer basis.'' 133 Cong. Rec. S4054-5 (daily ed. 
March 27, 1987). This is the same manner in which the Board has 
interpreted the term activity in the nonbanking provision of section 4 
as referring to generic categories

[[Page 217]]

of activities, not to discrete products and services.
    (vi) Accordingly, consistent with the terms and purposes of the 
legislation and the Congressional intent to minimize unfair competition 
and the other adverse effects set out in the CEBA findings, the Board 
concludes that the term activity as used in section 4(f)(3) means any 
line of banking or nonbanking business. This definition does not, 
however, envision a product-by-product approach to the activity 
limitation. The Board believes it would be helpful to describe the 
application of the activity limitation in the context of the following 
major categories of activities: deposit-taking, lending, trust, and 
other activities engaged in by banks.
    (2) Deposit-taking activities. (i) With respect to deposit-taking, 
the Board believes that the activity limitation in section 4(f)(3) 
generally refers to three types of activity: demand deposit-taking; non-
demand deposit-taking with a third party payment capability; and time 
and savings deposit-taking without third party payment powers. As 
previously discussed, it is clear from the terms and intent of CEBA that 
the activity limitation would prevent, and was designed to prevent, 
nonbank banks that prior to the enactment of CEBA had refrained from 
accepting demand deposits in order to avoid coverage as a bank under the 
BHC Act, from starting to take these deposits after enactment of CEBA 
and thus becoming full-service banks. Accordingly, CEBA requires that 
the taking of demand deposits be treated as a separate activity.
    (ii) The Board also considers nondemand deposits withdrawable by 
check or other similar means for payment to third parties or others to 
constitute a separate line of business for purposes of applying the 
activity limitation. In this regard, the Board has previously recognized 
that this line of businesss constitutes a permissible but separate 
activity under section 4 of the BHC Act. Furthermore, the offering of 
accounts with transaction capability requires different expertise and 
systems than non-transaction deposit-taking and represented a distinct 
new activity that traditionally separated banks from thrift and similar 
institutions.
    (iii) Support for this view may also be found in the House Banking 
Committee report on proposed legislation prior to CEBA that contained a 
similar prohibition on new activities for nonbank banks. In discussing 
the activity limitation, the report recognized a distinction between 
demand deposits and accounts with transaction capability and those 
without transaction capability:

    With respect to deposits, the Committee recognizes that it is 
legitimate for an institution currently involved in offering demand 
deposits or other third party transaction accounts to make use of new 
technologies that are in the process of replacing the existing check-
based, paper payment system. Again, however, the Committee does not 
believe that technology should be used as a lever for an institution 
that was only incidentally involved in the payment system to transform 
itself into a significant offeror of transaction account capability. \6\
---------------------------------------------------------------------------

    \6\ H. Rep. No. 99-175, 99th Cong., 1st Sess. 13 (1985).
---------------------------------------------------------------------------

    (iv) Finally, this distinction between demand and nondemand 
checkable accounts and accounts not subject to withdrawal by check was 
specifically recognized by Congress in the redefinition of the term bank 
in CEBA to include an institution that takes demand deposits or 
``deposits that the depositor may withdraw by check or other means for 
payment to third parties or others'' as well as in various exemptions 
from that definition for trust companies, credit card banks, and certain 
industrial banks. \7\
---------------------------------------------------------------------------

    \7\ See 12 U.S.C. 1841(c)(2) (D), (F), (H), and (I).
---------------------------------------------------------------------------

    (v) Thus, an institution that as of March 5, 1987, offered only time 
and savings accounts that were not withdrawable by check for payment to 
third parties could not thereafter begin offering accounts with 
transaction capability, for example, NOW accounts or other types of 
transaction accounts.
    (3) Lending. As noted, the CEBA activity limitation does not treat 
lending as a single activity; it clearly distinguishes between 
commercial and other types of lending. This distinction is also 
reflected in the definition of bank in the BHC Act in effect both prior 
to

[[Page 218]]

and after enactment of CEBA as well as in various of the exceptions from 
this definition. In addition, commercial lending is a specialized form 
of lending involving different techniques and analysis from other types 
of lending. Based upon these factors, the Board would view commercial 
lending as a separate and distinct activity for purposes of the activity 
limitation in section 4(f)(3). The Board's decisions under section 4 of 
the BHC Act have not generally differentiated between types of 
commercial lending, and thus the Board would view commercial lending as 
a single activity for purposes of CEBA. Thus, a nonbank bank that made 
commercial loans as of March 5, 1987, could make any type of commercial 
loan thereafter.
    (i) Commercial lending. For purposes of the activity limitation, a 
commercial loan is defined in accordance with the Supreme Court's 
decision in Board of Governors v. Dimension Financial Corporation, 474 
U.S. 361 (1986), as a direct loan to a business customer for the purpose 
of providing funds for that customer's business. In this regard, the 
Board notes that whether a particular transaction is a commercial loan 
must be determined not from the face of the instrument, but from the 
application of the definition of commercial loan in the Dimension 
decision to that transaction. Thus, certain transactions of the type 
mentioned in the Board's ruling at issue in Dimension and in the Senate 
and Conference Reports in the CEBA legislation \8\ would be commercial 
loans if they meet the test for commercial loans established in 
Dimension. Under this test, a commercial loan would not include, for 
example, an open-market investment in a commercial entity that does not 
involve a borrower-lender relationship or negotiation of credit terms, 
such as a money market transaction.
---------------------------------------------------------------------------

    \8\ S. Rep. No. 100-19 at 31; Conference Report at 123.
---------------------------------------------------------------------------

    (ii) Other lending. Based upon the guidance in the Act as to the 
degree of specificity required in applying the activity limitation with 
respect to lending, the Board believes that, in addition to commercial 
lending, there are three other types of lending activities: consumer 
mortgage lending, consumer credit card lending, and other consumer 
lending. Mortgage lending and credit card lending are recognized, 
discrete lines of banking and business activity, involving techniques 
and processes that are different from and more specialized than those 
required for general consumer lending. For example, these activities 
are, in many cases, conducted by specialized institutions, such as 
mortgage companies and credit card institutions, or through separate 
organizational structures within an institution, particularly in the 
case of mortgage lending. Additionally, the Board's decisions under 
section 4 of the Act have recognized mortgage banking and credit card 
lending as separate activities for bank holding companies. The Board's 
Regulation Y reflects this specialization, noting as examples of 
permissible lending activity: consumer finance, credit card and mortgage 
lending. 12 CFR 225.25(b)(1). Finally, CEBA itself recognizes the 
specialized nature of credit card lending by exempting an institution 
specializing in that activity from the bank definition. For purpose of 
the activity limitation, a consumer mortgage loan will mean any loan to 
an individual that is secured by real estate and that is not a 
commercial loan. A credit card loan would be any loan made to an 
individual by means of a credit card that is not a commercial loan.
    (4) Trust activities. Under section 4 of the Act, the Board has 
historically treated trust activities as a single activity and has not 
differentiated the function on the basis of whether the customer was an 
individual or a business. See 12 CFR 225.25(b)(3). Similarly, the trust 
company exemption from the bank definition in CEBA makes no distinction 
between various types of trust activities. Accordingly, the Board would 
view trust activities as a separate activity without additional 
differentiation for purposes of the activity limitation in section 
4(f)(3).
    (5) Other activities. With respect to activities other than the 
various traditional deposit-taking, lending or trust activities, the 
Board believes it appropriate, for the reasons discussed above,

[[Page 219]]

to apply the activity limitation in section 4(f)(3) as the term activity 
generally applies in other provisions of section 4 of the BHC Act. Thus, 
a grandfathered nonbank bank could not, for example, commence after 
March 5, 1987, any of the following activities (unless it was engaged in 
such an activity as of that date): discount securities brokerage, full-
service securities brokerage investment advisory services, underwriting 
or dealing in government securities as permissible for member banks, 
foreign exchange transaction services, real or personal property 
leasing, courier services, data processing for third parties, insurance 
agency activities,\9\ real estate development, real estate brokerage, 
real estate syndication, insurance underwriting, management consulting, 
futures commission merchant, or activities of the general type listed in 
Sec. 225.25(b) of Regulation Y.
---------------------------------------------------------------------------

    \9\ In this area, section 4 of the Act does not treat all insurance 
agency activities as a single activity. Thus, for example, the Act 
treats the sale of credit-related life, accident and health insurance as 
a separate activity from general insurance agency activities. See 12 
U.S.C. 1843(c)(8).
---------------------------------------------------------------------------

    (6) Meaning of engaged in. In order to be engaged in an activity, a 
nonbank bank must demonstrate that it had a program in place to provide 
a particular product or service included within the grandfathered 
activity to a customer and that it was in fact offering the product or 
service to customers as of March 5, 1987. Thus, a nonbank bank is not 
engaged in an activity as of March 5, 1987, if the product or service in 
question was in a planning state as of that date and had not been 
offered or delivered to a customer. Consistent with prior Board 
interpretations of the term activity in the grandfather provisions of 
section 4, the Board does not believe that a company may be engaged in 
an activity on the basis of a single isolated transaction that was not 
part of a program to offer the particular product or to conduct in the 
activity on an ongoing basis. For example, a nonbank bank that held an 
interest in a single real estate project would not thereby be engaged in 
real estate development for purposes of this provision, unless evidence 
was presented indicating the interest was held under a program to 
commence a real estate development business.
    (7) Meaning of as of The Board believes that the grandfather date 
``as of March 5, 1987'' as used throughout section 4(f)(3) should refer 
to activities engaged in on March 5, 1987, or a reasonably short period 
preceding this date not exceeding 13 months. 133 Cong. Rec. S3957 (daily 
ed. March 26, 1987). (Remarks of Senators Dodd and Proxmire). Activities 
that the institution had terminated prior to March 5, 1988, however, 
would not be considered to have been conducted or engaged in as of March 
5. For example, if within 13 months of March 5, 1987, the nonbank bank 
had terminated its commercial lending activity in order to avoid the 
bank definition in the Act, the nonbank bank could not recommence that 
activity after enactment of CEBA.
    (d) Cross-marketing limitation--(1) In general. Section 4(f)(3) also 
limits cross-marketing activities by nonbank banks and their affiliates. 
Under this provision, a nonbank bank may not offer or market a product 
or service of an affiliate unless the product or service may be offered 
by bank holding companies generally under section 4(c)(8) of the BHC 
Act. In addition, a nonbank bank may not permit any of its products or 
services to be offered or marketed by or through a nonbank affiliate 
unless the affiliate engages only in activities permissible for a bank 
holding company under section 4(c)(8). These limitations are subject to 
an exception for products or services that were being so offered or 
marketed as of March 5, 1987, but only in the same manner in which they 
were being offered or marketed as of that date.
    (2) Examples of impermissible cross-marketing. The Conference Report 
illustrates the application of this limitation to the following two 
covered transactions: (i) products and services of an affiliate that 
bank holding companies may not offer under the BHC Act, and (ii) 
products and services of the nonbank bank. In the first case, the 
restrictions would prohibit, for example, a company from marketing life 
insurance or automotive supplies through its affiliate nonbank bank 
because these products are not generally

[[Page 220]]

permissible under the BHC Act. Conference Report at 126. In the second 
case, a nonbank bank may not permit its products or services to be 
offered or marketed through a life insurance affiliate or automobile 
parts retailer because these affiliates engage in activities prohibited 
under the BHC Act. Id.
    (3) Permissible cross-marketing. On the other hand, a nonbank bank 
could offer to its customers consumer loans from an affiliated mortgage 
banking or consumer finance company. These affiliates could likewise 
offer their customers the nonbank bank's products or services provided 
the affiliates engaged only in activities permitted for bank holding 
companies under the closely-related-to-banking standard of section 
4(c)(8) of the BHC Act. If the affiliate is engaged in both permissible 
and impermissible activities within the meaning of section 4(c)(8) of 
the BHC Act, however, the affiliate could not offer or market the 
nonbank bank's products or services.
    (4) Product approach to cross-marketing restriction. (i) Unlike the 
activity restrictions, the cross-marketing restrictions of CEBA apply by 
their terms to individual products and services. Thus, an affiliate of a 
nonbank bank that was engaged in activities that are not permissible for 
bank holding companies and that was marketing a particular product or 
service of a nonbank bank on the grandfather date could continue to 
market that product and, as discussed below, could change the terms and 
conditions of the loan. The nonbank affiliate could not, however, begin 
to offer or market another product or service of the nonbank bank.
    (ii) The Board believes that the term product or service must be 
interpreted in light of its accepted ordinary commercial usage. In some 
instances, commercial usage has identified a group of products so 
closely related that they constitute a product line (e.g., certificates 
of deposit) and differences in versions of the product (e.g., a one-year 
certificate of deposit) simply represent a difference in the terms of 
the product.\10\ This approach is consistent with the treatment in 
CEBA's legislative history of certificates of deposit as a product line 
rather than each particular type of CD as a separate product.\11\
---------------------------------------------------------------------------

    \10\ American Bankers Association, Banking Terminology (1981).
    \11\ During the Senate debates on CEBA, Senator Proxmire in response 
to a statement from Senator Cranston that the joint-marketing 
restrictions do not lock into place the specific terms or conditions of 
the particular grandfathered product or service, stated:
    That is correct. For example, if a nonbank bank was jointly 
marketing on March 5, 1987, a 3 year, $5,000 certificate of deposit, 
this bill would not prohibit offering in the same manner a 1 year, 
$2,000 certificate of deposit with a different interest rate. 133 Cong. 
Rec. S3959 (daily ed. March 26, 1987).
---------------------------------------------------------------------------

    (iii) In the area of consumer lending, the Board believes the 
following provide examples of different consumer loan products: mortgage 
loans to finance the purchase of the borrower's residence, unsecured 
consumer loans, consumer installment loans secured by the personal 
property to be purchased (e.g. automobile, boat or home appliance 
loans), or second mortgage loans.\12\ Under this interpretation, a 
nonbank bank that offered automobile loans through a nonbank affiliate 
on the grandfather date could market boat loans, appliance loans or any 
type of secured consumer installment loan through that affiliate. It 
could not, however, market unsecured consumer loans, home mortgage loans 
or other types of consumer loans.
---------------------------------------------------------------------------

    \12\ In this regard, the Supreme Court in United States v. 
Philadelphia National Bank, noted that ``the principal banking products 
are of course various types of credit, for example: unsecured personal 
and business loans, mortgage loans, loans secured by securities or 
accounts receivable, automobile installment and consumer goods, 
installment loans, tuition financing, bank credit cards, revolving 
credit funds.'' 374 U.S. 321, 326 n.5 (1963).
---------------------------------------------------------------------------

    (iv) In other areas, the Board believes that the determination as to 
what constitutes a product or service should be made on a case-by-case 
basis consistent with the principles that the terms product or service 
must be interpreted in accordance with their ordinary commercial usage 
and must be narrower in scope than the definition of activity. 
Essentially, the concept applied in this analysis is one of permitting 
the continuation of the specific product marketing activity that was 
undertaken as

[[Page 221]]

of March 5, 1987. Thus, for example, while insurance underwriting may 
constitute a separate activity under CEBA, a nonbank bank could not 
market a life insurance policy issued by the affiliate if on the 
grandfather date it had only marketed homeowners' policies issued by the 
affiliate.
    (5) Change in terms and conditions permitted. (i) The cross-
marketing restrictions would not limit the ability of the institution to 
change the specific terms and conditions of a particular grandfathered 
product or service. The Conference Report indicates a legislative intent 
not to lock into place the specific terms or conditions of a 
grandfathered product or service. Conference Report at 126. For example, 
a nonbank bank marketing a three-year, $5,000 certificate of deposit 
through an affiliate under the exemption could offer a one-year $2,000 
certificate of deposit with a different interest rate after the 
grandfather date. See footnote 11 above. Modifications that alter the 
type of product, however, are not permitted. Thus, a nonbank bank that 
marketed through affiliates on March 5, 1987, only certificates of 
deposit could not commence marketing MMDA's or NOW accounts after the 
grandfather date.
    (ii) General changes in the character of the product or service as 
the result of market or technological innovation are similarly permitted 
to the extent that they do not transform a grandfathered product into a 
new product. Thus, an unsecured line of credit could not be modified to 
include a lien on the borrower's residence without becoming a new 
product.
    (6) Meaning of offer or market. In the Board's opinion, the terms 
offer or market in the cross-marketing restrictions refer to the 
presentation to a customer of an institution's products or service 
through any type of program, including telemarketing, advertising 
brochures, direct mailing, personal solicitation, customer referrals, or 
joint-marketing agreements or presentations. An institution must have 
offered or actually marketed the product or service on March 5 or 
shortly before that date (as discussed above) to qualify for the 
grandfather privilege. Thus, if the cross-marketing program was in the 
planning stage on March 5, 1987, the program would not quality for 
grandfather treatment under CEBA.
    (7) Limitations on cross-marketing to in the same manner. (i) The 
cross-marketing restriction in section 4(f)(3) contains a grandfather 
provision that permits products or services that would otherwise be 
prohibited from being offered or marketed under the provision to 
continue to be offered or marketed by a particular entity if the 
products or services were being so offered or marketed as of March 5, 
1987, but ``only in the same manner in which they were being offered or 
marketed as of that date.'' Thus, to qualify for the grandfather 
provision, the manner of offering or marketing the otherwise prohibited 
product or service must remain the same as on the grandfather date.
    (ii) In interpreting this provision, the Board notes that Congress 
designed the joint-marketing restrictions to prevent the significant 
risk to the public posed by the conduct of such activities by insured 
banks affiliated with companies engaged in general commerce, to ensure 
objectivity in the credit-granting process and to ``minimize the unfair 
competitive advantage that grandfathered commercial companies owning 
nonbank banks might otherwise engage over regulated bank holding 
companies and our competing commercial companies that have no subsidiary 
bank.'' Conference Report at 125-126. The Board believes that 
determinations regarding the manner of cross-marketing of a particular 
product or service may best be accomplished by applying the limitation 
to the particular facts in each case consistent with the stated purpose 
of this provision of CEBA and the general principle that grandfather 
restrictions and exceptions to general prohibitions must be narrowly 
construed in order to prevent the exception from nullifying the rule. 
Essentially, as in the scope of the term ``product or service'', the 
guiding principle of Congressional intent with respect to this term is 
to permit only the continuation of the specific types of cross-marketing 
activity that were undertaken as of March 5, 1987.
    (8) Eligibility for cross-marketing grandfather exemption. The 
Conference Report also clarifies that entitlement to

[[Page 222]]

an exemption to continue to cross-market products and services otherwise 
prohibited by the statute applies only to the specific company that was 
engaged in the activity as of March 5, 1987. Conference Report at 126. 
Thus, an affiliate that was not engaged in cross-marketing products or 
services as of the grandfather date may not commence these activities 
under the exemption even if such activities were being conducted by 
another affiliate. Id.; see also S. Rep. No. 100-19 at 33-34.
    (e) Eligibility for grandfathered nonbank bank status. In reviewing 
the reports required by CEBA, the Board notes that a number of 
institutions that had not commenced business operations on August 10, 
1987, the date of enactment of CEBA, claimed grandfather privileges 
under section 4(f)(3) of CEBA. To qualify for grandfather privileges 
under section 4(f)(3), the institution must have ``bec[o]me a bank as a 
result of the enactment of [CEBA]'' and must have been controlled by a 
nonbanking company on March 5, 1987. 12 U.S.C. 1843(f)(1)(A). An 
institution that did not have FDIC insurance on August 10, 1987, and 
that did not accept demand deposits or transaction accounts or engage in 
the business of commercial lending on that date, would not have become a 
bank as a result of enactment of CEBA. Thus, institutions that had not 
commenced operations on August 10, 1987, could not qualify for 
grandfather privileges under section 4(f)(3) of CEBA. This view is 
supported by the activity limitations of section 4(f)(3), which, as 
noted, limit the activities of grandfathered nonbank banks to those in 
which they were lawfully engaged as of March 5, 1987. A nonbank bank 
that had not commenced conducting business activities on March 5, 1987, 
could not after enactment of CEBA engage in any activities under this 
provision.

[Reg. Y, 53 FR 37746, Sept. 28, 1988, as amended by Reg. Y, 62 FR 9343, 
Feb. 28, 1997]



                 Subpart J_Merchant Banking Investments

    Source: Reg. Y, 66 FR 8484, Jan. 31, 2001, unless otherwise noted.



Sec. 225.170  What type of investments are permitted by this subpart, and 

under what conditions may they be made?

    (a) What types of investments are permitted by this subpart? Section 
4(k)(4)(H) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) and 
this subpart authorize a financial holding company, directly or 
indirectly and as principal or on behalf of one or more persons, to 
acquire or control any amount of shares, assets or ownership interests 
of a company or other entity that is engaged in any activity not 
otherwise authorized for the financial holding company under section 4 
of the Bank Holding Company Act. For purposes of this subpart, shares, 
assets or ownership interests acquired or controlled under section 
4(k)(4)(H) and this subpart are referred to as ``merchant banking 
investments.'' A financial holding company may not directly or 
indirectly acquire or control any merchant banking investment except in 
compliance with the requirements of this subpart.
    (b) Must the investment be a bona fide merchant banking investment? 
The acquisition or control of shares, assets or ownership interests 
under this subpart is not permitted unless it is part of a bona fide 
underwriting or merchant or investment banking activity.
    (c) What types of ownership interests may be acquired? Shares, 
assets or ownership interests of a company or other entity include any 
debt or equity security, warrant, option, partnership interest, trust 
certificate or other instrument representing an ownership interest in 
the company or entity, whether voting or nonvoting.
    (d) Where in a financial holding company may merchant banking 
investments be made? A financial holding company and any subsidiary 
(other than a depository institution or subsidiary of a depository 
institution) may acquire or control merchant banking investments. A 
financial holding company and its subsidiaries may not acquire or 
control merchant banking investments on behalf of a depository 
institution or subsidiary of a depository institution.
    (e) May assets other than shares be held directly? A financial 
holding company may not under this subpart acquire or

[[Page 223]]

control assets, other than debt or equity securities or other ownership 
interests in a company, unless:
    (1) The assets are held by or promptly transferred to a portfolio 
company;
    (2) The portfolio company maintains policies, books and records, 
accounts, and other indicia of corporate, partnership or limited 
liability organization and operation that are separate from the 
financial holding company and limit the legal liability of the financial 
holding company for obligations of the portfolio company; and
    (3) The portfolio company has management that is separate from the 
financial holding company to the extent required by Sec. 225.171.
    (f) What type of affiliate is required for a financial holding 
company to make merchant banking investments? A financial holding 
company may not acquire or control merchant banking investments under 
this subpart unless the financial holding company qualifies under at 
least one of the following paragraphs:
    (1) Securities affiliate. The financial holding company is or has an 
affiliate that is registered under the Securities Exchange Act of 1934 
(15 U.S.C. 78c, 78o, 78o-4) as:
    (i) A broker or dealer; or
    (ii) A municipal securities dealer, including a separately 
identifiable department or division of a bank that is registered as a 
municipal securities dealer.
    (2) Insurance affiliate with an investment adviser affiliate. The 
financial holding company controls:
    (i) An insurance company that is predominantly engaged in 
underwriting life, accident and health, or property and casualty 
insurance (other than credit-related insurance), or providing and 
issuing annuities; and
    (ii) A company that:
    (A) Is registered with the Securities and Exchange Commission as an 
investment adviser under the Investment Advisers Act of 1940 (15 U.S.C. 
80b-1 et seq.); and
    (B) Provides investment advice to an insurance company.



Sec. 225.171  What are the limitations on managing or operating a portfolio 

company held as a merchant banking investment?

    (a) May a financial holding company routinely manage or operate a 
portfolio company? Except as permitted in paragraph (e) of this section, 
a financial holding company may not routinely manage or operate any 
portfolio company.
    (b) When does a financial holding company routinely manage or 
operate a company?
    (1) Examples of routine management or operation--(i) Executive 
officer interlocks at the portfolio company. A financial holding company 
routinely manages or operates a portfolio company if any director, 
officer or employee of the financial holding company serves as or has 
the responsibilities of an executive officer of the portfolio company.
    (ii) Interlocks by executive officers of the financial holding 
company. (A) Prohibition. A financial holding company routinely manages 
or operates a portfolio company if any executive officer of the 
financial holding company serves as or has the responsibilities of an 
officer or employee of the portfolio company.
    (B) Definition. For purposes of paragraph (b)(1)(ii)(A) of this 
section, the term ``financial holding company'' includes the financial 
holding company and only the following subsidiaries of the financial 
holding company:
    (1) A securities broker or dealer registered under the Securities 
Exchange Act of 1934;
    (2) A depository institution;
    (3) An affiliate that engages in merchant banking activities under 
this subpart or insurance company investment activities under section 
4(k)(4)(I) of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(I));
    (4) A small business investment company (as defined in section 
302(b) of the Small Business Investment Act of 1958 (15 U.S.C. 682(b)) 
controlled by the financial holding company or by any depository 
institution controlled by the financial holding company; and

[[Page 224]]

    (5) Any other affiliate that engages in significant equity 
investment activities that are subject to a special capital charge under 
the capital adequacy rules or guidelines of the Board.
    (iii) Covenants regarding ordinary course of business. A financial 
holding company routinely manages or operates a portfolio company if any 
covenant or other contractual arrangement exists between the financial 
holding company and the portfolio company that would restrict the 
portfolio company's ability to make routine business decisions, such as 
entering into transactions in the ordinary course of business or hiring 
officers or employees other than executive officers.
    (2) Presumptions of routine management or operation. A financial 
holding company is presumed to routinely manage or operate a portfolio 
company if:
    (i) Any director, officer, or employee of the financial holding 
company serves as or has the responsibilities of an officer (other than 
an executive officer) or employee of the portfolio company; or
    (ii) Any officer or employee of the portfolio company is supervised 
by any director, officer, or employee of the financial holding company 
(other than in that individual's capacity as a director of the portfolio 
company).
    (c) How may a financial holding company rebut a presumption that it 
is routinely managing or operating a portfolio company? A financial 
holding company may rebut a presumption that it is routinely managing or 
operating a portfolio company under paragraph (b)(2) of this section by 
presenting information to the Board demonstrating to the Board's 
satisfaction that the financial holding company is not routinely 
managing or operating the portfolio company.
    (d) What arrangements do not involve routinely managing or operating 
a portfolio company?--(1) Director representation at portfolio 
companies. A financial holding company may select any or all of the 
directors of a portfolio company or have one or more of its directors, 
officers, or employees serve as directors of a portfolio company if:
    (i) The portfolio company employs officers and employees responsible 
for routinely managing and operating the company; and
    (ii) The financial holding company does not routinely manage or 
operate the portfolio company, except as permitted in paragraph (e) of 
this section.
    (2) Covenants or other provisions regarding extraordinary events. A 
financial holding company may, by virtue of covenants or other written 
agreements with a portfolio company, restrict the ability of the 
portfolio company, or require the portfolio company to consult with or 
obtain the approval of the financial holding company, to take actions 
outside of the ordinary course of the business of the portfolio company. 
Examples of the types of actions that may be subject to these types of 
covenants or agreements include, but are not limited to, the following:
    (i) The acquisition of significant assets or control of another 
company by the portfolio company or any of its subsidiaries;
    (ii) Removal or selection of an independent accountant or auditor or 
investment banker by the portfolio company;
    (iii) Significant changes to the business plan or accounting methods 
or policies of the portfolio company;
    (iv) Removal or replacement of any or all of the executive officers 
of the portfolio company;
    (v) The redemption, authorization or issuance of any equity or debt 
securities (including options, warrants or convertible shares) of the 
portfolio company or any borrowing by the portfolio company outside of 
the ordinary course of business;
    (vi) The amendment of the articles of incorporation or by-laws (or 
similar governing documents) of the portfolio company; and
    (vii) The sale, merger, consolidation, spin-off, recapitalization, 
liquidation, dissolution or sale of substantially all of the assets of 
the portfolio company or any of its significant subsidiaries.
    (3) Providing advisory and underwriting services to, and having 
consultations with, a portfolio company. A financial holding company 
may:
    (i) Provide financial, investment and management consulting advice 
to a

[[Page 225]]

portfolio company in a manner consistent with and subject to any 
restrictions on such activities contained in Sec. Sec. 225.28(b)(6) or 
225.86(b)(1) of this part (12 CFR 225.28(b)(6) and 225.86(b)(1));
    (ii) Provide assistance to a portfolio company in connection with 
the underwriting or private placement of its securities, including 
acting as the underwriter or placement agent for such securities; and
    (iii) Meet with the officers or employees of a portfolio company to 
monitor or provide advice with respect to the portfolio company's 
performance or activities.
    (e) When may a financial holding company routinely manage or operate 
a portfolio company?--(1) Special circumstances required. A financial 
holding company may routinely manage or operate a portfolio company only 
when intervention by the financial holding company is necessary or 
required to obtain a reasonable return on the financial holding 
company's investment in the portfolio company upon resale or other 
disposition of the investment, such as to avoid or address a significant 
operating loss or in connection with a loss of senior management at the 
portfolio company.
    (2) Duration Limited. A financial holding company may routinely 
manage or operate a portfolio company only for the period of time as may 
be necessary to address the cause of the financial holding company's 
involvement, to obtain suitable alternative management arrangements, to 
dispose of the investment, or to otherwise obtain a reasonable return 
upon the resale or disposition of the investment.
    (3) Notice required for extended involvement. A financial holding 
company may not routinely manage or operate a portfolio company for a 
period greater than nine months without prior written notice to the 
Board.
    (4) Documentation required. A financial holding company must 
maintain and make available to the Board upon request a written record 
describing its involvement in routinely managing or operating a 
portfolio company.
    (f) May a depository institution or its subsidiary routinely manage 
or operate a portfolio company?--(1) In general. A depository 
institution and a subsidiary of a depository institution may not 
routinely manage or operate a portfolio company in which an affiliated 
company owns or controls an interest under this subpart.
    (2) Definition applying provisions governing routine management or 
operation. For purposes of this section other than paragraph (e) and for 
purposes of Sec. 225.173(d), a financial holding company includes a 
depository institution controlled by the financial holding company and a 
subsidiary of such a depository institution.
    (3) Exception for certain subsidiaries of depository institutions. 
For purposes of paragraph (e) of this section, a financial holding 
company includes a financial subsidiary held in accordance with section 
5136A of the Revised Statutes (12 U.S.C. 24a) or section 46 of the 
Federal Deposit Insurance Act (12 U.S.C. 1831w), and a subsidiary that 
is a small business investment company and that is held in accordance 
with the Small Business Investment Act (15 U.S.C. 661 et seq.), and such 
a subsidiary may, in accordance with the limitations set forth in this 
section, routinely manage or operate a portfolio company in which an 
affiliated company owns or controls an interest under this subpart.



Sec. 225.172  What are the holding periods permitted for merchant banking 

investments?

    (a) Must investments be made for resale? A financial holding company 
may own or control shares, assets and ownership interests pursuant to 
this subpart only for a period of time to enable the sale or disposition 
thereof on a reasonable basis consistent with the financial viability of 
the financial holding company's merchant banking investment activities.
    (b) What period of time is generally permitted for holding merchant 
banking investments?--(1) In general. Except as provided in this section 
or Sec. 225.173, a financial holding company may not, directly or 
indirectly, own, control or hold any share, asset or ownership interest 
pursuant to this subpart for a period that exceeds 10 years.
    (2) Ownership interests acquired from or transferred to companies 
held under this subpart. For purposes of paragraph

[[Page 226]]

(b)(1) of this section, shares, assets or ownership interests--
    (i) Acquired by a financial holding company from a company in which 
the financial holding company held an interest under this subpart will 
be considered to have been acquired by the financial holding company on 
the date that the share, asset or ownership interest was acquired by the 
company; and
    (ii) Acquired by a company from a financial holding company will be 
considered to have been acquired by the company on the date that the 
share, asset or ownership interest was acquired by the financial holding 
company if--
    (A) The financial holding company held the share, asset, or 
ownership interest under this subpart; and
    (B) The financial holding company holds an interest in the acquiring 
company under this subpart.
    (3) Interests previously held by a financial holding company under 
limited authority. For purposes of paragraph (b)(1) of this section, any 
shares, assets, or ownership interests previously owned or controlled, 
directly or indirectly, by a financial holding company under any other 
provision of the Federal banking laws that imposes a limited holding 
period will if acquired under this subpart be considered to have been 
acquired by the financial holding company under this subpart on the date 
the financial holding company first acquired ownership or control of the 
shares, assets or ownership interests under such other provision of law. 
For purposes of this paragraph (b)(3), a financial holding company 
includes a depository institution controlled by the financial holding 
company and any subsidiary of such a depository institution.
    (4) Approval required to hold interests held in excess of time 
limit. A financial holding company may seek Board approval to own, 
control or hold shares, assets or ownership interests of a company under 
this subpart for a period that exceeds the period specified in paragraph 
(b)(1) of this section. A request for approval must:
    (i) Be submitted to the Board at least 90 days prior to the 
expiration of the applicable time period;
    (ii) Provide the reasons for the request, including information that 
addresses the factors in paragraph (b)(5) of this section; and
    (iii) Explain the financial holding company's plan for divesting the 
shares, assets or ownership interests.
    (5) Factors governing Board determinations. In reviewing any 
proposal under paragraph (b)(4) of this section, the Board may consider 
all the facts and circumstances related to the investment, including:
    (i) The cost to the financial holding company of disposing of the 
investment within the applicable period;
    (ii) The total exposure of the financial holding company to the 
company and the risks that disposing of the investment may pose to the 
financial holding company;
    (iii) Market conditions;
    (iv) The nature of the portfolio company's business;
    (v) The extent and history of involvement by the financial holding 
company in the management and operations of the company; and
    (vi) The average holding period of the financial holding company's 
merchant banking investments.
    (6) Restrictions applicable to investments held beyond time period. 
A financial holding company that directly or indirectly owns, controls 
or holds any share, asset or ownership interest of a company under this 
subpart for a total period that exceeds the period specified in 
paragraph (b)(1) of this section must--
    (i) For purposes of determining the financial holding company's 
regulatory capital, apply to the financial holding company's adjusted 
carrying value of such shares, assets, or ownership interests a capital 
charge determined by the Board that must be:
    (A) Higher than the maximum marginal Tier 1 capital charge 
applicable under the Board's capital adequacy rules or guidelines (see 
12 CFR 225 appendix A) to merchant banking investments held by that 
financial holding company; and
    (B) In no event less than 25 percent of the adjusted carrying value 
of the investment; and

[[Page 227]]

    (ii) Abide by any other restrictions that the Board may impose in 
connection with granting approval under paragraph (b)(4) of this 
section.



Sec. 225.173  How are investments in private equity funds treated under this 

subpart?

    (a) What is a private equity fund? For purposes of this subpart, a 
``private equity fund'' is any company that:
    (1) Is formed for the purpose of and is engaged exclusively in the 
business of investing in shares, assets, and ownership interests of 
financial and nonfinancial companies for resale or other disposition;
    (2) Is not an operating company;
    (3) No more than 25 percent of the total equity of which is held, 
owned or controlled, directly or indirectly, by the financial holding 
company and its directors, officers, employees and principal 
shareholders;
    (4) Has a maximum term of not more than 15 years; and
    (5) Is not formed or operated for the purpose of making investments 
inconsistent with the authority granted under section 4(k)(4)(H) of the 
Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H)) or evading the 
limitations governing merchant banking investments contained in this 
subpart.
    (b) What form may a private equity fund take? A private equity fund 
may be a corporation, partnership, limited liability company or other 
type of company that issues ownership interests in any form.
    (c) What is the holding period permitted for interests in private 
equity funds?--(1) In general. A financial holding company may own, 
control or hold any interest in a private equity fund under this subpart 
and any interest in a portfolio company that is owned or controlled by a 
private equity fund in which the financial holding company owns or 
controls any interest under this subpart for the duration of the fund, 
up to a maximum of 15 years.
    (2) Request to hold interest for longer period. A financial holding 
company may seek Board approval to own, control or hold an interest in 
or held through a private equity fund for a period longer than the 
duration of the fund in accordance with Sec. 225.172(b) of this 
subpart.
    (3) Application of rules. The rules described in Sec. 225.172(b)(2) 
and (3) governing holding periods of interests acquired, transferred or 
previously held by a financial holding company apply to interests in, 
held through, or acquired from a private equity fund.
    (d) How do the restrictions on routine management and operation 
apply to private equity funds and investments held through a private 
equity fund?--(1) Portfolio companies held through a private equity 
fund. A financial holding company may not routinely manage or operate a 
portfolio company that is owned or controlled by a private equity fund 
in which the financial holding company owns or controls any interest 
under this subpart, except as permitted under Sec. 225.171(e).
    (2) Private equity funds controlled by a financial holding company. 
A private equity fund that is controlled by a financial holding company 
may not routinely manage or operate a portfolio company, except as 
permitted under Sec. 225.171(e).
    (3) Private equity funds that are not controlled by a financial 
holding company. A private equity fund may routinely manage or operate a 
portfolio company so long as no financial holding company controls the 
private equity fund or as permitted under Sec. 225.171(e).
    (4) When does a financial holding company control a private equity 
fund? A financial holding company controls a private equity fund for 
purposes of this subpart if the financial holding company, including any 
director, officer, employee or principal shareholder of the financial 
holding company:
    (i) Serves as a general partner, managing member, or trustee of the 
private equity fund (or serves in a similar role with respect to the 
private equity fund);
    (ii) Owns or controls 25 percent or more of any class of voting 
shares or similar interests in the private equity fund;
    (iii) In any manner selects, controls or constitutes a majority of 
the directors, trustees or management of the private equity fund; or

[[Page 228]]

    (iv) Owns or controls more than 5 percent of any class of voting 
shares or similar interests in the private equity fund and is the 
investment adviser to the fund.



Sec. 225.174  What aggregate thresholds apply to merchant banking investments?

    (a) In general. A financial holding company may not, without Board 
approval, directly or indirectly acquire any additional shares, assets 
or ownership interests under this subpart or make any additional capital 
contribution to any company the shares, assets or ownership interests of 
which are held by the financial holding company under this subpart if 
the aggregate carrying value of all merchant banking investments held by 
the financial holding company under this subpart exceeds:
    (1) 30 percent of the Tier 1 capital of the financial holding 
company; or
    (2) After excluding interests in private equity funds, 20 percent of 
the Tier 1 capital of the financial holding company.
    (b) How do these thresholds apply to a private equity fund? 
Paragraph (a) of this section applies to the interest acquired or 
controlled by the financial holding company under this subpart in a 
private equity fund. Paragraph (a) of this section does not apply to any 
interest in a company held by a private equity fund or to any interest 
held by a person that is not affiliated with the financial holding 
company.
    (c) How long do these thresholds remain in effect? This Sec. 
225.174 shall cease to be effective on the date that a final rule issued 
by the Board that specifically addresses the appropriate regulatory 
capital treatment of merchant banking investments becomes effective.



Sec. 225.175  What risk management, record keeping and reporting policies are 

required to make merchant banking investments?

    (a) What internal controls and records are necessary?--(1) General. 
A financial holding company, including a private equity fund controlled 
by a financial holding company, that makes investments under this 
subpart must establish and maintain policies, procedures, records and 
systems reasonably designed to conduct, monitor and manage such 
investment activities and the risks associated with such investment 
activities in a safe and sound manner, including policies, procedures, 
records and systems reasonably designed to:
    (i) Monitor and assess the carrying value, market value and 
performance of each investment and the aggregate portfolio;
    (ii) Identify and manage the market, credit, concentration and other 
risks associated with such investments;
    (iii) Identify, monitor and assess the terms, amounts and risks 
arising from transactions and relationships (including contingent fees 
or contingent interests) with each company in which the financial 
holding company holds an interest under this subpart;
    (iv) Ensure the maintenance of corporate separateness between the 
financial holding company and each company in which the financial 
holding company holds an interest under this subpart and protect the 
financial holding company and its depository institution subsidiaries 
from legal liability for the operations conducted and financial 
obligations of each such company; and
    (v) Ensure compliance with this part and any other provisions of law 
governing transactions and relationships with companies in which the 
financial holding company holds an interest under this subpart (e.g., 
fiduciary principles or sections 23A and 23B of the Federal Reserve Act 
(12 U.S.C. 371c, 371c-1), if applicable).
    (2) Availability of records. A financial holding company must make 
the policies, procedures and records required by paragraph (a)(1) of 
this section available to the Board or the appropriate Reserve Bank upon 
request.
    (b) What periodic reports must be filed? A financial holding company 
must provide reports to the appropriate Reserve Bank in such format and 
at such times as the Board may prescribe.
    (c) Is notice required for the acquisition of companies?--(1) 
Fulfillment of statutory notice requirement. Except as required in 
paragraph (c)(2) of this section, no post-acquisition notice under 
section 4(k)(6) of the Bank Holding Company Act (12 U.S.C. 1843(k)(6)) 
is required by a financial holding company in connection with an 
investment

[[Page 229]]

made under this subpart if the financial holding company has previously 
filed a notice under Sec. 225.87 indicating that it had commenced 
merchant banking investment activities under this subpart.
    (2) Notice of large individual investments. A financial holding 
company must provide written notice to the Board on the appropriate form 
within 30 days after acquiring more than 5 percent of the voting shares, 
assets or ownership interests of any company under this subpart, 
including an interest in a private equity fund, at a total cost to the 
financial holding company that exceeds the lesser of 5 percent of the 
Tier 1 capital of the financial holding company or $200 million.



Sec. 225.176  How do the statutory cross marketing and sections 23A and B 

limitations apply to merchant banking investments?

    (a) Are cross marketing activities prohibited?--(1) In general. A 
depository institution, including a subsidiary of a depository 
institution, controlled by a financial holding company may not:
    (i) Offer or market, directly or through any arrangement, any 
product or service of any company if more than 5 percent of the 
company's voting shares, assets or ownership interests are owned or 
controlled by the financial holding company pursuant to this subpart; or
    (ii) Allow any product or service of the depository institution, 
including any product or service of a subsidiary of the depository 
institution, to be offered or marketed, directly or through any 
arrangement, by or through any company described in paragraph (a)(1)(i) 
of this section.
    (2) How are certain subsidiaries treated? For purposes of paragraph 
(a)(1) of this section, a subsidiary of a depository institution does 
not include a financial subsidiary held in accordance with section 5136A 
of the Revised Statutes (12 U.S.C. 24a) or section 46 of the Federal 
Deposit Insurance Act. (12 U.S.C. 1831w), any company held by a company 
owned in accordance with section 25 or 25A of the Federal Reserve Act 
(12 U.S.C. 601 et seq.; 12 U.S.C. 611 et seq.), or any company held by a 
small business investment company owned in accordance with the Small 
Business Investment Act of 1958 (15 U.S.C. 661 et seq.).
    (3) How do the cross marketing restrictions apply to private equity 
funds? The restriction contained in paragraph (a)(1) of this section 
does not apply to:
    (i) Portfolio companies held by a private equity fund that the 
financial holding company does not control; or
    (ii) The sale, offer or marketing of any interest in a private 
equity fund, whether or not controlled by the financial holding company.
    (b) When are companies held under section 4(k)(4)(H) affiliates 
under sections 23A and B?--(1) Rebuttable presumption of control. The 
following rebuttable presumption of control shall apply for purposes of 
sections 23A and 23B of the Federal Reserve Act (12 U.S.C. 371c, 371c-
1): if a financial holding company directly or indirectly owns or 
controls more than 15 percent of the total equity of a company pursuant 
to this subpart, the company shall be presumed to be an affiliate of any 
member bank that is affiliated with the financial holding company.
    (2) Request to rebut presumption. A financial holding company may 
rebut this presumption by providing information acceptable to the Board 
demonstrating that the financial holding company does not control the 
company.
    (3) Presumptions that control does not exist. Absent evidence to the 
contrary, the presumption in paragraph (b)(1) of this section will be 
considered to have been rebutted without Board approval under paragraph 
(b)(2) of this section if any one of the following requirements are met:
    (i) No officer, director or employee of the financial holding 
company serves as a director, trustee, or general partner (or individual 
exercising similar functions) of the company;
    (ii) A person that is not affiliated or associated with the 
financial holding company owns or controls a greater percentage of the 
equity capital of the portfolio company than the amount owned or 
controlled by the financial holding company, and no more than one 
officer or employee of the holding company serves as a director or 
trustee

[[Page 230]]

(or individual exercising similar functions) of the company; or
    (iii) A person that is not affiliated or associated with the 
financial holding company owns or controls more than 50 percent of the 
voting shares of the portfolio company, and officers and employees of 
the holding company do not constitute a majority of the directors or 
trustees (or individuals exercising similar functions) of the company.
    (4) Convertible instruments. For purposes of paragraph (b)(1) of 
this section, equity capital includes options, warrants and any other 
instrument convertible into equity capital.
    (5) Application of presumption to private equity funds. A financial 
holding company will not be presumed to own or control the equity 
capital of a company for purposes of paragraph (b)(1) of this section 
solely by virtue of an investment made by the financial holding company 
in a private equity fund that owns or controls the equity capital of the 
company unless the financial holding company controls the private equity 
fund as described in Sec. 225.173(d)(4).
    (6) Application of sections 23A and B to U.S. branches and agencies 
of foreign banks. Sections 23A and 23B of the Federal Reserve Act (12 
U.S.C. 371c, 371c-1) shall apply to all covered transactions between 
each U.S. branch and agency of a foreign bank that acquires or controls, 
or that is affiliated with a company that acquires or controls, merchant 
banking investments and--
    (i) Any portfolio company that the foreign bank or affiliated 
company controls or is presumed to control under paragraph (b)(1) of 
this section; and
    (ii) Any company that the foreign bank or affiliated company 
controls or is presumed to control under paragraph (b)(1) of this 
section if the company is engaged in acquiring or controlling merchant 
banking investments and the proceeds of the covered transaction are used 
for the purpose of funding the company's merchant banking investment 
activities.



Sec. 225.177  Definitions.

    (a) What do references to a financial holding company include?--(1) 
Except as otherwise expressly provided, the term ``financial holding 
company'' as used in this subpart means the financial holding company 
and all of its subsidiaries, including a private equity fund or other 
fund controlled by the financial holding company.
    (2) Except as otherwise expressly provided, the term ``financial 
holding company'' does not include a depository institution or 
subsidiary of a depository institution or any portfolio company 
controlled directly or indirectly by the financial holding company.
    (b) What do references to a depository institution include? For 
purposes of this subpart, the term ``depository institution'' includes a 
U.S. branch or agency of a foreign bank.
    (c) What is a portfolio company? A portfolio company is any company 
or entity:
    (1) That is engaged in any activity not authorized for the financial 
holding company under section 4 of the Bank Holding Company Act (12 
U.S.C. 1843); and
    (2) Any shares, assets or ownership interests of which are held, 
owned or controlled directly or indirectly by the financial holding 
company pursuant to this subpart, including through a private equity 
fund that the financial holding company controls.
    (d) Who are the executive officers of a company?--(1) An executive 
officer of a company is any person who participates or has the authority 
to participate (other than in the capacity as a director) in major 
policymaking functions of the company, whether or not the officer has an 
official title, the title designates the officer as an assistant, or the 
officer serves without salary or other compensation.
    (2) The term ``executive officer'' does not include--
    (i) Any person, including a person with an official title, who may 
exercise a certain measure of discretion in the performance of his 
duties, including the discretion to make decisions in the ordinary 
course of the company's business, but who does not participate in the 
determination of major policies of the company and whose decisions are 
limited by policy standards fixed by senior management of the company; 
or

[[Page 231]]

    (ii) Any person who is excluded from participating (other than in 
the capacity of a director) in major policymaking functions of the 
company by resolution of the board of directors or by the bylaws of the 
company and who does not in fact participate in such policymaking 
functions.

                          Conditions to Orders



Sec. 225.200  Conditions to Board's section 20 orders.

    (a) Introduction. Under section 20 of the Glass-Steagall Act (12 
U.S.C. 377) and section 4(c)(8) of the Bank Holding Company Act (12 
U.S.C. 1843(c)(8)), a nonbank subsidiary of a bank holding company may 
to a limited extent underwrite and deal in securities for which 
underwriting and dealing by a member bank is prohibited. Pursuant to the 
Securities Act of 1933 and the Securities Exchange Act of 1934, these 
so-called section 20 subsidiaries are required to register with the SEC 
as broker-dealers and are subject to all the financial reporting, anti-
fraud and financial responsibility rules applicable to broker-dealers. 
In addition, transactions between insured depository institutions and 
their section 20 affiliates are restricted by sections 23A and 23B of 
the Federal Reserve Act (12 U.S.C. 371c and 371c-1). The Board expects a 
section 20 subsidiary, like any other subsidiary of a bank holding 
company, to be operated prudently. Doing so would include observing 
corporate formalities (such as the maintenance of separate accounting 
and corporate records), and instituting appropriate risk management, 
including independent trading and exposure limits consistent with parent 
company guidelines.
    (b) Conditions. As a condition of each order approving establishment 
of a section 20 subsidiary, a bank holding company shall comply with the 
following conditions.
    (1) Capital. (i) A bank holding company shall maintain adequate 
capital on a fully consolidated basis. If operating a section 20 
authorized to underwrite and deal in all types of debt and equity 
securities, a bank holding company shall maintain strong capital on a 
fully consolidated basis.
    (ii) In the event that a bank or thrift affiliate of a section 20 
subsidiary shall become less than well capitalized (as defined in 
section 38 of the Federal Deposit Insurance Act, 12 U.S.C. 1831o), and 
the bank holding company shall fail to restore it promptly to the well 
capitalized level, the Board may, in its discretion, reimpose the 
funding, credit extension and credit enhancement firewalls contained in 
its 1989 order allowing underwriting and dealing in bank-ineligible 
securities,\1\ or order the bank holding company to divest the section 
20 subsidiary.
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    \1\ Firewalls 5-8, 19, 21 and 22 of J.P. Morgan & Co., The Chase 
Manhattan Corp., Bankers Trust New York Corp., Citicorp, and Security 
Pacific Corp., 75 Federal Reserve Bulletin 192, 214-16 (1989).
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    (iii) A foreign bank that operates a branch or agency in the United 
States shall maintain strong capital on a fully consolidated basis at 
levels above the minimum levels required by the Basle Capital Accord. In 
the event that the Board determines that the foreign bank's capital has 
fallen below these levels and the foreign bank fails to restore its 
capital position promptly, the Board may, in its discretion, reimpose 
the funding, credit extension and credit enhancement firewalls contained 
in its 1990 order allowing foreign banks to underwrite and deal in bank-
ineligible securities,\2\ or order the foreign bank to divest the 
section 20 subsidiary.
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    \2\ Firewalls 5-8, 19, 21 and 22 of Canadian Imperial Bank of 
Commerce, The Royal Bank of Canada, Barclays PLC and Barclays Bank PLC, 
76 Federal Reserve Bulletin 158, (1990).
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    (2) Internal controls. (i) Each bank holding company or foreign bank 
shall cause its subsidiary banks, thrifts, branches or agencies \3\ to 
adopt policies and procedures, including appropriate limits on exposure, 
to govern their participation in transactions underwritten or arranged 
by a section 20 affiliate.
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    \3\ The terms ``branch'' and ``agency'' refer to a U.S. branch and 
agency of a foreign bank.
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    (ii) Each bank holding company or foreign bank shall ensure that an 
independent and thorough credit evaluation has been undertaken in 
connection with participation by a bank, thrift, or branch or agency in 
such transactions, and that adequate documentation of

[[Page 232]]

that evaluation is maintained for review by examiners of the appropriate 
federal banking agency and the Federal Reserve.
    (3) Interlocks restriction. (i) Directors, officers or employees of 
a bank or thrift subsidiary of a bank holding company, or a bank or 
thrift subsidiary or branch or agency of a foreign bank, shall not serve 
as a majority of the board of directors or the chief executive officer 
of an affiliated section 20 subsidiary.
    (ii) Directors, officers or employees of a section 20 subsidiary 
shall not serve as a majority of the board of directors or the chief 
executive officer of an affiliated bank or thrift subsidiary or branch 
or agency, except that the manager of a branch or agency may act as a 
director of the underwriting subsidiary.
    (iii) For purposes of this standard, the manager of a branch or 
agency of a foreign bank generally will be considered to be the chief 
executive officer of the branch or agency.
    (4) Customer disclosure--(i) Disclosure to section 20 customers. A 
section 20 subsidiary shall provide, in writing, to each of its retail 
customers,\4\ at the time an investment account is opened, the same 
minimum disclosures, and obtain the same customer acknowledgment, 
described in the Interagency Statement on Retail Sales of Nondeposit 
Investment Products (Statement) as applicable in such situations. These 
disclosures must be provided regardless of whether the section 20 
subsidiary is itself engaged in activities through arrangements with a 
bank that is covered by the Statement.
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    \4\ For purposes of this operating standard, a retail customer is 
any customer that is not an ``accredited investor'' as defined in 17 CFR 
230.501(a).
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    (ii) Disclosures accompanying investment advice. A director, 
officer, or employee of a bank, thrift, branch or agency may not express 
an opinion on the value or the advisability of the purchase or the sale 
of a bank-ineligible security that he or she knows is being underwritten 
or dealt in by a section 20 affiliate unless he or she notifies the 
customer of the affiliate's role.
    (5) Intra-day credit. Any intra-day extension of credit to a section 
20 subsidiary by an affiliated bank, thrift, branch or agency shall be 
on market terms consistent with section 23B of the Federal Reserve Act.
    (6) Restriction on funding purchases of securities during 
underwriting period. No bank, thrift, branch or agency shall knowingly 
extend credit to a customer secured by, or for the purpose of 
purchasing, any bank-ineligible security that a section 20 affiliate is 
underwriting or has underwritten within the past 30 days, unless:
    (i) The extension of credit is made pursuant to, and consistent with 
any conditions imposed in a preexisting line of credit that was not 
established in contemplation of the underwriting; or
    (ii) The extension of credit is made in connection with clearing 
transactions for the section 20 affiliate.
    (7) Reporting requirement. (i) Each bank holding company or foreign 
bank shall submit quarterly to the appropriate Federal Reserve Bank any 
FOCUS report filed with the NASD or other self-regulatory organizations, 
and any information required by the Board to monitor compliance with 
these operating standards and section 20 of the Glass-Steagall Act, on 
forms provided by the Board.
    (ii) In the event that a section 20 subsidiary is required to 
furnish notice concerning its capitalization to the Securities and 
Exchange Commission pursuant to 17 CFR 240.17a-11, a copy of the notice 
shall be filed concurrently with the appropriate Federal Reserve Bank.
    (8) Foreign banks. A foreign bank shall ensure that any extension of 
credit by its branch or agency to a section 20 affiliate, and any 
purchase by such branch or agency, as principal or fiduciary, of 
securities for which a section 20 affiliate is a principal underwriter, 
conforms to sections 23A and 23B of the Federal Reserve Act, and that 
its branches and agencies not advertise or suggest that they are 
responsible for the obligations of a section 20 affiliate, consistent 
with section 23B(c) of the Federal Reserve Act.

[62 FR 45306, Aug. 27, 1997, as amended by Reg. Y, 63 FR 14804, Mar. 27, 
1998]

[[Page 233]]



   Sec. Appendix A to Part 225--Capital Adequacy Guidelines for Bank 

                  Holding Companies: 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 bank holding companies (banking organizations).\1\ The 
principal objectives of this measure are to: (i) Make regulatory capital 
requirements more sensitive to differences in risk profiles among 
banking organizations; (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 banking organizations 
throughout the world.\2\
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    \1\ Supervisory ratios that relate capital to total assets for bank 
holding companies are outlined in appendices B and D of this part.
    \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 broad risk categories. 
An institution'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\ Banking organizations 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 banking 
organizations 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 organizations 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 organizations 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 on a consolidated basis to any bank 
holding company with consolidated assets of $500 million or more. The 
risk-based guidelines also apply on a consolidated basis to any bank 
holding company with consolidated assets of less than $500 million if 
the holding company (i) is engaged in significant nonbanking activities 
either directly or through a nonbank subsidiary; (ii) conducts 
significant off-balance sheet activities (including securitization and 
asset management or administration) either directly or through a nonbank 
subsidiary; or (iii) has a material amount of debt or equity securities 
outstanding (other than trust preferred securities) that are registered 
with the Securities and Exchange Commission (SEC). The Federal Reserve 
may apply the risk-based guidelines at its discretion to any bank 
holding company, regardless of asset size, if such action is warranted 
for supervisory purposes.\4\
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    \4\ [Reserved]
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    The risk-based guidelines are to be used in the inspection 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 bank holding company, the Federal Reserve will take into account 
the organization'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 risk-based ratio does not, however, incorporate other factors

[[Page 234]]

that can affect an organization's financial condition. These factors 
include overall interest rate exposure; liquidity, funding and market 
risks; the quality and level of earnings; investment or loan portfolio 
concentrations; the quality of loans and investments; the effectiveness 
of loan and investment policies; and management's ability to monitor and 
control financial and operating risks.
    In addition to evaluating capital ratios, an overall assessment of 
capital adequacy must take account of these other factors, including, in 
particular, the level and severity of problem and classified assets. For 
this reason, the final supervisory judgment on an organization's capital 
adequacy may differ significantly from conclusions that might be drawn 
solely from the level of the organization's 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, banking organizations generally are expected to operate well 
above the minimum risk-based ratios. In particular, banking 
organizations 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 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. Banking organizations 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

    (i) A banking organization's qualifying total capital consists of 
two types of capital components: ``core capital elements'' (tier 1 
capital elements) and ``supplementary capital elements'' (tier 2 capital 
elements). These capital elements and the various limits, restrictions, 
and deductions to which they are subject, are discussed below. To 
qualify as an element of tier 1 or tier 2 capital, an instrument must be 
fully paid up and effectively unsecured. Accordingly, if a banking 
organization has purchased, or has directly or indirectly funded the 
purchase of, its own capital instrument, that instrument generally is 
disqualified from inclusion in regulatory capital. A qualifying tier 1 
or tier 2 capital instrument must be subordinated to all senior 
indebtedness of the organization. If issued by a bank, it also must be 
subordinated to claims of depositors. In addition, the instrument must 
not contain or be covered by any covenants, terms, or restrictions that 
are inconsistent with safe and sound banking practices.
    (ii) On a case-by-case basis, the Federal Reserve may determine 
whether, and to what extent, any instrument that does not fit wholly 
within the terms of a capital element set forth below, or that does not 
have the characteristics or the ability to absorb losses commensurate 
with the capital treatment specified below, will qualify 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 addressed in the guidelines; the ability of the instrument to 
absorb losses, particularly while the organization operates as a going 
concern; the maturity and redemption features of the instrument; and 
other relevant terms and factors.
    (iii) The redemption of capital instruments before stated maturity 
could have a significant impact on an organization's overall capital 
structure. Consequently, an organization should consult with the Federal 
Reserve before redeeming any equity or other capital instrument included 
in tier 1 or tier 2 capital prior to stated maturity if such redemption 
could have a material effect on the level or composition of the 
organization's capital base. Such consultation generally would not be 
necessary when the instrument is to be redeemed with the proceeds of, or 
replaced by, a like amount of a capital instrument that is of equal or 
higher quality with regard to terms and maturity and the Federal Reserve 
considers the organization's capital position to be fully sufficient.

         A. The Definition and Components of Qualifying Capital

    1. Tier 1 capital. Tier 1 capital generally is defined as the sum of 
core capital elements less any amounts of goodwill, other intangible 
assets, interest-only strips receivables, deferred tax assets, 
nonfinancial equity investments, and other items that are required to be 
deducted in accordance with section II.B. of this appendix. Tier 1 
capital must represent at least 50 percent of qualifying total capital.
    a. Core capital elements (tier 1 capital elements). The elements 
qualifying for inclusion in the tier 1 component of a banking 
organization's qualifying total capital are:
    i. Qualifying common stockholders' equity;

[[Page 235]]

    ii. Qualifying noncumulative perpetual preferred stock, including 
related surplus, and senior perpetual preferred stock issued to the 
United States Department of the Treasury (Treasury) under the Troubled 
Asset Relief Program (TARP) established by the Emergency Economic 
Stabilization Act of 2008, Division A of Pub. L. No. 110-343 (which for 
purposes of this appendix shall be considered qualifying noncumulative 
perpetual preferred stock), including related surplus;
    iii. Minority interest related to qualifying common or noncumulative 
perpetual preferred stock directly issued by a consolidated U.S. 
depository institution or foreign bank subsidiary (Class A minority 
interest); and
    iv. Restricted core capital elements. The aggregate of these items 
is limited within tier 1 capital as set forth in section II.A.1.b. of 
this appendix. These elements are defined to include:
    (1) Qualifying cumulative perpetual preferred stock (including 
related surplus);
    (2) Minority interest related to qualifying cumulative perpetual 
preferred stock directly issued by a consolidated U.S. depository 
institution or foreign bank subsidiary (Class B minority interest);
    (3) Minority interest related to qualifying common stockholders' 
equity or perpetual preferred stock issued by a consolidated subsidiary 
that is neither a U.S. depository institution nor a foreign bank (Class 
C minority interest); and
    (4) Qualifying trust preferred securities.
    b. Limits on restricted core capital elements--i. Limits. (1) The 
aggregate amount of restricted core capital elements that may be 
included in the tier 1 capital of a banking organization must not exceed 
25 percent of the sum of all core capital elements, including restricted 
core capital elements, net of goodwill less any associated deferred tax 
liability. Stated differently, the aggregate amount of restricted core 
capital elements is limited to one-third of the sum of core capital 
elements, excluding restricted core capital elements, net of goodwill 
less any associated deferred tax liability.
    (2) In addition, the aggregate amount of restricted core capital 
elements (other than qualifying mandatory convertible preferred 
securities \5\) that may be included in the tier 1 capital of an 
internationally active banking organization \6\ must not exceed 15 
percent of the sum of all core capital elements, including restricted 
core capital elements, net of goodwill less any associated deferred tax 
liability.
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    \5\ Qualifying mandatory convertible preferred securities generally 
consist of the joint issuance by a bank holding company to investors of 
trust preferred securities and a forward purchase contract, which the 
investors fully collateralize with the securities, that obligates the 
investors to purchase a fixed amount of the bank holding company's 
common stock, generally in three years. A bank holding company wishing 
to issue mandatorily convertible preferred securities and include them 
in tier 1 capital must consult with the Federal Reserve prior to 
issuance to ensure that the securities' terms are consistent with tier 1 
capital treatment.
    \6\ For this purpose, an internationally active banking organization 
is a banking organization that (1) as of its most recent year-end FR Y-
9C reports total consolidated assets equal to $250 billion or more or 
(2) on a consolidated basis, reports total on-balance-sheet foreign 
exposure of $10 billion or more on its filings of the most recent year-
end FFIEC 009 Country Exposure Report.
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    (3) Amounts of restricted core capital elements in excess of this 
limit generally may be included in tier 2 capital. The excess amounts of 
restricted core capital elements that are in the form of Class C 
minority interest and qualifying trust preferred securities are subject 
to further limitation within tier 2 capital in accordance with section 
II.A.2.d.iv. of this appendix. A banking organization may attribute 
excess amounts of restricted core capital elements first to any 
qualifying cumulative perpetual preferred stock or to Class B minority 
interest, and second to qualifying trust preferred securities or to 
Class C minority interest, which are subject to a tier 2 sublimit.
    ii. Transition.
    (1) The quantitative limits for restricted core capital elements set 
forth in sections II.A.1.b.i. and II.A.2.d.iv. of this appendix become 
effective on March 31, 2009. Prior to that time, a banking organization 
with restricted core capital elements in amounts that cause it to exceed 
these limits must consult with the Federal Reserve on a plan for 
ensuring that the banking organization is not unduly relying on these 
elements in its capital base and, where appropriate, for reducing such 
reliance to ensure that the organization complies with these limits as 
of March 31, 2009.
    (2) Until March 31, 2009, the aggregate amount of qualifying 
cumulative perpetual preferred stock (including related surplus) and 
qualifying trust preferred securities that a banking organization may 
include in tier 1 capital is limited to 25 percent of the sum of the 
following core capital elements: qualifying common stockholders' equity, 
Qualifying noncumulative and cumulative perpetual preferred stock 
(including related surplus), qualifying minority interest in the equity 
accounts of consolidated subsidiaries, and qualifying trust preferred 
securities. Amounts of qualifying cumulative perpetual

[[Page 236]]

preferred stock (including related surplus) and qualifying trust 
preferred securities in excess of this limit may be included in tier 2 
capital.
    (3) Until March 31, 2009, internationally active banking 
organizations generally are expected to limit the amount of qualifying 
cumulative perpetual preferred stock (including related surplus) and 
qualifying trust preferred securities included in tier 1 capital to 15 
percent of the sum of core capital elements set forth in section 
II.A.1.b.ii.2. of this appendix.
    c. Definitions and requirements for core capital elements--i. 
Qualifying common stockholders' equity.
    (1) Definition. Qualifying 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 qualifying common 
stockholders' equity.
    (2) Restrictions on terms and features. A capital instrument that 
has a stated maturity date or that has a preference with regard to 
liquidation or the payment of dividends is not deemed to be a component 
of qualifying common stockholders' equity, regardless of whether or not 
it is called common equity. Terms or features that grant other 
preferences also may call into question whether the capital instrument 
would be deemed to be qualifying common stockholders' equity. Features 
that require, or provide significant incentives for, the issuer to 
redeem the instrument for cash or cash equivalents will render the 
instrument ineligible as a component of qualifying common stockholders' 
equity.
    (3) Reliance on voting common stockholders' equity. Although section 
II.A.1. of this appendix allows for the inclusion of elements other than 
common stockholders' equity within tier 1 capital, voting common 
stockholders' equity, which is the most desirable capital element from a 
supervisory standpoint, generally should be the dominant element within 
tier 1 capital. Thus, banking organizations should avoid over-reliance 
on preferred stock and nonvoting elements within tier 1 capital. Such 
nonvoting elements can include portions of common stockholders' equity 
where, for example, a banking organization has a class of nonvoting 
common equity, or a class of voting common equity that has substantially 
fewer voting rights per share than another class of voting common 
equity. Where a banking organization relies excessively on nonvoting 
elements within tier 1 capital, the Federal Reserve generally will 
require the banking organization to allocate a portion of the nonvoting 
elements to tier 2 capital.
    ii. Qualifying perpetual preferred stock.
    (1) Qualifying requirements. Perpetual preferred stock qualifying 
for inclusion in tier 1 capital has no maturity date and cannot be 
redeemed at the option of the holder. Perpetual preferred stock will 
qualify for inclusion in tier 1 capital only if it can absorb losses 
while the issuer operates as a going concern.
    (2) Restrictions on terms and features. Perpetual preferred stock 
included in tier 1 capital may not have any provisions restricting the 
banking organization's ability or legal right to defer or waive 
dividends, other than provisions requiring prior or concurrent deferral 
or waiver of payments on more junior instruments, which the Federal 
Reserve generally expects in such instruments consistent with the notion 
that the most junior capital elements should absorb losses first. 
Dividend deferrals or waivers for preferred stock, which the Federal 
Reserve expects will occur either voluntarily or at its direction when 
an organization is in a weakened condition, must not be subject to 
arrangements that would diminish the ability of the deferral to shore up 
the banking organization's resources. Any perpetual preferred stock with 
a feature permitting redemption at the option of the issuer may qualify 
as tier 1 capital only if the redemption is subject to prior approval of 
the Federal Reserve. Features that require, or create significant 
incentives for the issuer to redeem the instrument for cash or cash 
equivalents will render the instrument ineligible for inclusion in tier 
1 capital. For example, perpetual preferred stock that has a credit-
sensitive dividend feature--that is, a dividend rate that is reset 
periodically based, in whole or in part, on the banking organization's 
current credit standing--generally does not qualify for inclusion in 
tier 1 capital.\7\ Similarly, perpetual preferred stock that has a 
dividend rate step-up or a market value conversion feature--that is, a 
feature whereby the holder must or can convert the preferred stock into 
common stock at the market price prevailing at the time of conversion--
generally does not qualify for inclusion in

[[Page 237]]

tier 1 capital. \8\ Perpetual preferred stock that does not qualify for 
inclusion in tier 1 capitol generally will qualify for inclusion in tier 
2 capital.
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    \7\ Traditional floating-rate or adjustable-rate 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 in relation to an independent index based 
solely on general market interest rates), however, generally qualifies 
for inclusion in tier 1 capital provided all other requirements are met.
    \8\ Notwithstanding this provision, senior perpetual preferred stock 
issued to the Treasury under the TARP established by the Emergency 
Economic Stabilization Act of 2008, Division A of Pub. L. No. 110-343, 
may be included in tier 1 capital. In addition, traditional convertible 
perpetual preferred stock, which the holder must or can convert at a 
fixed number of common shares at a preset price, generally qualifies for 
inclusion in tier 1 capital provided all other requirements are met.
    \9\ 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.
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    (3) Noncumulative and cumulative features. Perpetual preferred stock 
that is noncumulative generally may not permit the accumulation or 
payment of unpaid dividends in any form, including in the form of common 
stock. Perpetual preferred stock that provides for the accumulation or 
future payment of unpaid dividends is deemed to be cumulative, 
regardless of whether or not it is called noncumulative.
    iii. Qualifying minority interest. Minority interest in the common 
and preferred stockholders' equity accounts of a consolidated subsidiary 
(minority interest) represents stockholders' equity associated with 
common or preferred equity instruments issued by a banking 
organization's consolidated subsidiary that are held by investors other 
than the banking organization. Minority interest is included in tier 1 
capital because, as a general rule, it represents equity that is freely 
available to absorb losses in the issuing subsidiary. Nonetheless, 
minority interest typically is not available to absorb losses in the 
banking organization as a whole, a feature that is a particular concern 
when the minority interest is issued by a subsidiary that is neither a 
U.S. depository institution nor a foreign bank. For this reason, this 
appendix distinguishes among three types of qualifying minority 
interest. Class A minority interest is minority interest related to 
qualifying common and noncumulative perpetual preferred equity 
instruments issued directly (that is, not through a subsidiary) by a 
consolidated U.S. depository institution \9\ or foreign bank \10\ 
subsidiary of a banking organization. Class A minority interest is not 
subject to a formal limitation within tier 1 capital. Class B minority 
interest is minority interest related to qualifying cumulative perpetual 
preferred equity instruments issued directly by a consolidated U.S. 
depository institution or foreign bank subsidiary of a banking 
organization. Class B minority interest is a restricted core capital 
element subject to the limitations set forth in section II.A.1.b.i. of 
this appendix, but is not subject to a tier 2 sub-limit. Class C 
minority interest is minority interest related to qualifying common or 
perpetual preferred stock issued by a banking organization's 
consolidated subsidiary that is neither a U.S. depository institution 
nor a foreign bank. Class C minority interest is eligible for inclusion 
in tier 1 capital as a restricted core capital element and is subject to 
the limitations set forth in sections II.A.1.b.i. and II.A.2.d.iv. of 
this appendix. Minority interest in small business investment companies, 
investment funds that hold nonfinancial equity investments (as defined 
in section II.B.5.b. of this appendix), and subsidiaries engaged in 
nonfinancial activities are not included in the banking organization's 
tier 1 or total capital if the banking organization's interest in the 
company or fund is held under one of the legal authorities listed in 
section II.B.5.b. of this appendix. In addition, minority interest in 
consolidated asset-backed commercial paper programs (ABCP) (as defined 
in section III.B.6. of this appendix) that are sponsored by a banking 
organization are not included in the organization's tier 1 or total 
capital if the organization excludes the consolidated assets of such 
programs from risk-weighted assets pursuant to section III.B.6. of this 
appendix.
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    \10\ For this purpose, a foreign 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.
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    iv. Qualifying trust preferred securities.
    (1) A banking organization that wishes to issue trust preferred 
securities and include them in tier 1 capital must first consult with 
the Federal Reserve. Trust preferred securities are defined as undated 
preferred securities issued by a trust or similar entity sponsored (but 
generally not consolidated) by a banking organization that is the sole 
common equity holder of the trust. Qualifying trust preferred securities 
must allow for dividends to be deferred for at least twenty consecutive 
quarters without an event of default, unless an event of default leading 
to

[[Page 238]]

acceleration permitted under section II.A.1.c.iv.(2) has occurred. The 
required notification period for such deferral must be reasonably short, 
no more than 15 business days prior to the payment date. Qualifying 
trust preferred securities are otherwise subject to the same 
restrictions on terms and features as qualifying perpetual preferred 
stock under section II.A.1.c.ii.(2) of this appendix.
    (2) The sole asset of the trust must be a junior subordinated note 
issued by the sponsoring banking organization that has a minimum 
maturity of thirty years, is subordinated with regard to both 
liquidation and priority of periodic payments to all senior and 
subordinated debt of the sponsoring banking organization (other than 
other junior subordinated notes underlying trust preferred securities). 
Otherwise the terms of a junior subordinated note must mirror those of 
the preferred securities issued by the trust.\11\ The note must comply 
with section II.A.2.d. of this appendix and the Federal Reserve's 
subordinated debt policy statement set forth in 12 CFR 250.166 \12\ 
except that the note may provide for an event of default and the 
acceleration of principal and accrued interest upon (a) nonpayment of 
interest for 20 or more consecutive quarters or (b) termination of the 
trust without redemption of the trust preferred securities, distribution 
of the notes to investors, or assumption of the obligation by a 
successor to the banking organization.
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    \11\ Under generally accepted accounting principles, the trust 
issuing the preferred securities generally is not consolidated on the 
banking organization's balance sheet; rather the underlying subordinated 
note is recorded as a liability on the organization's balance sheet. 
Only the amount of the trust preferred securities issued, which 
generally is equal to the amount of the underlying subordinated note 
less the amount of the sponsoring banking organization's common equity 
investment in the trust (which is recorded as an asset on the banking 
organization's consolidated balance sheet), may be included in tier 1 
capital. Because this calculation method effectively deducts the banking 
organization's common stock investment in the trust in computing the 
numerator of the capital ratio, the common equity investment in the 
trust should be excluded from the calculation of risk-weighted assets in 
accordance with footnote 17 of this appendix. Where a banking 
organization has issued trust preferred securities as part of a pooled 
issuance, the organization generally must not buy back a security issued 
from the pool. Where a banking organization does hold such a security 
(for example, as a result of an acquisition of another banking 
organization), the amount of the trust preferred securities includable 
in regulatory capital must, consistent with section II.(i) of this 
appendix, be reduced by the notional amount of the banking 
organization's investment in the security issued by the pooling entity.
    \12\ Trust preferred securities issued before April 15, 2005, 
generally would be includable in tier 1 capital despite noncompliance 
with sections II.A.1.c.iv. or II.A.2.d. of this appendix or 12 CFR 
250.166 provided the non-complying terms of the instrument (i) have been 
commonly used by banking organizations, (ii) do not provide an 
unreasonably high degree of protection to the holder in circumstances 
other than bankruptcy of the banking organization, and (iii) do not 
effectively allow a holder in due course of the note to stand ahead of 
senior or subordinated debt holders in the event of bankruptcy of the 
banking organization.
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    (3) In the last five years before the maturity of the note, the 
outstanding amount of the associated trust preferred securities is 
excluded from tier 1 capital and included in tier 2 capital, where the 
trust preferred securities are subject to the amortization provisions 
and quantitative restrictions set forth in sections II.A.2.d.iii. and 
iv. of this appendix as if the trust preferred securities were limited-
life preferred stock.
    2. Supplementary capital elements (tier 2 capital elements). The 
tier 2 component of an institution'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), perpetual debt, 
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 an 
institution'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.
    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

[[Page 239]]

loans or lease financing receivables. Allowances for loan and lease 
losses exclude ``allocated transfer risk reserves,'' \13\ and reserves 
created against identified losses.
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    \13\ 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.\14\
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    \14\ 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 banking organization 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 (and related 
surplus) that meets the requirements set forth in section 
II.A.1.c.ii.(1) of this appendix is eligible for inclusion in tier 2 
capital without limit.\15\
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    \15\ 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 capital. If the holder of such an instrument has 
the 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 banking 
organization. In the last five years before the maturity of the stock, 
it must be treated as limited-life preferred stock, subject to the 
amortization provisions and quantitative restrictions set forth in 
sections II.A.2.d.iii. and iv. of this appendix.
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    c. Hybrid capital instruments, perpetual debt, 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. If issued by a bank, it must also be subordinated 
to claims or 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.
    Perpetual debt and mandatory convertible debt securities that meet 
the criteria set forth in 12 CFR part 225, appendix B, also qualify as 
unlimited elements of Tier 2 capital for bank holding companies.
    d. Subordinated debt and intermediate-term preferred stock--i. Five-
year minimum maturity. Subordinated debt and intermediate-term preferred 
stock must have an original weighted average maturity of at least five 
years to qualify as tier 2 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 banking organization.
    ii. Other restrictions on subordinated debt. Subordinated debt 
included in tier 2 capital must comply with the Federal Reserve's 
subordinated debt policy statement set forth in 12 CFR 250.166.\16\ 
Accordingly, such subordinated debt must meet the following 
requirements:
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    \16\ The subordinated debt policy statement set forth in 12 CFR 
250.166 notes that certain terms found in subordinated debt may provide 
protection to investors without adversely affecting the overall benefits 
of the instrument to the issuing banking organization and, thus, would 
be acceptable for subordinated debt included in capital. For example, a 
provision that prohibits a bank holding company from merging, 
consolidating, or selling substantially all of its assets unless the new 
entity redeems or assumes the subordinated debt or that designates the 
failure to pay principal and interest on a timely basis as an event of 
default would be acceptable, so long as the occurrence of such events 
does not allow the debt holders to accelerate the payment of principal 
or interest on the debt.

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[[Page 240]]

    (1) The subordinated debt must be unsecured.
    (2) The subordinated debt must clearly state on its face that it is 
not a deposit and is not insured by a Federal agency.
    (3) The subordinated debt must not have credit-sensitive features or 
other provisions that are inconsistent with safe and sound banking 
practice.
    (4) Subordinated debt issued by a subsidiary U.S. depository 
institution or foreign bank of a bank holding company must be 
subordinated in right of payment to the claims of all the institution's 
general creditors and depositors, and generally must not contain 
provisions permitting debt holders to accelerate payment of principal or 
interest upon the occurrence of any event other than receivership of the 
institution. Subordinated debt issued by a bank holding company or its 
subsidiaries that are neither U.S. depository institutions nor foreign 
banks must be subordinated to all senior indebtedness of the issuer; 
that is, the debt must be subordinated at a minimum to all borrowed 
money, similar obligations arising from off-balance sheet guarantees and 
direct credit substitutes, and obligations associated with derivative 
products such as interest rate and foreign exchange contracts, commodity 
contracts, and similar arrangements. Subordinated debt issued by a bank 
holding company or any of its subsidiaries that is not a U.S. depository 
institution or foreign bank must not contain provisions permitting debt 
holders to accelerate the payment of principal or interest upon the 
occurrence of any event other than the bankruptcy of the bank holding 
company or the receivership of a major subsidiary depository 
institution. Thus, a provision permitting acceleration in the event that 
any other affiliate of the bank holding company issuer enters into 
bankruptcy or receivership makes the instrument ineligible for inclusion 
in tier 2 capital.
    iii. Discounting in last five years. 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 capital is reduced, or discounted, as these 
instruments approach maturity: one-fifth of the outstanding amount is 
excluded each year during the instrument's last five years before 
maturity. When remaining maturity is less than one year, the instrument 
is excluded from tier 2 capital.
    iv. Limits. The aggregate amount of term subordinated debt 
(excluding mandatory convertible debt) and limited-life preferred stock 
as well as, beginning March 31, 2009, qualifying trust preferred 
securities and Class C minority interest in excess of the limits set 
forth in section II.A.1.b.i. of this appendix that may be included in 
tier 2 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 of these 
instruments in excess of this limit, although not included in tier 2 
capital, will be taken into account by the Federal Reserve in its 
overall assessment of a banking organization's funding and financial 
condition.
    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 an institution'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 Reserve generally 
has not included unrealized asset appreciation in capital ratio 
calculations, although it has long taken such values into account as a 
separate factor in assessing the overall financial strength of a banking 
organization.
    ii. Consistent with long-standing supervisory practice, the excess 
of market values over book values for assets held by bank holding 
companies will generally not be recognized in supplementary capital or 
in the calculation of the risk-based capital ratio. However, all bank 
holding companies are encouraged to disclose their equivalent of 
premises (building) and security revaluation

[[Page 241]]

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 an organization's capital for the 
purpose of calculating the risk-based capital ratio.\17\ These assets 
include:
---------------------------------------------------------------------------

    \17\ 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 investments in 
other designated subsidiaries or associated companies at the discretion 
of the Federal Reserve--deducted from total capital components (as 
described in greater detail below).
    (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 A.
    1. Goodwill and other intangible assets--a. Goodwill. Goodwill is 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. Any goodwill carried on the balance sheet of a bank holding 
company after December 31, 1992, will be deducted from the sum of core 
capital elements in determining Tier 1 capital for ratio calculation 
purposes. Any goodwill in existence before March 12, 1988, is 
``grandfathered'' during the transition period and is not deducted from 
core capital elements until after December 31, 1992. However, bank 
holding company goodwill acquired as a result of a merger or acquisition 
that was consummated on or after March 12, 1988, is deducted 
immediately.
    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, an organization'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 holding 
company's capital ratios for supervisory and applications purposes. 
However, in making an overall assessment of a bank holding company's 
capital adequacy for applications purposes, the Board may, if it deems 
appropriate, take into account the quality and composition of an 
organization'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 a contractual right to receive some or all of the 
interest due on transferred assets and expose the bank holding company 
to credit risk directly or indirectly associated with transferred assets 
that exceeds a pro rata share of the bank holding company'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 holding company'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 holding company 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 holding company 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,

[[Page 242]]

as adjusted for capital purposes in accordance with the instructions to 
the Consolidated Financial Statements for Bank Holding Companies (FR Y-
9C Report). The amount of credit-enhancing I/Os that a bank holding 
company may include in capital shall be its fair value. If both the 
application of the limits on mortgage servicing assets, nonmortgage 
servicing 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 holding company 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. Nonmortgage servicing 
assets and purchased credit card relationships are subject, in the 
aggregate, 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.\18\
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    \18\ 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 holding company'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. Bank holding companies 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. Bank holding companies 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 inspection process. In addition, 
the Federal Reserve may require, on a case-by-case basis, an independent 
valuation of a bank holding company's intangible assets or credit-
enhancing I/Os.
    g. Growing organizations. Consistent with long-standing Board 
policy, banking organizations 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-- a. Unconsolidated banking 
or finance subsidiaries. The aggregate amount of investments in banking 
or finance subsidiaries \19\ whose financial statements are not 
consolidated for accounting or regulatory reporting purposes, regardless 
of whether the investment is made by the parent bank holding company or 
its direct or indirect subsidiaries, will be deducted from the 
consolidated parent banking organization's total capital components.\20\ 
Generally, investments for this purpose are defined as equity and debt 
capital

[[Page 243]]

investments and any other instruments that are deemed to be capital in 
the particular subsidiary.
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    \19\ 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. For purposes of this 
section, the definition of banking and finance subsidiary does not 
include a trust or other special purpose entity used to issue trust 
preferred securities.
    \20\ 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 FR Y-9C Report.
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    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 an 
organization's capital. Rather, such advances generally will be included 
in the parent banking organization'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 consolidated parent 
banking organization's capital if, in the judgment of the Federal 
Reserve, the risks 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 banking organization'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 parent organization and its affiliates 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 organization.
    b. Other subsidiaries and investments. The deduction of investments, 
regardless of whether they are made by the parent bank holding company 
or by its direct or indirect subsidiaries, from a consolidated banking 
organization's capital will also be applied in the case of any 
subsidiaries, that, while consolidated for accounting purposes, are not 
consolidated for certain specified supervisory or regulatory purposes, 
such as to facilitate functional regulation. For this purpose, aggregate 
capital investments (that is, the sum of any equity or debt instruments 
that are deemed to be capital) in these subsidiaries will be deducted 
from the consolidated parent banking organization's total capital 
components.\21\
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    \21\ Investments in unconsolidated subsidiaries will be deducted 
from both Tier 1 and Tier 2 capital. As a general rule, one-half (50 
percent) of the aggregate amount of capital investments will be deducted 
from the bank holding company's Tier 1 capital and one-half (50 percent) 
from its Tier 2 capital. However, the Federal Reserve may, on a case-by-
case basis, deduct a proportionately greater amount from Tier 1 if the 
risks associated with the subsidiary so warrant. If the amount 
deductible from Tier 2 capital exceeds actual Tier 2 capital, the excess 
would be deducted from Tier 1 capital. Bank holding companies' risk-
based capital ratios, net of these deductions, must exceed the minimum 
standards set forth in section IV.
---------------------------------------------------------------------------

    Advances (that is, loans, extensions of credit, guarantees, 
commitments, or any other forms of credit exposure) to such subsidiaries 
that are not deemed to be capital will generally not be deducted from 
capital. Rather, such advances will normally be included in the parent 
banking organization's consolidated assets and 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, be deducted from the consolidated parent banking 
organization's capital if, in the judgment of the Federal Reserve, the 
risks stemming from such advances are comparable to the risks associated 
with capital investments or if such 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.\22\
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    \22\ In assessing the overall capital adequacy of a banking 
organization, the Federal Reserve may also consider the organization's 
fully consolidated capital position.
---------------------------------------------------------------------------

    In general, when investments in a consolidated subsidiary are 
deducted from a consolidated parent banking organization's capital, the 
subsidiary's assets will also be excluded from the consolidated assets 
of the parent banking organization in order to assess the latter's 
capital adequacy.\23\
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    \23\ If the subsidiary's assets are consolidated with the parent 
banking organization for financial reporting purposes, this adjustment 
will involve excluding the subsidiary's assets on a line-by-line basis 
from the consolidated parent organization's assets. The parent banking 
organization's capital ratio will then be calculated on a consolidated 
basis with the exception that the assets of the excluded subsidiary will 
not be consolidated with the remainder of the parent banking 
organization.
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    The Federal Reserve may also deduct from a banking organization's 
capital, on a case-by-case basis, investments in certain other

[[Page 244]]

subsidiaries in order to determine if the consolidated banking 
organization meets minimum supervisory capital requirements without 
reliance on the resources invested in such subsidiaries.
    The Federal Reserve will not automatically deduct investments in 
other unconsolidated subsidiaries or investments in joint ventures and 
associated companies.\24\ Nonetheless, the resources invested in these 
entities, like investments in unconsolidated banking and finance 
subsidiaries, support assets not consolidated with the rest of the 
banking organization's activities and, therefore, may not be generally 
available to support additional leverage or absorb losses elsewhere in 
the banking organization. Moreover, experience has shown that banking 
organizations 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.
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    \24\ The definition of such entities is contained in the 
instructions to the Consolidated Financial Statements for Bank Holding 
Companies. Under regulatory reporting procedures, associated companies 
and joint ventures generally are defined as companies in which the 
banking organization owns 20 to 50 percent of the voting stock.
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    For this reason, the Federal Reserve will monitor the level and 
nature of such investments for individual banking organizations and may, 
on a case-by-case basis, deduct such investments from total capital 
components, apply an appropriate risk-weighted capital charge against 
the organization's proportionate share of the assets of its associated 
companies, require a line-by-line consolidation of the entity (in the 
event that the parent's control over the entity makes it the functional 
equivalent of a subsidiary), or otherwise require the organization 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 parent banking organization has significant influence over 
the financial or managerial policies or operations of the subsidiary, 
joint venture, or associated company;
    (2) The banking organization 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 parent banking organization.
    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) will be deducted from an organization's total capital 
components for the purpose of determining the numerator of the risk-
based capital ratio.
    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 banking organizations to 
deduct non-reciprocal holdings of such capital instruments.\25\
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    \25\ 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 holding company's capital may not exceed the lesser of:
    i. The amount of these deferred-tax assets that the bank holding 
company is expected to realize within one year of the calendar quarter-
end date, based on its projections of future taxable income for that 
year,\26\ or
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    \26\ 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 holding company 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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[[Page 245]]

    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 banking organization'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 holding 
company 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 parent bank 
holding company or by its direct or indirect subsidiaries. For purposes 
of this section II.B.5, investments held by a bank holding company 
include all investments held directly or indirectly by the bank holding 
company or any of its subsidiaries.
    b. Scope of nonfinancial equity investments. A nonfinancial equity 
investment means any equity investment held by the bank holding company: 
under the merchant banking authority of section 4(k)(4)(H) of the BHC 
Act and subpart J of the Board's Regulation Y (12 CFR 225.175 et seq.); 
under section 4(c)(6) or 4(c)(7) of BHC Act in a nonfinancial company or 
in a company that makes investments in nonfinancial companies; in a 
nonfinancial company through a small business investment company (SBIC) 
under section 302(b) of the Small Business Investment Act of 1958; \27\ 
in a nonfinancial company under the portfolio investment provisions of 
the Board's Regulation K (12 CFR 211.8(c)(3)); or in a nonfinancial 
company under section 24 of the Federal Deposit Insurance Act (other 
than section 24(f)).\28\ A nonfinancial company is an entity that 
engages in any activity that has not been determined 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)).
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    \27\ 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 parent banking organization is treated as a nonfinancial equity 
investment.
    \28\ See 12 U.S.C. 1843(c)(6), (c)(7) and (k)(4)(H); 15 U.S.C. 
682(b); 12 CFR 211.5(b)(1)(iii); and 12 U.S.C. 1831a. In a case in which 
the Board of Directors of the FDIC, acting directly in exceptional cases 
and after a review of the proposed activity, has permitted a lesser 
capital deduction for an investment approved by the Board of Directors 
under section 24 of the Federal Deposit Insurance Act, such deduction 
shall also apply to the consolidated bank holding company capital 
calculation so long as the bank's investments under section 24 and SBIC 
investments represent, in the aggregate, less than 15 percent of the 
Tier 1 capital of the bank.
---------------------------------------------------------------------------

    c. Amount of deduction from core capital. i. The bank holding 
company 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 
holding company. The amount of the percentage deduction increases as the 
aggregate amount of nonfinancial equity investments held by the bank 
holding company increases as a percentage of the bank holding company'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      Elements (as a percentage of
 holding company (as a percentage of the    the adjusted carrying value
   Tier 1 capital of the parent banking          of the investment)
             organization)\1\
------------------------------------------------------------------------
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 the parent holding company's Tier 1 
capital. For example, if the adjusted carrying value of all nonfinancial 
equity investments held by a bank holding company equals 20 percent of 
the Tier 1 capital of the bank holding company, then the amount of the 
deduction

[[Page 246]]

would be 8 percent of the adjusted carrying value of all investments up 
to 15 percent of the company's Tier 1 capital, and 12 percent of the 
adjusted carrying value of all investments in excess of 15 percent of 
the company'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 holding company's risk-weighted assets for purposes of 
computing the denominator of the company's risk-based capital ratio.\29\
---------------------------------------------------------------------------

    \29\ 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 banking organizations 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 banking organization from 
nonfinancial equity investments increases with its concentration in such 
investments and strong capital levels above the minimum requirements are 
particularly important when a banking organization 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 
banking organizations and apply heightened supervision to equity 
investment activities as appropriate, including where the banking 
organization has a high degree of concentration in nonfinancial equity 
investments, to ensure that each organization 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 banking organization, 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 holding company through one 
or more SBICs that are consolidated with the bank holding company or in 
one or more SBICs that are not consolidated with the bank holding 
company to the extent that all such investments, in the aggregate, do 
not exceed 15 percent of the aggregate of the bank holding company's pro 
rata interests in the Tier 1 capital of its subsidiary banks. Any 
nonfinancial equity investment that is held through or in an SBIC and 
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 
parent holding company's consolidated risk-weighted assets.\30\
---------------------------------------------------------------------------

    \30\ If a bank holding company has an investment in an SBIC that is 
consolidated for accounting purposes but that is not wholly owned by the 
bank holding company, the adjusted carrying value of the bank holding 
company's nonfinancial equity investments through the SBIC is equal to 
the holding company'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 holding company. If a bank holding company 
has an investment in a 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 holding company 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 holding company 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 holding company holds through one or more 
SBICs that are consolidated with the bank holding company or in one or 
more SBICs that are not consolidated with the bank holding company 
exceeds, in the aggregate, 15 percent of the aggregate Tier 1 capital of 
the company's subsidiary banks, the appropriate percentage of such 
amounts (as set forth in Table 1) must be deducted from the bank holding 
company'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 holding company 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 holding company prior to March 13, 2000, or that 
was made after such

[[Page 247]]

date pursuant to a binding written commitment \31\ entered into by the 
bank holding company prior to March 13, 2000, provided that in either 
case the bank holding company has continuously held the investment since 
the relevant investment date.\32\ 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 
holding company through a stock split or stock dividend on an investment 
made prior to March 13, 2000, provided the bank holding company provides 
no consideration for the shares or interests received and the 
transaction does not materially increase the bank'' holding company'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 
holding company 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 holding company 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 holding company's 
consolidated risk-weighted assets.
---------------------------------------------------------------------------

    \31\ A ``binding written commitment'' means a legally binding 
written agreement that requires the banking organization 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 banking organization 
the right to acquire equity or make an investment, but do not require 
the banking organization to take such actions, are not considered a 
binding written commitment for purposes of this section II.B.5.
    \32\ For example, if a bank holding company made an equity 
investment in 100 shares of a nonfinancial company prior to March 13, 
2000, that investment would not be subject to a deduction under this 
section II.B.5. However, if the bank holding company 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 holding company sold and repurchased shares of the 
company after March 13, 2000, the adjusted carrying value of the re-
acquired 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 
consolidated bank holding company reduced by any unrealized gains on 
those investments that are reflected in such carrying value but excluded 
from the bank holding company'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 holding company) 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.\33\
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    \33\ Unrealized gains on AFS 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 parent banking organization'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 consolidated bank holding company's core capital in accordance with 
section II.B.1 of this appendix). 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 banking organization'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,

[[Page 248]]

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. 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.

   Attachment II--Summary of Definition of Qualifying Capital for Bank
                           Holding Companies*
                   [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; bank holding
     preferred stock.                     companies should avoid undue
                                          reliance on preferred stock in
                                          tier 1.
    Qualifying cumulative perpetual      Limited to 25% of the sum of
     preferred stock.                     common stock, qualifying
                                          perpetual stock, and minority
                                          interests.
    Minority interest in equity          Organizations should avoid
     accounts of consolidated             using 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; organizations
 building).                               encouraged 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 after a
     determined by supervisory            formal rulemaking.
     authority.
      TOTAL CAPITAL (tier 1 + tier 2-    Must equal or exceed 8% of
       deductions).                       weighted-risk assets.
------------------------------------------------------------------------
\1\ Requirements for the deduction of other intangible assets and
  residual interests are set forth in section II.B.1. 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.

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 
bank holding companies 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 banking 
organization'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

[[Page 249]]

than the 50 percent risk weight appropriate to U.S. municipal revenue 
bonds.\34\
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    \34\ 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 the prospectus. An 
organization 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 of less than 20 percent. If an 
organization 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 organization 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 organization'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 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.
---------------------------------------------------------------------------

    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 the terms of one 
of the risk weight categories set forth below or that imposes risks on a 
bank holding company 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 the terms of one of the credit 
conversion factors set forth below or that imposes risks on a banking 
organization 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 a 
subsidiary lending institution; securities issued or guaranteed by the 
central governments of the OECD-based group of countries,\35\ U.S. 
Government 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.
---------------------------------------------------------------------------

    \35\ 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

[[Page 250]]

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 an organization's 
loan portfolio--which, in turn, would affect the overall supervisory 
assessment of the organization'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 holding company 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 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 
holding company 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 holding company (third-party asset) and the risk 
assumed by the bank holding company exceeds the pro rata share of the 
bank holding company's interest in the third-party asset. If the bank 
holding company has no claim on the third-party asset, then the bank 
holding company'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 holding company'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 holding 
company'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 holding company 
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

[[Page 251]]

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 holding company 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 the Commission's uniform net capital 
requirements for brokers and dealers.
    xii. Recourse means the retention, by a bank holding company, 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 banking organization's claim on the asset. If a 
banking organization 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 holding company 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 holding company 
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 holding company 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

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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 holding 
company'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 holding company 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 holding company 
to credit risk directly or indirectly associated with the transferred 
assets that exceeds a pro rata share of the bank holding company'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 
holding company 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 holding company 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 which the bank holding company directly or indirectly retains 
or assumes credit risk multiplied by a 100 percent conversion factor.
    ii. Risk-weight factor. To determine the bank holding company'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 holding company 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/Ostrip) 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

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position that is one grade below investment grade or better or a short-
term rating that is investment grade, the bank holding company 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 holding company 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 holding company 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 holding company 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 (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 credit-enhancing 
I/O strip will be treated as if the credit-enhancing I/O strip was 
retained by the bank holding company 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 holding 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 
holding company and not transferred.
    2. Where the aggregate capital requirement for residual interests 
and other recourse obligations in connection with the same transfer of 
assets exceed the full risk-based capital requirement for those assets, 
a bank holding company 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

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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 
holding company'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 holding company'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 highest 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 holding company and the bank holding company is 
able to demonstrate to the satisfaction of the Federal Reserve, prior to 
relying upon its use, that the bank holding company'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 
holding company's risk management system, which explicitly incorporates 
the full range of risks arising from a bank holding company'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 holding company'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 holding company's internal credit risk system must 
identify gradations of risk among ``pass'' assets and other risk 
positions;
    5. The bank holding company must have clear, explicit criteria that 
are used to classify assets into each internal risk grade, including 
subjective factors;
    6. The bank holding company must have independent credit risk 
management or loan review personnel assigning or reviewing the credit 
risk ratings;
    7. The bank holding company 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 holding company 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 the NRSRO specifies ranges of rating categories to them, 
the bank holding company may apply the rating category that corresponds 
to the bank holding company's position. In order to rely on a program 
rating, the bank holding company 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 holding company 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 holding company participates in a securitization 
sponsored by another party, the Federal Reserve may authorize the bank 
holding company to use this approach based on a programmatic rating 
obtained by the sponsor of the program.
    iii. Computer Program. The bank holding company is using an 
acceptable credit assessment computer program to determine the rating of 
a direct credit substitute or recourse obligation (but not residual 
interest)

[[Page 255]]

issued in connection with a structured finance program. A NRSRO must 
have developed the computer program, and the bank holding company 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 holding company 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 liability account established in accordance with generally accepted 
accounting principles. This limitation does not apply when a bank 
holding company 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 holding company 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 
organization 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 an organization'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 are 
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 banking organization 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 
banking organization must establish pursuant to GAAP a non-capital 
reserve sufficient to meet the organization'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 banking organization is 
qualifying if it meets the criteria for well capitalized or, by order of 
the Board, adequately capitalized, as those criteria are set forth in 
the Board's prompt corrective action regulation for state member banks 
(12 CFR 208.40). For purposes of determining whether an organization 
meets these criteria, its capital ratios must be calculated without 
regard to the 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 banking organization on transfers of small business 
obligations receiving the preferential capital treatment cannot exceed 
15 percent of the organization's total risk-based capital. By order, the 
Board may approve a higher limit.
    c. If a bank holding company 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 organization was 
qualifying and did not exceed the capital limit.
    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 exposures held in 
a bankruptcy-remote, special purpose entity.
    b. A bank holding company 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 holding company 
is the sponsor of the ABCP program. If a bank holding company excludes 
such consolidated ABCP program

[[Page 256]]

assets, the bank holding company must assess the appropriate risk-based 
capital charge against any exposures of the organization 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 holding company 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 holding company is not required to 
hold duplicative risk-based capital under this appendix against the 
overlapping position. Instead, the bank holding company 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 risk 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 subsidiary depository 
institutions or in transit and gold bullion held in either a subsidiary 
depository institution's own vaults or in another's vaults on an 
allocated basis, to the extent it is offset by gold bullion 
liabilities.\36\ 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 \37\ 
of the OECD countries and U.S. Government agencies,\38\ 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 subsidiary 
depository institutions have 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, are considered to 
be unconditionally guaranteed.
---------------------------------------------------------------------------

    \36\ All other holdings of bullion are assigned to the 100 percent 
risk category.
    \37\ 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 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 of countries that do not belong to the 
OECD-based group of countries.
    \38\ A U.S. Governmnt 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).
---------------------------------------------------------------------------

    This category also includes claims collateralized by cash on deposit 
in the subsidiary lending institution 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 banking organization'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.
    This category also includes ABCP (i) purchased by a bank holding 
company between September 19, 2008, and January 30, 2009 (unless 
extended by the Board), from an SEC-registered open-end investment 
company that holds itself out as a money market mutual fund under SEC 
Rule 2a-7 (17 CFR 270.2a-7) and (ii) pledged by the bank holding company 
to a Federal Reserve Bank to secure financing from the ABCP lending 
facility established by the Board on September 19, 2008.
    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

[[Page 257]]

guaranteed by,\39\ U.S. depository institutions \40\ and foreign banks 
\41\; and long-term claims on, and the portions of long-term claims that 
are guaranteed by, U.S. depository institutions and OECD banks.\42\
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    \39\ 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 U.S. depository institutions or foreign banks.
    \40\ See footnote 9 of this appendix for the definition of a U.S. 
depository institution. For this purpose, the definition also includes 
U.S.-chartered depository institutions owned by foreigners. However, 
branches and agencies of foreign banks located in the U.S., as well as 
all bank holding companies, are excluded.
    \41\ See footnote 10 of this appendix for the definition of a 
foreign bank. 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 United 
States) 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.
    \42\ 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.
---------------------------------------------------------------------------

    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 subsidiary depository institutions have 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 
\43\ 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.\44\
---------------------------------------------------------------------------

    \43\ 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.
    \44\ 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.
---------------------------------------------------------------------------

    c. This category also includes the portions of claims (including 
repurchase transactions) collateralized by cash on deposit in the 
subsidiary lending institution or by securities issued or guaranteed by 
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 \45\ on, or guaranteed by, a 
qualifying securities firm \46\ incorporated in the United States or

[[Page 258]]

other member of the OECD-based group of countries 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 the claim arises under a contract that:
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    \45\ Claims on a qualifying securities firm that are instruments the 
firm, or its parent company, uses to satisfy its applicable capital 
requirement are not eligible for this risk weight.
    \46\ 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 
and are in compliance with the SEC's net capital rule, 17 CFR 240.15c3-
1. With regard to securities firms incorporated in other countries in 
the OECD-based group of countries, qualifying securities firms are those 
securities firms that a banking organization 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).
---------------------------------------------------------------------------

    (1) Is a reverse repurchase/repurchase agreement or securities 
lending/borrowing transaction executed under standard industry 
documentation;
    (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.\47\
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    \47\ For example, a claim is exempt from the automatic stay in 
bankruptcy in the United States if it arises under a securities contract 
or 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 \48\ on 1- to 4-family residential properties, 
either owner-occupied or rented, or on multifamily residential 
properties,\49\ that meet certain criteria.\50\ Loans included in this 
category must have been made in accordance with prudent underwriting 
standards;\51\ 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

[[Page 259]]

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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    \48\ If a banking organization 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.
    \49\ Loans that qualify as loans secured by 1- to 4-family 
residential properties or multifamily residential properties are listed 
in the instructions to the FR Y-9C 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 holding company 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).
    \50\ 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.
    \51\ 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 banking organization'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 claims 
on non-OECD central governments that entail some degree of transfer 
risk.\52\ 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 organization on acceptances outstanding 
involving standard risk claims;\53\ 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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    \52\ 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 subsidiary depository institutions.
    \53\ 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.
---------------------------------------------------------------------------

    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

[[Page 260]]

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.\54\
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    \54\ 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.
---------------------------------------------------------------------------

    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, 
\55\ and partly-paid shares and securities; they do not include 
commitments to make residential mortgage loans or forward foreign 
exchange contracts.
---------------------------------------------------------------------------

    \55\ Forward forward deposits accepted are treated as interest rate 
contracts.
---------------------------------------------------------------------------

    c. Securities lent by a banking organization are treated in one of 
two ways, depending upon whether the lender is at risk of loss. If a 
banking organization, 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 banking organization 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 
organization, or the independent custodian acting on the lending 
organization's behalf. Where a banking organization 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 banking 
organization, the transaction is deemed to be collateralized by cash on 
deposit in a subsidiary depository institution 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 \56\ 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.\57\ 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.\58\
---------------------------------------------------------------------------

    \56\ That is, a participation in which the originating banking 
organization 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.
    \57\ 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.
    \58\ 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.
---------------------------------------------------------------------------

    e. In the case of direct credit substitutes in which a risk 
participation has been acquired, the acquiring banking organization'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

[[Page 261]]

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 banking organization is obligated only for its 
pro rata share of the risk and there is no recourse to the originating 
banking organization, each banking organization 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.\59\
---------------------------------------------------------------------------

    \59\ For example, if a banking organization has a 10 percent share 
of a $10 syndicated direct credit substitute that provides credit 
support to a $100 loan, then the banking organization's $1 pro rata 
share in the enhancement means that a $10 pro rata share of the loan is 
included in risk weighted assets.
---------------------------------------------------------------------------

    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 participation in performance 
standby letters of credit. Peformance 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 banking 
organization can, at its option, unconditionally (without cause) cancel 
the commitment;\60\ and (2) the banking organization 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.
---------------------------------------------------------------------------

    \60\ 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.
---------------------------------------------------------------------------

    c.i. Commitments are defined as any legally binding arrangements 
that obligate a banking organization to extend credit in the form of 
loans or leases; to purchase loans, securities, or other 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 banking 
organization is obligated solely for its pro rata share, only the 
organization's proportional share of the syndicated commitment is taken 
into account in calculating the risk-based capital ratio.
    ii. Banking organizations 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 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 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 U.S. depository institutions or OECD banks as 
participations in which the originating banking organization 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 banking organization 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.

[[Page 262]]

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 
organizations 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 also are converted at 10 percent.
    b. Banking organizations 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, 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 banking organization has the 
unconditional right to cancel the line of credit at any time, in 
accordance with applicable law.
    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 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. Banking organizations should use, subject to examiner 
review, the effective rather than the apparent or stated notional amount 
in this calculation. The credit conversion factors are:

[[Page 263]]



                                               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:
    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 banking organization 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 banking organization 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 banking organization'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 banking organization 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 banking organization 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.\61\
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    \61\ 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 banking organization 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 banking

[[Page 264]]

organization's files and available for inspection by the Federal 
Reserve. The Federal Reserve may determine that a banking organization'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.\62\
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    \62\ 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 = (0.4 x Agross) + 0.6(NGR x 
Agross)

    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 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 the 
same 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 current exposures for other counterparties.
    iii. A banking organization must use consistently 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--an institution 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.\63\ However,

[[Page 265]]

the maximum risk weight applicable to the credit equivalent amount of 
such contracts is 50 percent.
---------------------------------------------------------------------------

    \63\ 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 banking organization'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 banking organizations may be 
exposed, such as interest rate, liquidity, market or operational risks. 
For this reason, banking organizations are generally expected to operate 
with capital positions well above the minimum ratios.
    Institutions with high or inordinate levels of risk are expected to 
operate well above minimum capital standards. Banking organizations 
experiencing or anticipating significant growth are also expected to 
maintain capital, including tangible capital positions, well above the 
minimum levels. For example, most such organizations 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 
banking organizations. In all cases, organizations 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 organization 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 organization. In 
addition, such organizations 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 bank holding 
companies \64\ 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 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 
an organization's total capital. The Federal Reserve will continue to 
require bank holding companies to maintain reserves at levels fully 
sufficient to cover losses inherent in their loan portfolios.
---------------------------------------------------------------------------

    \64\ As noted in section I, bank holding companies with less than 
$500 million in consolidated assets would generally be exempt from the 
calculation and analysis of risk-based ratios on a consolidated holding 
company basis, subject to certain terms and conditions.
---------------------------------------------------------------------------

    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 organizations' capital 
securities, or other items at the direction of the Federal Reserve. The 
conditions under which these deductions are to be made and the 
procedures for making the 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

[[Page 266]]

of capital. However, by year-end 1990, banking organizations 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 an organization'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, banking organizations 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 ratios set forth in appendix B of this part. In 
addition, as more fully set forth in appendix D to this part, banking 
organizations are expected to maintain a minimum ratio of Tier 1 capital 
to total assets during this transition period.

  Attachment I--Sample Calculation of Risk-Based Capital Ratio for Bank
                            Holding Companies
Example of a banking organization 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         5,000
     properties............................................
    Loans to private corporations..........................       65,000
                                                            ------------
      Total Balance Sheet Assets...........................     $100,000
                                                            ============
Off-Balance Sheet Items:
    Standby letters of credit (``SLCs'') backing general         $10,000
     obligation debt issues of U.S. municipalities
     (``GOs'').............................................
    Long-term legally binding commitments to private              20,000
     corporations..........................................
                                                            ------------
      Total Off/Balance Sheet Items........................      $30,000
This bank holding company's total capital to total assets (leverage)
 ratio would be: ($6,000/$100,000)=6.00%.
To compute the bank holding company'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 holding company's ratio of total capital to weighted risk assets (risk-based capital ratio) would be:
 ($6,000/$80,500)=7.45%


[Reg. Y, 54 FR 4209, Jan. 27, 1989]

    Editorial Note: For Federal Register citations affecting appendix A 
to part 225, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and on GPO Access.

    Effective Date Note: At 73 FR 79606, Dec. 30, 2008, appendix A of 
part 225 was amended in section II.B. by revising paragraphs 1.a., 
1.e.iii., and 1.f. effective Jan. 29, 2009. For the convenience of the 
user, the revised text is set forth as follows:

[[Page 267]]



   Sec. Appendix A to Part 225--Capital Adequacy Guidelines for Bank 

                  Holding Companies: Risk-Based Measure

                                * * * * *

    II. * * *
    B. * * *
    1. * * *
    a. Goodwill. Goodwill is an intangible asset that represents the 
excess of the cost of an acquired entity over the net of the amounts 
assigned to assets acquired and liabilities assumed. Goodwill is 
deducted from the sum of core capital elements in determining tier 1 
capital.

                                * * * * *

    e. * * *
    iii. Bank holding companies may elect to deduct goodwill, 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. Bank holding companies must review the book value of 
goodwill and other 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 inspection process. 
In addition, the Federal Reserve may require, on a case-by-case basis, 
an independent valuation of a bank holding company's goodwill, other 
intangible assets, or credit-enhancing I/Os.

                                * * * * *



   Sec. Appendix B to Part 225--Capital Adequacy Guidelines for Bank 

       Holding Companies and State Member Banks: Leverage Measure

    The Board of Governors of the Federal Reserve System has adopted 
minimum capital ratios and guidelines to provide a framework for 
assessing the adequacy of the capital of bank holding companies and 
state member banks (collectively ``banking organizations''). The 
guidelines generally apply to all state member banks and bank holding 
companies regardless of size 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 of Governors will review the 
guidelines from time to time for possible adjustment commensurate with 
changes in the economy, financial markets, and banking practices. In 
this regard, the Board has determined that during the transition period 
through year-end 1990 for implementation of the risk-based capital 
guidelines contained in appendix A to this part and in appendix A to 
part 208, a banking organization may choose to fulfill the requirements 
of the guidelines relating capital to total assets contained in this 
appendix in one of two manners. Until year-end 1990, a banking 
organization may choose to conform to either the 5.5 percent and 6 
percent minimum primary and total capital standards set forth in this 
appendix, or the 7.25 percent year-end 1990 minimum risk-based capital 
standard set forth in appendix A to this part and appendix A to part 
208. Those organizations that choose to conform during this period to 
the 7.25 percent year-end 1990 risk-based capital standard will be 
deemed to be in compliance with the capital adequacy guidelines set 
forth in this appendix.
    Two principal measurements of capital are used--the primary capital 
ratio and the total capital ratio. The definitions of primary and total 
capital for banks and bank holding companies and formulas for 
calculating the capital ratios are set forth below in the definitional 
sections of these guidelines.

                           Capital Guidelines

    The Board has established a minimum level of primary capital to 
total assets of 5.5 percent and a minimum level of total capital to 
total assets of 6.0 percent. Generally, banking organizations are 
expected to operate above the minimum primary and total capital levels. 
Those organizations whose operations involve or are exposed to high or 
inordinate degrees of risk will be expected to hold additional capital 
to compensate for these risks.
    In addition, the Board has established the following three zones for 
total capital for banking organizations of all sizes:

                           Total Capital Ratio
                              [In percent]
Zone 1....................................  Above 7.0.
Zone 2....................................  6.0 to 7.0.
Zone 3....................................  Below 6.0.
 

    The capital guidelines assume adequate liquidity and a moderate 
amount of risk in the loan and investment portfolios and in off-

[[Page 268]]

balance sheet activities. The Board is concerned that some banking 
organizations may attempt to comply with the guidelines in ways that 
reduce their liquidity or increase risk. Banking organizations should 
avoid the practice of attempting to meet the guidelines by decreasing 
the level of liquid assets in relation to total assets. In assessing 
compliance with the guidelines, the Federal Reserve will take into 
account liquidity and the overall degree of risk associated with an 
organization's operations, including the volume of assets exposed to 
risk.
    The Federal Reserve will also take into account the sale of loans or 
other assets with recourse and the volume and nature of all off-balance 
sheet risk. Particularly close attention will be directed to risks 
associated with standby letters of credit and participation in joint 
venture activities. The Federal Reserve will review the relationship of 
all on- and off-balance sheet risks to capital and will require those 
institutions with high or inordinate levels of risk to hold additional 
primary capital. In addition, the Federal Reserve will continue to 
review the need for more explicit procedures for factoring on- and off-
balance sheet risks into the assessment of capital adequacy.
    The capital guidelines apply to both banks and bank holding 
companies on a consolidated basis.\1\ Some banking organizations are 
engaged in significant nonbanking activities that typically require 
capital ratios higher than those of commercial banks alone. The Board 
believes that, as a matter of both safety and soundness and competitive 
equity, the degree of leverage common in banking should not 
automatically extend to nonbanking activities. Consequently, in 
evaluating the consolidated capital positions of banking organizations, 
the Board is placing greater weight on the building-block approach for 
assessing capital requirements. This approach generally provides that 
nonbank subsidiaries of a banking organization should maintain levels of 
capital consistent with the levels that have been established by 
industry norms or standards, by Federal or State regulatory agencies for 
similar firms that are not affiliated with banking organizations, or 
that may be established by the Board after taking into account risk 
factors of a particular industry. The assessment of an organization's 
consolidated capital adequacy must take into account the amount and 
nature of all nonbank activities, and an institution's consolidated 
capital position should at least equal the sum of the capital 
requirements of the organization's bank and nonbank subsidiaries as well 
as those of the parent company.
---------------------------------------------------------------------------

    \1\ The guidelines will apply to bank holding companies with less 
than $150 million in consolidated assets on a bank-only basis unless:
    (1) The holding company or any nonbank subsidiary is engaged 
directly or indirectly in any nonbank activity involving significant 
leverage or
    (2) The holding company or any nonbank subsidiary has outstanding 
significant debt held by the general public. Debt held by the general 
public is defined to mean debt held by parties other than financial 
institutions, officers, directors, and controlling shareholders of the 
banking organization or their related interests.
---------------------------------------------------------------------------

                           Supervisory Action

    The nature and intensity of supervisory action will be determined by 
an organization's compliance with the required minimum primary capital 
ratio as well as by the zone in which the company's total capital ratio 
falls. Banks and bank holding companies with primary capital ratios 
below the 5.5 percent minimum will be considered undercapitalized unless 
they can demonstrate clear extenuating circumstances. Such banking 
organizations will be required to submit an acceptable plan for 
achieving compliance with the capital guidelines and will be subject to 
denial of applications and appropriate supervisory enforcement actions.
    The zone in which an organization's total capital ratio falls will 
normally trigger the following supervisory responses, subject to 
qualitative analysis:
    For institutions operating in Zone 1, the Federal Reserve will:

--Consider that capital is generally adequate if the primary capital 
ratio is acceptable to the Federal Reserve and is above the 5.5 percent 
minimum.

    For institutions operating in Zone 2, the Federal Reserve will:

--Pay particular attention to financial factors, such as asset quality, 
liquidity, off-balance sheet risk, and interest rate risk, as they 
relate to the adequacy of capital. If these areas are deficient and the 
Federal Reserve concludes capital is not fully adequate, the Federal 
Reserve will intensify its monitoring and take appropriate supervisory 
action.

    For institutions operating in Zone 3, the Federal Reserve will:

--Consider that the institution is undercapitalized, absent clear 
extenuating circumstances;
--Require the institution to submit a comprehensive capital plan, 
acceptable to the Federal Reserve, that includes a program for achieving 
compliance with the required minimum ratios within a reasonable time 
period; and
--Institute appropriate supervisory and/or administrative enforcement 
action, which may include the issuance of a capital directive or denial 
of applications, unless a

[[Page 269]]

capital plan acceptable to the Federal Reserve has been adopted by the 
institution.

Treatment of Intangible Assets for the Purpose of Assessing the Capital 
        Adequacy of Bank Holding Companies and State Member Banks

    In considering the treatment of intangible assets for the purpose of 
assessing capital adequacy, the Federal Reserve recognizes that the 
determination of the future benefits and useful lives of certain 
intangible assets may involve a degree of uncertainty that is not 
normally associated with other banking assets. Supervisory concern over 
intangible assets derives from this uncertainty and from the possibility 
that, in the event an organization experiences financial difficulties, 
such assets may not provide the degree of support generally associated 
with other assets. For this reason, the Federal Reserve will carefully 
review the level and specific character of intangible assets in 
evaluating the capital adequacy of state member banks and bank holding 
companies.
    The Federal Reserve recognizes that intangible assets may differ 
with respect to predictability of any income stream directly associated 
with a particular asset, the existence of a market for the asset, the 
ability to sell the asset, or the reliability of any estimate of the 
asset's useful life. Certain intangible assets have predictable income 
streams and objectively verifiable values and may contribute to an 
organization's profitability and overall financial strength. The value 
of other intangibles, such as goodwill, may involve a number of 
assumptions and may be more subject to changes in general economic 
circumstances or to changes in an individual institution's future 
prospects. Consequently, the value of such intangible assets may be 
difficult to ascertain. Consistent with prudent banking practices and 
the principle of the diversification of risks, banking organizations 
should avoid excessive balance sheet concentration in any category or 
related categories of intangible assets.

                         Bank Holding Companies

    While the Federal Reserve will consider the amount and nature of all 
intangible assets, those holding companies with aggregate intangible 
assets in excess of 25 percent of tangible primary capital (i.e., stated 
primary capital less all intangible assets) or those institutions with 
lesser, although still significant, amounts of goodwill will be subject 
to close scrutiny. For the purpose of assessing capital adequacy, the 
Federal Reserve may, on a case-by-case basis, make adjustments to an 
organization's capital ratios based upon the amount of intangible assets 
in excess of the 25 percent threshold level or upon the specific 
character of the organization's intangible assets in relation to its 
overall financial condition. Such adjustments may require some 
organizations to raise additional capital.
    The Board expects banking organizations (including state member 
banks) contemplating expansion proposals to ensure that pro forma 
capital ratios exceed the minimum capital levels without significant 
reliance on intangibles, particularly goodwill. Consequently, in 
reviewing acquisition proposals, the Board will take into consideration 
both the stated primary capital ratio (that is, the ratio without any 
adjustment for intangible assets) and the primary capital ratio after 
deducting intangibles. In acting on applications, the Board will take 
into account the nature and amount of intangible assets and will, as 
appropriate, adjust capital ratios to include certain intangible assets 
on a case-by-case basis.

                           State Member Banks

    State member banks with intangible assets in excess of 25 percent of 
intangible primary capital will be subject to close scrutiny. In 
addition, for the purpose of calculating capital ratios of state member 
banks, the Federal Reserve will deduct goodwill from primary capital and 
total capital. The Federal Reserve may, on a case-by-case basis, make 
further adjustments to a bank's capital ratios based on the amount of 
intangible assets (aside from goodwill) in excess of the 25 percent 
threshold level or on the specific character of the bank's intangible 
assets in relation to its overall financial condition. Such adjustments 
may require some banks to raise additional capital.
    In addition, state member banks and bank holding companies are 
expected to review periodically the value at which intangible assets are 
carried on their balance sheets to determine whether there has been any 
impairment of value or whether changing circumstances warrant a 
shortening of amortization periods. Institutions should make appropriate 
reductions in carrying values and amortization periods in light of this 
review, and examiners will evaluate the treatment of intangible assets 
during on-site examinations.

Definition of Capital To Be Used in Determining Capital Adequacy of Bank 
                Holding Companies and State Member Banks

                       Primary Capital Components

    The components of primary capital are:
--Common stock,
--Perpetual preferred stock (preferred stock that does not have a stated 
maturity date and that may not be redeemed at the option of the holder),
--Surplus (excluding surplus relating to limited-life preferred stock),
--Undivided profits,
--Contingency and other capital reserves,

[[Page 270]]

--Mandatory convertible instruments,\2\
---------------------------------------------------------------------------

    \2\ See the definitional section below that lists the criteria for 
mandatory convertible instruments to qualify as primary capital.
---------------------------------------------------------------------------

--Allowance for possible loan and lease losses (exclusive of allocated 
transfer risk reserves),
--Minority interest in equity accounts of consolidated subsidiaries,
--Perpetual debt instruments (for bank holding companies but not for 
state member banks).

               Limits on Certain Forms of Primary Capital

    Bank Holding Companies. The maximum composite amount of mandatory 
convertible securities, perpetual debt, and perpetual preferred stock 
that may be counted as primary capital for bank holding companies is 
limited to 33.3 percent of all primary capital, including these 
instruments. Perpetual preferred stock issued prior to November 20, 1985 
(or determined by the Federal Reserve to be in the process of being 
issued prior to that date), shall continue to be included as primary 
capital.
    The maximum composite amount of mandatory convertible securities and 
perpetual debt that may be counted as primary capital for bank holding 
companies is limited to 20 percent of all primary capital, including 
these instruments. The maximum amount of equity commitment notes (a form 
of mandatory convertible securities) that may be counted as primary 
capital for a bank holding company is limited to 10 percent of all 
primary capital, including mandatory convertible securities. Amounts 
outstanding in excess of these limitations may be counted as secondary 
capital provided they meet the requirements of secondary capital 
instruments.
    State Member Banks. The composite limitations on the amount of 
mandatory convertible securities and perpetual preferred stock 
(perpetual debt is not primary capital for state member banks) that may 
serve as primary capital for bank holding companies shall not be applied 
formally to state member banks, although the Board shall determine 
appropriate limits for these forms of primary capital on a case-by-case 
basis.
    The maximum amount of mandatory convertible securities that may be 
counted as primary capital for state member banks is limited to 16\2/3\ 
percent of all primary capital, including mandatory convertible 
securities. Equity commitment notes, one form of mandatory convertible 
securities, shall not be included as primary capital for state member 
banks, except that notes issued by state member banks prior to May 15, 
1985, will continue to be included in primary capital. Amounts of 
mandatory convertible securities in excess of these limitations may be 
counted as secondary capital if they meet the requirements of secondary 
capital instruments.

                      Secondary Capital Components

    The components of secondary capital are:

--Limited-life preferred stock (including related surplus) and
--Bank subordinated notes and debentures and unsecured long-term debt of 
the parent company and its nonbank subsidiaries.

               Restrictions Relating to Capital Components

    To qualify as primary or secondary capital, a capital instrument 
should not contain or be covered by any convenants, terms, or 
restrictions that are inconsistent with safe and sound banking 
practices. Examples of such terms are those regarded as unduly 
interfering with the ability of the bank or holding company to conduct 
normal banking operations or those resulting in significantly higher 
dividends or interest payments in the event of a deterioration in the 
financial condition of the issuer.
    The secondary components must meet the following conditions to 
qualify as capital:

--The instrument must have an original weighted-average maturity of at 
least seven years.
--The instrument must be unsecured.
--The instrument must clearly state on its face that it is not a deposit 
and is not insured by a Federal agency.
--Bank debt instruments must be subordinated to claims of depositors.
--For banks only, the aggregate amount of limited-life preferred stock 
and subordinate debt qualifying as capital may not exceed 50 percent of 
the amount of the bank's primary capital.
    As secondary capital components approach maturity, the banking 
organization must plan to redeem or replace the instruments while 
maintaining an adequate overall capital position. Thus, the remaining 
maturity of secondary capital components will be an important 
consideration in assessing the adequacy of total capital.

                             Capital Ratios

    The primary and total capital ratios for bank holding companies are 
computed as follows:
    Primary capital ratio:

Primary capital components/Total assets + Allowance for loan and lease 
losses (exclusive of allocated transfer risk reserves)
    Total capital ratio:

Primary capital components + Secondary capital components/Total assets + 
Allowance for loan and lease losses (exclusive of allocated transfer 
risk reserves)

[[Page 271]]

    The primary and total capital ratios for state member banks are 
computed as follows:

    Primary capital ratio:

Primary capital components--Goodwill/Average total assets + Allowance 
for loan and lease losses (exclusive of allocated transfer risk 
reserves)--Goodwill
    Total capital ratio:

Primary capital components + Secondary capital components--Goodwill/
Average total assets + Allowance for loan and lease losses (exclusive of 
allocated transfer risk reserves)--Goodwill
    Generally, period-end amounts will be used to calculate bank holding 
company ratios. However, the Federal Reserve will discourage temporary 
balance sheet adjustments or any other ``window dressing'' practices 
designed to achieve transitory compliance with the guidelines. Banking 
organizations are expected to maintain adequate capital positions at all 
times. Thus, the Federal Reserve will, on a case-by-case basis, use 
average total assets in the calculation of bank holding company capital 
ratios whenever this approach provides a more meaningful indication of 
an individual holding company's capital position.
    For the calculation of bank capital ratios, ``average total assets'' 
will generally be defined as the quarterly average total assets figure 
reported on the bank's Report of Condition. If warranted, however, the 
Federal Reserve may calculate bank capital ratios based upon total 
assets as of period-end. All other components of the bank's capital 
ratios will be based upon period-end balances.

    Criteria for Determining the Primary Capital Status of Mandatory 
 Convertible Securities of Bank Holding Companies and State Member Banks

    Mandatory convertible securities are subordinated debt instruments 
that are eventually transformed into common or perpetual preferred stock 
within a specified period of time, not to exceed 12 years. To be counted 
as primary capital, mandatory convertible securities must meet the 
criteria set forth below. These criteria cover the two basic types of 
mandatory convertible securities: ``equity contract notes''--securities 
that obligate the holder to take common or perpetual preferred stock of 
the issuer in lieu of cash for repayment of principal, and ``equity 
commitment notes''--securities that are redeemable only with the 
proceeds from the sale of common or perpetual preferred stock. Both 
equity commitment notes and equity contract notes qualify as primary 
capital for bank holding companies, but only equity contract notes 
qualify as primary capital for banks.

  Criteria Applicable to Both Types of Mandatory Convertible Securities

    a. The securities must mature in 12 years or less.
    b. The issuer may redeem securities prior to maturity only with the 
proceeds from the sale of common or perpetual preferred stock of the 
bank or bank holding company. Any exception to this rule must be 
approved by the Federal Reserve. The securities may not be redeemed with 
the proceeds of another issue of mandatory convertible securities. Nor 
may the issuer repurchase or acquire its own mandatory convertible 
securities for resale or reissuance.
    c. Holders of the securities may not accelerate the payment of 
principal except in the event of bankruptcy, insolvency, or 
reorganization.
    d. The securities must be subordinate in right of payment to all 
senior indebtedness of the issuer. In the event that the proceeds of the 
securities are reloaned to an affiliate, the loan must be subordinated 
to the same degree as the original issue.
    e. An issuer that intends to dedicate the proceeds of an issue of 
common or perpetual preferred stock to satisfy the funding requirements 
of an issue of mandatory convertible securities (i.e. the requirement to 
retire or redeem the notes with the proceeds from the issuance of common 
or perpetual preferred stock) generally must make such a dedication 
during the quarter in which the new common or preferred stock is 
issued.\3\ As a general rule, if the dedication is not made within the 
prescribed period, then the securities issued may not at a later date be 
dedicated to the retirement or redemption of the mandatory convertible 
securities.\4\
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    \3\ Common or perpetual preferred stock issued under dividend 
reinvestment plans or issued to finance acquisitions, including 
acquisitions of business entities, may be dedicated to the retirement or 
redemption of the mandatory convertible securities. Documentation 
certified by an authorized agent of the issuer showing the amount of 
common stock or perpetual preferred stock issued, the dates of issue, 
and amounts of such issues dedicated to the retirement or redemption of 
mandatory convertible securities will satisfy the dedication 
requirement.
    \4\ The dedication procedure is necessary to ensure that the primary 
capital of the issuer is not overstated. For each dollar of common or 
perpetual preferred proceeds dedicated to the retirement or redemption 
of the notes, there is a corresponding reduction in the amount of 
outstanding mandatory securities that may qualify as primary capital. De 
minimis amounts (in relation to primary capital) of common or perpetual 
preferred stock issued under arrangements in which the amount of stock 
issued is not predictable, such as dividend reinvestment plans and 
employee stock option plans (but excluding public stock offerings and 
stock issued in connection with acquisitions), should be dedicated by no 
later than the company's fiscal year end.

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[[Page 272]]

         Additional Criteria Applicable to Equity Contract Notes

    a. The note must contain a contractual provision (or must be issued 
with a mandatory stock purchase contract) that requires the holder of 
the instrument to take the common or perpetual stock of the issuer in 
lieu of cash in satisfaction of the claim for principal repayment. The 
obligation of the holder to take the common or perpetual preferred stock 
of the issuer may be waived if, and to the extent that, prior to the 
maturity date of the obligation, the issuer sells new common or 
perpetual preferred stock and dedicates the proceeds to the retirement 
or redemption of the notes. The dedication generally must be made during 
the quarter in which the new common or preferred stock is issued.
    b. A stock purchase contract may be separated from a security only 
if: (1) The holder of the contract provides sufficient collateral \5\ to 
the issuer, or to an independent trustee for the benefit of the issuer, 
to assure performance under the contract and (2) the stock purchase 
contract requires the purchase of common or perpetual preferred stock.
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    \5\ Collateral is defined as: (1) Cash or certificates of deposit; 
(2) U.S. government securities that will mature prior to or simultaneous 
with the maturity of the equity contract and that have a par or maturity 
value at least equal to the amount of the holder's obligation under the 
stock purchase contract; (3) standby letters of credit issued by an 
insured U.S. bank that is not an affiliate of the issuer; or (4) other 
collateral as may be designated from time to time by the Federal 
Reserve.
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        Additional Criteria Applicable to Equity Commitment Notes

    a. The indenture or note agreement must contain the following two 
provisions:
    1. The proceeds of the sale of common or perpetual preferred stock 
will be the sole source of repayment for the notes, and the issuer must 
dedicate the proceeds for the purpose of repaying the notes. 
(Documentation certified by an authorized agent of the issued showing 
the amount of common or perpetual preferred stock issued, the dates of 
issue, and amounts of such issues dedicated to the retirement or 
redemption of mandatory convertible securities will satisfy the 
dedication requirement.)
    2. By the time that one-third of the life of the securities has run, 
the issuer must have raised and dedicated an amount equal to one-third 
of the original principal of the securities. By the time that two-thirds 
of the life of the securities has run, the issuer must have raised and 
dedicated an amount equal to two-thirds of the original principal of the 
securities. At least 60 days prior to the maturity of the securities, 
the issuer must have raised and dedicated an amount equal to the entire 
original principal of the securities. Proceeds dedicated to redemption 
or retirement of the notes must come only from the sale of common or 
perpetual preferred stock.\6\
---------------------------------------------------------------------------

    \6\ The funded portions of the securities will be deducted from 
primary capital to avoid double counting.
---------------------------------------------------------------------------

    b. If the issuer fails to meet any of these periodic funding 
requirements, the Federal Reserve immediately will cease to treat the 
unfunded securities as primary capital and will take appropriate 
supervisory action. In addition, failure to meet the funding 
requirements will be viewed as a breach of a regulatory commitment and 
will be taken into consideration by the Board in acting on statutory 
applications.
    c. If a security is issued by a subsidiary of a bank or bank holding 
company, any guarantee of the principal by that subsidiary's parent bank 
or bank holding company must be subordinate to the same degree as the 
security issued by the subsidiary and limited to repayment of the 
principal amount of the security at its final maturity.

 Criteria for Determining the Primary Capital Status of Perpetual Debt 
                  Instruments of Bank Holding Companies

    1. The instrument must be unsecured and, if issued by a bank, must 
be subordinated to the claims of depositors.
    2. The instrument may not provide the noteholder with the right to 
demand repayment of principal except in the event of bankruptcy, 
insolvency, or reorganization. The instrument must provide that 
nonpayment of interest shall not trigger repayment of the principal of 
the perpetual debt note or any other obligation of the issuer, nor shall 
it constitute prima facie evidence of insolvency or bankruptcy.
    3. The issuer shall not voluntarily redeem the debt issue without 
prior approval of the Federal Reserve, except when the debt is converted 
to, exchanged for, or simultaneously replaced in like amount by an issue 
of common or perpetual preferred stock of the issuer or the issuer's 
parent company.
    4. If issued by a bank holding company, a bank subsidiary, or a 
subsidiary with substantial operations, the instrument must contain a 
provision that allows the issuer to

[[Page 273]]

defer interest payments on the perpetual debt in the event of, and at 
the same time as the elimination of dividends on all outstanding common 
or preferred stock of the issuer (or in the case of a guarantee by a 
parent company at the same time as the elimination of the dividends of 
the parent company's common and preferred stock). In the case of a 
nonoperating subsidiary (a funding subsidiary or one formed to issue 
securities), the deferral of interest payments must be triggered by 
elimination of dividends by the parent company.
    5. If issued by a bank holding company or a subsidiary with 
substantial operations, the instrument must convert automatically to 
common or perpetual preferred stock of the issuer when the issuer's 
retained earnings and surplus accounts become negative. If an operating 
subsidiary's perpetual debt is guaranteed by its parent, the debt may 
convert to the shares of the issuer or guarantor and such conversion may 
be triggered when the issuer's or parent's retained earnings and surplus 
accounts become negative. If issued by a nonoperating subsidiary of a 
bank holding company or bank, the instrument must convert automatically 
to common or preferred stock of the issuer's parent when the retained 
earnings and surplus accounts of the issuer's parent become negative.

[Reg. Y, 50 FR 16066, Apr. 24, 1985, as amended at 51 FR 40969, Nov. 12, 
1986. Redesignated and amended at 54 FR 4209, Jan. 27, 1989; 55 FR 
32832, Aug. 10, 1990; 58 FR 474, Jan. 6, 1993]



Sec. Appendix C to Part 225--Small Bank Holding Company Policy Statement

   Policy Statement on Assessment of Financial and Managerial Factors

    In acting on applications filed under the Bank Holding Company Act, 
the Board has adopted, and continues to follow, the principle that bank 
holding companies should serve as a source of strength for their 
subsidiary banks. When bank holding companies incur debt and rely upon 
the earnings of their subsidiary banks as the means of repaying such 
debt, a question arises as to the probable effect upon the financial 
condition of the holding company and its subsidiary bank or banks.
    The Board believes that a high level of debt at the parent holding 
company impairs the ability of a bank holding company to provide 
financial assistance to its subsidiary bank(s) and, in some cases, the 
servicing requirements on such debt may be a significant drain on the 
resources of the bank(s). For these reasons, the Board has not favored 
the use of acquisition debt in the formation of bank holding companies 
or in the acquisition of additional banks. Nevertheless, the Board has 
recognized that the transfer of ownership of small banks often requires 
the use of acquisition debt. The Board, therefore, has permitted the 
formation and expansion of small bank holding companies with debt levels 
higher than would be permitted for larger holding companies. Approval of 
these applications has been given on the condition that small bank 
holding companies demonstrate the ability to service acquisition debt 
without straining the capital of their subsidiary banks and, further, 
that such companies restore their ability to serve as a source of 
strength for their subsidiary banks within a relatively short period of 
time.
    In the interest of continuing its policy of facilitating the 
transfer of ownership in banks without compromising bank safety and 
soundness, the Board has, as described below, adopted the following 
procedures and standards for the formation and expansion of small bank 
holding companies subject to this policy statement.

                  1. Applicability of Policy Statement

    This policy statement applies only to bank holding companies with 
pro forma consolidated assets of less than $500 million that (i) are not 
engaged in significant nonbanking activities either directly or through 
a nonbank subsidiary; (ii) do not conduct significant off-balance sheet 
activities (including securitization and asset management or 
administration) either directly or through a nonbank subsidiary; and 
(iii) do not have a material amount of debt or equity securities 
outstanding (other than trust preferred securities) that are registered 
with the Securities and Exchange Commission. The Board may in its 
discretion exclude any bank holding company, regardless of asset size, 
from the policy statement if such action is warranted for supervisory 
purposes.\1\
---------------------------------------------------------------------------

    \1\ [Reserved]
---------------------------------------------------------------------------

    While this policy statement primarily applies to the formation of 
small bank holding companies, it also applies to existing small bank 
holding companies that wish to acquire an additional bank or company and 
to transactions involving changes in control, stock redemptions, or 
other shareholder transactions. \2\
---------------------------------------------------------------------------

    \2\ The appropriate Reserve Bank should be contacted to determine 
the manner in which a specific situation may qualify for treatment under 
this policy statement.
---------------------------------------------------------------------------

                         2. Ongoing Requirements

    The following guidelines must be followed on an ongoing basis for 
all organizations operating under this policy statement.
    A. Reduction in parent company leverage: Small bank holding 
companies are to reduce their parent company debt consistent with the 
requirement that all debt be retired within 25 years of being incurred. 
The Board

[[Page 274]]

also expects that these bank holding companies reach a debt to equity 
ratio of .30:1 or less within 12 years of the incurrence of the debt.\3\ 
The bank holding company must also comply with debt servicing and other 
requirements imposed by its creditors.
---------------------------------------------------------------------------

    \3\ The term debt, as used in the ratio of debt to equity, means any 
borrowed funds (exclusive of short-term borrowings that arise out of 
current transactions, the proceeds of which are used for current 
transactions), and any securities issued by, or obligations of, the 
holding company that are the functional equivalent of borrowed funds.
    Subordinated debt associated with trust preferred securities 
generally would be treated as debt for purposes of paragraphs 2.C., 
3.A., 4.A.i, and 4.B.i. of this policy statement. A bank holding 
company, however, may exclude from debt an amount of subordinated debt 
associated with trust preferred securities up to 25 percent of the 
holding company's equity (as defined below) less goodwill on the parent 
company's balance sheet in determining compliance with the requirements 
of such paragraphs of the policy statement. In addition, a bank holding 
company subject to this Policy Statement that has not issued 
subordinated debt associated with a new issuance of trust preferred 
securities after December 31, 2005 may exclude from debt any 
subordinated debt associated with trust preferred securities until 
December 31, 2010. Bank holding companies subject to this Policy 
Statement may also exclude from debt until December 31, 2010, any 
subordinated debt associated with refinanced issuances of trust 
preferred securities originally issued on or prior to December 31, 2005, 
provided that the refinancing does not increase the bank holding 
company's outstanding amount of subordinated debt. Subordinated debt 
associated with trust preferred securities will not be included as debt 
in determining compliance with any other requirements of this policy 
statement.
    The term equity, as used in the ratio of debt to equity, means the 
total stockholders' equity of the bank holding company as defined in 
accordance with generally accepted accounting principles. In determining 
the total amount of stockholders' equity, the bank holding company 
should account for its investments in the common stock of subsidiaries 
by the equity method of accounting.
    Ordinarily the Board does not view redeemable preferred stock as a 
substitute for common stock in a small bank holding company. 
Nevertheless, to a limited degree and under certain circumstances, the 
Board will consider redeemable preferred stock as equity in the capital 
accounts of the holding company if the following conditions are met: (1) 
The preferred stock is redeemable only at the option of the issuer and 
(2) the debt to equity ratio of the holding company would be at or 
remain below .30:1 following the redemption or retirement of any 
preferred stock. Preferred stock that is convertible into common stock 
of the holding company may be treated as equity.
---------------------------------------------------------------------------

    B. Capital adequacy: Each insured depository subsidiary of a small 
bank holding company is expected to be well-capitalized. Any institution 
that is not well-capitalized is expected to become well-capitalized 
within a brief period of time.
    C. Dividend restrictions: A small bank holding company whose debt to 
equity ratio is greater than 1.0:1 is not expected to pay corporate 
dividends until such time as it reduces its debt to equity ratio to 
1.0:1 or less and otherwise meets the criteria set forth in Sec. Sec. 
225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of Regulation Y.\4\
---------------------------------------------------------------------------

    \4\ Dividends may be paid by small bank holding companies with debt 
to equity at or below 1.0:1 and otherwise meeting the requirements of 
Sec. Sec. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) if the 
dividends are reasonable in amount, do not adversely affect the ability 
of the bank holding company to service its debt in an orderly manner, 
and do not adversely affect the ability of the subsidiary banks to be 
well-capitalized. It is expected that dividends will be eliminated if 
the holding company is (1) not reducing its debt consistent with the 
requirement that the debt to equity ratio be reduced to .30:1 within 12 
years of consummation of the proposal or (2) not meeting the 
requirements of its loan agreement(s).
---------------------------------------------------------------------------

    Small bank holding companies formed before the effective date of 
this policy statement may switch to a plan that adheres to the intent of 
this statement provided they comply with the requirements set forth 
above.

                 3. Core Requirements for All Applicants

    In assessing applications or notices by organizations subject to 
this policy statement, the Board will continue to take into account a 
full range of financial and other information about the applicant, and 
its current and proposed subsidiaries, including the recent trend and 
stability of earnings, past and prospective growth, asset quality, the 
ability to meet debt servicing requirements without placing an undue 
strain on the resources of the bank(s), and the record and competency of 
management. In addition, the Board will require applicants to meet the 
following requirements:
    A. Minimum down payment: The amount of acquisition debt should not 
exceed 75 percent of the purchase price of the bank(s) or company to be 
acquired. When the owner(s)

[[Page 275]]

of the holding company incurs debt to finance the purchase of the 
bank(s) or company, such debt will be considered acquisition debt even 
though it does not represent an obligation of the bank holding company, 
unless the owner(s) can demonstrate that such debt can be serviced 
without reliance on the resources of the bank(s) or bank holding 
company.
    B. Ability to reduce parent company leverage: The bank holding 
company must clearly be able to reduce its debt to equity ratio and 
comply with its loan agreement(s) as set forth in paragraph 2A above.
    Failure to meet the criteria in this section would normally result 
in denial of an application.

 4. Additional Application Requirements for Expedited/Waived Processing

    A. Expedited notices under Sec. Sec. 225.14 and 225.23 of 
Regulation Y: A small bank holding company proposal will be eligible for 
the expedited processing procedures set forth in Sec. Sec. 225.14 and 
225.23 of Regulation Y if the bank holding company is in compliance with 
the ongoing requirements of this policy statement, the bank holding 
company meets the core requirements for all applicants noted above, and 
the following requirements are met:
    i. The parent bank holding company has a pro forma debt to equity 
ratio of 1.0:1 or less.
    ii. The bank holding company meets all of the criteria for expedited 
action set forth in Sec. Sec. 225.14 or 225.23 of Regulation Y.
    B. Waiver of stock redemption filing: A small bank holding company 
will be eligible for the stock redemption filing exception for well-
capitalized bank holding companies contained in Sec. 225.4(b)(6) if the 
following requirements are met:
    i. The parent bank holding company has a pro forma debt to equity 
ratio of 1.0:1 or less.
    ii. The bank holding company is in compliance with the ongoing 
requirements of this policy statement and meets the requirements of 
Sec. Sec. 225.14(c)(1)(ii), 225.14(c)(2), and 225.14(c)(7) of 
Regulation Y.

[62 FR 9343, Feb. 28, 1997, as amended at 71 FR 9902, Feb. 28, 2006]



   Sec. Appendix D to Part 225--Capital Adequacy Guidelines for Bank 

               Holding Companies: 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 bank holding companies (banking 
organizations).\1\ The principal objectives of this measure is to place 
a constraint on the maximum degree to which a banking organization can 
leverage its equity capital base. It is intended to be used as a 
supplement to the risk-based capital measure.
---------------------------------------------------------------------------

    \1\ Supervisory ratios that related capital to total assets for 
state member banks are outlined in appendix B of this part.
---------------------------------------------------------------------------

    b. The tier 1 leverage guidelines apply on a consolidated basis to 
any bank holding company with consolidated assets of $500 million or 
more. The tier 1 leverage guidelines also apply on a consolidated basis 
to any bank holding company with consolidated assets of less than $500 
million if the holding company (i) is engaged in significant nonbanking 
activities either directly or through a nonbank subsidiary; (ii) 
conducts significant off-balance sheet activities (including 
securitization and asset management or administration) either directly 
or through a nonbank subsidiary; or (iii) has a material amount of debt 
or equity securities outstanding (other than trust preferred securities) 
that are registered with the Securities and Exchange Commission. The 
Federal Reserve may apply the tier 1 leverage guidelines at its 
discretion to any bank holding company, regardless of asset size, if 
such action is warranted for supervisory purposes.\2\
---------------------------------------------------------------------------

    \2\ [Reserved]
---------------------------------------------------------------------------

    c. The tier 1 leverage guidelines are to be used in the inspection 
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 Board has established a minimum ratio of Tier 1 capital to 
total assets of 3.0 percent for strong bank holding companies (rated 
composite ``1'' under the BOPEC rating system of bank holding 
companies), and for bank holding companies that have implemented the 
Board's risk-based capital measure for market risk as set forth in 
appendices A and E of this part. For all other bank holding companies, 
the minimum ratio of Tier 1 capital to total assets is 4.0 percent. 
Banking organizations with supervisory, financial, operational, or 
managerial weaknesses, as well as organizations 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 bank holding company if warranted by its particular 
circumstances or risk profile. In all cases, bank holding companies 
should hold capital commensurate with the

[[Page 276]]

level and nature of the risks, including the volume and severity of 
problem loans, to which they are exposed.
    b. A banking organization'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. 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 organization's Consolidated Financial 
Statements (FR Y-9C Report), 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 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 from Tier 1 capital; deferred tax assets that are dependent 
upon future taxable income, net of their valuation allowance, in excess 
of the limitation 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\
---------------------------------------------------------------------------

    \3\ Deductions from Tier 1 capital and other adjustments are 
discussed more fully in section II.B. of appendix A of this part.
---------------------------------------------------------------------------

    c. Whenever appropriate, including when an organization 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 organization'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 and long-standing Federal Reserve policy and 
practice with regard to leverage guidelines. Organizations 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.
    d. Notwithstanding anything in this appendix to the contrary, a bank 
holding company may deduct from its average total consolidated assets 
the amount of any asset-backed commercial paper (i) purchased by the 
bank holding company between September 19, 2008, and January 30, 2009 
(unless extended by the Board), from an SEC-registered open-end 
investment company that holds itself out as a money market mutual fund 
under SEC Rule 2a-7 (17 CFR 270.2a-7) and (ii) pledged by the bank 
holding company to a Federal Reserve Bank to secure financing from the 
ABCP lending facility established by the Board on September 19, 2008.

[Reg. Y, 59 FR 65926, Dec. 22, 1994, as amended by 60 FR 39231, Aug. 1, 
1995; 63 FR 30370, June 4, 1998; 63 FR 42676, Aug. 10, 1998; 66 FR 
59651, Nov. 29, 2001; 67 FR 3803, Jan. 25, 2002; 70 FR 11838, Mar. 10, 
2005; 71 FR 9902, Feb. 28, 2006; 73 FR 55708, Sept. 26, 2008]



   Sec. Appendix E to Part 225--Capital Adequacy Guidelines for Bank 

                 Holding Companies: Market Risk Measure

      Section 1. Purpose, Applicability, Scope, and Effective Date

    (a) Purpose. The purpose of this appendix is to ensure that bank 
holding companies (organizations) 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 
organizations.
---------------------------------------------------------------------------

    \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 bank holding 
company 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 holding company's most recent 
quarterly Y-9C Report.
---------------------------------------------------------------------------

    (i) 10 percent or more of total assets; \3\ or
---------------------------------------------------------------------------

    \3\ Total assets means quarter-end total assets as reported in the 
bank holding company's most recent Y-9C Report.
---------------------------------------------------------------------------

    (ii) $1 billion or more.
    (2) The Federal Reserve may additionally apply this appendix to any 
bank holding company if the Federal Reserve deems it necessary or 
appropriate for safe and sound banking practices.
    (3) The Federal Reserve may exclude a bank holding company otherwise 
meeting

[[Page 277]]

the criteria of paragraph (b)(1) of this section from coverage under 
this appendix if it determines the organization 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 an organization'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 holding company may opt to comply with this 
appendix as early as January 1, 1997. \4\
---------------------------------------------------------------------------

    \4\ A bank holding company 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 an organization'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 still 
owned by the lender. Covered positions exclude all positions in a 
banking organization'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 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 
organization'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 due to market price or 
rate movements 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. An organization subject to 
this appendix shall calculate its risk-based capital ratio denominator 
as follows:
    (1) Adjusted risk-weighted assets. Calculate 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 adjusted risk-weighted assets as determined 
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, and
    (iv)(A) 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); or

[[Page 278]]

    (B) If the transaction does not meet the criteria set forth in 
paragraph (iv)(A) of this section, then either:
    (1) The bank has conducted sufficient legal review to reach a well-
founded conclusion that:
    (i) The securities borrowing agreement executed in connection with 
the transaction provides the bank the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and to 
liquidate or set off collateral promptly upon an event of counterparty 
default, including in a bankruptcy, insolvency, or other similar 
proceeding of the counterparty; and
    (ii) Under applicable law of the relevant jurisdiction, its rights 
under the agreement are legal, valid, binding, and enforceable and any 
exercise of rights under the agreement will not be stayed or avoided; or
    (2) The transaction is either overnight or unconditionally 
cancelable at any time by the bank, and the bank has conducted 
sufficient legal review to reach a well-founded conclusion that:
    (i) The securities borrowing agreement executed in connection with 
the transaction provides the bank the right to accelerate, terminate, 
and close-out on a net basis all transactions under the agreement and to 
liquidate or set off collateral promptly upon an event of counterparty 
default; and
    (ii) Under the law governing the agreement, its rights under the 
agreement are legal, valid, binding, and enforceable.
    (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 organization's risk-based capital ratio 
denominator.
    (b) Risk-based capital ratio numerator. An organization 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\ An institution 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 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 organization's risk-based capital ratio numerator.

                       Section 4. Internal Models

    (a) General. For risk-based capital purposes, a bank holding company 
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 an organization to

[[Page 279]]

use alternative techniques to measure the market risk of de minimis 
exposures so long as the techniques adequately measure associated market 
risk.
---------------------------------------------------------------------------

    \10\ An organization'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 an organization's internal model must be 
commensurate with the nature and size of its covered positions. An 
organization 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 holding company subject to this 
appendix must have a risk management system that meets the following 
minimum qualitative requirements:
    (1) The organization must have a risk control unit that reports 
directly to senior management and is independent from business trading 
units.
    (2) The organization's internal risk measurement model must be 
integrated into the daily management process.
    (3) The organization's policies and procedures must identify, and 
the organization must conduct, appropriate stress tests and backtests. 
\11\ The organization'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 an 
organization's daily VAR measures to its corresponding daily trading 
profits and losses.
---------------------------------------------------------------------------

    (4) The organization must conduct independent reviews of its risk 
measurement and risk management systems at least annually.
    (c) Market risk factors. The organization'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 organization 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 an organization using a 
weighting scheme or other similar method) of at least one year. The 
organization 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. An organization 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 categories, provided that the organization's process for 
measuring correlations is sound. In the event that the VAR measures do 
not incorporate empirical correlations across risk categories, then the 
organization 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 holding company 
starts to comply with this appendix, it 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 99th percentile, 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 organization 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 holding company 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.

[[Page 280]]



     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 holding company may use its 
internal model to measure specific risk. If the organization 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 organization 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 holding company 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 holding company models the specific risk of covered 
debt positions but not covered equity positions (or vice versa), then 
the bank holding company 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 holding company does not 
model specific risk in accordance with section 5(a) or 5(b) of this 
appendix, then the organization'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 or 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, an organization 
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, 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, an organization 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) An organization may net long and short covered debt positions 
(including derivatives) in identical debt issues or indices.
    (iii) An organization 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
------------------------------------------------------------------------


[[Page 281]]

    (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 
organization 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 organization 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 or purchased options) for which the underlying is a covered 
equity position.
    (A) For covered equity positions that are derivatives, an 
organization 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, an organization 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) An organization may net long and short covered equity positions 
(including derivatives) in identical equity issues or equity indices in 
the same market. \16\
---------------------------------------------------------------------------

    \16\ An organization may also net positions in depository receipts 
against an opposite position in the underlying equity or identical 
equity in different markets, provided that the organization includes the 
costs of conversion.
---------------------------------------------------------------------------

    (iii)(A) An organization 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 covered equity positions that are index contracts comprising a 
well-diversified portfolio of equity instruments, the net long or short 
position is to be 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, an organization may apply a 2.0 percent risk 
weighting factor to one side (long or short) of each equity 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, an 
organization 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

[[Page 282]]

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.

[61 FR 47373, Sept. 6, 1996, as amended at 62 FR 68068, Dec. 30, 1997; 
64 FR 19038, Apr. 19, 1999; 65 FR 75859, Dec. 5, 2000; 69 FR 44921, July 
28, 2004; 71 FR 8937, Feb. 22, 2006]



    Sec. Appendix F to Part 225--Interagency Guidelines Establishing 

                     Information Security Standards

                            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 Information Security 
Standards (Guidelines) set forth standards pursuant to sections 501 and 
505 of the Gramm-Leach-Bliley Act (15 U.S.C. 6801 and 6805). 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 bank holding companies and their nonbank subsidiaries or 
affiliates (except brokers, dealers, persons providing insurance, 
investment companies, and investment advisors), for which the Board has 
supervisory authority.
    B. Preservation of Existing Authority. These Guidelines do not 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 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 holding company 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 holding company.
    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 holding company.
    f. Subsidiary means any company controlled by a bank holding 
company, 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 holding company shall 
implement a comprehensive written information security program that 
includes administrative, technical, and physical safeguards appropriate 
to the size and complexity of the bank holding company and the nature 
and scope of its activities. While all parts of the bank holding company 
are not required to implement a uniform set of policies, all elements of 
the information security program must be coordinated. A bank holding 
company also shall ensure that each of its subsidiaries is subject to a 
comprehensive information security program. The bank holding company may 
fulfill this requirement either by including a subsidiary within the 
scope of the bank holding company'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 bank holding companies.
    B. Objectives. A bank holding company'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

[[Page 283]]

    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 holding company shall:
    1. Approve the bank holding company's written information security 
program; and
    2. Oversee the development, implementation, and maintenance of the 
bank holding company's information security program, including assigning 
specific responsibility for its implementation and reviewing reports 
from management.
    B. Assess Risk. Each bank holding company 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 holding company 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 holding company's activities. Each 
bank holding company must consider whether the following security 
measures are appropriate for the bank holding company and, if so, adopt 
those measures the bank holding company 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 holding company'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 
holding company 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 holding company'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 holding company'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 holding company 
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 holding company'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 holding company should review audits, summaries of test results, or 
other equivalent evaluations of its service providers.
    E. Adjust the Program. Each bank holding company 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 holding company's own changing business arrangements, such as 
mergers and acquisitions, alliances and joint ventures, outsourcing 
arrangements, and changes to customer information systems.
    F. Report to the Board. Each bank holding company 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 holding company's compliance with these 
Guidelines. The reports

[[Page 284]]

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 holding company 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 holding company 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 holding company entered into the contract on or before March 5, 
2001.

Supplement A to Appendix F to Part 225--Interagency Guidance on Response 
 Programs for Unauthorized Access to Customer Information and Customer 
                                 Notice

                              I. Background

    This Guidance \1\ interprets section 501(b) of the Gramm-Leach-
Bliley Act (``GLBA'') and the Interagency Guidelines Establishing 
Information Security Standards (the ``Security Guidelines'')\2\ and 
describes response programs, including customer notification procedures, 
that a financial institution should develop and implement to address 
unauthorized access to or use of customer information that could result 
in substantial harm or inconvenience to a customer. The scope of, and 
definitions of terms used in, this Guidance are identical to those of 
the Security Guidelines. For example, the term ``customer information'' 
is the same term used in the Security Guidelines, and means any record 
containing nonpublic personal information about a customer, whether in 
paper, electronic, or other form, maintained by or on behalf of the 
institution.
---------------------------------------------------------------------------

    \1\ This Guidance is being jointly issued by the Board of Governors 
of the Federal Reserve System (Board), the Federal Deposit Insurance 
Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), 
and the Office of Thrift Supervision (OTS).
    \2\ 12 CFR part 30, app. B (OCC); 12 CFR part 208, app. D-2 and part 
225, app. F (Board); 12 CFR part 364, app. B (FDIC); and 12 CFR part 
570, app. B (OTS). The ``Interagency Guidelines Establishing Information 
Security Standards'' were formerly known as ``The Interagency Guidelines 
Establishing Information Security Standards.''
---------------------------------------------------------------------------

                   A. Interagency Security Guidelines

    Section 501(b) of the GLBA required the Agencies to establish 
appropriate standards for financial institutions subject to their 
jurisdiction that include administrative, technical, and physical 
safeguards, to protect the security and confidentiality of customer 
information. Accordingly, the Agencies issued Security Guidelines 
requiring every financial institution to have an information security 
program 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.

                     B. Risk Assessment and Controls

    1. The Security Guidelines direct every financial institution to 
assess the following risks, among others, when developing its 
information security program:
    a. Reasonably foreseeable internal and external threats that could 
result in unauthorized disclosure, misuse, alteration, or destruction of 
customer information or customer information systems;
    b. The likelihood and potential damage of threats, taking into 
consideration the sensitivity of customer information; and
    c. The sufficiency of policies, procedures, customer information 
systems, and other arrangements in place to control risks.\3\
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    \3\ See Security Guidelines, III.B.
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    2. Following the assessment of these risks, the Security Guidelines 
require a financial institution to design a program to address the 
identified risks. The particular security measures an institution should 
adopt will depend upon the risks presented by the complexity and scope 
of its business. At a minimum, the financial institution is required to 
consider the specific security measures enumerated in the Security 
Guidelines,\4\ and adopt those that are appropriate for the institution, 
including:
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    \4\ See Security Guidelines, III.C.
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    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. Background checks for employees with responsibilities for access 
to customer information; and

[[Page 285]]

    c. Response programs that specify actions to be taken when the 
financial institution suspects or detects that unauthorized individuals 
have gained access to customer information systems, including 
appropriate reports to regulatory and law enforcement agencies.\5\
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    \5\ See Security Guidelines, III.C.
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                          C. Service Providers

    The Security Guidelines direct every financial institution to 
require its service providers by contract to implement appropriate 
measures designed to protect against unauthorized access to or use of 
customer information that could result in substantial harm or 
inconvenience to any customer.\6\
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    \6\ See Security Guidelines, II.B. and III.D. Further, the Agencies 
note that, in addition to contractual obligations to a financial 
institution, a service provider may be required to implement its own 
comprehensive information security program in accordance with the 
Safeguards Rule promulgated by the Federal Trade Commission (``FTC''), 
16 CFR part 314.
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                          II. Response Program

    Millions of Americans, throughout the country, have been victims of 
identity theft.\7\ Identity thieves misuse personal information they 
obtain from a number of sources, including financial institutions, to 
perpetrate identity theft. Therefore, financial institutions should take 
preventative measures to safeguard customer information against attempts 
to gain unauthorized access to the information. For example, financial 
institutions should place access controls on customer information 
systems and conduct background checks for employees who are authorized 
to access customer information.\8\ However, every financial institution 
should also develop and implement a risk-based response program to 
address incidents of unauthorized access to customer information in 
customer information systems \9\ that occur nonetheless. A response 
program should be a key part of an institution's information security 
program.\10\ The program should be appropriate to the size and 
complexity of the institution and the nature and scope of its 
activities.
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    \7\ The FTC estimates that nearly 10 million Americans discovered 
they were victims of some form of identity theft in 2002. See The 
Federal Trade Commission, Identity Theft Survey Report, (September 
2003), available at http://www.ftc.gov/os/2003/09/synovatereport.pdf.
    \8\ Institutions should also conduct background checks of employees 
to ensure that the institution does not violate 12 U.S.C. 1829, which 
prohibits an institution from hiring an individual convicted of certain 
criminal offenses or who is subject to a prohibition order under 12 
U.S.C. 1818(e)(6).
    \9\ Under the Guidelines, an institution's customer information 
systems consist of all of the methods used to access, collect, store, 
use, transmit, protect, or dispose of customer information, including 
the systems maintained by its service providers. See Security 
Guidelines, I.C.2.d (I.C.2.c for OTS).
    \10\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, Dec. 2002 available at http://
www.ffiec.gov/ffiecinfobase/html--pages/infosec--book--frame.htm. 
Federal Reserve SR 97-32, Sound Practice Guidance for Information 
Security for Networks, Dec. 4, 1997; OCC Bulletin 2000-14, 
``Infrastructure Threats--Intrusion Risks'' (May 15, 2000), for 
additional guidance on preventing, detecting, and responding to 
intrusions into financial institution computer systems.
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    In addition, each institution should be able to address incidents of 
unauthorized access to customer information in customer information 
systems maintained by its domestic and foreign service providers. 
Therefore, consistent with the obligations in the Guidelines that relate 
to these arrangements, and with existing guidance on this topic issued 
by the Agencies,\11\ an institution's contract with its service provider 
should require the service provider to take appropriate actions to 
address incidents of unauthorized access to the financial institution's 
customer information, including notification to the institution as soon 
as possible of any such incident, to enable the institution to 
expeditiously implement its response program.
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    \11\ See Federal Reserve SR Ltr. 00-04, Outsourcing of Information 
and Transaction Processing, Feb. 9, 2000; OCC Bulletin 2001-47, ``Third-
Party Relationships Risk Management Principles,'' Nov. 1, 2001; FDIC FIL 
68-99, Risk Assessment Tools and Practices for Information System 
Security, July 7, 1999; OTS Thrift Bulletin 82a, Third Party 
Arrangements, Sept. 1, 2004.
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                   A. Components of a Response Program

    1. At a minimum, an institution's response program should contain 
procedures for the following:
    a. Assessing the nature and scope of an incident, and identifying 
what customer information systems and types of customer information have 
been accessed or misused;
    b. Notifying its primary Federal regulator as soon as possible when 
the institution becomes aware of an incident involving unauthorized 
access to or use of sensitive customer information, as defined below;

[[Page 286]]

    c. Consistent with the Agencies' Suspicious Activity Report 
(``SAR'') regulations,\12\ notifying appropriate law enforcement 
authorities, in addition to filing a timely SAR in situations involving 
Federal criminal violations requiring immediate attention, such as when 
a reportable violation is ongoing;
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    \12\ An institution's obligation to file a SAR is set out in the 
Agencies' SAR regulations and Agency guidance. See 12 CFR 21.11 
(national banks, Federal branches and agencies); 12 CFR 208.62 (State 
member banks); 12 CFR 211.5(k) (Edge and agreement corporations); 12 CFR 
211.24(f) (uninsured State branches and agencies of foreign banks); 12 
CFR 225.4(f) (bank holding companies and their nonbank subsidiaries); 12 
CFR part 353 (State non-member banks); and 12 CFR 563.180 (savings 
associations). National banks must file SARs in connection with computer 
intrusions and other computer crimes. See OCC Bulletin 2000-14, 
``Infrastructure Threats--Intrusion Risks'' (May 15, 2000); Advisory 
Letter 97-9, ``Reporting Computer Related Crimes'' (November 19, 1997) 
(general guidance still applicable though instructions for new SAR form 
published in 65 FR 1229, 1230 (January 7, 2000)). See also Federal 
Reserve SR 01-11, Identity Theft and Pretext Calling, Apr. 26, 2001; SR 
97-28, Guidance Concerning Reporting of Computer Related Crimes by 
Financial Institutions, Nov. 6, 1997; FDIC FIL 48-2000, Suspicious 
Activity Reports, July 14, 2000; FIL 47-97, Preparation of Suspicious 
Activity Reports, May 6, 1997; OTS CEO Memorandum 139, Identity Theft 
and Pretext Calling, May 4, 2001; CEO Memorandum 126, New Suspicious 
Activity Report Form, July 5, 2000; http://www.ots.treas.gov/BSA (for 
the latest SAR form and filing instructions required by OTS as of July 
1, 2003).
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    d. Taking appropriate steps to contain and control the incident to 
prevent further unauthorized access to or use of customer information, 
for example, by monitoring, freezing, or closing affected accounts, 
while preserving records and other evidence;\13\ and
---------------------------------------------------------------------------

    \13\ See FFIEC Information Technology Examination Handbook, 
Information Security Booklet, Dec. 2002, pp. 68-74.
---------------------------------------------------------------------------

    e. Notifying customers when warranted.
    2. Where an incident of unauthorized access to customer information 
involves customer information systems maintained by an institution's 
service providers, it is the responsibility of the financial institution 
to notify the institution's customers and regulator. However, an 
institution may authorize or contract with its service provider to 
notify the institution's customers or regulator on its behalf.

                          III. Customer Notice

    Financial institutions have an affirmative duty to protect their 
customers' information against unauthorized access or use. Notifying 
customers of a security incident involving the unauthorized access or 
use of the customer's information in accordance with the standard set 
forth below is a key part of that duty. Timely notification of customers 
is important to manage an institution's reputation risk. Effective 
notice also may reduce an institution's legal risk, assist in 
maintaining good customer relations, and enable the institution's 
customers to take steps to protect themselves against the consequences 
of identity theft. When customer notification is warranted, an 
institution may not forgo notifying its customers of an incident because 
the institution believes that it may be potentially embarrassed or 
inconvenienced by doing so.

                    A. Standard for Providing Notice

    When a financial institution becomes aware of an incident of 
unauthorized access to sensitive customer information, the institution 
should conduct a reasonable investigation to promptly determine the 
likelihood that the information has been or will be misused. If the 
institution determines that misuse of its information about a customer 
has occurred or is reasonably possible, it should notify the affected 
customer as soon as possible. Customer notice may be delayed if an 
appropriate law enforcement agency determines that notification will 
interfere with a criminal investigation and provides the institution 
with a written request for the delay. However, the institution should 
notify its customers as soon as notification will no longer interfere 
with the investigation.

                    1. Sensitive Customer Information

    Under the Guidelines, an institution must protect against 
unauthorized access to or use of customer information that could result 
in substantial harm or inconvenience to any customer. Substantial harm 
or inconvenience is most likely to result from improper access to 
sensitive customer information because this type of information is most 
likely to be misused, as in the commission of identity theft. For 
purposes of this Guidance, sensitive customer information means a 
customer's name, address, or telephone number, in conjunction with the 
customer's social security number, driver's license number, account 
number, credit or debit card number, or a personal identification number 
or password that would permit access to the customer's account. 
Sensitive customer information also includes any combination of 
components of customer information that would

[[Page 287]]

allow someone to log onto or access the customer's account, such as user 
name and password or password and account number.

                          2. Affected Customers

    If a financial institution, based upon its investigation, can 
determine from its logs or other data precisely which customers' 
information has been improperly accessed, it may limit notification to 
those customers with regard to whom the institution determines that 
misuse of their information has occurred or is reasonably possible. 
However, there may be situations where the institution determines that a 
group of files has been accessed improperly, but is unable to identify 
which specific customers' information has been accessed. If the 
circumstances of the unauthorized access lead the institution to 
determine that misuse of the information is reasonably possible, it 
should notify all customers in the group.

                      B. Content of Customer Notice

    1. Customer notice should be given in a clear and conspicuous 
manner. The notice should describe the incident in general terms and the 
type of customer information that was the subject of unauthorized access 
or use. It also should generally describe what the institution has done 
to protect the customers' information from further unauthorized access. 
In addition, it should include a telephone number that customers can 
call for further information and assistance.\14\ The notice also should 
remind customers of the need to remain vigilant over the next twelve to 
twenty-four months, and to promptly report incidents of suspected 
identity theft to the institution. The notice should include the 
following additional items, when appropriate:
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    \14\ The institution should, therefore, ensure that it has 
reasonable policies and procedures in place, including trained 
personnel, to respond appropriately to customer inquiries and requests 
for assistance.
---------------------------------------------------------------------------

    a. A recommendation that the customer review account statements and 
immediately report any suspicious activity to the institution;
    b. A description of fraud alerts and an explanation of how the 
customer may place a fraud alert in the customer's consumer reports to 
put the customer's creditors on notice that the customer may be a victim 
of fraud;
    c. A recommendation that the customer periodically obtain credit 
reports from each nationwide credit reporting agency and have 
information relating to fraudulent transactions deleted;
    d. An explanation of how the customer may obtain a credit report 
free of charge; and
    e. Information about the availability of the FTC's online guidance 
regarding steps a consumer can take to protect against identity theft. 
The notice should encourage the customer to report any incidents of 
identity theft to the FTC, and should provide the FTC's Web site address 
and toll-free telephone number that customers may use to obtain the 
identity theft guidance and report suspected incidents of identity 
theft.\15\
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    \15\ Currently, the FTC Web site for the ID Theft brochure and the 
FTC Hotline phone number are http://www.consumer.gov/idtheft and 1-877-
IDTHEFT. The institution may also refer customers to any materials 
developed pursuant to section 151(b) of the FACT Act (educational 
materials developed by the FTC to teach the public how to prevent 
identity theft).
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    2. The Agencies encourage financial institutions to notify the 
nationwide consumer reporting agencies prior to sending notices to a 
large number of customers that include contact information for the 
reporting agencies.

                     C. Delivery of Customer Notice

    Customer notice should be delivered in any manner designed to ensure 
that a customer can reasonably be expected to receive it. For example, 
the institution may choose to contact all customers affected by 
telephone or by mail, or by electronic mail for those customers for whom 
it has a valid e-mail address and who have agreed to receive 
communications electronically.

[66 FR 8636, Feb. 1, 2001, as amended at 70 FR 15751, 15753, Mar. 29, 
2005; 71 FR 5780, Feb. 3, 2006]



   Sec. Appendix G to Part 225--Capital Adequacy Guidelines for Bank 

   Holding Companies: Internal-Ratings-Based and Advanced Measurement 

                               Approaches

Part I General Provisions
    Section 1 Purpose, Applicability, Reservation of Authority, and 
Principle of Conservatism
    Section 2 Definitions
    Section 3 Minimum Risk-Based Capital Requirements
Part II Qualifying Capital
    Section 11 Additional Deductions
    Section 12 Deductions and Limitations Not Required
    Section 13 Eligible Credit Reserves
Part III Qualification
    Section 21 Qualification Process
    Section 22 Qualification Requirements
    Section 23 Ongoing Qualification
    Section 24 Merger and Acquisition Transitional Arrangements

[[Page 288]]

Part IV Risk-Weighted Assets for General Credit Risk
    Section 31 Mechanics for Calculating Total Wholesale and Retail 
Risk-Weighted Assets
    Section 32 Counterparty Credit Risk of Repo-Style Transactions, 
Eligible Margin Loans, and OTC Derivative Contracts
    Section 33 Guarantees and Credit Derivatives: PD Substitution and 
LGD Adjustment Approaches
    Section 34 Guarantees and Credit Derivatives: Double Default 
Treatment
    Section 35 Risk-Based Capital Requirement for Unsettled Transactions
Part V Risk-Weighted Assets for Securitization Exposures
    Section 41 Operational Criteria for Recognizing the Transfer of Risk
    Section 42 Risk-Based Capital Requirement for Securitization 
Exposures
    Section 43 Ratings-Based Approach (RBA)
    Section 44 Internal Assessment Approach (IAA)
    Section 45 Supervisory Formula Approach (SFA)
    Section 46 Recognition of Credit Risk Mitigants for Securitization 
Exposures
    Section 47 Risk-Based Capital Requirement for Early Amortization 
Provisions
Part VI Risk-Weighted Assets for Equity Exposures
    Section 51 Introduction and Exposure Measurement
    Section 52 Simple Risk Weight Approach (SRWA)
    Section 53 Internal Models Approach (IMA)
    Section 54 Equity Exposures to Investment Funds
    Section 55 Equity Derivative Contracts
Part VII Risk-Weighted Assets for Operational Risk
    Section 61 Qualification Requirements for Incorporation of 
Operational Risk Mitigants
    Section 62 Mechanics of Risk-Weighted Asset Calculation
Part VIII Disclosure
    Section 71 Disclosure Requirements

                       Part I. General Provisions

    Section 1. Purpose, Applicability, Reservation of Authority, and 
                        Principle of Conservatism

    (a) Purpose. This appendix establishes:
    (1) Minimum qualifying criteria for bank holding company using bank 
holding company-specific internal risk measurement and management 
processes for calculating risk-based capital requirements;
    (2) Methodologies for such bank holding company to calculate their 
risk-based capital requirements; and
    (3) Public disclosure requirements for such bank holding company.
    (b) Applicability. (1) This appendix applies to a bank holding 
company that:
    (i) Has consolidated total assets, as reported on the most recent 
year-end Consolidated Report of Condition and Income (Call Report) or 
Thrift Financial Report (TFR), equal to $250 billion or more;
    (ii) Has consolidated total on-balance sheet foreign exposure at the 
most recent year-end equal to $10 billion or more (where total on-
balance sheet foreign exposure equals total cross-border claims less 
claims with head office or guarantor located in another country plus 
redistributed guaranteed amounts to the country of head office or 
guarantor plus local country claims on local residents plus revaluation 
gains on foreign exchange and derivative products, calculated in 
accordance with the Federal Financial Institutions Examination Council 
(FFIEC) 009 Country Exposure Report);
    (iii) Is a subsidiary of a depository institution that uses 12 CFR 
part 3, appendix C, 12 CFR part 208, appendix F, 12 CFR part 325, 
appendix D, or 12 CFR part 567, appendix C, to calculate its risk-based 
capital requirements; or
    (iv) Is a subsidiary of a bank holding company that uses 12 CFR part 
225, appendix G, to calculate its risk-based capital requirements.
    (2) Any bank holding company may elect to use this appendix to 
calculate its risk-based capital requirements.
    (3) A bank holding company that is subject to this appendix must use 
this appendix unless the Federal Reserve determines in writing that 
application of this appendix is not appropriate in light of the bank 
holding company's asset size, level of complexity, risk profile, or 
scope of operations. In making a determination under this paragraph, the 
Federal Reserve will apply notice and response procedures in the same 
manner and to the same extent as the notice and response procedures in 
12 CFR 263.202.
    (c) Reservation of authority--(1) Additional capital in the 
aggregate. The Federal Reserve may require a bank holding company to 
hold an amount of capital greater than otherwise required under this 
appendix if the Federal Reserve determines that the bank holding 
company's risk-based capital requirement under this appendix is not 
commensurate with the bank holding company's credit, market, 
operational, or other risks. In making a determination under this 
paragraph, the Federal Reserve will apply notice and response procedures 
in the same manner and to the same extent as the notice and response 
procedures in 12 CFR 263.202.
    (2) Specific risk-weighted asset amounts. (i) If the Federal Reserve 
determines that the risk-weighted asset amount calculated under this 
appendix by the bank holding company for one or more exposures is not 
commensurate with the risks associated with those exposures, the Federal 
Reserve may require the bank holding company to assign a different

[[Page 289]]

risk-weighted asset amount to the exposures, to assign different risk 
parameters to the exposures (if the exposures are wholesale or retail 
exposures), or to use different model assumptions for the exposures (if 
relevant), all as specified by the Federal Reserve.
    (ii) If the Federal Reserve determines that the risk-weighted asset 
amount for operational risk produced by the bank holding company under 
this appendix is not commensurate with the operational risks of the bank 
holding company, the Federal Reserve may require the bank holding 
company to assign a different risk-weighted asset amount for operational 
risk, to change elements of its operational risk analytical framework, 
including distributional and dependence assumptions, or to make other 
changes to the bank holding company's operational risk management 
processes, data and assessment systems, or quantification systems, all 
as specified by the Federal Reserve.
    (3) Other supervisory authority. Nothing in this appendix limits the 
authority of the Federal Reserve under any other provision of law or 
regulation to take supervisory or enforcement action, including action 
to address unsafe or unsound practices or conditions, deficient capital 
levels, or violations of law.
    (d) Principle of conservatism. Notwithstanding the requirements of 
this appendix, a bank holding company may choose not to apply a 
provision of this appendix to one or more exposures, provided that:
    (1) The bank holding company can demonstrate on an ongoing basis to 
the satisfaction of the Federal Reserve that not applying the provision 
would, in all circumstances, unambiguously generate a risk-based capital 
requirement for each such exposure greater than that which would 
otherwise be required under this appendix;
    (2) The bank holding company appropriately manages the risk of each 
such exposure;
    (3) The bank holding company notifies the Federal Reserve in writing 
prior to applying this principle to each such exposure; and
    (4) The exposures to which the bank holding company applies this 
principle are not, in the aggregate, material to the bank holding 
company.

                         Section 2. Definitions

    Advanced internal ratings-based (IRB) systems means a bank holding 
company's internal risk rating and segmentation system; risk parameter 
quantification system; data management and maintenance system; and 
control, oversight, and validation system for credit risk of wholesale 
and retail exposures.
    Advanced systems means a bank holding company's advanced IRB 
systems, operational risk management processes, operational risk data 
and assessment systems, operational risk quantification systems, and, to 
the extent the bank holding company uses the following systems, the 
internal models methodology, double default excessive correlation 
detection process, IMA for equity exposures, and IAA for securitization 
exposures to ABCP programs.
    Affiliate with respect to a company means any company that controls, 
is controlled by, or is under common control with, the company.
    Applicable external rating means:
    (1) With respect to an exposure that has multiple external ratings 
assigned by NRSROs, the lowest solicited external rating assigned to the 
exposure by any NRSRO; and
    (2) With respect to an exposure that has a single external rating 
assigned by an NRSRO, the external rating assigned to the exposure by 
the NRSRO.
    Applicable inferred rating means:
    (1) With respect to an exposure that has multiple inferred ratings, 
the lowest inferred rating based on a solicited external rating; and
    (2) With respect to an exposure that has a single inferred rating, 
the inferred rating.
    Asset-backed commercial paper (ABCP) program means a program that 
primarily issues commercial paper that:
    (1) Has an external rating; and
    (2) Is backed by underlying exposures held in a bankruptcy-remote 
SPE.
    Asset-backed commercial paper (ABCP) program sponsor means a bank 
holding company that:
    (1) Establishes an ABCP program;
    (2) Approves the sellers permitted to participate in an ABCP 
program;
    (3) Approves the exposures to be purchased by an ABCP program; or
    (4) Administers the ABCP program by monitoring the underlying 
exposures, underwriting or otherwise arranging for the placement of debt 
or other obligations issued by the program, compiling monthly reports, 
or ensuring compliance with the program documents and with the program's 
credit and investment policy.
    Backtesting means the comparison of a bank holding company's 
internal estimates with actual outcomes during a sample period not used 
in model development. In this context, backtesting is one form of out-
of-sample testing.
    Bank holding company is defined in section 2 of the Bank Holding 
Company Act (12 U.S.C. 1841).
    Benchmarking means the comparison of a bank holding company's 
internal estimates with relevant internal and external data or with 
estimates based on other estimation techniques.
    Business environment and internal control factors means the 
indicators of a bank holding company's operational risk profile that

[[Page 290]]

reflect a current and forward-looking assessment of the bank holding 
company's underlying business risk factors and internal control 
environment.
    Carrying value means, with respect to an asset, the value of the 
asset on the balance sheet of the bank holding company, determined in 
accordance with GAAP.
    Clean-up call means a contractual provision that permits an 
originating bank holding company or servicer to call securitization 
exposures before their stated maturity or call date. See also eligible 
clean-up call.
    Commodity derivative contract means a commodity-linked swap, 
purchased commodity-linked option, forward commodity-linked contract, or 
any other instrument linked to commodities that gives rise to similar 
counterparty credit risks.
    Company means a corporation, partnership, limited liability company, 
depository institution, business trust, special purpose entity, 
association, or similar organization.
    Control. A person or company controls a company if it:
    (1) Owns, controls, or holds with power to vote 25 percent or more 
of a class of voting securities of the company; or
    (2) Consolidates the company for financial reporting purposes.
    Controlled early amortization provision means an early amortization 
provision that meets all the following conditions:
    (1) The originating bank holding company has appropriate policies 
and procedures to ensure that it has sufficient capital and liquidity 
available in the event of an early amortization;
    (2) Throughout the duration of the securitization (including the 
early amortization period), there is the same pro rata sharing of 
interest, principal, expenses, losses, fees, recoveries, and other cash 
flows from the underlying exposures based on the originating bank 
holding company's and the investors' relative shares of the underlying 
exposures outstanding measured on a consistent monthly basis;
    (3) The amortization period is sufficient for at least 90 percent of 
the total underlying exposures outstanding at the beginning of the early 
amortization period to be repaid or recognized as in default; and
    (4) The schedule for repayment of investor principal is not more 
rapid than would be allowed by straight-line amortization over an 18-
month period.
    Credit derivative means a financial contract executed under standard 
industry credit derivative documentation that allows one party (the 
protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure) to another party (the protection 
provider). See also eligible credit derivative.
    Credit-enhancing interest-only strip (CEIO) means an on-balance 
sheet asset that, in form or in substance:
    (1) Represents a contractual right to receive some or all of the 
interest and no more than a minimal amount of principal due on the 
underlying exposures of a securitization; and
    (2) Exposes the holder to credit risk directly or indirectly 
associated with the underlying exposures that exceeds a pro rata share 
of the holder's claim on the underlying exposures, whether through 
subordination provisions or other credit-enhancement techniques.
    Credit-enhancing representations and warranties means 
representations and warranties that are made or assumed in connection 
with a transfer of underlying exposures (including loan servicing 
assets) and that obligate a bank holding company to protect another 
party from losses arising from the credit risk of the underlying 
exposures. Credit-enhancing representations and warranties include 
provisions to protect a party from losses resulting from the default or 
nonperformance of the obligors of the underlying exposures or from an 
insufficiency in the value of the collateral backing the underlying 
exposures. Credit-enhancing representations and warranties do not 
include:
    (1) Early default clauses and similar warranties that permit the 
return of, or premium refund clauses that cover, first-lien residential 
mortgage exposures for a period not to exceed 120 days from the date of 
transfer, provided that the date of transfer is within one year of 
origination of the residential mortgage exposure;
    (2) Premium refund clauses that cover underlying exposures 
guaranteed, in whole or in part, by the U.S. government, a U.S. 
government agency, or a U.S. government sponsored enterprise, provided 
that the clauses are for a period not to exceed 120 days from the date 
of transfer; or
    (3) Warranties that permit the return of underlying exposures in 
instances of misrepresentation, fraud, or incomplete documentation.
    Credit risk mitigant means collateral, a credit derivative, or a 
guarantee.
    Credit-risk-weighted assets means 1.06 multiplied by the sum of:
    (1) Total wholesale and retail risk-weighted assets;
    (2) Risk-weighted assets for securitization exposures; and
    (3) Risk-weighted assets for equity exposures.
    Current exposure means, with respect to a netting set, the larger of 
zero or the market value of a transaction or portfolio of transactions 
within the netting set that would be lost upon default of the 
counterparty, assuming no recovery on the value of the

[[Page 291]]

transactions. Current exposure is also called replacement cost.
    Default--(1) Retail. (i) A retail exposure of a bank holding company 
is in default if:
    (A) The exposure is 180 days past due, in the case of a residential 
mortgage exposure or revolving exposure;
    (B) The exposure is 120 days past due, in the case of all other 
retail exposures; or
    (C) The bank holding company has taken a full or partial charge-off, 
write-down of principal, or material negative fair value adjustment of 
principal on the exposure for credit-related reasons.
    (ii) Notwithstanding paragraph (1)(i) of this definition, for a 
retail exposure held by a non-U.S. subsidiary of the bank holding 
company that is subject to an internal ratings-based approach to capital 
adequacy consistent with the Basel Committee on Banking Supervision's 
``International Convergence of Capital Measurement and Capital 
Standards: A Revised Framework'' in a non-U.S. jurisdiction, the bank 
holding company may elect to use the definition of default that is used 
in that jurisdiction, provided that the bank holding company has 
obtained prior approval from the Federal Reserve to use the definition 
of default in that jurisdiction.
    (iii) A retail exposure in default remains in default until the bank 
holding company has reasonable assurance of repayment and performance 
for all contractual principal and interest payments on the exposure.
    (2) Wholesale. (i) A bank holding company's wholesale obligor is in 
default if:
    (A) The bank holding company determines that the obligor is unlikely 
to pay its credit obligations to the bank holding company in full, 
without recourse by the bank holding company to actions such as 
realizing collateral (if held); or
    (B) The obligor is past due more than 90 days on any material credit 
obligation(s) to the bank holding company.\1\
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    \1\ Overdrafts are past due once the obligor has breached an advised 
limit or been advised of a limit smaller than the current outstanding 
balance.
---------------------------------------------------------------------------

    (ii) An obligor in default remains in default until the bank holding 
company has reasonable assurance of repayment and performance for all 
contractual principal and interest payments on all exposures of the bank 
holding company to the obligor (other than exposures that have been 
fully written-down or charged-off).
    Dependence means a measure of the association among operational 
losses across and within units of measure.
    Depository institution is defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813).
    Derivative contract means a financial contract whose value is 
derived from the values of one or more underlying assets, reference 
rates, or indices of asset values or reference rates. Derivative 
contracts include interest rate derivative contracts, exchange rate 
derivative contracts, equity derivative contracts, commodity derivative 
contracts, credit derivatives, and any other instrument that poses 
similar counterparty credit risks. Derivative contracts also include 
unsettled securities, commodities, and foreign exchange transactions 
with a contractual settlement or delivery lag that is longer than the 
lesser of the market standard for the particular instrument or five 
business days.
    Early amortization provision means a provision in the documentation 
governing a securitization that, when triggered, causes investors in the 
securitization exposures to be repaid before the original stated 
maturity of the securitization exposures, unless the provision:
    (1) Is triggered solely by events not directly related to the 
performance of the underlying exposures or the originating bank holding 
company (such as material changes in tax laws or regulations); or
    (2) Leaves investors fully exposed to future draws by obligors on 
the underlying exposures even after the provision is triggered.
    Economic downturn conditions means, with respect to an exposure held 
by the bank holding company, those conditions in which the aggregate 
default rates for that exposure's wholesale or retail exposure 
subcategory (or subdivision of such subcategory selected by the bank 
holding company) in the exposure's national jurisdiction (or subdivision 
of such jurisdiction selected by the bank holding company) are 
significantly higher than average.
    Effective maturity (M) of a wholesale exposure means:
    (1) For wholesale exposures other than repo-style transactions, 
eligible margin loans, and OTC derivative contracts described in 
paragraph (2) or (3) of this definition:
    (i) The weighted-average remaining maturity (measured in years, 
whole or fractional) of the expected contractual cash flows from the 
exposure, using the undiscounted amounts of the cash flows as weights; 
or
    (ii) The nominal remaining maturity (measured in years, whole or 
fractional) of the exposure.
    (2) For repo-style transactions, eligible margin loans, and OTC 
derivative contracts subject to a qualifying master netting agreement 
for which the bank holding company does not apply the internal models 
approach in paragraph (d) of section 32 of this appendix, the weighted-
average remaining maturity (measured in years, whole or fractional) of 
the individual transactions subject to the qualifying master netting 
agreement, with the weight of each individual transaction set

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equal to the notional amount of the transaction.
    (3) For repo-style transactions, eligible margin loans, and OTC 
derivative contracts for which the bank holding company applies the 
internal models approach in paragraph (d) of section 32 of this 
appendix, the value determined in paragraph (d)(4) of section 32 of this 
appendix.
    Effective notional amount means, for an eligible guarantee or 
eligible credit derivative, the lesser of the contractual notional 
amount of the credit risk mitigant and the EAD of the hedged exposure, 
multiplied by the percentage coverage of the credit risk mitigant. For 
example, the effective notional amount of an eligible guarantee that 
covers, on a pro rata basis, 40 percent of any losses on a $100 bond 
would be $40.
    Eligible clean-up call means a clean-up call that:
    (1) Is exercisable solely at the discretion of the originating bank 
holding company or servicer;
    (2) Is not structured to avoid allocating losses to securitization 
exposures held by investors or otherwise structured to provide credit 
enhancement to the securitization; and
    (3) (i) For a traditional securitization, is only exercisable when 
10 percent or less of the principal amount of the underlying exposures 
or securitization exposures (determined as of the inception of the 
securitization) is outstanding; or
    (ii) For a synthetic securitization, is only exercisable when 10 
percent or less of the principal amount of the reference portfolio of 
underlying exposures (determined as of the inception of the 
securitization) is outstanding.
    Eligible credit derivative means a credit derivative in the form of 
a credit default swap, n\th\-to-default swap, total return swap, or any 
other form of credit derivative approved by the Federal Reserve, 
provided that:
    (1) The contract meets the requirements of an eligible guarantee and 
has been confirmed by the protection purchaser and the protection 
provider;
    (2) Any assignment of the contract has been confirmed by all 
relevant parties;
    (3) If the credit derivative is a credit default swap or n\th\-to-
default swap, the contract includes the following credit events:
    (i) Failure to pay any amount due under the terms of the reference 
exposure, subject to any applicable minimal payment threshold that is 
consistent with standard market practice and with a grace period that is 
closely in line with the grace period of the reference exposure; and
    (ii) Bankruptcy, insolvency, or inability of the obligor on the 
reference exposure to pay its debts, or its failure or admission in 
writing of its inability generally to pay its debts as they become due, 
and similar events;
    (4) The terms and conditions dictating the manner in which the 
contract is to be settled are incorporated into the contract;
    (5) If the contract allows for cash settlement, the contract 
incorporates a robust valuation process to estimate loss reliably and 
specifies a reasonable period for obtaining post-credit event valuations 
of the reference exposure;
    (6) If the contract requires the protection purchaser to transfer an 
exposure to the protection provider at settlement, the terms of at least 
one of the exposures that is permitted to be transferred under the 
contract provides that any required consent to transfer may not be 
unreasonably withheld;
    (7) If the credit derivative is a credit default swap or n\th\-to-
default swap, the contract clearly identifies the parties responsible 
for determining whether a credit event has occurred, specifies that this 
determination is not the sole responsibility of the protection provider, 
and gives the protection purchaser the right to notify the protection 
provider of the occurrence of a credit event; and
    (8) If the credit derivative is a total return swap and the bank 
holding company records net payments received on the swap as net income, 
the bank holding company records offsetting deterioration in the value 
of the hedged exposure (either through reductions in fair value or by an 
addition to reserves).
    Eligible credit reserves means all general allowances that have been 
established through a charge against earnings to absorb credit losses 
associated with on- or off-balance sheet wholesale and retail exposures, 
including the allowance for loan and lease losses (ALLL) associated with 
such exposures but excluding allocated transfer risk reserves 
established pursuant to 12 U.S.C. 3904 and other specific reserves 
created against recognized losses.
    Eligible double default guarantor, with respect to a guarantee or 
credit derivative obtained by a bank holding company, means:
    (1) U.S.-based entities. A depository institution, a bank holding 
company, a savings and loan holding company (as defined in 12 U.S.C. 
1467a) provided all or substantially all of the holding company's 
activities are permissible for a financial holding company under 12 
U.S.C. 1843(k), a securities broker or dealer registered with the SEC 
under the Securities Exchange Act of 1934 (15 U.S.C. 78o et seq.), or an 
insurance company in the business of providing credit protection (such 
as a monoline bond insurer or re-insurer) that is subject to supervision 
by a State insurance regulator, if:
    (i) At the time the guarantor issued the guarantee or credit 
derivative or at any time thereafter, the bank holding company assigned 
a PD to the guarantor's rating grade that was equal to or lower than the 
PD associated with a long-term external rating in

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the third-highest investment-grade rating category; and
    (ii) The bank holding company currently assigns a PD to the 
guarantor's rating grade that is equal to or lower than the PD 
associated with a long-term external rating in the lowest investment-
grade rating category; or
    (2) Non-U.S.-based entities. A foreign bank (as defined in Sec. 
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), a 
non-U.S.-based securities firm, or a non-U.S.-based insurance company in 
the business of providing credit protection, if:
    (i) The bank holding company demonstrates that the guarantor is 
subject to consolidated supervision and regulation comparable to that 
imposed on U.S. depository institutions, securities broker-dealers, or 
insurance companies (as the case may be), or has issued and outstanding 
an unsecured long-term debt security without credit enhancement that has 
a long-term applicable external rating of at least investment grade;
    (ii) At the time the guarantor issued the guarantee or credit 
derivative or at any time thereafter, the bank holding company assigned 
a PD to the guarantor's rating grade that was equal to or lower than the 
PD associated with a long-term external rating in the third-highest 
investment-grade rating category; and
    (iii) The bank holding company currently assigns a PD to the 
guarantor's rating grade that is equal to or lower than the PD 
associated with a long-term external rating in the lowest investment-
grade rating category.
    Eligible guarantee means a guarantee that:
    (1) Is written and unconditional;
    (2) Covers all or a pro rata portion of all contractual payments of 
the obligor on the reference exposure;
    (3) Gives the beneficiary a direct claim against the protection 
provider;
    (4) Is not unilaterally cancelable by the protection provider for 
reasons other than the breach of the contract by the beneficiary;
    (5) Is legally enforceable against the protection provider in a 
jurisdiction where the protection provider has sufficient assets against 
which a judgment may be attached and enforced;
    (6) Requires the protection provider to make payment to the 
beneficiary on the occurrence of a default (as defined in the guarantee) 
of the obligor on the reference exposure in a timely manner without the 
beneficiary first having to take legal actions to pursue the obligor for 
payment;
    (7) Does not increase the beneficiary's cost of credit protection on 
the guarantee in response to deterioration in the credit quality of the 
reference exposure; and
    (8) Is not provided by an affiliate of the bank holding company, 
unless the affiliate is an insured depository institution, bank, 
securities broker or dealer, or insurance company that:
    (i) Does not control the bank holding company; and
    (ii) Is subject to consolidated supervision and regulation 
comparable to that imposed on U.S. depository institutions, securities 
broker-dealers, or insurance companies (as the case may be).
    Eligible margin loan means an extension of credit where:
    (1) The extension of credit is collateralized exclusively by liquid 
and readily marketable debt or equity securities, gold, or conforming 
residential mortgages;
    (2) The collateral is marked to market daily, and the transaction is 
subject to daily margin maintenance requirements;
    (3) The extension of credit is conducted under an agreement that 
provides the bank holding company the right to accelerate and terminate 
the extension of credit and to liquidate or set off collateral promptly 
upon an event of default (including upon an event of bankruptcy, 
insolvency, or similar proceeding) of the counterparty, provided that, 
in any such case, any exercise of rights under the agreement will not be 
stayed or avoided under applicable law in the relevant jurisdictions; 
\2\ and
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    \2\ This requirement is met where all transactions under the 
agreement are (i) executed under U.S. law and (ii) constitute 
``securities contracts'' under section 555 of the Bankruptcy Code (11 
U.S.C. 555), qualified financial contracts under section 11(e)(8) of the 
Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or netting 
contracts between or among financial institutions under sections 401-407 
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 
U.S.C. 4401-4407) or the Federal Reserve Board's Regulation EE (12 CFR 
part 231).
---------------------------------------------------------------------------

    (4) The bank holding company has conducted sufficient legal review 
to conclude with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that the agreement meets the 
requirements of paragraph (3) of this definition and is legal, valid, 
binding, and enforceable under applicable law in the relevant 
jurisdictions.
    Eligible operational risk offsets means amounts, not to exceed 
expected operational loss, that:
    (1) Are generated by internal business practices to absorb highly 
predictable and reasonably stable operational losses, including reserves 
calculated consistent with GAAP; and
    (2) Are available to cover expected operational losses with a high 
degree of certainty over a one-year horizon.
    Eligible purchased wholesale exposure means a purchased wholesale 
exposure that:

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    (1) The bank holding company or securitization SPE purchased from an 
unaffiliated seller and did not directly or indirectly originate;
    (2) Was generated on an arm's-length basis between the seller and 
the obligor (intercompany accounts receivable and receivables subject to 
contra-accounts between firms that buy and sell to each other do not 
satisfy this criterion);
    (3) Provides the bank holding company or securitization SPE with a 
claim on all proceeds from the exposure or a pro rata interest in the 
proceeds from the exposure;
    (4) Has an M of less than one year; and
    (5) When consolidated by obligor, does not represent a concentrated 
exposure relative to the portfolio of purchased wholesale exposures.
    Eligible securitization guarantor means:
    (1) A sovereign entity, the Bank for International Settlements, the 
International Monetary Fund, the European Central Bank, the European 
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage 
Corporation (Farmer Mac), a multilateral development bank, a depository 
institution, a bank holding company, a savings and loan holding company 
(as defined in 12 U.S.C. 1467a) provided all or substantially all of the 
holding company's activities are permissible for a financial holding 
company under 12 U.S.C. 1843(k), a foreign bank (as defined in Sec. 
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), or a 
securities firm;
    (2) Any other entity (other than a securitization SPE) that has 
issued and outstanding an unsecured long-term debt security without 
credit enhancement that has a long-term applicable external rating in 
one of the three highest investment-grade rating categories; or
    (3) Any other entity (other than a securitization SPE) that has a PD 
assigned by the bank holding company that is lower than or equal to the 
PD associated with a long-term external rating in the third highest 
investment-grade rating category.
    Eligible servicer cash advance facility means a servicer cash 
advance facility in which:
    (1) The servicer is entitled to full reimbursement of advances, 
except that a servicer may be obligated to make non-reimbursable 
advances for a particular underlying exposure if any such advance is 
contractually limited to an insignificant amount of the outstanding 
principal balance of that exposure;
    (2) The servicer's right to reimbursement is senior in right of 
payment to all other claims on the cash flows from the underlying 
exposures of the securitization; and
    (3) The servicer has no legal obligation to, and does not, make 
advances to the securitization if the servicer concludes the advances 
are unlikely to be repaid.
    Equity derivative contract means an equity-linked swap, purchased 
equity-linked option, forward equity-linked contract, or any other 
instrument linked to equities that gives rise to similar counterparty 
credit risks.
    Equity exposure means:
    (1) A security or instrument (whether voting or non-voting) that 
represents a direct or indirect ownership interest in, and is a residual 
claim on, the assets and income of a company, unless:
    (i) The issuing company is consolidated with the bank holding 
company under GAAP;
    (ii) The bank holding company is required to deduct the ownership 
interest from tier 1 or tier 2 capital under this appendix;
    (iii) The ownership interest incorporates a payment or other similar 
obligation on the part of the issuing company (such as an obligation to 
make periodic payments); or
    (iv) The ownership interest is a securitization exposure;
    (2) A security or instrument that is mandatorily convertible into a 
security or instrument described in paragraph (1) of this definition;
    (3) An option or warrant that is exercisable for a security or 
instrument described in paragraph (1) of this definition; or
    (4) Any other security or instrument (other than a securitization 
exposure) to the extent the return on the security or instrument is 
based on the performance of a security or instrument described in 
paragraph (1) of this definition.
    Excess spread for a period means:
    (1) Gross finance charge collections and other income received by a 
securitization SPE (including market interchange fees) over a period 
minus interest paid to the holders of the securitization exposures, 
servicing fees, charge-offs, and other senior trust or similar expenses 
of the SPE over the period; divided by
    (2) The principal balance of the underlying exposures at the end of 
the period.
    Exchange rate derivative contract means a cross-currency interest 
rate swap, forward foreign-exchange contract, currency option purchased, 
or any other instrument linked to exchange rates that gives rise to 
similar counterparty credit risks.
    Excluded mortgage exposure means any one- to four-family residential 
pre-sold construction loan for a residence for which the purchase 
contract is cancelled that would receive a 100 percent risk weight under 
section 618(a)(2) of the Resolution Trust Corporation Refinancing, 
Restructuring, and Improvement Act and under 12 CFR part 225, appendix 
A, section III.C.3.
    Expected credit loss (ECL) means:
    (1) For a wholesale exposure to a non-defaulted obligor or segment 
of non-defaulted retail exposures that is carried at fair value

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with gains and losses flowing through earnings or that is classified as 
held-for-sale and is carried at the lower of cost or fair value with 
losses flowing through earnings, zero.
    (2) For all other wholesale exposures to non-defaulted obligors or 
segments of non-defaulted retail exposures, the product of PD times LGD 
times EAD for the exposure or segment.
    (3) For a wholesale exposure to a defaulted obligor or segment of 
defaulted retail exposures, the bank holding company's impairment 
estimate for allowance purposes for the exposure or segment.
    (4) Total ECL is the sum of expected credit losses for all wholesale 
and retail exposures other than exposures for which the bank holding 
company has applied the double default treatment in section 34 of this 
appendix.
    Expected exposure (EE) means the expected value of the probability 
distribution of non-negative credit risk exposures to a counterparty at 
any specified future date before the maturity date of the longest term 
transaction in the netting set. Any negative market values in the 
probability distribution of market values to a counterparty at a 
specified future date are set to zero to convert the probability 
distribution of market values to the probability distribution of credit 
risk exposures.
    Expected operational loss (EOL) means the expected value of the 
distribution of potential aggregate operational losses, as generated by 
the bank holding company's operational risk quantification system using 
a one-year horizon.
    Expected positive exposure (EPE) means the weighted average over 
time of expected (non-negative) exposures to a counterparty where the 
weights are the proportion of the time interval that an individual 
expected exposure represents. When calculating risk-based capital 
requirements, the average is taken over a one-year horizon.
    Exposure at default (EAD). (1) For the on-balance sheet component of 
a wholesale exposure or segment of retail exposures (other than an OTC 
derivative contract, or a repo-style transaction or eligible margin loan 
for which the bank holding company determines EAD under section 32 of 
this appendix), EAD means:
    (i) If the exposure or segment is a security classified as 
available-for-sale, the bank holding company's carrying value (including 
net accrued but unpaid interest and fees) for the exposure or segment 
less any allocated transfer risk reserve for the exposure or segment, 
less any unrealized gains on the exposure or segment, and plus any 
unrealized losses on the exposure or segment; or
    (ii) If the exposure or segment is not a security classified as 
available-for-sale, the bank holding company's carrying value (including 
net accrued but unpaid interest and fees) for the exposure or segment 
less any allocated transfer risk reserve for the exposure or segment.
    (2) For the off-balance sheet component of a wholesale exposure or 
segment of retail exposures (other than an OTC derivative contract, or a 
repo-style transaction or eligible margin loan for which the bank 
holding company determines EAD under section 32 of this appendix) in the 
form of a loan commitment, line of credit, trade-related letter of 
credit, or transaction-related contingency, EAD means the bank holding 
company's best estimate of net additions to the outstanding amount owed 
the bank holding company, including estimated future additional draws of 
principal and accrued but unpaid interest and fees, that are likely to 
occur over a one-year horizon assuming the wholesale exposure or the 
retail exposures in the segment were to go into default. This estimate 
of net additions must reflect what would be expected during economic 
downturn conditions. Trade-related letters of credit are short-term, 
self-liquidating instruments that are used to finance the movement of 
goods and are collateralized by the underlying goods. Transaction-
related contingencies relate to a particular transaction and include, 
among other things, performance bonds and performance-based letters of 
credit.
    (3) For the off-balance sheet component of a wholesale exposure or 
segment of retail exposures (other than an OTC derivative contract, or a 
repo-style transaction or eligible margin loan for which the bank 
holding company determines EAD under section 32 of this appendix) in the 
form of anything other than a loan commitment, line of credit, trade-
related letter of credit, or transaction-related contingency, EAD means 
the notional amount of the exposure or segment.
    (4) EAD for OTC derivative contracts is calculated as described in 
section 32 of this appendix. A bank holding company also may determine 
EAD for repo-style transactions and eligible margin loans as described 
in section 32 of this appendix.
    (5) For wholesale or retail exposures in which only the drawn 
balance has been securitized, the bank holding company must reflect its 
share of the exposures' undrawn balances in EAD. Undrawn balances of 
revolving exposures for which the drawn balances have been securitized 
must be allocated between the seller's and investors' interests on a pro 
rata basis, based on the proportions of the seller's and investors' 
shares of the securitized drawn balances.
    Exposure category means any of the wholesale, retail, 
securitization, or equity exposure categories.
    External operational loss event data means, with respect to a bank 
holding company, gross operational loss amounts, dates, recoveries, and 
relevant causal information for

[[Page 296]]

operational loss events occurring at organizations other than the bank 
holding company.
    External rating means a credit rating that is assigned by an NRSRO 
to an exposure, provided:
    (1) The credit rating fully reflects the entire amount of credit 
risk with regard to all payments owed to the holder of the exposure. If 
a holder is owed principal and interest on an exposure, the credit 
rating must fully reflect the credit risk associated with timely 
repayment of principal and interest. If a holder is owed only principal 
on an exposure, the credit rating must fully reflect only the credit 
risk associated with timely repayment of principal; and
    (2) The credit rating is published in an accessible form and is or 
will be included in the transition matrices made publicly available by 
the NRSRO that summarize the historical performance of positions rated 
by the NRSRO.
    Financial collateral means collateral:
    (1) In the form of:
    (i) Cash on deposit with the bank holding company (including cash 
held for the bank holding company by a third-party custodian or 
trustee);
    (ii) Gold bullion;
    (iii) Long-term debt securities that have an applicable external 
rating of one category below investment grade or higher;
    (iv) Short-term debt instruments that have an applicable external 
rating of at least investment grade;
    (v) Equity securities that are publicly traded;
    (vi) Convertible bonds that are publicly traded;
    (vii) Money market mutual fund shares and other mutual fund shares 
if a price for the shares is publicly quoted daily; or
    (viii) Conforming residential mortgages; and
    (2) In which the bank holding company has a perfected, first 
priority security interest or, outside of the United States, the legal 
equivalent thereof (with the exception of cash on deposit and 
notwithstanding the prior security interest of any custodial agent).
    GAAP means generally accepted accounting principles as used in the 
United States.
    Gain-on-sale means an increase in the equity capital (as reported on 
Schedule HC of the FR Y-9C Report) of a bank holding company that 
results from a securitization (other than an increase in equity capital 
that results from the bank holding company's receipt of cash in 
connection with the securitization).
    Guarantee means a financial guarantee, letter of credit, insurance, 
or other similar financial instrument (other than a credit derivative) 
that allows one party (beneficiary) to transfer the credit risk of one 
or more specific exposures (reference exposure) to another party 
(protection provider). See also eligible guarantee.
    High volatility commercial real estate (HVCRE) exposure means a 
credit facility that finances or has financed the acquisition, 
development, or construction (ADC) of real property, unless the facility 
finances:
    (1) One- to four-family residential properties; or
    (2) Commercial real estate projects in which:
    (i) The loan-to-value ratio is less than or equal to the applicable 
maximum supervisory loan-to-value ratio in the relevant agency's real 
estate lending standards at 12 CFR part 34, Subpart D (OCC), 12 CFR part 
208, appendix C (Federal Reserve); 12 CFR part 365, Subpart D (FDIC); 
and 12 CFR 560.100-560.101 (OTS).
    (ii) The borrower has contributed capital to the project in the form 
of cash or unencumbered readily marketable assets (or has paid 
development expenses out-of-pocket) of at least 15 percent of the real 
estate's appraised ``as completed'' value; and
    (iii) The borrower contributed the amount of capital required by 
paragraph (2)(ii) of this definition before the bank holding company 
advances funds under the credit facility, and the capital contributed by 
the borrower, or internally generated by the project, is contractually 
required to remain in the project throughout the life of the project. 
The life of a project concludes only when the credit facility is 
converted to permanent financing or is sold or paid in full. Permanent 
financing may be provided by the bank holding company that provided the 
ADC facility as long as the permanent financing is subject to the bank 
holding company's underwriting criteria for long-term mortgage loans.
    Inferred rating. A securitization exposure has an inferred rating 
equal to the external rating referenced in paragraph (2)(i) of this 
definition if:
    (1) The securitization exposure does not have an external rating; 
and
    (2) Another securitization exposure issued by the same issuer and 
secured by the same underlying exposures:
    (i) Has an external rating;
    (ii) Is subordinated in all respects to the unrated securitization 
exposure;
    (iii) Does not benefit from any credit enhancement that is not 
available to the unrated securitization exposure; and
    (iv) Has an effective remaining maturity that is equal to or longer 
than that of the unrated securitization exposure.
    Interest rate derivative contract means a single-currency interest 
rate swap, basis swap, forward rate agreement, purchased interest rate 
option, when-issued securities, or any other instrument linked to 
interest rates

[[Page 297]]

that gives rise to similar counterparty credit risks.
    Internal operational loss event data means, with respect to a bank 
holding company, gross operational loss amounts, dates, recoveries, and 
relevant causal information for operational loss events occurring at the 
bank holding company.
    Investing bank holding company means, with respect to a 
securitization, a bank holding company that assumes the credit risk of a 
securitization exposure (other than an originating bank holding company 
of the securitization). In the typical synthetic securitization, the 
investing bank holding company sells credit protection on a pool of 
underlying exposures to the originating bank holding company.
    Investment fund means a company:
    (1) All or substantially all of the assets of which are financial 
assets; and
    (2) That has no material liabilities.
    Investors' interest EAD means, with respect to a securitization, the 
EAD of the underlying exposures multiplied by the ratio of:
    (1) The total amount of securitization exposures issued by the 
securitization SPE to investors; divided by
    (2) The outstanding principal amount of underlying exposures.
    Loss given default (LGD) means:
    (1) For a wholesale exposure, the greatest of:
    (i) Zero;
    (ii) The bank holding company's empirically based best estimate of 
the long-run default-weighted average economic loss, per dollar of EAD, 
the bank holding company would expect to incur if the obligor (or a 
typical obligor in the loss severity grade assigned by the bank holding 
company to the exposure) were to default within a one-year horizon over 
a mix of economic conditions, including economic downturn conditions; or
    (iii) The bank holding company's empirically based best estimate of 
the economic loss, per dollar of EAD, the bank holding company would 
expect to incur if the obligor (or a typical obligor in the loss 
severity grade assigned by the bank holding company to the exposure) 
were to default within a one-year horizon during economic downturn 
conditions.
    (2) For a segment of retail exposures, the greatest of:
    (i) Zero;
    (ii) The bank holding company's empirically based best estimate of 
the long-run default-weighted average economic loss, per dollar of EAD, 
the bank holding company would expect to incur if the exposures in the 
segment were to default within a one-year horizon over a mix of economic 
conditions, including economic downturn conditions; or
    (iii) The bank holding company's empirically based best estimate of 
the economic loss, per dollar of EAD, the bank holding company would 
expect to incur if the exposures in the segment were to default within a 
one-year horizon during economic downturn conditions.
    (3) The economic loss on an exposure in the event of default is all 
material credit-related losses on the exposure (including accrued but 
unpaid interest or fees, losses on the sale of collateral, direct 
workout costs, and an appropriate allocation of indirect workout costs). 
Where positive or negative cash flows on a wholesale exposure to a 
defaulted obligor or a defaulted retail exposure (including proceeds 
from the sale of collateral, workout costs, additional extensions of 
credit to facilitate repayment of the exposure, and draw-downs of unused 
credit lines) occur after the date of default, the economic loss must 
reflect the net present value of cash flows as of the default date using 
a discount rate appropriate to the risk of the defaulted exposure.
    Main index means the Standard & Poor's 500 Index, the FTSE All-World 
Index, and any other index for which the bank holding company can 
demonstrate to the satisfaction of the Federal Reserve that the equities 
represented in the index have comparable liquidity, depth of market, and 
size of bid-ask spreads as equities in the Standard & Poor's 500 Index 
and FTSE All-World Index.
    Multilateral development bank means the International Bank for 
Reconstruction and Development, the International Finance Corporation, 
the Inter-American Development Bank, the Asian Development Bank, the 
African Development Bank, the European Bank for Reconstruction and 
Development, the European Investment Bank, the European Investment Fund, 
the Nordic Investment Bank, the Caribbean Development Bank, the Islamic 
Development Bank, the Council of Europe Development Bank, and any other 
multilateral lending institution or regional development bank in which 
the U.S. government is a shareholder or contributing member or which the 
Federal Reserve determines poses comparable credit risk.
    Nationally recognized statistical rating organization (NRSRO) means 
an entity registered with the SEC as a nationally recognized statistical 
rating organization under section 15E of the Securities Exchange Act of 
1934 (15 U.S.C. 78o-7).
    Netting set means a group of transactions with a single counterparty 
that are subject to a qualifying master netting agreement or qualifying 
cross-product master netting agreement. For purposes of the internal 
models methodology in paragraph (d) of section 32 of this appendix, each 
transaction that is not subject to such a master netting agreement is 
its own netting set.
    N\th\-to-default credit derivative means a credit derivative that 
provides credit protection only for the n\th\-defaulting reference 
exposure in a group of reference exposures.

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    Obligor means the legal entity or natural person contractually 
obligated on a wholesale exposure, except that a bank holding company 
may treat the following exposures as having separate obligors:
    (1) Exposures to the same legal entity or natural person denominated 
in different currencies;
    (2) (i) An income-producing real estate exposure for which all or 
substantially all of the repayment of the exposure is reliant on the 
cash flows of the real estate serving as collateral for the exposure; 
the bank holding company, in economic substance, does not have recourse 
to the borrower beyond the real estate collateral; and no cross-default 
or cross-acceleration clauses are in place other than clauses obtained 
solely out of an abundance of caution; and
    (ii) Other credit exposures to the same legal entity or natural 
person; and
    (3) (i) A wholesale exposure authorized under section 364 of the 
U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural person 
who is a debtor-in-possession for purposes of Chapter 11 of the 
Bankruptcy Code; and
    (ii) Other credit exposures to the same legal entity or natural 
person.
    Operational loss means a loss (excluding insurance or tax effects) 
resulting from an operational loss event. Operational loss includes all 
expenses associated with an operational loss event except for 
opportunity costs, forgone revenue, and costs related to risk management 
and control enhancements implemented to prevent future operational 
losses.
    Operational loss event means an event that results in loss and is 
associated with any of the following seven operational loss event type 
categories:
    (1) Internal fraud, which means the operational loss event type 
category that comprises operational losses resulting from an act 
involving at least one internal party of a type intended to defraud, 
misappropriate property, or circumvent regulations, the law, or company 
policy, excluding diversity- and discrimination-type events.
    (2) External fraud, which means the operational loss event type 
category that comprises operational losses resulting from an act by a 
third party of a type intended to defraud, misappropriate property, or 
circumvent the law. Retail credit card losses arising from non-
contractual, third-party initiated fraud (for example, identity theft) 
are external fraud operational losses. All other third-party initiated 
credit losses are to be treated as credit risk losses.
    (3) Employment practices and workplace safety, which means the 
operational loss event type category that comprises operational losses 
resulting from an act inconsistent with employment, health, or safety 
laws or agreements, payment of personal injury claims, or payment 
arising from diversity- and discrimination-type events.
    (4) Clients, products, and business practices, which means the 
operational loss event type category that comprises operational losses 
resulting from the nature or design of a product or from an 
unintentional or negligent failure to meet a professional obligation to 
specific clients (including fiduciary and suitability requirements).
    (5) Damage to physical assets, which means the operational loss 
event type category that comprises operational losses resulting from the 
loss of or damage to physical assets from natural disaster or other 
events.
    (6) Business disruption and system failures, which means the 
operational loss event type category that comprises operational losses 
resulting from disruption of business or system failures.
    (7) Execution, delivery, and process management, which means the 
operational loss event type category that comprises operational losses 
resulting from failed transaction processing or process management or 
losses arising from relations with trade counterparties and vendors.
    Operational risk means the risk of loss resulting from inadequate or 
failed internal processes, people, and systems or from external events 
(including legal risk but excluding strategic and reputational risk).
    Operational risk exposure means the 99.9\th\ percentile of the 
distribution of potential aggregate operational losses, as generated by 
the bank holding company's operational risk quantification system over a 
one-year horizon (and not incorporating eligible operational risk 
offsets or qualifying operational risk mitigants).
    Originating bank holding company, with respect to a securitization, 
means a bank holding company that:
    (1) Directly or indirectly originated or securitized the underlying 
exposures included in the securitization; or
    (2) Serves as an ABCP program sponsor to the securitization.
    Other retail exposure means an exposure (other than a securitization 
exposure, an equity exposure, a residential mortgage exposure, an 
excluded mortgage exposure, a qualifying revolving exposure, or the 
residual value portion of a lease exposure) that is managed as part of a 
segment of exposures with homogeneous risk characteristics, not on an 
individual-exposure basis, and is either:
    (1) An exposure to an individual for non-business purposes; or
    (2) An exposure to an individual or company for business purposes if 
the bank holding company's consolidated business credit exposure to the 
individual or company is $1 million or less.

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    Over-the-counter (OTC) derivative contract means a derivative 
contract that is not traded on an exchange that requires the daily 
receipt and payment of cash-variation margin.
    Probability of default (PD) means:
    (1) For a wholesale exposure to a non-defaulted obligor, the bank 
holding company's empirically based best estimate of the long-run 
average one-year default rate for the rating grade assigned by the bank 
holding company to the obligor, capturing the average default experience 
for obligors in the rating grade over a mix of economic conditions 
(including economic downturn conditions) sufficient to provide a 
reasonable estimate of the average one-year default rate over the 
economic cycle for the rating grade.
    (2) For a segment of non-defaulted retail exposures, the bank 
holding company's empirically based best estimate of the long-run 
average one-year default rate for the exposures in the segment, 
capturing the average default experience for exposures in the segment 
over a mix of economic conditions (including economic downturn 
conditions) sufficient to provide a reasonable estimate of the average 
one-year default rate over the economic cycle for the segment and 
adjusted upward as appropriate for segments for which seasoning effects 
are material. For purposes of this definition, a segment for which 
seasoning effects are material is a segment where there is a material 
relationship between the time since origination of exposures within the 
segment and the bank holding company's best estimate of the long-run 
average one-year default rate for the exposures in the segment.
    (3) For a wholesale exposure to a defaulted obligor or segment of 
defaulted retail exposures, 100 percent.
    Protection amount (P) means, with respect to an exposure hedged by 
an eligible guarantee or eligible credit derivative, the effective 
notional amount of the guarantee or credit derivative, reduced to 
reflect any currency mismatch, maturity mismatch, or lack of 
restructuring coverage (as provided in section 33 of this appendix).
    Publicly traded means traded on:
    (1) Any exchange registered with the SEC as a national securities 
exchange under section 6 of the Securities Exchange Act of 1934 (15 
U.S.C. 78f); or
    (2) Any non-U.S.-based securities exchange that:
    (i) Is registered with, or approved by, a national securities 
regulatory authority; and
    (ii) Provides a liquid, two-way market for the instrument in 
question, meaning that there are enough independent bona fide offers to 
buy and sell so that a sales price reasonably related to the last sales 
price or current bona fide competitive bid and offer quotations can be 
determined promptly and a trade can be settled at such a price within 
five business days.
    Qualifying central counterparty means a counterparty (for example, a 
clearinghouse) that:
    (1) Facilitates trades between counterparties in one or more 
financial markets by either guaranteeing trades or novating contracts;
    (2) Requires all participants in its arrangements to be fully 
collateralized on a daily basis; and
    (3) The bank holding company demonstrates to the satisfaction of the 
Federal Reserve is in sound financial condition and is subject to 
effective oversight by a national supervisory authority.
    Qualifying cross-product master netting agreement means a qualifying 
master netting agreement that provides for termination and close-out 
netting across multiple types of financial transactions or qualifying 
master netting agreements in the event of a counterparty's default, 
provided that:
    (1) The underlying financial transactions are OTC derivative 
contracts, eligible margin loans, or repo-style transactions; and
    (2) The bank holding company obtains a written legal opinion 
verifying the validity and enforceability of the agreement under 
applicable law of the relevant jurisdictions if the counterparty fails 
to perform upon an event of default, including upon an event of 
bankruptcy, insolvency, or similar proceeding.
    Qualifying master netting agreement means any written, legally 
enforceable bilateral agreement, provided that:
    (1) The agreement creates a single legal obligation for all 
individual transactions covered by the agreement upon an event of 
default, including bankruptcy, insolvency, or similar proceeding, of the 
counterparty;
    (2) The agreement provides the bank holding company the right to 
accelerate, terminate, and close-out on a net basis all transactions 
under the agreement and to liquidate or set off collateral promptly upon 
an event of default, including upon an event of bankruptcy, insolvency, 
or similar proceeding, of the counterparty, provided that, in any such 
case, any exercise of rights under the agreement will not be stayed or 
avoided under applicable law in the relevant jurisdictions;
    (3) The bank holding company has conducted sufficient legal review 
to conclude with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that:
    (i) The agreement meets the requirements of paragraph (2) of this 
definition; and
    (ii) In the event of a legal challenge (including one resulting from 
default or from bankruptcy, insolvency, or similar proceeding) the 
relevant court and administrative authorities would find the agreement 
to be legal, valid, binding, and enforceable under the law of the 
relevant jurisdictions;

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    (4) The bank holding company establishes and maintains procedures to 
monitor possible changes in relevant law and to ensure that the 
agreement continues to satisfy the requirements of this definition; and
    (5) The agreement does not contain a walkaway clause (that is, a 
provision that permits a non-defaulting counterparty to make a lower 
payment than it would make otherwise under the agreement, or no payment 
at all, to a defaulter or the estate of a defaulter, even if the 
defaulter or the estate of the defaulter is a net creditor under the 
agreement).
    Qualifying revolving exposure (QRE) means an exposure (other than a 
securitization exposure or equity exposure) to an individual that is 
managed as part of a segment of exposures with homogeneous risk 
characteristics, not on an individual-exposure basis, and:
    (1) Is revolving (that is, the amount outstanding fluctuates, 
determined largely by the borrower's decision to borrow and repay, up to 
a pre-established maximum amount);
    (2) Is unsecured and unconditionally cancelable by the bank holding 
company to the fullest extent permitted by Federal law; and
    (3) Has a maximum exposure amount (drawn plus undrawn) of up to 
$100,000.
    Repo-style transaction means a repurchase or reverse repurchase 
transaction, or a securities borrowing or securities lending 
transaction, including a transaction in which the bank holding company 
acts as agent for a customer and indemnifies the customer against loss, 
provided that:
    (1) The transaction is based solely on liquid and readily marketable 
securities, cash, gold, or conforming residential mortgages;
    (2) The transaction is marked-to-market daily and subject to daily 
margin maintenance requirements;
    (3)(i) The transaction is a ``securities contract'' or ``repurchase 
agreement'' under section 555 or 559, respectively, of the Bankruptcy 
Code (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 or among financial 
institutions under sections 401-407 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407) or the Federal 
Reserve Board's Regulation EE (12 CFR part 231); or
    (ii) If the transaction does not meet the criteria set forth in 
paragraph (3)(i) of this definition, then either:
    (A) The transaction is executed under an agreement that provides the 
bank holding company the right to accelerate, terminate, and close-out 
the transaction on a net basis and to liquidate or set off collateral 
promptly upon an event of default (including upon an event of 
bankruptcy, insolvency, or similar proceeding) of the counterparty, 
provided that, in any such case, any exercise of rights under the 
agreement will not be stayed or avoided under applicable law in the 
relevant jurisdictions; or
    (B) The transaction is:
    (1) Either overnight or unconditionally cancelable at any time by 
the bank holding company; and
    (2) Executed under an agreement that provides the bank holding 
company the right to accelerate, terminate, and close-out the 
transaction on a net basis and to liquidate or set off collateral 
promptly upon an event of counterparty default; and
    (4) The bank holding company has conducted sufficient legal review 
to conclude with a well-founded basis (and maintains sufficient written 
documentation of that legal review) that the agreement meets the 
requirements of paragraph (3) of this definition and is legal, valid, 
binding, and enforceable under applicable law in the relevant 
jurisdictions.
    Residential mortgage exposure means an exposure (other than a 
securitization exposure, equity exposure, or excluded mortgage exposure) 
that is managed as part of a segment of exposures with homogeneous risk 
characteristics, not on an individual-exposure basis, and is:
    (1) An exposure that is primarily secured by a first or subsequent 
lien on one- to four-family residential property; or
    (2) An exposure with an original and outstanding amount of $1 
million or less that is primarily secured by a first or subsequent lien 
on residential property that is not one to four family.
    Retail exposure means a residential mortgage exposure, a qualifying 
revolving exposure, or an other retail exposure.
    Retail exposure subcategory means the residential mortgage exposure, 
qualifying revolving exposure, or other retail exposure subcategory.
    Risk parameter means a variable used in determining risk-based 
capital requirements for wholesale and retail exposures, specifically 
probability of default (PD), loss given default (LGD), exposure at 
default (EAD), or effective maturity (M).
    Scenario analysis means a systematic process of obtaining expert 
opinions from business managers and risk management experts to derive 
reasoned assessments of the likelihood and loss impact of plausible 
high-severity operational losses. Scenario analysis may include the 
well-reasoned evaluation and use of external operational loss event 
data, adjusted as appropriate to ensure relevance to a bank holding 
company's operational risk profile and control structure.
    SEC means the U.S. Securities and Exchange Commission.
    Securitization means a traditional securitization or a synthetic 
securitization.

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    Securitization exposure means an on-balance sheet or off-balance 
sheet credit exposure that arises from a traditional or synthetic 
securitization (including credit-enhancing representations and 
warranties).
    Securitization special purpose entity (securitization SPE) means a 
corporation, trust, or other entity organized for the specific purpose 
of holding underlying exposures of a securitization, the activities of 
which are limited to those appropriate to accomplish this purpose, and 
the structure of which is intended to isolate the underlying exposures 
held by the entity from the credit risk of the seller of the underlying 
exposures to the entity.
    Senior securitization exposure means a securitization exposure that 
has a first priority claim on the cash flows from the underlying 
exposures. When determining whether a securitization exposure has a 
first priority claim on the cash flows from the underlying exposures, a 
bank holding company is not required to consider amounts due under 
interest rate or currency derivative contracts, fees due, or other 
similar payments. Both the most senior commercial paper issued by an 
ABCP program and a liquidity facility that supports the ABCP program may 
be senior securitization exposures if the liquidity facility provider's 
right to reimbursement of the drawn amounts is senior to all claims on 
the cash flows from the underlying exposures except amounts due under 
interest rate or currency derivative contracts, fees due, or other 
similar payments.
    Servicer cash advance facility means a facility under which the 
servicer of the underlying exposures of a securitization may advance 
cash to ensure an uninterrupted flow of payments to investors in the 
securitization, including advances made to cover foreclosure costs or 
other expenses to facilitate the timely collection of the underlying 
exposures. See also eligible servicer cash advance facility.
    Sovereign entity means a central government (including the U.S. 
government) or an agency, department, ministry, or central bank of a 
central government.
    Sovereign exposure means:
    (1) A direct exposure to a sovereign entity; or
    (2) An exposure directly and unconditionally backed by the full 
faith and credit of a sovereign entity.
    Subsidiary means, with respect to a company, a company controlled by 
that company.
    Synthetic securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties through the use of 
one or more credit derivatives or guarantees (other than a guarantee 
that transfers only the credit risk of an individual retail exposure);
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures; and
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities).
    Tier 1 capital is defined in 12 CFR part 225, appendix A, as 
modified in part II of this appendix.
    Tier 2 capital is defined in 12 CFR part 225, appendix A, as 
modified in part II of this appendix.
    Total qualifying capital means the sum of tier 1 capital and tier 2 
capital, after all deductions required in this appendix.
    Total risk-weighted assets means:
    (1) The sum of:
    (i) Credit risk-weighted assets; and
    (ii) Risk-weighted assets for operational risk; minus
    (2) Excess eligible credit reserves not included in tier 2 capital.
    Total wholesale and retail risk-weighted assets means the sum of 
risk-weighted assets for wholesale exposures to non-defaulted obligors 
and segments of non-defaulted retail exposures; risk-weighted assets for 
wholesale exposures to defaulted obligors and segments of defaulted 
retail exposures; risk-weighted assets for assets not defined by an 
exposure category; and risk-weighted assets for non-material portfolios 
of exposures (all as determined in section 31 of this appendix) and 
risk-weighted assets for unsettled transactions (as determined in 
section 35 of this appendix) minus the amounts deducted from capital 
pursuant to 12 CFR part 225, appendix A (excluding those deductions 
reversed in section 12 of this appendix).
    Traditional securitization means a transaction in which:
    (1) All or a portion of the credit risk of one or more underlying 
exposures is transferred to one or more third parties other than through 
the use of credit derivatives or guarantees;
    (2) The credit risk associated with the underlying exposures has 
been separated into at least two tranches reflecting different levels of 
seniority;
    (3) Performance of the securitization exposures depends upon the 
performance of the underlying exposures;
    (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives,

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guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities);
    (5) The underlying exposures are not owned by an operating company;
    (6) The underlying exposures are not owned by a small business 
investment company described in section 302 of the Small Business 
Investment Act of 1958 (15 U.S.C. 682); and
    (7) The underlying exposures are not owned by a firm an investment 
in which qualifies as a community development investment under 12 U.S.C. 
24(Eleventh).
    (8) The Federal Reserve may determine that a transaction in which 
the underlying exposures are owned by an investment firm that exercises 
substantially unfettered control over the size and composition of its 
assets, liabilities, and off-balance sheet exposures is not a 
traditional securitization based on the transaction's leverage, risk 
profile, or economic substance.
    (9) The Federal Reserve may deem a transaction that meets the 
definition of a traditional securitization, notwithstanding paragraph 
(5), (6), or (7) of this definition, to be a traditional securitization 
based on the transaction's leverage, risk profile, or economic 
substance.
    Tranche means all securitization exposures associated with a 
securitization that have the same seniority level.
    Underlying exposures means one or more exposures that have been 
securitized in a securitization transaction.
    Unexpected operational loss (UOL) means the difference between the 
bank holding company's operational risk exposure and the bank holding 
company's expected operational loss.
    Unit of measure means the level (for example, organizational unit or 
operational loss event type) at which the bank holding company's 
operational risk quantification system generates a separate distribution 
of potential operational losses.
    Value-at-Risk (VaR) means the estimate of the maximum amount that 
the value of one or more exposures could decline due to market price or 
rate movements during a fixed holding period within a stated confidence 
interval.
    Wholesale exposure means a credit exposure to a company, natural 
person, sovereign entity, or governmental entity (other than a 
securitization exposure, retail exposure, excluded mortgage exposure, or 
equity exposure). Examples of a wholesale exposure include:
    (1) A non-tranched guarantee issued by a bank holding company on 
behalf of a company;
    (2) A repo-style transaction entered into by a bank holding company 
with a company and any other transaction in which a bank holding company 
posts collateral to a company and faces counterparty credit risk;
    (3) An exposure that a bank holding company treats as a covered 
position under 12 CFR part 225, appendix E for which there is a 
counterparty credit risk capital requirement;
    (4) A sale of corporate loans by a bank holding company to a third 
party in which the bank holding company retains full recourse;
    (5) An OTC derivative contract entered into by a bank holding 
company with a company;
    (6) An exposure to an individual that is not managed by a bank 
holding company as part of a segment of exposures with homogeneous risk 
characteristics; and
    (7) A commercial lease.
    Wholesale exposure subcategory means the HVCRE or non-HVCRE 
wholesale exposure subcategory.

           Section 3. Minimum Risk-Based Capital Requirements

    (a) Except as modified by paragraph (c) of this section or by 
section 23 of this appendix, each bank holding company must meet a 
minimum ratio of:
    (1) Total qualifying capital to total risk-weighted assets of 8.0 
percent; and
    (2) Tier 1 capital to total risk-weighted assets of 4.0 percent.
    (b) Each bank holding company must hold capital commensurate with 
the level and nature of all risks to which the bank holding company is 
exposed.
    (c) When a bank holding company subject to 12 CFR part 225, appendix 
E calculates its risk-based capital requirements under this appendix, 
the bank holding company must also refer to 12 CFR part 225, appendix E 
for supplemental rules to calculate risk-based capital requirements 
adjusted for market risk.

                       Part II. Qualifying Capital

                    Section 11. Additional Deductions

    (a) General. A bank holding company that uses this appendix must 
make the same deductions from its tier 1 capital and tier 2 capital 
required in 12 CFR part 225, appendix A, except that:
    (1) A bank holding company is not required to deduct certain equity 
investments and CEIOs (as provided in section 12 of this appendix); and
    (2) A bank holding company also must make the deductions from 
capital required by paragraphs (b) and (c) of this section.
    (b) Deductions from tier 1 capital. A bank holding company must 
deduct from tier 1 capital any gain-on-sale associated with a 
securitization exposure as provided in paragraph (a) of section 41 and 
paragraphs (a)(1), (c), (g)(1), and (h)(1) of section 42 of this 
appendix.

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    (c) Deductions from tier 1 and tier 2 capital. A bank holding 
company must deduct the exposures specified in paragraphs (c)(1) through 
(c)(7) in this section 50 percent from tier 1 capital and 50 percent 
from tier 2 capital. If the amount deductible from tier 2 capital 
exceeds the bank holding company's actual tier 2 capital, however, the 
bank holding company must deduct the excess from tier 1 capital.
    (1) Credit-enhancing interest-only strips (CEIOs). In accordance 
with paragraphs (a)(1) and (c) of section 42 of this appendix, any CEIO 
that does not constitute gain-on-sale.
    (2) Non-qualifying securitization exposures. In accordance with 
paragraphs (a)(4) and (c) of section 42 of this appendix, any 
securitization exposure that does not qualify for the Ratings-Based 
Approach, the Internal Assessment Approach, or the Supervisory Formula 
Approach under sections 43, 44, and 45 of this appendix, respectively.
    (3) Securitizations of non-IRB exposures. In accordance with 
paragraphs (c) and (g)(4) of section 42 of this appendix, certain 
exposures to a securitization any underlying exposure of which is not a 
wholesale exposure, retail exposure, securitization exposure, or equity 
exposure.
    (4) Low-rated securitization exposures. In accordance with section 
43 and paragraph (c) of section 42 of this appendix, any securitization 
exposure that qualifies for and must be deducted under the Ratings-Based 
Approach.
    (5) High-risk securitization exposures subject to the Supervisory 
Formula Approach. In accordance with paragraphs (b) and (c) of section 
45 of this appendix and paragraph (c) of section 42 of this appendix, 
certain high-risk securitization exposures (or portions thereof) that 
qualify for the Supervisory Formula Approach.
    (6) Eligible credit reserves shortfall. In accordance with paragraph 
(a)(1) of section 13 of this appendix, any eligible credit reserves 
shortfall.
    (7) Certain failed capital markets transactions. In accordance with 
paragraph (e)(3) of section 35 of this appendix, the bank holding 
company's exposure on certain failed capital markets transactions.
    (8) A bank holding company must also deduct an amount equal to the 
minimum regulatory capital requirement established by the regulator of 
any insurance underwriting subsidiary of the holding company. For U.S.-
based insurance underwriting subsidiaries, this amount generally would 
be 200 percent of the subsidiary's Authorized Control Level as 
established by the appropriate state regulator of the insurance company.

          Section 12. Deductions and Limitations Not Required.

    (a) Deduction of CEIOs. A bank holding company is not required to 
make the deductions from capital for CEIOs in 12 CFR part 225, appendix 
A, section II.B.1.e.
    (b) Deduction for certain equity investments. A bank holding company 
is not required to make the deductions from capital for nonfinancial 
equity investments in 12 CFR part 225, appendix A, section II.B.5.

                  Section 13. Eligible Credit Reserves

    (a) Comparison of eligible credit reserves to expected credit 
losses--(1) Shortfall of eligible credit reserves. If a bank holding 
company's eligible credit reserves are less than the bank holding 
company's total expected credit losses, the bank holding company must 
deduct the shortfall amount 50 percent from tier 1 capital and 50 
percent from tier 2 capital. If the amount deductible from tier 2 
capital exceeds the bank holding company's actual tier 2 capital, the 
bank holding company must deduct the excess amount from tier 1 capital.
    (2) Excess eligible credit reserves. If a bank holding company's 
eligible credit reserves exceed the bank holding company's total 
expected credit losses, the bank holding company may include the excess 
amount in tier 2 capital to the extent that the excess amount does not 
exceed 0.6 percent of the bank holding company's credit-risk-weighted 
assets.
    (b) Treatment of allowance for loan and lease losses. Regardless of 
any provision in 12 CFR part 225, appendix A, the ALLL is included in 
tier 2 capital only to the extent provided in paragraph (a)(2) of this 
section and in section 24 of this appendix.

                         Part III. Qualification

                    Section 21. Qualification Process

    (a) Timing. (1) A bank holding company that is described in 
paragraph (b)(1) of section 1 of this appendix must adopt a written 
implementation plan no later than six months after the later of April 1, 
2008, or the date the bank holding company meets a criterion in that 
section. The implementation plan must incorporate an explicit first 
floor period start date no later than 36 months after the later of April 
1, 2008, or the date the bank holding company meets at least one 
criterion under paragraph (b)(1) of section 1 of this appendix. The 
Federal Reserve may extend the first floor period start date.
    (2) A bank holding company that elects to be subject to this 
appendix under paragraph (b)(2) of section 1 of this appendix must adopt 
a written implementation plan.
    (b) Implementation plan. (1) The bank holding company's 
implementation plan must address in detail how the bank holding company 
complies, or plans to comply, with the qualification requirements in 
section 22 of this appendix. The bank holding company also must maintain 
a comprehensive and sound planning and governance process to

[[Page 304]]

oversee the implementation efforts described in the plan. At a minimum, 
the plan must:
    (i) Comprehensively address the qualification requirements in 
section 22 of this appendix for the bank holding company and each 
consolidated subsidiary (U.S. and foreign-based) of the bank holding 
company with respect to all portfolios and exposures of the bank holding 
company and each of its consolidated subsidiaries;
    (ii) Justify and support any proposed temporary or permanent 
exclusion of business lines, portfolios, or exposures from application 
of the advanced approaches in this appendix (which business lines, 
portfolios, and exposures must be, in the aggregate, immaterial to the 
bank holding company);
    (iii) Include the bank holding company's self-assessment of:
    (A) The bank holding company's current status in meeting the 
qualification requirements in section 22 of this appendix; and
    (B) The consistency of the bank holding company's current practices 
with the Federal Reserve's supervisory guidance on the qualification 
requirements;
    (iv) Based on the bank holding company's self-assessment, identify 
and describe the areas in which the bank holding company proposes to 
undertake additional work to comply with the qualification requirements 
in section 22 of this appendix or to improve the consistency of the bank 
holding company's current practices with the Federal Reserve's 
supervisory guidance on the qualification requirements (gap analysis);
    (v) Describe what specific actions the bank holding company will 
take to address the areas identified in the gap analysis required by 
paragraph (b)(1)(iv) of this section;
    (vi) Identify objective, measurable milestones, including delivery 
dates and a date when the bank holding company's implementation of the 
methodologies described in this appendix will be fully operational;
    (vii) Describe resources that have been budgeted and are available 
to implement the plan; and
    (viii) Receive approval of the bank holding company's board of 
directors.
    (2) The bank holding company must submit the implementation plan, 
together with a copy of the minutes of the board of directors' approval, 
to the Federal Reserve at least 60 days before the bank holding company 
proposes to begin its parallel run, unless the Federal Reserve waives 
prior notice.
    (c) Parallel run. Before determining its risk-based capital 
requirements under this appendix and following adoption of the 
implementation plan, the bank holding company must conduct a 
satisfactory parallel run. A satisfactory parallel run is a period of no 
less than four consecutive calendar quarters during which the bank 
holding company complies with the qualification requirements in section 
22 of this appendix to the satisfaction of the Federal Reserve. During 
the parallel run, the bank holding company must report to the Federal 
Reserve on a calendar quarterly basis its risk-based capital ratios 
using 12 CFR part 225, appendix A and the risk-based capital 
requirements described in this appendix. During this period, the bank 
holding company is subject to 12 CFR part 225, appendix A.
    (d) Approval to calculate risk-based capital requirements under this 
appendix. The Federal Reserve will notify the bank holding company of 
the date that the bank holding company may begin its first floor period 
if the Federal Reserve determines that:
    (1) The bank holding company fully complies with all the 
qualification requirements in section 22 of this appendix;
    (2) The bank holding company has conducted a satisfactory parallel 
run under paragraph (c) of this section; and
    (3) The bank holding company has an adequate process to ensure 
ongoing compliance with the qualification requirements in section 22 of 
this appendix.
    (e) Transitional floor periods. Following a satisfactory parallel 
run, a bank holding company is subject to three transitional floor 
periods.
    (1) Risk-based capital ratios during the transitional floor 
periods--(i) Tier 1 risk-based capital ratio. During a bank holding 
company's transitional floor periods, the bank holding company's tier 1 
risk-based capital ratio is equal to the lower of:
    (A) The bank holding company's floor-adjusted tier 1 risk-based 
capital ratio; or
    (B) The bank holding company's advanced approaches tier 1 risk-based 
capital ratio.
    (ii) Total risk-based capital ratio. During a bank holding company's 
transitional floor periods, the bank holding company's total risk-based 
capital ratio is equal to the lower of:
    (A) The bank holding company's floor-adjusted total risk-based 
capital ratio; or
    (B) The bank holding company's advanced approaches total risk-based 
capital ratio.
    (2) Floor-adjusted risk-based capital ratios. (i) A bank holding 
company's floor-adjusted tier 1 risk-based capital ratio during a 
transitional floor period is equal to the bank holding company's tier 1 
capital as calculated under 12 CFR part 225, appendix A, divided by the 
product of:
    (A) The bank holding company's total risk-weighted assets as 
calculated under 12 CFR part 225, appendix A; and
    (B) The appropriate transitional floor percentage in Table 1.
    (ii) A bank holding company's floor-adjusted total risk-based 
capital ratio during a transitional floor period is equal to the sum of 
the bank holding company's tier 1 and tier 2 capital as calculated under 
12 CFR part 225, appendix A, divided by the product of:

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    (A) The bank holding company's total risk-weighted assets as 
calculated under 12 CFR part 225, appendix A; and
    (B) The appropriate transitional floor percentage in Table 1.
    (iii) A bank holding company that meets the criteria in paragraph 
(b)(1) or (b)(2) of section 1 of this appendix as of April 1, 2008, must 
use 12 CFR part 225, appendix A during the parallel run and as the basis 
for its transitional floors.

                      Table 1--Transitional Floors
------------------------------------------------------------------------
                                                 Transitional floor
         Transitional floor period                   percentage
------------------------------------------------------------------------
First floor period........................  95 percent.
Second floor period.......................  90 percent.
Third floor period........................  85 percent.
------------------------------------------------------------------------

    (3) Advanced approaches risk-based capital ratios. (i) A bank 
holding company's advanced approaches tier 1 risk-based capital ratio 
equals the bank holding company's tier 1 risk-based capital ratio as 
calculated under this appendix (other than this section on transitional 
floor periods).
    (ii) A bank holding company's advanced approaches total risk-based 
capital ratio equals the bank holding company's total risk-based capital 
ratio as calculated under this appendix (other than this section on 
transitional floor periods).
    (4) Reporting. During the transitional floor periods, a bank holding 
company must report to the Federal Reserve on a calendar quarterly basis 
both floor-adjusted risk-based capital ratios and both advanced 
approaches risk-based capital ratios.
    (5) Exiting a transitional floor period. A bank holding company may 
not exit a transitional floor period until the bank holding company has 
spent a minimum of four consecutive calendar quarters in the period and 
the Federal Reserve has determined that the bank holding company may 
exit the floor period. The Federal Reserve's determination will be based 
on an assessment of the bank holding company's ongoing compliance with 
the qualification requirements in section 22 of this appendix.
    (6) Interagency study. After the end of the second transition year 
(2010), the Federal banking agencies will publish a study that evaluates 
the advanced approaches to determine if there are any material 
deficiencies. For any primary Federal supervisor to authorize any 
institution to exit the third transitional floor period, the study must 
determine that there are no such material deficiencies that cannot be 
addressed by then-existing tools, or, if such deficiencies are found, 
they are first remedied by changes to this appendix. Notwithstanding the 
preceding sentence, a primary Federal supervisor that disagrees with the 
finding of material deficiency may not authorize any institution under 
its jurisdiction to exit the third transitional floor period unless it 
provides a public report explaining its reasoning.

                 Section 22. Qualification Requirements

    (a) Process and systems requirements. (1) A bank holding company 
must have a rigorous process for assessing its overall capital adequacy 
in relation to its risk profile and a comprehensive strategy for 
maintaining an appropriate level of capital.
    (2) The systems and processes used by a bank holding company for 
risk-based capital purposes under this appendix must be consistent with 
the bank holding company's internal risk management processes and 
management information reporting systems.
    (3) Each bank holding company must have an appropriate 
infrastructure with risk measurement and management processes that meet 
the qualification requirements of this section and are appropriate given 
the bank holding company's size and level of complexity. Regardless of 
whether the systems and models that generate the risk parameters 
necessary for calculating a bank holding company's risk-based capital 
requirements are located at any affiliate of the bank holding company, 
the bank holding company itself must ensure that the risk parameters and 
reference data used to determine its risk-based capital requirements are 
representative of its own credit risk and operational risk exposures.
    (b) Risk rating and segmentation systems for wholesale and retail 
exposures. (1) A bank holding company must have an internal risk rating 
and segmentation system that accurately and reliably differentiates 
among degrees of credit risk for the bank holding company's wholesale 
and retail exposures.
    (2) For wholesale exposures:
    (i) A bank holding company must have an internal risk rating system 
that accurately and reliably assigns each obligor to a single rating 
grade (reflecting the obligor's likelihood of default). A bank holding 
company may elect, however, not to assign to a rating grade an obligor 
to whom the bank holding company extends credit based solely on the 
financial strength of a guarantor, provided that all of the bank holding 
company's exposures to the obligor are fully covered by eligible 
guarantees, the bank holding company applies the PD substitution 
approach in paragraph (c)(1) of section 33 of this appendix to all 
exposures to that obligor, and the bank holding company immediately 
assigns the obligor to a rating grade if a guarantee can no longer be 
recognized under this appendix. The bank holding company's wholesale 
obligor rating system must have at least seven discrete rating grades 
for non-defaulted obligors and at least one rating grade for defaulted 
obligors.
    (ii) Unless the bank holding company has chosen to directly assign 
LGD estimates to

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each wholesale exposure, the bank holding company must have an internal 
risk rating system that accurately and reliably assigns each wholesale 
exposure to a loss severity rating grade (reflecting the bank holding 
company's estimate of the LGD of the exposure). A bank holding company 
employing loss severity rating grades must have a sufficiently granular 
loss severity grading system to avoid grouping together exposures with 
widely ranging LGDs.
    (3) For retail exposures, a bank holding company must have an 
internal system that groups retail exposures into the appropriate retail 
exposure subcategory, groups the retail exposures in each retail 
exposure subcategory into separate segments with homogeneous risk 
characteristics, and assigns accurate and reliable PD and LGD estimates 
for each segment on a consistent basis. The bank holding company's 
system must identify and group in separate segments by subcategories 
exposures identified in paragraphs (c)(2)(ii) and (iii) of section 31 of 
this appendix.
    (4) The bank holding company's internal risk rating policy for 
wholesale exposures must describe the bank holding company's rating 
philosophy (that is, must describe how wholesale obligor rating 
assignments are affected by the bank holding company's choice of the 
range of economic, business, and industry conditions that are considered 
in the obligor rating process).
    (5) The bank holding company's internal risk rating system for 
wholesale exposures must provide for the review and update (as 
appropriate) of each obligor rating and (if applicable) each loss 
severity rating whenever the bank holding company receives new material 
information, but no less frequently than annually. The bank holding 
company's retail exposure segmentation system must provide for the 
review and update (as appropriate) of assignments of retail exposures to 
segments whenever the bank holding company receives new material 
information, but generally no less frequently than quarterly.
    (c) Quantification of risk parameters for wholesale and retail 
exposures. (1) The bank holding company must have a comprehensive risk 
parameter quantification process that produces accurate, timely, and 
reliable estimates of the risk parameters for the bank holding company's 
wholesale and retail exposures.
    (2) Data used to estimate the risk parameters must be relevant to 
the bank holding company's actual wholesale and retail exposures, and of 
sufficient quality to support the determination of risk-based capital 
requirements for the exposures.
    (3) The bank holding company's risk parameter quantification process 
must produce appropriately conservative risk parameter estimates where 
the bank holding company has limited relevant data, and any adjustments 
that are part of the quantification process must not result in a pattern 
of bias toward lower risk parameter estimates.
    (4) The bank holding company's risk parameter estimation process 
should not rely on the possibility of U.S. government financial 
assistance, except for the financial assistance that the U.S. government 
has a legally binding commitment to provide.
    (5) Where the bank holding company's quantifications of LGD directly 
or indirectly incorporate estimates of the effectiveness of its credit 
risk management practices in reducing its exposure to troubled obligors 
prior to default, the bank holding company must support such estimates 
with empirical analysis showing that the estimates are consistent with 
its historical experience in dealing with such exposures during economic 
downturn conditions.
    (6) PD estimates for wholesale obligors and retail segments must be 
based on at least five years of default data. LGD estimates for 
wholesale exposures must be based on at least seven years of loss 
severity data, and LGD estimates for retail segments must be based on at 
least five years of loss severity data. EAD estimates for wholesale 
exposures must be based on at least seven years of exposure amount data, 
and EAD estimates for retail segments must be based on at least five 
years of exposure amount data.
    (7) Default, loss severity, and exposure amount data must include 
periods of economic downturn conditions, or the bank holding company 
must adjust its estimates of risk parameters to compensate for the lack 
of data from periods of economic downturn conditions.
    (8) The bank holding company's PD, LGD, and EAD estimates must be 
based on the definition of default in this appendix.
    (9) The bank holding company must review and update (as appropriate) 
its risk parameters and its risk parameter quantification process at 
least annually.
    (10) The bank holding company must at least annually conduct a 
comprehensive review and analysis of reference data to determine 
relevance of reference data to the bank holding company's exposures, 
quality of reference data to support PD, LGD, and EAD estimates, and 
consistency of reference data to the definition of default contained in 
this appendix.
    (d) Counterparty credit risk model. A bank holding company must 
obtain the prior written approval of the Federal Reserve under section 
32 of this appendix to use the internal models methodology for 
counterparty credit risk.
    (e) Double default treatment. A bank holding company must obtain the 
prior written approval of the Federal Reserve under section 34 of this 
appendix to use the double default treatment.

[[Page 307]]

    (f) Securitization exposures. A bank holding company must obtain the 
prior written approval of the Federal Reserve under section 44 of this 
appendix to use the Internal Assessment Approach for securitization 
exposures to ABCP programs.
    (g) Equity exposures model. A bank holding company must obtain the 
prior written approval of the Federal Reserve under section 53 of this 
appendix to use the Internal Models Approach for equity exposures.
    (h) Operational risk--(1) Operational risk management processes. A 
bank holding company must:
    (i) Have an operational risk management function that:
    (A) Is independent of business line management; and
    (B) Is responsible for designing, implementing, and overseeing the 
bank holding company's operational risk data and assessment systems, 
operational risk quantification systems, and related processes;
    (ii) Have and document a process (which must capture business 
environment and internal control factors affecting the bank holding 
company's operational risk profile) to identify, measure, monitor, and 
control operational risk in bank holding company products, activities, 
processes, and systems; and
    (iii) Report operational risk exposures, operational loss events, 
and other relevant operational risk information to business unit 
management, senior management, and the board of directors (or a 
designated committee of the board).
    (2) Operational risk data and assessment systems. A bank holding 
company must have operational risk data and assessment systems that 
capture operational risks to which the bank holding company is exposed. 
The bank holding company's operational risk data and assessment systems 
must:
    (i) Be structured in a manner consistent with the bank holding 
company's current business activities, risk profile, technological 
processes, and risk management processes; and
    (ii) Include credible, transparent, systematic, and verifiable 
processes that incorporate the following elements on an ongoing basis:
    (A) Internal operational loss event data. The bank holding company 
must have a systematic process for capturing and using internal 
operational loss event data in its operational risk data and assessment 
systems.
    (1) The bank holding company's operational risk data and assessment 
systems must include a historical observation period of at least five 
years for internal operational loss event data (or such shorter period 
approved by the Federal Reserve to address transitional situations, such 
as integrating a new business line).
    (2) The bank holding company must be able to map its internal 
operational loss event data into the seven operational loss event type 
categories.
    (3) The bank holding company may refrain from collecting internal 
operational loss event data for individual operational losses below 
established dollar threshold amounts if the bank holding company can 
demonstrate to the satisfaction of the Federal Reserve that the 
thresholds are reasonable, do not exclude important internal operational 
loss event data, and permit the bank holding company to capture 
substantially all the dollar value of the bank holding company's 
operational losses.
    (B) External operational loss event data. The bank holding company 
must have a systematic process for determining its methodologies for 
incorporating external operational loss event data into its operational 
risk data and assessment systems.
    (C) Scenario analysis. The bank holding company must have a 
systematic process for determining its methodologies for incorporating 
scenario analysis into its operational risk data and assessment systems.
    (D) Business environment and internal control factors. The bank 
holding company must incorporate business environment and internal 
control factors into its operational risk data and assessment systems. 
The bank holding company must also periodically compare the results of 
its prior business environment and internal control factor assessments 
against its actual operational losses incurred in the intervening 
period.
    (3) Operational risk quantification systems. (i) The bank holding 
company's operational risk quantification systems:
    (A) Must generate estimates of the bank holding company's 
operational risk exposure using its operational risk data and assessment 
systems;
    (B) Must employ a unit of measure that is appropriate for the bank 
holding company's range of business activities and the variety of 
operational loss events to which it is exposed, and that does not 
combine business activities or operational loss events with demonstrably 
different risk profiles within the same loss distribution;
    (C) Must include a credible, transparent, systematic, and verifiable 
approach for weighting each of the four elements, described in paragraph 
(h)(2)(ii) of this section, that a bank holding company is required to 
incorporate into its operational risk data and assessment systems;
    (D) May use internal estimates of dependence among operational 
losses across and within units of measure if the bank holding company 
can demonstrate to the satisfaction of the Federal Reserve that its 
process for estimating dependence is sound, robust to a variety of 
scenarios, and implemented with

[[Page 308]]

integrity, and allows for the uncertainty surrounding the estimates. If 
the bank holding company has not made such a demonstration, it must sum 
operational risk exposure estimates across units of measure to calculate 
its total operational risk exposure; and
    (E) Must be reviewed and updated (as appropriate) whenever the bank 
holding company becomes aware of information that may have a material 
effect on the bank holding company's estimate of operational risk 
exposure, but the review and update must occur no less frequently than 
annually.
    (ii) [Reserved]
    (i) Data management and maintenance. (1) A bank holding company must 
have data management and maintenance systems that adequately support all 
aspects of its advanced systems and the timely and accurate reporting of 
risk-based capital requirements.
    (2) A bank holding company must retain data using an electronic 
format that allows timely retrieval of data for analysis, validation, 
reporting, and disclosure purposes.
    (3) A bank holding company must retain sufficient data elements 
related to key risk drivers to permit adequate monitoring, validation, 
and refinement of its advanced systems.
    (j) Control, oversight, and validation mechanisms. (1) The bank 
holding company's senior management must ensure that all components of 
the bank holding company's advanced systems function effectively and 
comply with the qualification requirements in this section.
    (2) The bank holding company's board of directors (or a designated 
committee of the board) must at least annually review the effectiveness 
of, and approve, the bank holding company's advanced systems.
    (3) A bank holding company must have an effective system of controls 
and oversight that:
    (i) Ensures ongoing compliance with the qualification requirements 
in this section;
    (ii) Maintains the integrity, reliability, and accuracy of the bank 
holding company's advanced systems; and
    (iii) Includes adequate governance and project management processes.
    (4) The bank holding company must validate, on an ongoing basis, its 
advanced systems. The bank holding company's validation process must be 
independent of the advanced systems' development, implementation, and 
operation, or the validation process must be subjected to an independent 
review of its adequacy and effectiveness. Validation must include:
    (i) An evaluation of the conceptual soundness of (including 
developmental evidence supporting) the advanced systems;
    (ii) An ongoing monitoring process that includes verification of 
processes and benchmarking; and
    (iii) An outcomes analysis process that includes back-testing.
    (5) The bank holding company must have an internal audit function 
independent of business-line management that at least annually assesses 
the effectiveness of the controls supporting the bank holding company's 
advanced systems and reports its findings to the bank holding company's 
board of directors (or a committee thereof).
    (6) The bank holding company must periodically stress test its 
advanced systems. The stress testing must include a consideration of how 
economic cycles, especially downturns, affect risk-based capital 
requirements (including migration across rating grades and segments and 
the credit risk mitigation benefits of double default treatment).
    (k) Documentation. The bank holding company must adequately document 
all material aspects of its advanced systems.

                    Section 23. Ongoing Qualification

    (a) Changes to advanced systems. A bank holding company must meet 
all the qualification requirements in section 22 of this appendix on an 
ongoing basis. A bank holding company must notify the Federal Reserve 
when the bank holding company makes any change to an advanced system 
that would result in a material change in the bank holding company's 
risk-weighted asset amount for an exposure type, or when the bank 
holding company makes any significant change to its modeling 
assumptions.
    (b) Failure to comply with qualification requirements. (1) If the 
Federal Reserve determines that a bank holding company that uses this 
appendix and has conducted a satisfactory parallel run fails to comply 
with the qualification requirements in section 22 of this appendix, the 
Federal Reserve will notify the bank holding company in writing of the 
bank holding company's failure to comply.
    (2) The bank holding company must establish and submit a plan 
satisfactory to the Federal Reserve to return to compliance with the 
qualification requirements.
    (3) In addition, if the Federal Reserve determines that the bank 
holding company's risk-based capital requirements are not commensurate 
with the bank holding company's credit, market, operational, or other 
risks, the Federal Reserve may require such a bank holding company to 
calculate its risk-based capital requirements:
    (i) Under 12 CFR part 225, appendix A; or
    (ii) Under this appendix with any modifications provided by the 
Federal Reserve.

      Section 24. Merger and Acquisition Transitional Arrangements

    (a) Mergers and acquisitions of companies without advanced systems. 
If a bank holding

[[Page 309]]

company merges with or acquires a company that does not calculate its 
risk-based capital requirements using advanced systems, the bank holding 
company may use 12 CFR part 225, appendix A to determine the risk-
weighted asset amounts for, and deductions from capital associated with, 
the merged or acquired company's exposures for up to 24 months after the 
calendar quarter during which the merger or acquisition consummates. The 
Federal Reserve may extend this transition period for up to an 
additional 12 months. Within 90 days of consummating the merger or 
acquisition, the bank holding company must submit to the Federal Reserve 
an implementation plan for using its advanced systems for the acquired 
company. During the period when 12 CFR part 225, appendix A apply to the 
merged or acquired company, any ALLL, net of allocated transfer risk 
reserves established pursuant to 12 U.S.C. 3904, associated with the 
merged or acquired company's exposures may be included in the acquiring 
bank holding company's tier 2 capital up to 1.25 percent of the acquired 
company's risk-weighted assets. All general allowances of the merged or 
acquired company must be excluded from the bank holding company's 
eligible credit reserves. In addition, the risk-weighted assets of the 
merged or acquired company are not included in the bank holding 
company's credit-risk-weighted assets but are included in total risk-
weighted assets. If a bank holding company relies on this paragraph, the 
bank holding company must disclose publicly the amounts of risk-weighted 
assets and qualifying capital calculated under this appendix for the 
acquiring bank holding company and under 12 CFR part 225, appendix A for 
the acquired company.
    (b) Mergers and acquisitions of companies with advanced systems--(1) 
If a bank holding company merges with or acquires a company that 
calculates its risk-based capital requirements using advanced systems, 
the bank holding company may use the acquired company's advanced systems 
to determine the risk-weighted asset amounts for, and deductions from 
capital associated with, the merged or acquired company's exposures for 
up to 24 months after the calendar quarter during which the acquisition 
or merger consummates. The Federal Reserve may extend this transition 
period for up to an additional 12 months. Within 90 days of consummating 
the merger or acquisition, the bank holding company must submit to the 
Federal Reserve an implementation plan for using its advanced systems 
for the merged or acquired company.
    (2) If the acquiring bank holding company is not subject to the 
advanced approaches in this appendix at the time of acquisition or 
merger, during the period when 12 CFR part 225, appendix A apply to the 
acquiring bank holding company, the ALLL associated with the exposures 
of the merged or acquired company may not be directly included in tier 2 
capital. Rather, any excess eligible credit reserves associated with the 
merged or acquired company's exposures may be included in the bank 
holding company's tier 2 capital up to 0.6 percent of the credit-risk-
weighted assets associated with those exposures.

          Part IV. Risk-Weighted Assets for General Credit Risk

 Section 31. Mechanics for Calculating Total Wholesale and Retail Risk-
                             Weighted Assets

    (a) Overview. A bank holding company must calculate its total 
wholesale and retail risk-weighted asset amount in four distinct phases:
    (1) Phase 1--categorization of exposures;
    (2) Phase 2--assignment of wholesale obligors and exposures to 
rating grades and segmentation of retail exposures;
    (3) Phase 3--assignment of risk parameters to wholesale exposures 
and segments of retail exposures; and
    (4) Phase 4--calculation of risk-weighted asset amounts.
    (b) Phase 1--Categorization. The bank holding company must determine 
which of its exposures are wholesale exposures, retail exposures, 
securitization exposures, or equity exposures. The bank holding company 
must categorize each retail exposure as a residential mortgage exposure, 
a QRE, or an other retail exposure. The bank holding company must 
identify which wholesale exposures are HVCRE exposures, sovereign 
exposures, OTC derivative contracts, repo-style transactions, eligible 
margin loans, eligible purchased wholesale exposures, unsettled 
transactions to which section 35 of this appendix applies, and eligible 
guarantees or eligible credit derivatives that are used as credit risk 
mitigants. The bank holding company must identify any on-balance sheet 
asset that does not meet the definition of a wholesale, retail, equity, 
or securitization exposure, as well as any non-material portfolio of 
exposures described in paragraph (e)(4) of this section.
    (c) Phase 2--Assignment of wholesale obligors and exposures to 
rating grades and retail exposures to segments--(1) Assignment of 
wholesale obligors and exposures to rating grades.
    (i) The bank holding company must assign each obligor of a wholesale 
exposure to a single obligor rating grade and must assign each wholesale 
exposure to which it does not directly assign an LGD estimate to a loss 
severity rating grade.
    (ii) The bank holding company must identify which of its wholesale 
obligors are in default.
    (2) Segmentation of retail exposures. (i) The bank holding company 
must group the retail exposures in each retail subcategory into

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segments that have homogeneous risk characteristics.
    (ii) The bank holding company must identify which of its retail 
exposures are in default. The bank holding company must segment 
defaulted retail exposures separately from non-defaulted retail 
exposures.
    (iii) If the bank holding company determines the EAD for eligible 
margin loans using the approach in paragraph (b) of section 32 of this 
appendix, the bank holding company must identify which of its retail 
exposures are eligible margin loans for which the bank holding company 
uses this EAD approach and must segment such eligible margin loans 
separately from other retail exposures.
    (3) Eligible purchased wholesale exposures. A bank holding company 
may group its eligible purchased wholesale exposures into segments that 
have homogeneous risk characteristics. A bank holding company must use 
the wholesale exposure formula in Table 2 in this section to determine 
the risk-based capital requirement for each segment of eligible 
purchased wholesale exposures.
    (d) Phase 3--Assignment of risk parameters to wholesale exposures 
and segments of retail exposures--(1) Quantification process. Subject to 
the limitations in this paragraph (d), the bank holding company must:
    (i) Associate a PD with each wholesale obligor rating grade;
    (ii) Associate an LGD with each wholesale loss severity rating grade 
or assign an LGD to each wholesale exposure;
    (iii) Assign an EAD and M to each wholesale exposure; and
    (iv) Assign a PD, LGD, and EAD to each segment of retail exposures.
    (2) Floor on PD assignment. The PD for each wholesale obligor or 
retail segment may not be less than 0.03 percent, except for exposures 
to or directly and unconditionally guaranteed by a sovereign entity, the 
Bank for International Settlements, the International Monetary Fund, the 
European Commission, the European Central Bank, or a multilateral 
development bank, to which the bank holding company assigns a rating 
grade associated with a PD of less than 0.03 percent.
    (3) Floor on LGD estimation. The LGD for each segment of residential 
mortgage exposures (other than segments of residential mortgage 
exposures for which all or substantially all of the principal of each 
exposure is directly and unconditionally guaranteed by the full faith 
and credit of a sovereign entity) may not be less than 10 percent.
    (4) Eligible purchased wholesale exposures. A bank holding company 
must assign a PD, LGD, EAD, and M to each segment of eligible purchased 
wholesale exposures. If the bank holding company can estimate ECL (but 
not PD or LGD) for a segment of eligible purchased wholesale exposures, 
the bank holding company must assume that the LGD of the segment equals 
100 percent and that the PD of the segment equals ECL divided by EAD. 
The estimated ECL must be calculated for the exposures without regard to 
any assumption of recourse or guarantees from the seller or other 
parties.
    (5) Credit risk mitigation--credit derivatives, guarantees, and 
collateral. (i) A bank holding company may take into account the risk 
reducing effects of eligible guarantees and eligible credit derivatives 
in support of a wholesale exposure by applying the PD substitution or 
LGD adjustment treatment to the exposure as provided in section 33 of 
this appendix or, if applicable, applying double default treatment to 
the exposure as provided in section 34 of this appendix. A bank holding 
company may decide separately for each wholesale exposure that qualifies 
for the double default treatment under section 34 of this appendix 
whether to apply the double default treatment or to use the PD 
substitution or LGD adjustment treatment without recognizing double 
default effects.
    (ii) A bank holding company may take into account the risk reducing 
effects of guarantees and credit derivatives in support of retail 
exposures in a segment when quantifying the PD and LGD of the segment.
    (iii) Except as provided in paragraph (d)(6) of this section, a bank 
holding company may take into account the risk reducing effects of 
collateral in support of a wholesale exposure when quantifying the LGD 
of the exposure and may take into account the risk reducing effects of 
collateral in support of retail exposures when quantifying the PD and 
LGD of the segment.
    (6) EAD for OTC derivative contracts, repo-style transactions, and 
eligible margin loans. (i) A bank holding company must calculate its EAD 
for an OTC derivative contract as provided in paragraphs (c) and (d) of 
section 32 of this appendix. A bank holding company may take into 
account the risk-reducing effects of financial collateral in support of 
a repo-style transaction or eligible margin loan and of any collateral 
in support of a repo-style transaction that is included in the bank 
holding company's VaR-based measure under 12 CFR part 225, appendix E 
through an adjustment to EAD as provided in paragraphs (b) and (d) of 
section 32 of this appendix. A bank holding company that takes 
collateral into account through such an adjustment to EAD under section 
32 of this appendix may not reflect such collateral in LGD.
    (ii) A bank holding company may attribute an EAD of zero to:
    (A) Derivative contracts that are publicly traded on an exchange 
that requires the daily receipt and payment of cash-variation margin;
    (B) Derivative contracts and repo-style transactions that are 
outstanding with a qualifying central counterparty (but not for

[[Page 311]]

those transactions that a qualifying central counterparty has rejected); 
and
    (C) Credit risk exposures to a qualifying central counterparty in 
the form of clearing deposits and posted collateral that arise from 
transactions described in paragraph (d)(6)(ii)(B) of this section.
    (7) Effective maturity. An exposure's M must be no greater than five 
years and no less than one year, except that an exposure's M must be no 
less than one day if the exposure has an original maturity of less than 
one year and is not part of a bank holding company's ongoing financing 
of the obligor. An exposure is not part of a bank holding company's 
ongoing financing of the obligor if the bank holding company:
    (i) Has a legal and practical ability not to renew or roll over the 
exposure in the event of credit deterioration of the obligor;
    (ii) Makes an independent credit decision at the inception of the 
exposure and at every renewal or roll over; and
    (iii) Has no substantial commercial incentive to continue its credit 
relationship with the obligor in the event of credit deterioration of 
the obligor.
    (e) Phase 4--Calculation of risk-weighted assets--(1) Non-defaulted 
exposures. (i) A bank holding company must calculate the dollar risk-
based capital requirement for each of its wholesale exposures to a non-
defaulted obligor (except eligible guarantees and eligible credit 
derivatives that hedge another wholesale exposure and exposures to which 
the bank holding company applies the double default treatment in section 
34 of this appendix) and segments of non-defaulted retail exposures by 
inserting the assigned risk parameters for the wholesale obligor and 
exposure or retail segment into the appropriate risk-based capital 
formula specified in Table 2 and multiplying the output of the formula 
(K) by the EAD of the exposure or segment. Alternatively, a bank holding 
company may apply a 300 percent risk weight to the EAD of an eligible 
margin loan if the bank holding company is not able to meet the 
agencies' requirements for estimation of PD and LGD for the margin loan.

[[Page 312]]

[GRAPHIC] [TIFF OMITTED] TR07DE07.005

    (ii) The sum of all the dollar risk-based capital requirements for 
each wholesale exposure to a non-defaulted obligor and segment of non-
defaulted retail exposures calculated in paragraph (e)(1)(i) of this 
section and in paragraph (e) of section 34 of this appendix equals the 
total dollar risk-based capital requirement for those exposures and 
segments.
    (iii) The aggregate risk-weighted asset amount for wholesale 
exposures to non-defaulted obligors and segments of non-defaulted retail 
exposures equals the total dollar risk-based capital requirement 
calculated in paragraph (e)(1)(ii) of this section multiplied by 12.5.
    (2) Wholesale exposures to defaulted obligors and segments of 
defaulted retail exposures. (i) The dollar risk-based capital 
requirement for each wholesale exposure to a defaulted obligor equals 
0.08 multiplied by the EAD of the exposure.
    (ii) The dollar risk-based capital requirement for a segment of 
defaulted retail exposures equals 0.08 multiplied by the EAD of the 
segment.
    (iii) The sum of all the dollar risk-based capital requirements for 
each wholesale exposure to a defaulted obligor calculated in paragraph 
(e)(2)(i) of this section plus the dollar risk-based capital 
requirements for each segment of defaulted retail exposures

[[Page 313]]

calculated in paragraph (e)(2)(ii) of this section equals the total 
dollar risk-based capital requirement for those exposures and segments.
    (iv) The aggregate risk-weighted asset amount for wholesale 
exposures to defaulted obligors and segments of defaulted retail 
exposures equals the total dollar risk-based capital requirement 
calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5.
    (3) Assets not included in a defined exposure category. (i) A bank 
holding company may assign a risk-weighted asset amount of zero to cash 
owned and held in all offices of subsidiary depository institutions or 
in transit and for gold bullion held in either a subsidiary depository 
institution's own vaults, or held in another depository institution's 
vaults on an allocated basis, to the extent the gold bullion assets are 
offset by gold bullion liabilities.
    (ii) The risk-weighted asset amount for the residual value of a 
retail lease exposure equals such residual value.
    (iii) The risk-weighted asset amount for any other on-balance-sheet 
asset that does not meet the definition of a wholesale, retail, 
securitization, or equity exposure equals the carrying value of the 
asset.
    (4) Non-material portfolios of exposures. The risk-weighted asset 
amount of a portfolio of exposures for which the bank holding company 
has demonstrated to the Federal Reserve's satisfaction that the 
portfolio (when combined with all other portfolios of exposures that the 
bank holding company seeks to treat under this paragraph) is not 
material to the bank holding company is the sum of the carrying values 
of on-balance sheet exposures plus the notional amounts of off-balance 
sheet exposures in the portfolio. For purposes of this paragraph (e)(4), 
the notional amount of an OTC derivative contract that is not a credit 
derivative is the EAD of the derivative as calculated in section 32 of 
this appendix.

    Section 32. Counterparty Credit Risk of Repo-Style Transactions, 
           Eligible Margin Loans, and OTC Derivative Contracts

    (a) In General. (1) This section describes two methodologies--a 
collateral haircut approach and an internal models methodology--that a 
bank holding company may use instead of an LGD estimation methodology to 
recognize the benefits of financial collateral in mitigating the 
counterparty credit risk of repo-style transactions, eligible margin 
loans, collateralized OTC derivative contracts, and single product 
netting sets of such transactions and to recognize the benefits of any 
collateral in mitigating the counterparty credit risk of repo-style 
transactions that are included in a bank holding company's VaR-based 
measure under 12 CFR part 225, appendix E. A third methodology, the 
simple VaR methodology, is available for single product netting sets of 
repo-style transactions and eligible margin loans.
    (2) This section also describes the methodology for calculating EAD 
for an OTC derivative contract or a set of OTC derivative contracts 
subject to a qualifying master netting agreement. A bank holding company 
also may use the internal models methodology to estimate EAD for 
qualifying cross-product master netting agreements.
    (3) A bank holding company may only use the standard supervisory 
haircut approach with a minimum 10-business-day holding period to 
recognize in EAD the benefits of conforming residential mortgage 
collateral that secures repo-style transactions (other than repo-style 
transactions included in the bank holding company's VaR-based measure 
under 12 CFR part 225, appendix E), eligible margin loans, and OTC 
derivative contracts.
    (4) A bank holding company may use any combination of the three 
methodologies for collateral recognition; however, it must use the same 
methodology for similar exposures.
    (b) EAD for eligible margin loans and repo-style transactions--(1) 
General. A bank holding company may recognize the credit risk mitigation 
benefits of financial collateral that secures an eligible margin loan, 
repo-style transaction, or single-product netting set of such 
transactions by factoring the collateral into its LGD estimates for the 
exposure. Alternatively, a bank holding company may estimate an 
unsecured LGD for the exposure, as well as for any repo-style 
transaction that is included in the bank holding company's VaR-based 
measure under 12 CFR part 225, appendix E, and determine the EAD of the 
exposure using:
    (i) The collateral haircut approach described in paragraph (b)(2) of 
this section;
    (ii) For netting sets only, the simple VaR methodology described in 
paragraph (b)(3) of this section; or
    (iii) The internal models methodology described in paragraph (d) of 
this section.
    (2) Collateral haircut approach--(i) EAD equation. A bank holding 
company may determine EAD for an eligible margin loan, repo-style 
transaction, or netting set by setting EAD equal to max {0, [([Sigma]E-
[Sigma]C) + [Sigma](Es x Hs) + [Sigma](Efx x Hfx)]{time} , where:
    (A) [Sigma]E equals the value of the exposure (the sum of the 
current market values of all instruments, gold, and cash the bank 
holding company has lent, sold subject to repurchase, or posted as 
collateral to the counterparty under the transaction (or netting set));
    (B) [Sigma]C equals the value of the collateral (the sum of the 
current market values of all instruments, gold, and cash the bank 
holding company has borrowed, purchased subject to resale, or taken as 
collateral from the counterparty under the transaction (or netting 
set));

[[Page 314]]

    (C) Es equals the absolute value of the net position in a given 
instrument or in gold (where the net position in a given instrument or 
in gold equals the sum of the current market values of the instrument or 
gold the bank holding company has lent, sold subject to repurchase, or 
posted as collateral to the counterparty minus the sum of the current 
market values of that same instrument or gold the bank holding company 
has borrowed, purchased subject to resale, or taken as collateral from 
the counterparty);
    (D) Hs equals the market price volatility haircut appropriate to the 
instrument or gold referenced in Es;
    (E) Efx equals the absolute value of the net position of instruments 
and cash in a currency that is different from the settlement currency 
(where the net position in a given currency equals the sum of the 
current market values of any instruments or cash in the currency the 
bank holding company has lent, sold subject to repurchase, or posted as 
collateral to the counterparty minus the sum of the current market 
values of any instruments or cash in the currency the bank holding 
company has borrowed, purchased subject to resale, or taken as 
collateral from the counterparty); and
    (F) Hfx equals the haircut appropriate to the mismatch between the 
currency referenced in Efx and the settlement currency.
    (ii) Standard supervisory haircuts. (A) Under the standard 
supervisory haircuts approach:
    (1) A bank holding company must use the haircuts for market price 
volatility (Hs) in Table 3, as adjusted in certain circumstances as 
provided in paragraph (b)(2)(ii)(A)(3) and (4) of this section;

                       Table 3--Standard Supervisory Market Price Volatility Haircuts \1\
----------------------------------------------------------------------------------------------------------------
                                                                              Issuers exempt
 Applicable external rating grade    Residual maturity for debt securities   from the 3 basis    Other issuers
   category for debt securities                                                point floor
----------------------------------------------------------------------------------------------------------------
Two highest investment-grade        <= 1 year.............................              0.005               0.01
 rating categories for long-term    1 year, <= 5 years.........               0.02               0.04
 ratings/highest investment-grade    5 years...................               0.04               0.08
 rating category for short-term
 ratings.
----------------------------------------------------------------------------------------------------------------
Two lowest investment-grade rating  <= 1 year.............................               0.01               0.02
 categories for both short- and      1 year, <= 5 years........               0.03               0.06
 long-term ratings.                  5 years...................               0.06               0.12
----------------------------------------------------------------------------------------------------------------
One rating category below           All...................................               0.15               0.25
 investment grade.
----------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold.....0.15.......
----------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertible bonds), c0.25rming
 residential mortgages, and nonfinancial collateral.
----------------------------------------------------------------------------------------------------------------
Mutual funds.........................Highest haircut applicable to any security in which the
                                                         fund can invest.
----------------------------------------------------------------------------------------------------------------
Cash on deposit with the bank holding company (including a certi0icate of
 deposit issued by the bank holding company).
----------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 3 are based on a ten-business-day holding period.

    (2) For currency mismatches, a bank holding company must use a 
haircut for foreign exchange rate volatility (Hfx) of 8 percent, as 
adjusted in certain circumstances as provided in paragraph 
(b)(2)(ii)(A)(3) and (4) of this section.
    (3) For repo-style transactions, a bank holding company may multiply 
the supervisory haircuts provided in paragraphs (b)(2)(ii)(A)(1) and (2) 
of this section by the square root of \1/2\ (which equals 0.707107).
    (4) A bank holding company must adjust the supervisory haircuts 
upward on the basis of a holding period longer than ten business days 
(for eligible margin loans) or five business days (for repo-style 
transactions) where and as appropriate to take into account the 
illiquidity of an instrument.
    (iii) Own internal estimates for haircuts. With the prior written 
approval of the Federal Reserve, a bank holding company may calculate 
haircuts (Hs and Hfx) using its own internal estimates of the 
volatilities of market prices and foreign exchange rates.
    (A) To receive Federal Reserve approval to use its own internal 
estimates, a bank holding company must satisfy the following minimum 
quantitative standards:
    (1) A bank holding company must use a 99th percentile one-tailed 
confidence interval.
    (2) The minimum holding period for a repo-style transaction is five 
business days and for an eligible margin loan is ten business days. When 
a bank holding company calculates an own-estimates haircut on a 
TN-day holding period, which is different from the minimum 
holding period for the transaction type, the applicable haircut 
(HM) is

[[Page 315]]

calculated using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TR07DE07.014

(i) TM equals 5 for repo-style transactions and 10 for 
eligible margin loans;
(ii) TN equals the holding period used by the bank holding 
company to derive HN; and
(iii) HN equals the haircut based on the holding period 
TN.
    (3) A bank holding company must adjust holding periods upwards where 
and as appropriate to take into account the illiquidity of an 
instrument.
    (4) The historical observation period must be at least one year.
    (5) A bank holding company must update its data sets and recompute 
haircuts no less frequently than quarterly and must also reassess data 
sets and haircuts whenever market prices change materially.
    (B) With respect to debt securities that have an applicable external 
rating of investment grade, a bank holding company may calculate 
haircuts for categories of securities. For a category of securities, the 
bank holding company must calculate the haircut on the basis of internal 
volatility estimates for securities in that category that are 
representative of the securities in that category that the bank holding 
company has lent, sold subject to repurchase, posted as collateral, 
borrowed, purchased subject to resale, or taken as collateral. In 
determining relevant categories, the bank holding company must at a 
minimum take into account:
    (1) The type of issuer of the security;
    (2) The applicable external rating of the security;
    (3) The maturity of the security; and
    (4) The interest rate sensitivity of the security.
    (C) With respect to debt securities that have an applicable external 
rating of below investment grade and equity securities, a bank holding 
company must calculate a separate haircut for each individual security.
    (D) Where an exposure or collateral (whether in the form of cash or 
securities) is denominated in a currency that differs from the 
settlement currency, the bank holding company must calculate a separate 
currency mismatch haircut for its net position in each mismatched 
currency based on estimated volatilities of foreign exchange rates 
between the mismatched currency and the settlement currency.
    (E) A bank holding company's own estimates of market price and 
foreign exchange rate volatilities may not take into account the 
correlations among securities and foreign exchange rates on either the 
exposure or collateral side of a transaction (or netting set) or the 
correlations among securities and foreign exchange rates between the 
exposure and collateral sides of the transaction (or netting set).
    (3) Simple VaR methodology. With the prior written approval of the 
Federal Reserve, a bank holding company may estimate EAD for a netting 
set using a VaR model that meets the requirements in paragraph 
(b)(3)(iii) of this section. In such event, the bank holding company 
must set EAD equal to max {0, [([Sigma]E--[Sigma]C) + PFE]{time} , 
where:
    (i) [Sigma]E equals the value of the exposure (the sum of the 
current market values of all instruments, gold, and cash the bank 
holding company has lent, sold subject to repurchase, or posted as 
collateral to the counterparty under the netting set);
    (ii) [Sigma]C equals the value of the collateral (the sum of the 
current market values of all instruments, gold, and cash the bank 
holding company has borrowed, purchased subject to resale, or taken as 
collateral from the counterparty under the netting set); and
    (iii) PFE (potential future exposure) equals the bank holding 
company's empirically based best estimate of the 99th percentile, one-
tailed confidence interval for an increase in the value of ([Sigma]E--
[Sigma]C) over a five-business-day holding period for repo-style 
transactions or over a ten-business-day holding period for eligible 
margin loans using a minimum one-year historical observation period of 
price data representing the instruments that the bank holding company 
has lent, sold subject to repurchase, posted as collateral, borrowed, 
purchased subject to resale, or taken as collateral. The bank holding 
company must validate its VaR model, including by establishing and 
maintaining a rigorous and regular back-testing regime.
    (c) EAD for OTC derivative contracts. (1) A bank holding company 
must determine the EAD for an OTC derivative contract that is not 
subject to a qualifying master netting agreement using the current 
exposure methodology in paragraph (c)(5) of this section or using the 
internal models methodology described in paragraph (d) of this section.
    (2) A bank holding company must determine the EAD for multiple OTC 
derivative contracts that are subject to a qualifying master netting 
agreement using the current exposure methodology in paragraph (c)(6) of 
this section or using the internal models methodology described in 
paragraph (d) of this section.
    (3) Counterparty credit risk for credit derivatives. Notwithstanding 
the above, (i) A bank holding company that purchases a credit derivative 
that is recognized under section 33 or 34 of this appendix as a credit 
risk mitigant for an exposure that is not a covered position under 12 
CFR part 225, appendix E need not compute a separate counterparty credit 
risk capital requirement under this section so long as the bank holding 
company

[[Page 316]]

does so consistently for all such credit derivatives and either includes 
all or excludes all such credit derivatives that are subject to a master 
netting agreement from any measure used to determine counterparty credit 
risk exposure to all relevant counterparties for risk-based capital 
purposes.
    (ii) A bank holding company that is the protection provider in a 
credit derivative must treat the credit derivative as a wholesale 
exposure to the reference obligor and need not compute a counterparty 
credit risk capital requirement for the credit derivative under this 
section, so long as it does so consistently for all such credit 
derivatives and either includes all or excludes all such credit 
derivatives that are subject to a master netting agreement from any 
measure used to determine counterparty credit risk exposure to all 
relevant counterparties for risk-based capital purposes (unless the bank 
holding company is treating the credit derivative as a covered position 
under 12 CFR part 225, appendix E, in which case the bank holding 
company must compute a supplemental counterparty credit risk capital 
requirement under this section).
    (4) Counterparty credit risk for equity derivatives. A bank holding 
company must treat an equity derivative contract as an equity exposure 
and compute a risk-weighted asset amount for the equity derivative 
contract under part VI (unless the bank holding company is treating the 
contract as a covered position under 12 CFR part 225, appendix E). In 
addition, if the bank holding company is treating the contract as a 
covered position under 12 CFR part 225, appendix E and in certain other 
cases described in section 55 of this appendix, the bank holding company 
must also calculate a risk-based capital requirement for the 
counterparty credit risk of an equity derivative contract under this 
part.
    (5) Single OTC derivative contract. Except as modified by paragraph 
(c)(7) of this section, the EAD for a single OTC derivative contract 
that is not subject to a qualifying master netting agreement is equal to 
the sum of the bank holding company's current credit exposure and 
potential future credit exposure (PFE) on the derivative contract.
    (i) Current credit exposure. The current credit exposure for a 
single OTC derivative contract is the greater of the mark-to-market 
value of the derivative contract or zero.
    (ii) PFE. The PFE for a single OTC derivative contract, including an 
OTC derivative contract with a negative mark-to-market value, is 
calculated by multiplying the notional principal amount of the 
derivative contract by the appropriate conversion factor in Table 4. For 
purposes of calculating either the PFE under this paragraph or the gross 
PFE under paragraph (c)(6) of this section for exchange rate contracts 
and other similar contracts in which the notional principal amount is 
equivalent to the cash flows, notional principal amount is the net 
receipts to each party falling due on each value date in each currency. 
For any OTC derivative contract that does not fall within one of the 
specified categories in Table 4, the PFE must be calculated using the 
``other'' conversion factors. A bank holding company must use an OTC 
derivative contract's effective notional principal amount (that is, its 
apparent or stated notional principal amount multiplied by any 
multiplier in the OTC derivative contract) rather than its apparent or 
stated notional principal amount in calculating PFE. PFE of the 
protection provider of a credit derivative is capped at the net present 
value of the amount of unpaid premiums.

[[Page 317]]



                                           Table 4--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Credit       Credit (non-
                                                              Foreign      (investment-     investment-                      Precious
         Remaining maturity \2\            Interest rate   exchange rate       grade           grade          Equity      metals (except       Other
                                                             and gold        reference       reference                         gold)
                                                                            obligor)\3\      obligor)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................           0.00            0.01             0.05            0.10            0.06            0.07            0.10
Over one to five years..................           0.005           0.05             0.05            0.10            0.08            0.07            0.12
Over five years.........................           0.015           0.075            0.05            0.10            0.10            0.08           0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
  derivative contract.
\2\ For an OTC derivative 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 equals the time until the next reset date. For an interest rate derivative contract
  with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A bank holding company must use the column labeled ``Credit (investment-grade reference obligor)'' for a credit derivative whose reference obligor
  has an outstanding unsecured long-term debt security without credit enhancement that has a long-term applicable external rating of at least investment
  grade. A bank holding company must use the column labeled ``Credit (non-investment-grade reference obligor)'' for all other credit derivatives.


[[Page 318]]

    (6) Multiple OTC derivative contracts subject to a qualifying master 
netting agreement. Except as modified by paragraph (c)(7) of this 
section, the EAD for multiple OTC derivative contracts subject to a 
qualifying master netting agreement is equal to the sum of the net 
current credit exposure and the adjusted sum of the PFE exposure for all 
OTC derivative contracts subject to the qualifying master netting 
agreement.
    (i) Net current credit exposure. The net current credit exposure is 
the greater of:
    (A) The net sum of all positive and negative mark-to-market values 
of the individual OTC derivative contracts subject to the qualifying 
master netting agreement; or
    (B) zero.
    (ii) Adjusted sum of the PFE. The adjusted sum of the PFE, Anet, is 
calculated as Anet = (0.4xAgross)+(0.6xNGRxAgross), where:
    (A) Agross = the gross PFE (that is, the sum of the PFE amounts (as 
determined under paragraph (c)(5)(ii) of this section) for each 
individual OTC derivative contract subject to the qualifying master 
netting agreement); and
    (B) NGR = the net to gross ratio (that is, the ratio of the net 
current credit exposure to the gross current credit exposure). In 
calculating the NGR, the gross current credit exposure equals the sum of 
the positive current credit exposures (as determined under paragraph 
(c)(5)(i) of this section) of all individual OTC derivative contracts 
subject to the qualifying master netting agreement.
    (7) Collateralized OTC derivative contracts. A bank holding company 
may recognize the credit risk mitigation benefits of financial 
collateral that secures an OTC derivative contract or single-product 
netting set of OTC derivatives by factoring the collateral into its LGD 
estimates for the contract or netting set. Alternatively, a bank holding 
company may recognize the credit risk mitigation benefits of financial 
collateral that secures such a contract or netting set that is marked to 
market on a daily basis and subject to a daily margin maintenance 
requirement by estimating an unsecured LGD for the contract or netting 
set and adjusting the EAD calculated under paragraph (c)(5) or (c)(6) of 
this section using the collateral haircut approach in paragraph (b)(2) 
of this section. The bank holding company must substitute the EAD 
calculated under paragraph (c)(5) or (c)(6) of this section for [Sigma]E 
in the equation in paragraph (b)(2)(i) of this section and must use a 
ten-business-day minimum holding period (TM = 10).
    (d) Internal models methodology. (1) With prior written approval 
from the Federal Reserve, a bank holding company may use the internal 
models methodology in this paragraph (d) to determine EAD for 
counterparty credit risk for OTC derivative contracts (collateralized or 
uncollateralized) and single-product netting sets thereof, for eligible 
margin loans and single-product netting sets thereof, and for repo-style 
transactions and single-product netting sets thereof. A bank holding 
company that uses the internal models methodology for a particular 
transaction type (OTC derivative contracts, eligible margin loans, or 
repo-style transactions) must use the internal models methodology for 
all transactions of that transaction type. A bank holding company may 
choose to use the internal models methodology for one or two of these 
three types of exposures and not the other types. A bank holding company 
may also use the internal models methodology for OTC derivative 
contracts, eligible margin loans, and repo-style transactions subject to 
a qualifying cross-product netting agreement if:
    (i) The bank holding company effectively integrates the risk 
mitigating effects of cross-product netting into its risk management and 
other information technology systems; and
    (ii) The bank holding company obtains the prior written approval of 
the Federal Reserve. A bank holding company that uses the internal 
models methodology for a transaction type must receive approval from the 
Federal Reserve to cease using the methodology for that transaction type 
or to make a material change to its internal model.
    (2) Under the internal models methodology, a bank holding company 
uses an internal model to estimate the expected exposure (EE) for a 
netting set and then calculates EAD based on that EE.
    (i) The bank holding company must use its internal model's 
probability distribution for changes in the market value of a netting 
set that are attributable to changes in market variables to determine 
EE.
    (ii) Under the internal models methodology, EAD = [alpha] x 
effective EPE, or, subject to Federal Reserve approval as provided in 
paragraph (d)(7), a more conservative measure of EAD.
[GRAPHIC] [TIFF OMITTED] TR07DE07.026

(that is, effective EPE is the time-weighted average of effective EE 
where the weights are the proportion that an individual effective EE 
represents in a one-year time interval) where:
    (1) Effective EEtk = max (Effective EEtk-1, 
EEtk) (that is, for a specific datetk, effective 
EE is the greater of EE at that date or the effective EE at the previous 
date); and
    (2) tk represents the kth future time period in the model 
and there are n time periods represented in the model over the first 
year; and
    (B) [alpha] = 1.4 except as provided in paragraph (d)(6), or when 
the Federal Reserve has determined that the bank holding company must

[[Page 319]]

set [alpha] higher based on the bank holding company's specific 
characteristics of counterparty credit risk.
    (iii) A bank holding company may include financial collateral 
currently posted by the counterparty as collateral (but may not include 
other forms of collateral) when calculating EE.
    (iv) If a bank holding company hedges some or all of the 
counterparty credit risk associated with a netting set using an eligible 
credit derivative, the bank holding company may take the reduction in 
exposure to the counterparty into account when estimating EE. If the 
bank holding company recognizes this reduction in exposure to the 
counterparty in its estimate of EE, it must also use its internal model 
to estimate a separate EAD for the bank holding company's exposure to 
the protection provider of the credit derivative.
    (3) To obtain Federal Reserve approval to calculate the 
distributions of exposures upon which the EAD calculation is based, the 
bank holding company must demonstrate to the satisfaction of the Federal 
Reserve that it has been using for at least one year an internal model 
that broadly meets the following minimum standards, with which the bank 
holding company must maintain compliance:
    (i) The model must have the systems capability to estimate the 
expected exposure to the counterparty on a daily basis (but is not 
expected to estimate or report expected exposure on a daily basis).
    (ii) The model must estimate expected exposure at enough future 
dates to reflect accurately all the future cash flows of contracts in 
the netting set.
    (iii) The model must account for the possible non-normality of the 
exposure distribution, where appropriate.
    (iv) The bank holding company must measure, monitor, and control 
current counterparty exposure and the exposure to the counterparty over 
the whole life of all contracts in the netting set.
    (v) The bank holding company must be able to measure and manage 
current exposures gross and net of collateral held, where appropriate. 
The bank holding company must estimate expected exposures for OTC 
derivative contracts both with and without the effect of collateral 
agreements.
    (vi) The bank holding company must have procedures to identify, 
monitor, and control specific wrong-way risk throughout the life of an 
exposure. Wrong-way risk in this context is the risk that future 
exposure to a counterparty will be high when the counterparty's 
probability of default is also high.
    (vii) The model must use current market data to compute current 
exposures. When estimating model parameters based on historical data, at 
least three years of historical data that cover a wide range of economic 
conditions must be used and must be updated quarterly or more frequently 
if market conditions warrant. The bank holding company should consider 
using model parameters based on forward-looking measures, where 
appropriate.
    (viii) A bank holding company must subject its internal model to an 
initial validation and annual model review process. The model review 
should consider whether the inputs and risk factors, as well as the 
model outputs, are appropriate.
    (4) Maturity. (i) If the remaining maturity of the exposure or the 
longest-dated contract in the netting set is greater than one year, the 
bank holding company must set M for the exposure or netting set equal to 
the lower of five years or M(EPE),\3\ where:
---------------------------------------------------------------------------

    \3\ Alternatively, a bank holding company that uses an internal 
model to calculate a one-sided credit valuation adjustment may use the 
effective credit duration estimated by the model as M(EPE) in place of 
the formula in paragraph (d)(4).
[GRAPHIC] [TIFF OMITTED] TR07DE07.015

    (B) dfk is the risk-free discount factor for future time 
period tk; and
    (C) [Delta]tk = tk-tk-1.
    (ii) If the remaining maturity of the exposure or the longest-dated 
contract in the netting set is one year or less, the bank holding 
company must set M for the exposure or netting set equal to one year, 
except as provided in paragraph (d)(7) of section 31 of this appendix.

[[Page 320]]

    (5) Collateral agreements. A bank holding company may capture the 
effect on EAD of a collateral agreement that requires receipt of 
collateral when exposure to the counterparty increases but may not 
capture the effect on EAD of a collateral agreement that requires 
receipt of collateral when counterparty credit quality deteriorates. For 
this purpose, a collateral agreement means a legal contract that 
specifies the time when, and circumstances under which, the counterparty 
is required to pledge collateral to the bank holding company for a 
single financial contract or for all financial contracts in a netting 
set and confers upon the bank holding company a perfected, first 
priority security interest (notwithstanding the prior security interest 
of any custodial agent), or the legal equivalent thereof, in the 
collateral posted by the counterparty under the agreement. This security 
interest must provide the bank holding company with a right to close out 
the financial positions and liquidate the collateral upon an event of 
default of, or failure to perform by, the counterparty under the 
collateral agreement. A contract would not satisfy this requirement if 
the bank holding company's exercise of rights under the agreement may be 
stayed or avoided under applicable law in the relevant jurisdictions. 
Two methods are available to capture the effect of a collateral 
agreement:
    (i) With prior written approval from the Federal Reserve, a bank 
holding company may include the effect of a collateral agreement within 
its internal model used to calculate EAD. The bank holding company may 
set EAD equal to the expected exposure at the end of the margin period 
of risk. The margin period of risk means, with respect to a netting set 
subject to a collateral agreement, the time period from the most recent 
exchange of collateral with a counterparty until the next required 
exchange of collateral plus the period of time required to sell and 
realize the proceeds of the least liquid collateral that can be 
delivered under the terms of the collateral agreement and, where 
applicable, the period of time required to re-hedge the resulting market 
risk, upon the default of the counterparty. The minimum margin period of 
risk is five business days for repo-style transactions and ten business 
days for other transactions when liquid financial collateral is posted 
under a daily margin maintenance requirement. This period should be 
extended to cover any additional time between margin calls; any 
potential closeout difficulties; any delays in selling collateral, 
particularly if the collateral is illiquid; and any impediments to 
prompt re-hedging of any market risk.
    (ii) A bank holding company that can model EPE without collateral 
agreements but cannot achieve the higher level of modeling 
sophistication to model EPE with collateral agreements can set effective 
EPE for a collateralized netting set equal to the lesser of:
    (A) The threshold, defined as the exposure amount at which the 
counterparty is required to post collateral under the collateral 
agreement, if the threshold is positive, plus an add-on that reflects 
the potential increase in exposure of the netting set over the margin 
period of risk. The add-on is computed as the expected increase in the 
netting set's exposure beginning from current exposure of zero over the 
margin period of risk. The margin period of risk must be at least five 
business days for netting sets consisting only of repo-style 
transactions subject to daily re-margining and daily marking-to-market, 
and ten business days for all other netting sets; or
    (B) Effective EPE without a collateral agreement.
    (6) Own estimate of alpha. With prior written approval of the 
Federal Reserve, a bank holding company may calculate alpha as the ratio 
of economic capital from a full simulation of counterparty exposure 
across counterparties that incorporates a joint simulation of market and 
credit risk factors (numerator) and economic capital based on EPE 
(denominator), subject to a floor of 1.2. For purposes of this 
calculation, economic capital is the unexpected losses for all 
counterparty credit risks measured at a 99.9 percent confidence level 
over a one-year horizon. To receive approval, the bank holding company 
must meet the following minimum standards to the satisfaction of the 
Federal Reserve:
    (i) The bank holding company's own estimate of alpha must capture in 
the numerator the effects of:
    (A) The material sources of stochastic dependency of distributions 
of market values of transactions or portfolios of transactions across 
counterparties;
    (B) Volatilities and correlations of market risk factors used in the 
joint simulation, which must be related to the credit risk factor used 
in the simulation to reflect potential increases in volatility or 
correlation in an economic downturn, where appropriate; and
    (C) The granularity of exposures (that is, the effect of a 
concentration in the proportion of each counterparty's exposure that is 
driven by a particular risk factor).
    (ii) The bank holding company must assess the potential model 
uncertainty in its estimates of alpha.
    (iii) The bank holding company must calculate the numerator and 
denominator of alpha in a consistent fashion with respect to modeling 
methodology, parameter specifications, and portfolio composition.
    (iv) The bank holding company must review and adjust as appropriate 
its estimates of the numerator and denominator of alpha

[[Page 321]]

on at least a quarterly basis and more frequently when the composition 
of the portfolio varies over time.
    (7) Other measures of counterparty exposure. With prior written 
approval of the Federal Reserve, a bank holding company may set EAD 
equal to a measure of counterparty credit risk exposure, such as peak 
EAD, that is more conservative than an alpha of 1.4 (or higher under the 
terms of paragraph (d)(2)(ii)(B) of this section) times EPE for every 
counterparty whose EAD will be measured under the alternative measure of 
counterparty exposure. The bank holding company must demonstrate the 
conservatism of the measure of counterparty credit risk exposure used 
for EAD. For material portfolios of new OTC derivative products, the 
bank holding company may assume that the current exposure methodology in 
paragraphs (c)(5) and (c)(6) of this section meets the conservatism 
requirement of this paragraph for a period not to exceed 180 days. For 
immaterial portfolios of OTC derivative contracts, the bank holding 
company generally may assume that the current exposure methodology in 
paragraphs (c)(5) and (c)(6) of this section meets the conservatism 
requirement of this paragraph.

 Section 33. Guarantees and Credit Derivatives: PD Substitution and LGD 
                          Adjustment Approaches

    (a) Scope. (1) This section applies to wholesale exposures for 
which:
    (i) Credit risk is fully covered by an eligible guarantee or 
eligible credit derivative; or
    (ii) Credit risk is covered on a pro rata basis (that is, on a basis 
in which the bank holding company and the protection provider share 
losses proportionately) by an eligible guarantee or eligible credit 
derivative.
    (2) Wholesale exposures on which there is a tranching of credit risk 
(reflecting at least two different levels of seniority) are 
securitization exposures subject to the securitization framework in part 
V.
    (3) A bank holding company may elect to recognize the credit risk 
mitigation benefits of an eligible guarantee or eligible credit 
derivative covering an exposure described in paragraph (a)(1) of this 
section by using the PD substitution approach or the LGD adjustment 
approach in paragraph (c) of this section or, if the transaction 
qualifies, using the double default treatment in section 34 of this 
appendix. A bank holding company's PD and LGD for the hedged exposure 
may not be lower than the PD and LGD floors described in paragraphs 
(d)(2) and (d)(3) of section 31 of this appendix.
    (4) If multiple eligible guarantees or eligible credit derivatives 
cover a single exposure described in paragraph (a)(1) of this section, a 
bank holding company may treat the hedged exposure as multiple separate 
exposures each covered by a single eligible guarantee or eligible credit 
derivative and may calculate a separate risk-based capital requirement 
for each separate exposure as described in paragraph (a)(3) of this 
section.
    (5) If a single eligible guarantee or eligible credit derivative 
covers multiple hedged wholesale exposures described in paragraph (a)(1) 
of this section, a bank holding company must treat each hedged exposure 
as covered by a separate eligible guarantee or eligible credit 
derivative and must calculate a separate risk-based capital requirement 
for each exposure as described in paragraph (a)(3) of this section.
    (6) A bank holding company must use the same risk parameters for 
calculating ECL as it uses for calculating the risk-based capital 
requirement for the exposure.
    (b) Rules of recognition. (1) A bank holding company may only 
recognize the credit risk mitigation benefits of eligible guarantees and 
eligible credit derivatives.
    (2) A bank holding company may only recognize the credit risk 
mitigation benefits of an eligible credit derivative to hedge an 
exposure that is different from the credit derivative's reference 
exposure used for determining the derivative's cash settlement value, 
deliverable obligation, or occurrence of a credit event if:
    (i) The reference exposure ranks pari passu (that is, equally) with 
or is junior to the hedged exposure; and
    (ii) The reference exposure and the hedged exposure are exposures to 
the same legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to assure payments under the credit 
derivative are triggered when the obligor fails to pay under the terms 
of the hedged exposure.
    (c) Risk parameters for hedged exposures--(1) PD substitution 
approach--(i) Full coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is greater than or equal to the EAD of the hedged exposure, a 
bank holding company may recognize the guarantee or credit derivative in 
determining the bank holding company's risk-based capital requirement 
for the hedged exposure by substituting the PD associated with the 
rating grade of the protection provider for the PD associated with the 
rating grade of the obligor in the risk-based capital formula applicable 
to the guarantee or credit derivative in Table 2 and using the 
appropriate LGD as described in paragraph (c)(1)(iii) of this section. 
If the bank holding company determines that full substitution of the 
protection provider's PD leads to an inappropriate degree of risk 
mitigation, the bank holding company may substitute a higher PD than 
that of the protection provider.

[[Page 322]]

    (ii) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is less than the EAD of the hedged exposure, the bank holding 
company must treat the hedged exposure as two separate exposures 
(protected and unprotected) in order to recognize the credit risk 
mitigation benefit of the guarantee or credit derivative.
    (A) The bank holding company must calculate its risk-based capital 
requirement for the protected exposure under section 31 of this 
appendix, where PD is the protection provider's PD, LGD is determined 
under paragraph (c)(1)(iii) of this section, and EAD is P. If the bank 
holding company determines that full substitution leads to an 
inappropriate degree of risk mitigation, the bank holding company may 
use a higher PD than that of the protection provider.
    (B) The bank holding company must calculate its risk-based capital 
requirement for the unprotected exposure under section 31 of this 
appendix, where PD is the obligor's PD, LGD is the hedged exposure's LGD 
(not adjusted to reflect the guarantee or credit derivative), and EAD is 
the EAD of the original hedged exposure minus P.
    (C) The treatment in this paragraph (c)(1)(ii) is applicable when 
the credit risk of a wholesale exposure is covered on a partial pro rata 
basis or when an adjustment is made to the effective notional amount of 
the guarantee or credit derivative under paragraph (d), (e), or (f) of 
this section.
    (iii) LGD of hedged exposures. The LGD of a hedged exposure under 
the PD substitution approach is equal to:
    (A) The lower of the LGD of the hedged exposure (not adjusted to 
reflect the guarantee or credit derivative) and the LGD of the guarantee 
or credit derivative, if the guarantee or credit derivative provides the 
bank holding company with the option to receive immediate payout upon 
triggering the protection; or
    (B) The LGD of the guarantee or credit derivative, if the guarantee 
or credit derivative does not provide the bank holding company with the 
option to receive immediate payout upon triggering the protection.
    (2) LGD adjustment approach--(i) Full coverage. If an eligible 
guarantee or eligible credit derivative meets the conditions in 
paragraphs (a) and (b) of this section and the protection amount (P) of 
the guarantee or credit derivative is greater than or equal to the EAD 
of the hedged exposure, the bank holding company's risk-based capital 
requirement for the hedged exposure is the greater of:
    (A) The risk-based capital requirement for the exposure as 
calculated under section 31 of this appendix, with the LGD of the 
exposure adjusted to reflect the guarantee or credit derivative; or
    (B) The risk-based capital requirement for a direct exposure to the 
protection provider as calculated under section 31 of this appendix, 
using the PD for the protection provider, the LGD for the guarantee or 
credit derivative, and an EAD equal to the EAD of the hedged exposure.
    (ii) Partial coverage. If an eligible guarantee or eligible credit 
derivative meets the conditions in paragraphs (a) and (b) of this 
section and the protection amount (P) of the guarantee or credit 
derivative is less than the EAD of the hedged exposure, the bank holding 
company must treat the hedged exposure as two separate exposures 
(protected and unprotected) in order to recognize the credit risk 
mitigation benefit of the guarantee or credit derivative.
    (A) The bank holding company's risk-based capital requirement for 
the protected exposure would be the greater of:
    (1) The risk-based capital requirement for the protected exposure as 
calculated under section 31 of this appendix, with the LGD of the 
exposure adjusted to reflect the guarantee or credit derivative and EAD 
set equal to P; or
    (2) The risk-based capital requirement for a direct exposure to the 
guarantor as calculated under section 31 of this appendix, using the PD 
for the protection provider, the LGD for the guarantee or credit 
derivative, and an EAD set equal to P.
    (B) The bank holding company must calculate its risk-based capital 
requirement for the unprotected exposure under section 31 of this 
appendix, where PD is the obligor's PD, LGD is the hedged exposure's LGD 
(not adjusted to reflect the guarantee or credit derivative), and EAD is 
the EAD of the original hedged exposure minus P.
    (3) M of hedged exposures. The M of the hedged exposure is the same 
as the M of the exposure if it were unhedged.
    (d) Maturity mismatch. (1) A bank holding company that recognizes an 
eligible guarantee or eligible credit derivative in determining its 
risk-based capital requirement for a hedged exposure must adjust the 
effective notional amount of the credit risk mitigant to reflect any 
maturity mismatch between the hedged exposure and the credit risk 
mitigant.
    (2) A maturity mismatch occurs when the residual maturity of a 
credit risk mitigant is less than that of the hedged exposure(s).
    (3) The residual maturity of a hedged exposure is the longest 
possible remaining time before the obligor is scheduled to fulfill its 
obligation on the exposure. If a credit risk mitigant has embedded 
options that may reduce its term, the bank holding company (protection 
purchaser) must use the shortest possible residual maturity for the 
credit risk mitigant. If a call is at the discretion of the

[[Page 323]]

protection provider, the residual maturity of the credit risk mitigant 
is at the first call date. If the call is at the discretion of the bank 
holding company (protection purchaser), but the terms of the arrangement 
at origination of the credit risk mitigant contain a positive incentive 
for the bank holding company to call the transaction before contractual 
maturity, the remaining time to the first call date is the residual 
maturity of the credit risk mitigant. For example, where there is a 
step-up in cost in conjunction with a call feature or where the 
effective cost of protection increases over time even if credit quality 
remains the same or improves, the residual maturity of the credit risk 
mitigant will be the remaining time to the first call.
    (4) A credit risk mitigant with a maturity mismatch may be 
recognized only if its original maturity is greater than or equal to one 
year and its residual maturity is greater than three months.
    (5) When a maturity mismatch exists, the bank holding company must 
apply the following adjustment to the effective notional amount of the 
credit risk mitigant: Pm = E x (t - 0.25)/(T - 0.25), where:
    (i) Pm = effective notional amount of the credit risk mitigant, 
adjusted for maturity mismatch;
    (ii) E = effective notional amount of the credit risk mitigant;
    (iii) t = the lesser of T or the residual maturity of the credit 
risk mitigant, expressed in years; and
    (iv) T = the lesser of five or the residual maturity of the hedged 
exposure, expressed in years.
    (e) Credit derivatives without restructuring as a credit event. If a 
bank holding company recognizes an eligible credit derivative that does 
not include as a credit event a restructuring of the hedged exposure 
involving forgiveness or postponement of principal, interest, or fees 
that results in a credit loss event (that is, a charge-off, specific 
provision, or other similar debit to the profit and loss account), the 
bank holding company must apply the following adjustment to the 
effective notional amount of the credit derivative: Pr = Pm x 0.60, 
where:
    (1) Pr = effective notional amount of the credit risk mitigant, 
adjusted for lack of restructuring event (and maturity mismatch, if 
applicable); and
    (2) Pm = effective notional amount of the credit risk mitigant 
adjusted for maturity mismatch (if applicable).
    (f) Currency mismatch. (1) If a bank holding company recognizes an 
eligible guarantee or eligible credit derivative that is denominated in 
a currency different from that in which the hedged exposure is 
denominated, the bank holding company must apply the following formula 
to the effective notional amount of the guarantee or credit derivative: 
Pc = Pr x (1 - HFX), where:
    (i) Pc = effective notional amount of the credit risk mitigant, 
adjusted for currency mismatch (and maturity mismatch and lack of 
restructuring event, if applicable);
    (ii) Pr = effective notional amount of the credit risk mitigant 
(adjusted for maturity mismatch and lack of restructuring event, if 
applicable); and
    (iii) HFX = haircut appropriate for the currency mismatch 
between the credit risk mitigant and the hedged exposure.
    (2) A bank holding company must set HFX equal to 8 
percent unless it qualifies for the use of and uses its own internal 
estimates of foreign exchange volatility based on a ten-business-day 
holding period and daily marking-to-market and remargining. A bank 
holding company qualifies for the use of its own internal estimates of 
foreign exchange volatility if it qualifies for:
    (i) The own-estimates haircuts in paragraph (b)(2)(iii) of section 
32 of this appendix;
    (ii) The simple VaR methodology in paragraph (b)(3) of section 32 of 
this appendix; or
    (iii) The internal models methodology in paragraph (d) of section 32 
of this appendix.
    (3) A bank holding company must adjust HFX calculated in 
paragraph (f)(2) of this section upward if the bank holding company 
revalues the guarantee or credit derivative less frequently than once 
every ten business days using the square root of time formula provided 
in paragraph (b)(2)(iii)(A)(2) of section 32 of this appendix.

 Section 34. Guarantees and Credit Derivatives: Double Default Treatment

    (a) Eligibility and operational criteria for double default 
treatment. A bank holding company may recognize the credit risk 
mitigation benefits of a guarantee or credit derivative covering an 
exposure described in paragraph (a)(1) of section 33 of this appendix by 
applying the double default treatment in this section if all the 
following criteria are satisfied.
    (1) The hedged exposure is fully covered or covered on a pro rata 
basis by:
    (i) An eligible guarantee issued by an eligible double default 
guarantor; or
    (ii) An eligible credit derivative that meets the requirements of 
paragraph (b)(2) of section 33 of this appendix and is issued by an 
eligible double default guarantor.
    (2) The guarantee or credit derivative is:
    (i) An uncollateralized guarantee or uncollateralized credit 
derivative (for example, a credit default swap) that provides protection 
with respect to a single reference obligor; or
    (ii) An nth-to-default credit derivative (subject to the 
requirements of paragraph (m) of section 42 of this appendix).
    (3) The hedged exposure is a wholesale exposure (other than a 
sovereign exposure).
    (4) The obligor of the hedged exposure is not:

[[Page 324]]

    (i) An eligible double default guarantor or an affiliate of an 
eligible double default guarantor; or
    (ii) An affiliate of the guarantor.
    (5) The bank holding company does not recognize any credit risk 
mitigation benefits of the guarantee or credit derivative for the hedged 
exposure other than through application of the double default treatment 
as provided in this section.
    (6) The bank holding company has implemented a process (which has 
received the prior, written approval of the Federal Reserve) to detect 
excessive correlation between the creditworthiness of the obligor of the 
hedged exposure and the protection provider. If excessive correlation is 
present, the bank holding company may not use the double default 
treatment for the hedged exposure.
    (b) Full coverage. If the transaction meets the criteria in 
paragraph (a) of this section and the protection amount (P) of the 
guarantee or credit derivative is at least equal to the EAD of the 
hedged exposure, the bank holding company may determine its risk-
weighted asset amount for the hedged exposure under paragraph (e) of 
this section.
    (c) Partial coverage. If the transaction meets the criteria in 
paragraph (a) of this section and the protection amount (P) of the 
guarantee or credit derivative is less than the EAD of the hedged 
exposure, the bank holding company must treat the hedged exposure as two 
separate exposures (protected and unprotected) in order to recognize 
double default treatment on the protected portion of the exposure.
    (1) For the protected exposure, the bank holding company must set 
EAD equal to P and calculate its risk-weighted asset amount as provided 
in paragraph (e) of this section.
    (2) For the unprotected exposure, the bank holding company must set 
EAD equal to the EAD of the original exposure minus P and then calculate 
its risk-weighted asset amount as provided in section 31 of this 
appendix.
    (d) Mismatches. For any hedged exposure to which a bank holding 
company applies double default treatment, the bank holding company must 
make applicable adjustments to the protection amount as required in 
paragraphs (d), (e), and (f) of section 33 of this appendix.
    (e) The double default dollar risk-based capital requirement. The 
dollar risk-based capital requirement for a hedged exposure to which a 
bank holding company has applied double default treatment is 
KDD multiplied by the EAD of the exposure. KDD is 
calculated according to the following formula: KDD = 
Ko x (0.15 + 160 x PDg),

Where:

(1)
[GRAPHIC] [TIFF OMITTED] TR07DE07.016

(2) PDg = PD of the protection provider.
(3) PDo = PD of the obligor of the hedged exposure.
(4) LGDg = (i) The lower of the LGD of the hedged exposure 
(not adjusted to reflect the guarantee or credit derivative) and the LGD 
of the guarantee or credit derivative, if the guarantee or credit 
derivative provides the bank holding company with the option to receive 
immediate payout on triggering the protection; or
(ii) The LGD of the guarantee or credit derivative, if the guarantee or 
credit derivative does not provide the bank holding company with the 
option to receive immediate payout on triggering the protection.
(5) [rho]OS (asset value correlation of the obligor) is 
calculated according to the appropriate formula for (R) provided in 
Table 2 in section 31 of this appendix, with PD equal to PDo.
(6) b (maturity adjustment coefficient) is calculated according to the 
formula for b provided in Table 2 in section 31 of this appendix, with 
PD equal to the lesser of PDo and PDg.
(7) M (maturity) is the effective maturity of the guarantee or credit 
derivative, which may not be less than one year or greater than five 
years.

  Section 35. Risk-Based Capital Requirement for Unsettled Transactions

    (a) Definitions. For purposes of this section:
    (1) Delivery-versus-payment (DvP) transaction means a securities or 
commodities transaction in which the buyer is obligated to make payment 
only if the seller has made delivery of the securities or commodities 
and the seller is obligated to deliver the securities or commodities 
only if the buyer has made payment.
    (2) Payment-versus-payment (PvP) transaction means a foreign 
exchange transaction in which each counterparty is obligated to make a 
final transfer of one or more currencies only if the other counterparty 
has

[[Page 325]]

made a final transfer of one or more currencies.
    (3) Normal settlement period. A transaction has a normal settlement 
period if the contractual settlement period for the transaction is equal 
to or less than the market standard for the instrument underlying the 
transaction and equal to or less than five business days.
    (4) Positive current exposure. The positive current exposure of a 
bank holding company for a transaction is the difference between the 
transaction value at the agreed settlement price and the current market 
price of the transaction, if the difference results in a credit exposure 
of the bank holding company to the counterparty.
    (b) Scope. This section applies to all transactions involving 
securities, foreign exchange instruments, and commodities that have a 
risk of delayed settlement or delivery. This section does not apply to:
    (1) Transactions accepted by a qualifying central counterparty that 
are subject to daily marking-to-market and daily receipt and payment of 
variation margin;
    (2) Repo-style transactions, including unsettled repo-style 
transactions (which are addressed in sections 31 and 32 of this 
appendix);
    (3) One-way cash payments on OTC derivative contracts (which are 
addressed in sections 31 and 32 of this appendix); or
    (4) Transactions with a contractual settlement period that is longer 
than the normal settlement period (which are treated as OTC derivative 
contracts and addressed in sections 31 and 32 of this appendix).
    (c) System-wide failures. In the case of a system-wide failure of a 
settlement or clearing system, the Federal Reserve may waive risk-based 
capital requirements for unsettled and failed transactions until the 
situation is rectified.
    (d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) 
transactions. A bank holding company must hold risk-based capital 
against any DvP or PvP transaction with a normal settlement period if 
the bank holding company's counterparty has not made delivery or payment 
within five business days after the settlement date. The bank holding 
company must determine its risk-weighted asset amount for such a 
transaction by multiplying the positive current exposure of the 
transaction for the bank holding company by the appropriate risk weight 
in Table 5.

      Table 5--Risk Weights for Unsettled DvP and PvP Transactions
------------------------------------------------------------------------
                                                       Risk weight to be
Number of business days after contractual settlement      applied to
                        date                           positive current
                                                      exposure (percent)
------------------------------------------------------------------------
From 5 to 15........................................               100
From 16 to 30.......................................               625
From 31 to 45.......................................               937.5
46 or more..........................................             1,250
------------------------------------------------------------------------

    (e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A bank holding company must hold risk-based 
capital against any non-DvP/non-PvP transaction with a normal settlement 
period if the bank holding company has delivered cash, securities, 
commodities, or currencies to its counterparty but has not received its 
corresponding deliverables by the end of the same business day. The bank 
holding company must continue to hold risk-based capital against the 
transaction until the bank holding company has received its 
corresponding deliverables.
    (2) From the business day after the bank holding company has made 
its delivery until five business days after the counterparty delivery is 
due, the bank holding company must calculate its risk-based capital 
requirement for the transaction by treating the current market value of 
the deliverables owed to the bank holding company as a wholesale 
exposure.
    (i) A bank holding company may assign an obligor rating to a 
counterparty for which it is not otherwise required under this appendix 
to assign an obligor rating on the basis of the applicable external 
rating of any outstanding unsecured long-term debt security without 
credit enhancement issued by the counterparty.
    (ii) A bank holding company may use a 45 percent LGD for the 
transaction rather than estimating LGD for the transaction provided the 
bank holding company uses the 45 percent LGD for all transactions 
described in paragraphs (e)(1) and (e)(2) of this section.
    (iii) A bank holding company may use a 100 percent risk weight for 
the transaction provided the bank holding company uses this risk weight 
for all transactions described in paragraphs (e)(1) and (e)(2) of this 
section.
    (3) If the bank holding company has not received its deliverables by 
the fifth business day after the counterparty delivery was due, the bank 
holding company must deduct the current market value of the deliverables 
owed to the bank holding company 50 percent from tier 1 capital and 50 
percent from tier 2 capital.
    (f) Total risk-weighted assets for unsettled transactions. Total 
risk-weighted assets for unsettled transactions is the sum of the risk-
weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP 
transactions.

[[Page 326]]

        Part V. Risk-Weighted Assets for Securitization Exposures

  Section 41. Operational Criteria for Recognizing the Transfer of Risk

    (a) Operational criteria for traditional securitizations. A bank 
holding company that transfers exposures it has originated or purchased 
to a securitization SPE or other third party in connection with a 
traditional securitization may exclude the exposures from the 
calculation of its risk-weighted assets only if each of the conditions 
in this paragraph (a) is satisfied. A bank holding company that meets 
these conditions must hold risk-based capital against any securitization 
exposures it retains in connection with the securitization. A bank 
holding company that fails to meet these conditions must hold risk-based 
capital against the transferred exposures as if they had not been 
securitized and must deduct from tier 1 capital any after-tax gain-on-
sale resulting from the transaction. The conditions are:
    (1) The transfer is considered a sale under GAAP;
    (2) The bank holding company has transferred to third parties credit 
risk associated with the underlying exposures; and
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls.
    (b) Operational criteria for synthetic securitizations. For 
synthetic securitizations, a bank holding company may recognize for 
risk-based capital purposes the use of a credit risk mitigant to hedge 
underlying exposures only if each of the conditions in this paragraph 
(b) is satisfied. A bank holding company that fails to meet these 
conditions must hold risk-based capital against the underlying exposures 
as if they had not been synthetically securitized. The conditions are:
    (1) The credit risk mitigant is financial collateral, an eligible 
credit derivative from an eligible securitization guarantor or an 
eligible guarantee from an eligible securitization guarantor;
    (2) The bank holding company transfers credit risk associated with 
the underlying exposures to third parties, and the terms and conditions 
in the credit risk mitigants employed do not include provisions that:
    (i) Allow for the termination of the credit protection due to 
deterioration in the credit quality of the underlying exposures;
    (ii) Require the bank holding company to alter or replace the 
underlying exposures to improve the credit quality of the pool of 
underlying exposures;
    (iii) Increase the bank holding company's cost of credit protection 
in response to deterioration in the credit quality of the underlying 
exposures;
    (iv) Increase the yield payable to parties other than the bank 
holding company in response to a deterioration in the credit quality of 
the underlying exposures; or
    (v) Provide for increases in a retained first loss position or 
credit enhancement provided by the bank holding company after the 
inception of the securitization;
    (3) The bank holding company obtains a well-reasoned opinion from 
legal counsel that confirms the enforceability of the credit risk 
mitigant in all relevant jurisdictions; and
    (4) Any clean-up calls relating to the securitization are eligible 
clean-up calls.

 Section 42. Risk-Based Capital Requirement for Securitization Exposures

    (a) Hierarchy of approaches. Except as provided elsewhere in this 
section:
    (1) A bank holding company must deduct from tier 1 capital any 
after-tax gain-on-sale resulting from a securitization and must deduct 
from total capital in accordance with paragraph (c) of this section the 
portion of any CEIO that does not constitute gain-on-sale.
    (2) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and qualifies for the Ratings-Based 
Approach in section 43 of this appendix, a bank holding company must 
apply the Ratings-Based Approach to the exposure.
    (3) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and does not qualify for the Ratings-
Based Approach, the bank holding company may either apply the Internal 
Assessment Approach in section 44 of this appendix to the exposure (if 
the bank holding company, the exposure, and the relevant ABCP program 
qualify for the Internal Assessment Approach) or the Supervisory Formula 
Approach in section 45 of this appendix to the exposure (if the bank 
holding company and the exposure qualify for the Supervisory Formula 
Approach).
    (4) If a securitization exposure does not require deduction under 
paragraph (a)(1) of this section and does not qualify for the Ratings-
Based Approach, the Internal Assessment Approach, or the Supervisory 
Formula Approach, the bank holding company must deduct the exposure from 
total capital in accordance with paragraph (c) of this section.
    (5) If a securitization exposure is an OTC derivative contract 
(other than a credit derivative) that has a first priority claim on the 
cash flows from the underlying exposures (notwithstanding amounts due 
under interest rate or currency derivative contracts, fees due, or other 
similar payments), with approval of the Federal Reserve, a bank holding 
company may choose to set the risk-weighted asset amount of the exposure 
equal to the amount of the exposure as determined in paragraph (e) of 
this section rather than apply the hierarchy of approaches described

[[Page 327]]

in paragraphs (a) (1) through (4) of this section.
    (b) Total risk-weighted assets for securitization exposures. A bank 
holding company's total risk-weighted assets for securitization 
exposures is equal to the sum of its risk-weighted assets calculated 
using the Ratings-Based Approach in section 43 of this appendix, the 
Internal Assessment Approach in section 44 of this appendix, and the 
Supervisory Formula Approach in section 45 of this appendix, and its 
risk-weighted assets amount for early amortization provisions calculated 
in section 47 of this appendix.
    (c) Deductions. (1) If a bank holding company must deduct a 
securitization exposure from total capital, the bank holding company 
must take the deduction 50 percent from tier 1 capital and 50 percent 
from tier 2 capital. If the amount deductible from tier 2 capital 
exceeds the bank holding company's tier 2 capital, the bank holding 
company must deduct the excess from tier 1 capital.
    (2) A bank holding company may calculate any deduction from tier 1 
capital and tier 2 capital for a securitization exposure net of any 
deferred tax liabilities associated with the securitization exposure.
    (d) Maximum risk-based capital requirement. Regardless of any other 
provisions of this part, unless one or more underlying exposures does 
not meet the definition of a wholesale, retail, securitization, or 
equity exposure, the total risk-based capital requirement for all 
securitization exposures held by a single bank holding company 
associated with a single securitization (including any risk-based 
capital requirements that relate to an early amortization provision of 
the securitization but excluding any risk-based capital requirements 
that relate to the bank holding company's gain-on-sale or CEIOs 
associated with the securitization) may not exceed the sum of:
    (1) The bank holding company's total risk-based capital requirement 
for the underlying exposures as if the bank holding company directly 
held the underlying exposures; and
    (2) The total ECL of the underlying exposures.
    (e) Amount of a securitization exposure. (1) The amount of an on-
balance sheet securitization exposure that is not a repo-style 
transaction, eligible margin loan, or OTC derivative contract (other 
than a credit derivative) is:
    (i) The bank holding company's carrying value minus any unrealized 
gains and plus any unrealized losses on the exposure, if the exposure is 
a security classified as available-for-sale; or
    (ii) The bank holding company's carrying value, if the exposure is 
not a security classified as available-for-sale.
    (2) The amount of an off-balance sheet securitization exposure that 
is not an OTC derivative contract (other than a credit derivative) is 
the notional amount of the exposure. For an off-balance-sheet 
securitization exposure to an ABCP program, such as a liquidity 
facility, the notional amount may be reduced to the maximum potential 
amount that the bank holding company could be required to fund given the 
ABCP program's current underlying assets (calculated without regard to 
the current credit quality of those assets).
    (3) The amount of a securitization exposure that is a repo-style 
transaction, eligible margin loan, or OTC derivative contract (other 
than a credit derivative) is the EAD of the exposure as calculated in 
section 32 of this appendix.
    (f) Overlapping exposures. If a bank holding company has multiple 
securitization exposures that provide duplicative coverage of the 
underlying exposures of a securitization (such as when a bank holding 
company provides a program-wide credit enhancement and multiple pool-
specific liquidity facilities to an ABCP program), the bank holding 
company is not required to hold duplicative risk-based capital against 
the overlapping position. Instead, the bank holding company may apply to 
the overlapping position the applicable risk-based capital treatment 
that results in the highest risk-based capital requirement.
    (g) Securitizations of non-IRB exposures. If a bank holding company 
has a securitization exposure where any underlying exposure is not a 
wholesale exposure, retail exposure, securitization exposure, or equity 
exposure, the bank holding company must:
    (1) If the bank holding company is an originating bank holding 
company, deduct from tier 1 capital any after-tax gain-on-sale resulting 
from the securitization and deduct from total capital in accordance with 
paragraph (c) of this section the portion of any CEIO that does not 
constitute gain-on-sale;
    (2) If the securitization exposure does not require deduction under 
paragraph (g)(1), apply the RBA in section 43 of this appendix to the 
securitization exposure if the exposure qualifies for the RBA;
    (3) If the securitization exposure does not require deduction under 
paragraph (g)(1) and does not qualify for the RBA, apply the IAA in 
section 44 of this appendix to the exposure (if the bank holding 
company, the exposure, and the relevant ABCP program qualify for the 
IAA); and
    (4) If the securitization exposure does not require deduction under 
paragraph (g)(1) and does not qualify for the RBA or the IAA, deduct the 
exposure from total capital in accordance with paragraph (c) of this 
section.
    (h) Implicit support. If a bank holding company provides support to 
a securitization in excess of the bank holding company's contractual 
obligation to provide credit support to the securitization (implicit 
support):

[[Page 328]]

    (1) The bank holding company must hold regulatory capital against 
all of the underlying exposures associated with the securitization as if 
the exposures had not been securitized and must deduct from tier 1 
capital any after-tax gain-on-sale resulting from the securitization; 
and
    (2) The bank holding company must disclose publicly:
    (i) That it has provided implicit support to the securitization; and
    (ii) The regulatory capital impact to the bank holding company of 
providing such implicit support.
    (i) Eligible servicer cash advance facilities. Regardless of any 
other provisions of this part, a bank holding company is not required to 
hold risk-based capital against the undrawn portion of an eligible 
servicer cash advance facility.
    (j) Interest-only mortgage-backed securities. Regardless of any 
other provisions of this part, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than 
100 percent.
    (k) Small-business loans and leases on personal property transferred 
with recourse. (1) Regardless of any other provisions of this appendix, 
a bank holding company that has transferred small-business loans and 
leases on personal property (small-business obligations) with recourse 
must include in risk-weighted assets only the contractual amount of 
retained recourse if all the following conditions are met:
    (i) The transaction is a sale under GAAP.
    (ii) The bank holding company establishes and maintains, pursuant to 
GAAP, a non-capital reserve sufficient to meet the bank holding 
company's reasonably estimated liability under the recourse arrangement.
    (iii) The loans and leases are 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 (15 U.S.C. 
632).
    (iv) The bank holding company is well capitalized, as defined in the 
Federal Reserve's prompt corrective action regulation at 12 CFR part 
208, Subpart D. For purposes of determining whether a bank holding 
company is well capitalized for purposes of this paragraph, the bank 
holding company's capital ratios must be calculated without regard to 
the capital treatment for transfers of small-business obligations with 
recourse specified in paragraph (k)(1) of this section.
    (2) The total outstanding amount of recourse retained by a bank 
holding company on transfers of small-business obligations receiving the 
capital treatment specified in paragraph (k)(1) of this section cannot 
exceed 15 percent of the bank holding company's total qualifying 
capital.
    (3) If a bank holding company ceases to be well capitalized or 
exceeds the 15 percent capital limitation, the preferential capital 
treatment specified in paragraph (k)(1) of this section will continue to 
apply to any transfers of small-business obligations with recourse that 
occurred during the time that the bank holding company was well 
capitalized and did not exceed the capital limit.
    (4) The risk-based capital ratios of the bank holding company must 
be calculated without regard to the capital treatment for transfers of 
small-business obligations with recourse specified in paragraph (k)(1) 
of this section as provided in 12 CFR part 225, appendix A.
    (l) Consolidated ABCP programs. (1) A bank holding company that 
qualifies as a primary beneficiary and must consolidate an ABCP program 
as a variable interest entity under GAAP may exclude the consolidated 
ABCP program assets from risk-weighted assets if the bank holding 
company is the sponsor of the ABCP program. If a bank holding company 
excludes such consolidated ABCP program assets from risk-weighted 
assets, the bank holding company must hold risk-based capital against 
any securitization exposures of the bank holding company to the ABCP 
program in accordance with this part.
    (2) If a bank holding company either is not permitted, or elects 
not, to exclude consolidated ABCP program assets from its risk-weighted 
assets, the bank holding company must hold risk-based capital against 
the consolidated ABCP program assets in accordance with this appendix 
but is not required to hold risk-based capital against any 
securitization exposures of the bank holding company to the ABCP 
program.
    (m) Nth-to-default credit derivatives--(1) First-to-default credit 
derivatives--(i) Protection purchaser. A bank holding company that 
obtains credit protection on a group of underlying exposures through a 
first-to-default credit derivative must determine its risk-based capital 
requirement for the underlying exposures as if the bank holding company 
synthetically securitized the underlying exposure with the lowest risk-
based capital requirement and had obtained no credit risk mitigant on 
the other underlying exposures.
    (ii) Protection provider. A bank holding company that provides 
credit protection on a group of underlying exposures through a first-to-
default credit derivative must determine its risk-weighted asset amount 
for the derivative by applying the RBA in section 43 of this appendix 
(if the derivative qualifies for the RBA) or, if the derivative does not 
qualify for the RBA, by setting its risk-weighted asset amount for the 
derivative equal to the product of:
    (A) The protection amount of the derivative;
    (B) 12.5; and
    (C) The sum of the risk-based capital requirements of the individual 
underlying exposures, up to a maximum of 100 percent.

[[Page 329]]

    (2) Second-or-subsequent-to-default credit derivatives--(i) 
Protection purchaser. (A) A bank holding company that obtains credit 
protection on a group of underlying exposures through a n\th\-to-default 
credit derivative (other than a first-to-default credit derivative) may 
recognize the credit risk mitigation benefits of the derivative only if:
    (1) The bank holding company also has obtained credit protection on 
the same underlying exposures in the form of first-through-(n-1)-to-
default credit derivatives; or
    (2) If n-1 of the underlying exposures have already defaulted.
    (B) If a bank holding company satisfies the requirements of 
paragraph (m)(2)(i)(A) of this section, the bank holding company must 
determine its risk-based capital requirement for the underlying 
exposures as if the bank holding company had only synthetically 
securitized the underlying exposure with the nth lowest risk-
based capital requirement and had obtained no credit risk mitigant on 
the other underlying exposures.
    (ii) Protection provider. A bank holding company that provides 
credit protection on a group of underlying exposures through a 
nth-to-default credit derivative (other than a first-to-
default credit derivative) must determine its risk-weighted asset amount 
for the derivative by applying the RBA in section 43 of this appendix 
(if the derivative qualifies for the RBA) or, if the derivative does not 
qualify for the RBA, by setting its risk-weighted asset amount for the 
derivative equal to the product of:
    (A) The protection amount of the derivative;
    (B) 12.5; and
    (C) The sum of the risk-based capital requirements of the individual 
underlying exposures (excluding the n-1 underlying exposures with the 
lowest risk-based capital requirements), up to a maximum of 100 percent.

                Section 43. Ratings-Based Approach (RBA)

    (a) Eligibility requirements for use of the RBA--(1) Originating 
bank holding company. An originating bank holding company must use the 
RBA to calculate its risk-based capital requirement for a securitization 
exposure if the exposure has two or more external ratings or inferred 
ratings (and may not use the RBA if the exposure has fewer than two 
external ratings or inferred ratings).
    (2) Investing bank holding company. An investing bank holding 
company must use the RBA to calculate its risk-based capital requirement 
for a securitization exposure if the exposure has one or more external 
or inferred ratings (and may not use the RBA if the exposure has no 
external or inferred rating).
    (b) Ratings-based approach. (1) A bank holding company must 
determine the risk-weighted asset amount for a securitization exposure 
by multiplying the amount of the exposure (as defined in paragraph (e) 
of section 42 of this appendix) by the appropriate risk weight provided 
in Table 6 and Table 7.
    (2) A bank holding company must apply the risk weights in Table 6 
when the securitization exposure's applicable external or applicable 
inferred rating represents a long-term credit rating, and must apply the 
risk weights in Table 7 when the securitization exposure's applicable 
external or applicable inferred rating represents a short-term credit 
rating.
    (i) A bank holding company must apply the risk weights in column 1 
of Table 6 or Table 7 to the securitization exposure if:
    (A) N (as calculated under paragraph (e)(6) of section 45 of this 
appendix) is six or more (for purposes of this section only, if the 
notional number of underlying exposures is 25 or more or if all of the 
underlying exposures are retail exposures, a bank holding company may 
assume that N is six or more unless the bank holding company knows or 
has reason to know that N is less than six); and
    (B) The securitization exposure is a senior securitization exposure.
    (ii) A bank holding company must apply the risk weights in column 3 
of Table 6 or Table 7 to the securitization exposure if N is less than 
six, regardless of the seniority of the securitization exposure.
    (iii) Otherwise, a bank holding company must apply the risk weights 
in column 2 of Table 6 or Table 7.

                         Table 6--Long-Term Credit Rating Risk Weights Under RBA and IAA
----------------------------------------------------------------------------------------------------------------
                                                        Column 1        Column 2        Column 3
                                                    -----------------------------------------------    Applicable
                                                      Risk weights    Risk weights    Risk weights    external or
       Applicable external or inferred rating          for senior    for non-senior        for          inferred
           (Illustrative rating example)             securitization  securitization  securitization      rating
                                                        exposures       exposures       exposures    (Illustrative
                                                        backed by       backed by    backed by non-      rating
                                                     granular pools  granular pools  granular pools     example)
--------------------------------------------------------------------------------------------------- ---------------
Highest investment grade (for example, AAA)........              7%             12%             20%
Second highest investment grade (for example, AA)..              8%             15%             25%
Third-highest investment grade--positive                        10%             18%             35%
 designation (for example, A+).....................
Third-highest investment grade (for example, A)....             12%             20%

[[Page 330]]

 
Third-highest investment grade--negative                        20%             35%
 designation (for example, A-).....................
                                                                    --------------------------------------------
Lowest investment grade--positive designation (for              35%                50%
 example, BBB+)....................................
Lowest investment grade (for example, BBB).........             60%                75%
                                                    ------------------------------------------------------------
Lowest investment grade--negative designation (for
 example, BBB-)....................................                       100%
One category below investment grade--positive
 designation (for example, BB+)....................                       250%
One category below investment grade (for example,
 BB)...............................................                       425%
One category below investment grade--negative
 designation (for example, BB-)....................                       650%
More than one category below investment grade......     Deduction from tier 1 and tier 2 capital.
----------------------------------------------------------------------------------------------------------------


                        Table 7--Short-Term Credit Rating Risk Weights Under RBA and IAA
----------------------------------------------------------------------------------------------------------------
                                                        Column 1        Column 2        Column 3
                                                    -----------------------------------------------    Applicable
                                                      Risk weights    Risk weights    Risk weights    external or
       Applicable external or inferred rating          for senior    for non-senior        for          inferred
           (Illustrative rating example)             securitization  securitization  securitization      rating
                                                        exposures       exposures       exposures    (Illustrative
                                                        backed by       backed by    backed by non-      rating
                                                     granular pools  granular pools  granular pools     example)
--------------------------------------------------------------------------------------------------- ---------------
Highest investment grade (for example, A1).........              7%             12%             20%
Second highest investment grade (for example, A2)..             12%             20%             35%
Third highest investment grade (for example, A3)...             60%             75%             75%
All other ratings..................................     Deduction from tier 1 and tier 2 capital.
----------------------------------------------------------------------------------------------------------------

             Section 44. Internal Assessment Approach (IAA)

    (a) Eligibility requirements. A bank holding company may apply the 
IAA to calculate the risk-weighted asset amount for a securitization 
exposure that the bank holding company has to an ABCP program (such as a 
liquidity facility or credit enhancement) if the bank holding company, 
the ABCP program, and the exposure qualify for use of the IAA.
    (1) Bank holding company qualification criteria. A bank holding 
company qualifies for use of the IAA if the bank holding company has 
received the prior written approval of the Federal Reserve. To receive 
such approval, the bank holding company must demonstrate to the Federal 
Reserve's satisfaction that the bank holding company's internal 
assessment process meets the following criteria:
    (i) The bank holding company's internal credit assessments of 
securitization exposures must be based on publicly available rating 
criteria used by an NRSRO.
    (ii) The bank holding company's internal credit assessments of 
securitization exposures used for risk-based capital purposes must be 
consistent with those used in the bank holding company's internal risk 
management process, management information reporting systems, and 
capital adequacy assessment process.
    (iii) The bank holding company's internal credit assessment process 
must have sufficient granularity to identify gradations of risk. Each of 
the bank holding company's internal credit assessment categories must 
correspond to an external rating of an NRSRO.
    (iv) The bank holding company's internal credit assessment process, 
particularly the stress test factors for determining credit enhancement 
requirements, must be at least as conservative as the most conservative 
of the publicly available rating criteria of the NRSROs that have 
provided external ratings to the commercial paper issued by the ABCP 
program.
    (A) Where the commercial paper issued by an ABCP program has an 
external rating from two or more NRSROs and the different NRSROs' 
benchmark stress factors require different levels of credit enhancement 
to achieve the same external rating equivalent, the bank holding company 
must apply the NRSRO stress factor that requires the highest level of 
credit enhancement.

[[Page 331]]

    (B) If any NRSRO that provides an external rating to the ABCP 
program's commercial paper changes its methodology (including stress 
factors), the bank holding company must evaluate whether to revise its 
internal assessment process.
    (v) The bank holding company must have an effective system of 
controls and oversight that ensures compliance with these operational 
requirements and maintains the integrity and accuracy of the internal 
credit assessments. The bank holding company must have an internal audit 
function independent from the ABCP program business line and internal 
credit assessment process that assesses at least annually whether the 
controls over the internal credit assessment process function as 
intended.
    (vi) The bank holding company must review and update each internal 
credit assessment whenever new material information is available, but no 
less frequently than annually.
    (vii) The bank holding company must validate its internal credit 
assessment process on an ongoing basis and at least annually.
    (2) ABCP-program qualification criteria. An ABCP program qualifies 
for use of the IAA if all commercial paper issued by the ABCP program 
has an external rating.
    (3) Exposure qualification criteria. A securitization exposure 
qualifies for use of the IAA if the exposure meets the following 
criteria:
    (i) The bank holding company initially rated the exposure at least 
the equivalent of investment grade.
    (ii) The ABCP program has robust credit and investment guidelines 
(that is, underwriting standards) for the exposures underlying the 
securitization exposure.
    (iii) The ABCP program performs a detailed credit analysis of the 
sellers of the exposures underlying the securitization exposure.
    (iv) The ABCP program's underwriting policy for the exposures 
underlying the securitization exposure establishes minimum asset 
eligibility criteria that include the prohibition of the purchase of 
assets that are significantly past due or of assets that are defaulted 
(that is, assets that have been charged off or written down by the 
seller prior to being placed into the ABCP program or assets that would 
be charged off or written down under the program's governing contracts), 
as well as limitations on concentration to individual obligors or 
geographic areas and the tenor of the assets to be purchased.
    (v) The aggregate estimate of loss on the exposures underlying the 
securitization exposure considers all sources of potential risk, such as 
credit and dilution risk.
    (vi) Where relevant, the ABCP program incorporates structural 
features into each purchase of exposures underlying the securitization 
exposure to mitigate potential credit deterioration of the underlying 
exposures. Such features may include wind-down triggers specific to a 
pool of underlying exposures.
    (b) Mechanics. A bank holding company that elects to use the IAA to 
calculate the risk-based capital requirement for any securitization 
exposure must use the IAA to calculate the risk-based capital 
requirements for all securitization exposures that qualify for the IAA 
approach. Under the IAA, a bank holding company must map its internal 
assessment of such a securitization exposure to an equivalent external 
rating from an NRSRO. Under the IAA, a bank holding company must 
determine the risk-weighted asset amount for such a securitization 
exposure by multiplying the amount of the exposure (as defined in 
paragraph (e) of section 42 of this appendix) by the appropriate risk 
weight in Table 6 and Table 7 in paragraph (b) of section 43 of this 
appendix.

             Section 45. Supervisory Formula Approach (SFA)

    (a) Eligibility requirements. A bank holding company may use the SFA 
to determine its risk-based capital requirement for a securitization 
exposure only if the bank holding company can calculate on an ongoing 
basis each of the SFA parameters in paragraph (e) of this section.
    (b) Mechanics. Under the SFA, a securitization exposure incurs a 
deduction from total capital (as described in paragraph (c) of section 
42 of this appendix) and/or an SFA risk-based capital requirement, as 
determined in paragraph (c) of this section. The risk-weighted asset 
amount for the securitization exposure equals the SFA risk-based capital 
requirement for the exposure multiplied by 12.5.
    (c) The SFA risk-based capital requirement. (1) If KIRB 
is greater than or equal to L + T, the entire exposure must be deducted 
from total capital.
    (2) If KIRB is less than or equal to L, the exposure's 
SFA risk-based capital requirement is UE multiplied by TP multiplied by 
the greater of:
    (i) 0.0056 * T; or
    (ii) S[L + T] - S[L].
    (3) If KIRB is greater than L and less than L + T, the 
bank holding company must deduct from total capital an amount equal to 
UE*TP*(KIRB - L), and the exposure's SFA risk-based capital 
requirement is UE multiplied by TP multiplied by the greater of:
    (i) 0.0056 * (T - (KIRB - L)); or
    (ii) S[L + T] - S[KIRB].
    (d) The supervisory formula:

[[Page 332]]

[GRAPHIC] [TIFF OMITTED] TR07DE07.017

    (11) In these expressions, [beta][Y; a, b] refers to the cumulative 
beta distribution with parameters a and b evaluated at Y. In the case 
where N = 1 and EWALGD = 100 percent, S[Y] in formula (1) must be 
calculated with K[Y] set equal to the product of KIRB and Y, 
and d set equal to 1 - KIRB.
    (e) SFA parameters--(1) Amount of the underlying exposures (UE). UE 
is the EAD of any underlying exposures that are wholesale and retail 
exposures (including the amount of any funded spread accounts, cash 
collateral accounts, and other similar funded credit enhancements) plus 
the amount of any underlying exposures that are securitization exposures 
(as defined in paragraph (e) of section 42 of this appendix) plus the 
adjusted carrying value of any underlying exposures that are equity 
exposures (as defined in paragraph (b) of section 51 of this appendix).

[[Page 333]]

    (2) Tranche percentage (TP). TP is the ratio of the amount of the 
bank holding company's securitization exposure to the amount of the 
tranche that contains the securitization exposure.
    (3) Capital requirement on underlying exposures (KIRB). (i) 
KIRB is the ratio of:
    (A) The sum of the risk-based capital requirements for the 
underlying exposures plus the expected credit losses of the underlying 
exposures (as determined under this appendix as if the underlying 
exposures were directly held by the bank holding company); to
    (B) UE.
    (ii) The calculation of KIRB must reflect the effects of 
any credit risk mitigant applied to the underlying exposures (either to 
an individual underlying exposure, to a group of underlying exposures, 
or to the entire pool of underlying exposures).
    (iii) All assets related to the securitization are treated as 
underlying exposures, including assets in a reserve account (such as a 
cash collateral account).
    (4) Credit enhancement level (L). (i) L is the ratio of:
    (A) The amount of all securitization exposures subordinated to the 
tranche that contains the bank holding company's securitization 
exposure; to
    (B) UE.
    (ii) A bank holding company must determine L before considering the 
effects of any tranche-specific credit enhancements.
    (iii) Any gain-on-sale or CEIO associated with the securitization 
may not be included in L.
    (iv) Any reserve account funded by accumulated cash flows from the 
underlying exposures that is subordinated to the tranche that contains 
the bank holding company's securitization exposure may be included in 
the numerator and denominator of L to the extent cash has accumulated in 
the account. Unfunded reserve accounts (that is, reserve accounts that 
are to be funded from future cash flows from the underlying exposures) 
may not be included in the calculation of L.
    (v) In some cases, the purchase price of receivables will reflect a 
discount that provides credit enhancement (for example, first loss 
protection) for all or certain tranches of the securitization. When this 
arises, L should be calculated inclusive of this discount if the 
discount provides credit enhancement for the securitization exposure.
    (5) Thickness of tranche (T). T is the ratio of:
    (i) The amount of the tranche that contains the bank holding 
company's securitization exposure; to
    (ii) UE.
    (6) Effective number of exposures (N). (i) Unless the bank holding 
company elects to use the formula provided in paragraph (f) of this 
section,
[GRAPHIC] [TIFF OMITTED] TR07DE07.018

where EADi represents the EAD associated with the ith 
instrument in the pool of underlying exposures.
    (ii) Multiple exposures to one obligor must be treated as a single 
underlying exposure.
    (iii) In the case of a re-securitization (that is, a securitization 
in which some or all of the underlying exposures are themselves 
securitization exposures), the bank holding company must treat each 
underlying exposure as a single underlying exposure and must not look 
through to the originally securitized underlying exposures.
    (7) Exposure-weighted average loss given default (EWALGD). EWALGD is 
calculated as:
[GRAPHIC] [TIFF OMITTED] TR07DE07.019

where LGDi represents the average LGD associated with all 
exposures to the ith obligor. In the case of a re-securitization, an LGD 
of 100 percent must be assumed for the underlying exposures that are 
themselves securitization exposures.
    (f) Simplified method for computing N and EWALGD. (1) If all 
underlying exposures of a securitization are retail exposures, a bank 
holding company may apply the SFA using the following simplifications:
    (i) h = 0; and
    (ii) v = 0.
    (2) Under the conditions in paragraphs (f)(3) and (f)(4) of this 
section, a bank holding company may employ a simplified method for 
calculating N and EWALGD.
    (3) If C1 is no more than 0.03, a bank holding company 
may set EWALGD = 0.50 if none of the underlying exposures is a 
securitization exposure or EWALGD = 1 if one or more of the underlying 
exposures is a securitization exposure, and may set N equal to the 
following amount:

[[Page 334]]

[GRAPHIC] [TIFF OMITTED] TR07DE07.020

where:
    (i) Cm is the ratio of the sum of the amounts of the `m' 
largest underlying exposures to UE; and
    (ii) The level of m is to be selected by the bank holding company.

    (4) Alternatively, if only C1 is available and 
C1 is no more than 0.03, the bank holding company may set 
EWALGD = 0.50 if none of the underlying exposures is a securitization 
exposure or EWALGD = 1 if one or more of the underlying exposures is a 
securitization exposure and may set N = 1/C1.

  Section 46. Recognition of Credit Risk Mitigants for Securitization 
                                Exposures

    (a) General. An originating bank holding company that has obtained a 
credit risk mitigant to hedge its securitization exposure to a synthetic 
or traditional securitization that satisfies the operational criteria in 
section 41 of this appendix may recognize the credit risk mitigant, but 
only as provided in this section. An investing bank holding company that 
has obtained a credit risk mitigant to hedge a securitization exposure 
may recognize the credit risk mitigant, but only as provided in this 
section. A bank holding company that has used the RBA in section 43 of 
this appendix or the IAA in section 44 of this appendix to calculate its 
risk-based capital requirement for a securitization exposure whose 
external or inferred rating (or equivalent internal rating under the 
IAA) reflects the benefits of a credit risk mitigant provided to the 
associated securitization or that supports some or all of the underlying 
exposures may not use the credit risk mitigation rules in this section 
to further reduce its risk-based capital requirement for the exposure to 
reflect that credit risk mitigant.
    (b) Collateral--(1) Rules of recognition. A bank holding company may 
recognize financial collateral in determining the bank holding company's 
risk-based capital requirement for a securitization exposure (other than 
a repo-style transaction, an eligible margin loan, or an OTC derivative 
contract for which the bank holding company has reflected collateral in 
its determination of exposure amount under section 32 of this appendix) 
as follows. The bank holding company's risk-based capital requirement 
for the collateralized securitization exposure is equal to the risk-
based capital requirement for the securitization exposure as calculated 
under the RBA in section 43 of this appendix or under the SFA in section 
45 of this appendix multiplied by the ratio of adjusted exposure amount 
(SE*) to original exposure amount (SE), where:
    (i) SE* = max {0, [SE--C x (1-Hs-Hfx)]{time} ;
    (ii) SE = the amount of the securitization exposure calculated under 
paragraph (e) of section 42 of this appendix;
    (iii) C = the current market value of the collateral;
    (iv) Hs = the haircut appropriate to the collateral type; and
    (v) Hfx = the haircut appropriate for any currency mismatch between 
the collateral and the exposure.
    (2) Mixed collateral. Where the collateral is a basket of different 
asset types or a basket of assets denominated in different currencies, 
the haircut on the basket will be
[GRAPHIC] [TIFF OMITTED] TR07DE07.023

where ai is the current market value of the asset in the 
basket divided by the current market value of all assets in the basket 
and Hi is the haircut applicable to that asset.
    (3) Standard supervisory haircuts. Unless a bank holding company 
qualifies for use of and uses own-estimates haircuts in paragraph (b)(4) 
of this section:
    (i) A bank holding company must use the collateral type haircuts 
(Hs) in Table 3;
    (ii) A bank holding company must use a currency mismatch haircut 
(Hfx) of 8 percent if the exposure and the collateral are denominated in 
different currencies;
    (iii) A bank holding company must multiply the supervisory haircuts 
obtained in paragraphs (b)(3)(i) and (ii) by the square root of 6.5 
(which equals 2.549510); and
    (iv) A bank holding company must adjust the supervisory haircuts 
upward on the basis of a holding period longer than 65 business days 
where and as appropriate to take into account the illiquidity of the 
collateral.
    (4) Own estimates for haircuts. With the prior written approval of 
the Federal Reserve, a bank holding company may calculate haircuts using 
its own internal estimates of market price volatility and foreign 
exchange volatility, subject to paragraph (b)(2)(iii) of section 32 of 
this appendix. The minimum holding period (TM) for securitization 
exposures is 65 business days.
    (c) Guarantees and credit derivatives--(1) Limitations on 
recognition. A bank holding

[[Page 335]]

company may only recognize an eligible guarantee or eligible credit 
derivative provided by an eligible securitization guarantor in 
determining the bank holding company's risk-based capital requirement 
for a securitization exposure.
    (2) ECL for securitization exposures. When a bank holding company 
recognizes an eligible guarantee or eligible credit derivative provided 
by an eligible securitization guarantor in determining the bank holding 
company's risk-based capital requirement for a securitization exposure, 
the bank holding company must also:
    (i) Calculate ECL for the protected portion of the exposure using 
the same risk parameters that it uses for calculating the risk-weighted 
asset amount of the exposure as described in paragraph (c)(3) of this 
section; and
    (ii) Add the exposure's ECL to the bank holding company's total ECL.
    (3) Rules of recognition. A bank holding company may recognize an 
eligible guarantee or eligible credit derivative provided by an eligible 
securitization guarantor in determining the bank holding company's risk-
based capital requirement for the securitization exposure as follows:
    (i) Full coverage. If the protection amount of the eligible 
guarantee or eligible credit derivative equals or exceeds the amount of 
the securitization exposure, the bank holding company may set the risk-
weighted asset amount for the securitization exposure equal to the risk-
weighted asset amount for a direct exposure to the eligible 
securitization guarantor (as determined in the wholesale risk weight 
function described in section 31 of this appendix), using the bank 
holding company's PD for the guarantor, the bank holding company's LGD 
for the guarantee or credit derivative, and an EAD equal to the amount 
of the securitization exposure (as determined in paragraph (e) of 
section 42 of this appendix).
    (ii) Partial coverage. If the protection amount of the eligible 
guarantee or eligible credit derivative is less than the amount of the 
securitization exposure, the bank holding company may set the risk-
weighted asset amount for the securitization exposure equal to the sum 
of:
    (A) Covered portion. The risk-weighted asset amount for a direct 
exposure to the eligible securitization guarantor (as determined in the 
wholesale risk weight function described in section 31 of this 
appendix), using the bank holding company's PD for the guarantor, the 
bank holding company's LGD for the guarantee or credit derivative, and 
an EAD equal to the protection amount of the credit risk mitigant; and
    (B) Uncovered portion. (1) 1.0 minus the ratio of the protection 
amount of the eligible guarantee or eligible credit derivative to the 
amount of the securitization exposure); multiplied by
    (2) The risk-weighted asset amount for the securitization exposure 
without the credit risk mitigant (as determined in sections 42-45 of 
this appendix).
    (4) Mismatches. The bank holding company must make applicable 
adjustments to the protection amount as required in paragraphs (d), (e), 
and (f) of section 33 of this appendix for any hedged securitization 
exposure and any more senior securitization exposure that benefits from 
the hedge. In the context of a synthetic securitization, when an 
eligible guarantee or eligible credit derivative covers multiple hedged 
exposures that have different residual maturities, the bank holding 
company must use the longest residual maturity of any of the hedged 
exposures as the residual maturity of all the hedged exposures.

   Section 47. Risk-Based Capital Requirement for Early Amortization 
                               Provisions

    (a) General. (1) An originating bank holding company must hold risk-
based capital against the sum of the originating bank holding company's 
interest and the investors' interest in a securitization that:
    (i) Includes one or more underlying exposures in which the borrower 
is permitted to vary the drawn amount within an agreed limit under a 
line of credit; and
    (ii) Contains an early amortization provision.
    (2) For securitizations described in paragraph (a)(1) of this 
section, an originating bank holding company must calculate the risk-
based capital requirement for the originating bank holding company's 
interest under sections 42-45 of this appendix, and the risk-based 
capital requirement for the investors' interest under paragraph (b) of 
this section.
    (b) Risk-weighted asset amount for investors' interest. The 
originating bank holding company's risk-weighted asset amount for the 
investors' interest in the securitization is equal to the product of the 
following 5 quantities:
    (1) The investors' interest EAD;
    (2) The appropriate conversion factor in paragraph (c) of this 
section;
    (3) KIRB (as defined in paragraph (e)(3) of section 45 of 
this appendix);
    (4) 12.5; and
    (5) The proportion of the underlying exposures in which the borrower 
is permitted to vary the drawn amount within an agreed limit under a 
line of credit.
    (c) Conversion factor. (1) (i) Except as provided in paragraph 
(c)(2) of this section, to calculate the appropriate conversion factor, 
a bank holding company must use Table 8 for a securitization that 
contains a controlled early amortization provision and must use Table 9 
for a securitization that contains a

[[Page 336]]

non-controlled early amortization provision. In circumstances where a 
securitization contains a mix of retail and nonretail exposures or a mix 
of committed and uncommitted exposures, a bank holding company may take 
a pro rata approach to determining the conversion factor for the 
securitization's early amortization provision. If a pro rata approach is 
not feasible, a bank holding company must treat the mixed securitization 
as a securitization of nonretail exposures if a single underlying 
exposure is a nonretail exposure and must treat the mixed securitization 
as a securitization of committed exposures if a single underlying 
exposure is a committed exposure.
    (ii) To find the appropriate conversion factor in the tables, a bank 
holding company must divide the three-month average annualized excess 
spread of the securitization by the excess spread trapping point in the 
securitization structure. In securitizations that do not require excess 
spread to be trapped, or that specify trapping points based primarily on 
performance measures other than the three-month average annualized 
excess spread, the excess spread trapping point is 4.5 percent.

            Table 8--Controlled Early Amortization Provisions
------------------------------------------------------------------------
                                       Uncommitted          Committed
------------------------------------------------------------------------
Retail Credit Lines............  Three-month average     90% CF
                                  annualized excess
                                  spread Conversion
                                  Factor (CF).
                                 133.33% of trapping
                                  point or more, 0% CF.
                                 less than 133.33% to
                                  100% of trapping
                                  point, 1% CF.
                                 less than 100% to 75%
                                  of trapping point, 2%
                                  CF.
                                 less than 75% to 50%
                                  of trapping point,
                                  10% CF.
                                 less than 50% to 25%
                                  of trapping point,
                                  20% CF.
                                 less than 25% of
                                  trapping point, 40%
                                  CF.
Non-retail Credit Lines........  90% CF................  90% CF
------------------------------------------------------------------------


          Table 9--Non-Controlled Early Amortization Provisions
------------------------------------------------------------------------
                                       Uncommitted          Committed
------------------------------------------------------------------------
Retail Credit Lines............  Three-month average     100% CF
                                  annualized excess
                                  spread Conversion
                                  Factor (CF).
                                 133.33% of trapping
                                  point or more, 0% CF.
                                 less than 133.33% to
                                  100% of trapping
                                  point, 5% CF.
                                 less than 100% to 75%
                                  of trapping point,
                                  15% CF.
                                 less than 75% to 50%
                                  of trapping point,
                                  50% CF.
                                 less than 50% of
                                  trapping point, 100%
                                  CF.
Non-retail Credit Lines........  100% CF...............  100% CF
------------------------------------------------------------------------

    (2) For a securitization for which all or substantially all of the 
underlying exposures are residential mortgage exposures, a bank holding 
company may calculate the appropriate conversion factor using paragraph 
(c)(1) of this section or may use a conversion factor of 10 percent. If 
the bank holding company chooses to use a conversion factor of 10 
percent, it must use that conversion factor for all securitizations for 
which all or substantially all of the underlying exposures are 
residential mortgage exposures.

           Part VI. Risk-Weighted Assets for Equity Exposures

            Section 51. Introduction and Exposure Measurement

    (a) General. To calculate its risk-weighted asset amounts for equity 
exposures that are not equity exposures to investment funds, a bank 
holding company may apply either the Simple Risk Weight Approach (SRWA) 
in section 52 of this appendix or, if it qualifies to do so, the 
Internal Models Approach (IMA) in section 53 of this appendix. A bank 
holding company must use the look-through approaches in section 54 of 
this appendix to calculate its risk-weighted asset amounts for equity 
exposures to investment funds.
    (b) Adjusted carrying value. For purposes of this part, the adjusted 
carrying value of an equity exposure is:
    (1) For the on-balance sheet component of an equity exposure, the 
bank holding company's carrying value of the exposure reduced by any 
unrealized gains on the exposure that are reflected in such carrying 
value but excluded from the bank holding company's tier 1 and tier 2 
capital; and
    (2) For the off-balance sheet component of an equity exposure, the 
effective notional principal amount of the exposure, the size of which 
is equivalent to a hypothetical on-balance sheet position in the 
underlying equity instrument that would evidence the same change in fair 
value (measured in dollars) for a given small change in the price of the 
underlying equity instrument, minus the adjusted carrying value of the 
on-balance sheet

[[Page 337]]

component of the exposure as calculated in paragraph (b)(1) of this 
section. For unfunded equity commitments that are unconditional, the 
effective notional principal amount is the notional amount of the 
commitment. For unfunded equity commitments that are conditional, the 
effective notional principal amount is the bank holding company's best 
estimate of the amount that would be funded under economic downturn 
conditions.

             Section 52. Simple Risk Weight Approach (SRWA)

    (a) General. Under the SRWA, a bank holding company's aggregate 
risk-weighted asset amount for its equity exposures is equal to the sum 
of the risk-weighted asset amounts for each of the bank holding 
company's individual equity exposures (other than equity exposures to an 
investment fund) as determined in this section and the risk-weighted 
asset amounts for each of the bank holding company's individual equity 
exposures to an investment fund as determined in section 54 of this 
appendix.
    (b) SRWA computation for individual equity exposures. A bank holding 
company must determine the risk-weighted asset amount for an individual 
equity exposure (other than an equity exposure to an investment fund) by 
multiplying the adjusted carrying value of the equity exposure or the 
effective portion and ineffective portion of a hedge pair (as defined in 
paragraph (c) of this section) by the lowest applicable risk weight in 
this paragraph (b).
    (1) 0 percent risk weight equity exposures. An equity exposure to an 
entity whose credit exposures are exempt from the 0.03 percent PD floor 
in paragraph (d)(2) of section 31 of this appendix is assigned a 0 
percent risk weight.
    (2) 20 percent risk weight equity exposures. An equity exposure to a 
Federal Home Loan Bank or Farmer Mac is assigned a 20 percent risk 
weight.
    (3) 100 percent risk weight equity exposures. The following equity 
exposures are assigned a 100 percent risk weight:
    (i) Community development equity exposures. An equity exposure that 
qualifies as a community development investment under 12 U.S.C. 24 
(Eleventh), excluding equity exposures to an unconsolidated small 
business investment company and equity exposures held through a 
consolidated small business investment company described in section 302 
of the Small Business Investment Act of 1958 (15 U.S.C. 682).
    (ii) Effective portion of hedge pairs. The effective portion of a 
hedge pair.
    (iii) Non-significant equity exposures. Equity exposures, excluding 
exposures to an investment firm that would meet the definition of a 
traditional securitization were it not for the Federal Reserve's 
application of paragraph (8) of that definition and has greater than 
immaterial leverage, to the extent that the aggregate adjusted carrying 
value of the exposures does not exceed 10 percent of the bank holding 
company's tier 1 capital plus tier 2 capital.
    (A) To compute the aggregate adjusted carrying value of a bank 
holding company's equity exposures for purposes of this paragraph 
(b)(3)(iii), the bank holding company may exclude equity exposures 
described in paragraphs (b)(1), (b)(2), (b)(3)(i), and (b)(3)(ii) of 
this section, the equity exposure in a hedge pair with the smaller 
adjusted carrying value, and a proportion of each equity exposure to an 
investment fund equal to the proportion of the assets of the investment 
fund that are not equity exposures or that meet the criterion of 
paragraph (b)(3)(i) of this section. If a bank holding company does not 
know the actual holdings of the investment fund, the bank holding 
company may calculate the proportion of the assets of the fund that are 
not equity exposures based on the terms of the prospectus, partnership 
agreement, or similar contract that defines the fund's permissible 
investments. If the sum of the investment limits for all exposure 
classes within the fund exceeds 100 percent, the bank holding company 
must assume for purposes of this paragraph (b)(3)(iii) that the 
investment fund invests to the maximum extent possible in equity 
exposures.
    (B) When determining which of a bank holding company's equity 
exposures qualify for a 100 percent risk weight under this paragraph, a 
bank holding company first must include equity exposures to 
unconsolidated small business investment companies or held through 
consolidated small business investment companies described in section 
302 of the Small Business Investment Act of 1958 (15 U.S.C. 682), then 
must include publicly traded equity exposures (including those held 
indirectly through investment funds), and then must include non-publicly 
traded equity exposures (including those held indirectly through 
investment funds).
    (4) 300 percent risk weight equity exposures. A publicly traded 
equity exposure (other than an equity exposure described in paragraph 
(b)(6) of this section and including the ineffective portion of a hedge 
pair) is assigned a 300 percent risk weight.
    (5) 400 percent risk weight equity exposures. An equity exposure 
(other than an equity exposure described in paragraph (b)(6) of this 
section) that is not publicly traded is assigned a 400 percent risk 
weight.
    (6) 600 percent risk weight equity exposures. An equity exposure to 
an investment firm that:
    (i) Would meet the definition of a traditional securitization were 
it not for the Federal Reserve's application of paragraph (8) of that 
definition; and
    (ii) Has greater than immaterial leverage is assigned a 600 percent 
risk weight.

[[Page 338]]

    (c) Hedge transactions--(1) Hedge pair. A hedge pair is two equity 
exposures that form an effective hedge so long as each equity exposure 
is publicly traded or has a return that is primarily based on a publicly 
traded equity exposure.
    (2) Effective hedge. Two equity exposures form an effective hedge if 
the exposures either have the same remaining maturity or each has a 
remaining maturity of at least three months; the hedge relationship is 
formally documented in a prospective manner (that is, before the bank 
holding company acquires at least one of the equity exposures); the 
documentation specifies the measure of effectiveness (E) the bank 
holding company will use for the hedge relationship throughout the life 
of the transaction; and the hedge relationship has an E greater than or 
equal to 0.8. A bank holding company must measure E at least quarterly 
and must use one of three alternative measures of E:
    (i) Under the dollar-offset method of measuring effectiveness, the 
bank holding company must determine the ratio of value change (RVC). The 
RVC is the ratio of the cumulative sum of the periodic changes in value 
of one equity exposure to the cumulative sum of the periodic changes in 
the value of the other equity exposure. If RVC is positive, the hedge is 
not effective and E equals 0. If RVC is negative and greater than or 
equal to -1 (that is, between zero and -1), then E equals the absolute 
value of RVC. If RVC is negative and less than -1, then E equals 2 plus 
RVC.
    (ii) Under the variability-reduction method of measuring 
effectiveness:
[GRAPHIC] [TIFF OMITTED] TR07DE07.021

(A) Xt = At - Bt;
(B) At = the value at time t of one exposure in a hedge pair; 
          and
(C) Bt = the value at time t of the other exposure in a hedge 
          pair.
    (iii) Under the regression method of measuring effectiveness, E 
equals the coefficient of determination of a regression in which the 
change in value of one exposure in a hedge pair is the dependent 
variable and the change in value of the other exposure in a hedge pair 
is the independent variable. However, if the estimated regression 
coefficient is positive, then the value of E is zero.
    (3) The effective portion of a hedge pair is E multiplied by the 
greater of the adjusted carrying values of the equity exposures forming 
a hedge pair.
    (4) The ineffective portion of a hedge pair is (1-E) multiplied by 
the greater of the adjusted carrying values of the equity exposures 
forming a hedge pair.

               Section 53. Internal Models Approach (IMA)

    (a) General. A bank holding company may calculate its risk-weighted 
asset amount for equity exposures using the IMA by modeling publicly 
traded and non-publicly traded equity exposures (in accordance with 
paragraph (c) of this section) or by modeling only publicly traded 
equity exposures (in accordance with paragraph (d) of this section).
    (b) Qualifying criteria. To qualify to use the IMA to calculate 
risk-based capital requirements for equity exposures, a bank holding 
company must receive prior written approval from the Federal Reserve. To 
receive such approval, the bank holding company must demonstrate to the 
Federal Reserve's satisfaction that the bank holding company meets the 
following criteria:
    (1) The bank holding company must have one or more models that:
    (i) Assess the potential decline in value of its modeled equity 
exposures;
    (ii) Are commensurate with the size, complexity, and composition of 
the bank holding company's modeled equity exposures; and
    (iii) Adequately capture both general market risk and idiosyncratic 
risk.
    (2) The bank holding company's model must produce an estimate of 
potential losses for its modeled equity exposures that is no less than 
the estimate of potential losses produced by a VaR methodology employing 
a 99.0 percent, one-tailed confidence interval of the distribution of 
quarterly returns for a benchmark portfolio of equity exposures 
comparable to the bank holding company's modeled equity exposures using 
a long-term sample period.
    (3) The number of risk factors and exposures in the sample and the 
data period used for quantification in the bank holding company's model 
and benchmarking exercise must be sufficient to provide confidence in

[[Page 339]]

the accuracy and robustness of the bank holding company's estimates.
    (4) The bank holding company's model and benchmarking process must 
incorporate data that are relevant in representing the risk profile of 
the bank holding company's modeled equity exposures, and must include 
data from at least one equity market cycle containing adverse market 
movements relevant to the risk profile of the bank holding company's 
modeled equity exposures. In addition, the bank holding company's 
benchmarking exercise must be based on daily market prices for the 
benchmark portfolio. If the bank holding company's model uses a scenario 
methodology, the bank holding company must demonstrate that the model 
produces a conservative estimate of potential losses on the bank holding 
company's modeled equity exposures over a relevant long-term market 
cycle. If the bank holding company employs risk factor models, the bank 
holding company must demonstrate through empirical analysis the 
appropriateness of the risk factors used.
    (5) The bank holding company must be able to demonstrate, using 
theoretical arguments and empirical evidence, that any proxies used in 
the modeling process are comparable to the bank holding company's 
modeled equity exposures and that the bank holding company has made 
appropriate adjustments for differences. The bank holding company must 
derive any proxies for its modeled equity exposures and benchmark 
portfolio using historical market data that are relevant to the bank 
holding company's modeled equity exposures and benchmark portfolio (or, 
where not, must use appropriately adjusted data), and such proxies must 
be robust estimates of the risk of the bank holding company's modeled 
equity exposures.
    (c) Risk-weighted assets calculation for a bank holding company 
modeling publicly traded and non-publicly traded equity exposures. If a 
bank holding company models publicly traded and non-publicly traded 
equity exposures, the bank holding company's aggregate risk-weighted 
asset amount for its equity exposures is equal to the sum of:
    (1) The risk-weighted asset amount of each equity exposure that 
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under 
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under 
section 52 of this appendix) and each equity exposure to an investment 
fund (as determined under section 54 of this appendix); and
    (2) The greater of:
    (i) The estimate of potential losses on the bank holding company's 
equity exposures (other than equity exposures referenced in paragraph 
(c)(1) of this section) generated by the bank holding company's internal 
equity exposure model multiplied by 12.5; or
    (ii) The sum of:
    (A) 200 percent multiplied by the aggregate adjusted carrying value 
of the bank holding company's publicly traded equity exposures that do 
not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, 
or 100 percent risk weight under paragraphs (b)(1) through (b)(3)(i) of 
section 52 of this appendix, and are not equity exposures to an 
investment fund;
    (B) 200 percent multiplied by the aggregate ineffective portion of 
all hedge pairs; and
    (C) 300 percent multiplied by the aggregate adjusted carrying value 
of the bank holding company's equity exposures that are not publicly 
traded, do not qualify for a 0 percent, 20 percent, or 100 percent risk 
weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of this 
appendix, and are not equity exposures to an investment fund.
    (d) Risk-weighted assets calculation for a bank holding company 
using the IMA only for publicly traded equity exposures. If a bank 
holding company models only publicly traded equity exposures, the bank 
holding company's aggregate risk-weighted asset amount for its equity 
exposures is equal to the sum of:
    (1) The risk-weighted asset amount of each equity exposure that 
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under 
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under 
section 52 of this appendix), each equity exposure that qualifies for a 
400 percent risk weight under paragraph (b)(5) of section 52 or a 600 
percent risk weight under paragraph (b)(6) of section 52 (as determined 
under section 52 of this appendix), and each equity exposure to an 
investment fund (as determined under section 54 of this appendix); and
    (2) The greater of:
    (i) The estimate of potential losses on the bank holding company's 
equity exposures (other than equity exposures referenced in paragraph 
(d)(1) of this section) generated by the bank holding company's internal 
equity exposure model multiplied by 12.5; or
    (ii) The sum of:
    (A) 200 percent multiplied by the aggregate adjusted carrying value 
of the bank holding company's publicly traded equity exposures that do 
not belong to a hedge pair, do not qualify for a 0 percent, 20 percent, 
or 100 percent risk weight under paragraphs (b)(1) through (b)(3)(i) of 
section 52 of this appendix, and are not equity exposures to an 
investment fund; and
    (B) 200 percent multiplied by the aggregate ineffective portion of 
all hedge pairs.

            Section 54. Equity Exposures to Investment Funds

    (a) Available approaches. (1) Unless the exposure meets the 
requirements for a community development equity exposure in paragraph 
(b)(3)(i) of section 52 of this appendix, a bank holding company must 
determine the

[[Page 340]]

risk-weighted asset amount of an equity exposure to an investment fund 
under the Full Look-Through Approach in paragraph (b) of this section, 
the Simple Modified Look-Through Approach in paragraph (c) of this 
section, the Alternative Modified Look-Through Approach in paragraph (d) 
of this section, or, if the investment fund qualifies for the Money 
Market Fund Approach, the Money Market Fund Approach in paragraph (e) of 
this section.
    (2) The risk-weighted asset amount of an equity exposure to an 
investment fund that meets the requirements for a community development 
equity exposure in paragraph (b)(3)(i) of section 52 of this appendix is 
its adjusted carrying value.
    (3) If an equity exposure to an investment fund is part of a hedge 
pair and the bank holding company does not use the Full Look-Through 
Approach, the bank holding company may use the ineffective portion of 
the hedge pair as determined under paragraph (c) of section 52 of this 
appendix as the adjusted carrying value for the equity exposure to the 
investment fund. The risk-weighted asset amount of the effective portion 
of the hedge pair is equal to its adjusted carrying value.
    (b) Full Look-Through Approach. A bank holding company that is able 
to calculate a risk-weighted asset amount for its proportional ownership 
share of each exposure held by the investment fund (as calculated under 
this appendix as if the proportional ownership share of each exposure 
were held directly by the bank holding company) may either:
    (1) Set the risk-weighted asset amount of the bank holding company's 
exposure to the fund equal to the product of:
    (i) The aggregate risk-weighted asset amounts of the exposures held 
by the fund as if they were held directly by the bank holding company; 
and
    (ii) The bank holding company's proportional ownership share of the 
fund; or
    (2) Include the bank holding company's proportional ownership share 
of each exposure held by the fund in the bank holding company's IMA.
    (c) Simple Modified Look-Through Approach. Under this approach, the 
risk-weighted asset amount for a bank holding company's equity exposure 
to an investment fund equals the adjusted carrying value of the equity 
exposure multiplied by the highest risk weight in Table 10 that applies 
to any exposure the fund is permitted to hold under its prospectus, 
partnership agreement, or similar contract that defines the fund's 
permissible investments (excluding derivative contracts that are used 
for hedging rather than speculative purposes and that do not constitute 
a material portion of the fund's exposures).

   Table 10--Modified Look-Through Approaches for Equity Exposures to
                            Investment Funds
------------------------------------------------------------------------
               Risk weight                         Exposure class
------------------------------------------------------------------------
0 percent................................  Sovereign exposures with a
                                            long-term applicable
                                            external rating in the
                                            highest investment-grade
                                            rating category and
                                            sovereign exposures of the
                                            United States.
20 percent...............................  Non-sovereign exposures with
                                            a long-term applicable
                                            external rating in the
                                            highest or second-highest
                                            investment-grade rating
                                            category; exposures with a
                                            short-term applicable
                                            external rating in the
                                            highest investment-grade
                                            rating category; and
                                            exposures to, or guaranteed
                                            by, depository institutions,
                                            foreign banks (as defined in
                                            12 CFR 211.2), or securities
                                            firms subject to
                                            consolidated supervision and
                                            regulation comparable to
                                            that imposed on U.S.
                                            securities broker-dealers
                                            that are repo-style
                                            transactions or bankers'
                                            acceptances.
50 percent...............................  Exposures with a long-term
                                            applicable external rating
                                            in the third-highest
                                            investment-grade rating
                                            category or a short-term
                                            applicable external rating
                                            in the second-highest
                                            investment-grade rating
                                            category.
100 percent..............................  Exposures with a long-term or
                                            short-term applicable
                                            external rating in the
                                            lowest investment-grade
                                            rating category.
200 percent..............................  Exposures with a long-term
                                            applicable external rating
                                            one rating category below
                                            investment grade.
300 percent..............................  Publicly traded equity
                                            exposures.
400 percent..............................  Non-publicly traded equity
                                            exposures; exposures with a
                                            long-term applicable
                                            external rating two rating
                                            categories or more below
                                            investment grade; and
                                            exposures without an
                                            external rating (excluding
                                            publicly traded equity
                                            exposures).
1,250 percent............................  OTC derivative contracts and
                                            exposures that must be
                                            deducted from regulatory
                                            capital or receive a risk
                                            weight greater than 400
                                            percent under this appendix.
------------------------------------------------------------------------

    (d) Alternative Modified Look-Through Approach. Under this approach, 
a bank holding company may assign the adjusted carrying value of an 
equity exposure to an investment fund on a pro rata basis to different 
risk weight categories in Table 10 based on the investment limits in the 
fund's prospectus, partnership agreement, or similar contract that 
defines the fund's permissible investments. The risk-weighted asset 
amount for the bank holding company's equity exposure to the investment 
fund equals the sum of each portion of the adjusted carrying value 
assigned to an exposure class multiplied by the applicable risk weight. 
If the sum of the

[[Page 341]]

investment limits for exposure classes within the fund exceeds 100 
percent, the bank holding company must assume that the fund invests to 
the maximum extent permitted under its investment limits in the exposure 
class with the highest risk weight under Table 10, and continues to make 
investments in order of the exposure class with the next highest risk 
weight under Table 10 until the maximum total investment level is 
reached. If more than one exposure class applies to an exposure, the 
bank holding company must use the highest applicable risk weight. A bank 
holding company may exclude derivative contracts held by the fund that 
are used for hedging rather than for speculative purposes and do not 
constitute a material portion of the fund's exposures.
    (e) Money Market Fund Approach. The risk-weighted asset amount for a 
bank holding company's equity exposure to an investment fund that is a 
money market fund subject to 17 CFR 270.2a-7 and that has an applicable 
external rating in the highest investment-grade rating category equals 
the adjusted carrying value of the equity exposure multiplied by 7 
percent.

                 Section 55. Equity Derivative Contracts

    Under the IMA, in addition to holding risk-based capital against an 
equity derivative contract under this part, a bank holding company must 
hold risk-based capital against the counterparty credit risk in the 
equity derivative contract by also treating the equity derivative 
contract as a wholesale exposure and computing a supplemental risk-
weighted asset amount for the contract under part IV. Under the SRWA, a 
bank holding company may choose not to hold risk-based capital against 
the counterparty credit risk of equity derivative contracts, as long as 
it does so for all such contracts. Where the equity derivative contracts 
are subject to a qualified master netting agreement, a bank holding 
company using the SRWA must either include all or exclude all of the 
contracts from any measure used to determine counterparty credit risk 
exposure.

           Part VII. Risk-Weighted Assets for Operational Risk

Section 61. Qualification Requirements for Incorporation of Operational 
                             Risk Mitigants

    (a) Qualification to use operational risk mitigants. A bank holding 
company may adjust its estimate of operational risk exposure to reflect 
qualifying operational risk mitigants if:
    (1) The bank holding company's operational risk quantification 
system is able to generate an estimate of the bank holding company's 
operational risk exposure (which does not incorporate qualifying 
operational risk mitigants) and an estimate of the bank holding 
company's operational risk exposure adjusted to incorporate qualifying 
operational risk mitigants; and
    (2) The bank holding company's methodology for incorporating the 
effects of insurance, if the bank holding company uses insurance as an 
operational risk mitigant, captures through appropriate discounts to the 
amount of risk mitigation:
    (i) The residual term of the policy, where less than one year;
    (ii) The cancellation terms of the policy, where less than one year;
    (iii) The policy's timeliness of payment;
    (iv) The uncertainty of payment by the provider of the policy; and
    (v) Mismatches in coverage between the policy and the hedged 
operational loss event.
    (b) Qualifying operational risk mitigants. Qualifying operational 
risk mitigants are:
    (1) Insurance that:
    (i) Is provided by an unaffiliated company that has a claims payment 
ability that is rated in one of the three highest rating categories by a 
NRSRO;
    (ii) Has an initial term of at least one year and a residual term of 
more than 90 days;
    (iii) Has a minimum notice period for cancellation by the provider 
of 90 days;
    (iv) Has no exclusions or limitations based upon regulatory action 
or for the receiver or liquidator of a failed depository institution; 
and
    (v) Is explicitly mapped to a potential operational loss event; and
    (2) Operational risk mitigants other than insurance for which the 
Federal Reserve has given prior written approval. In evaluating an 
operational risk mitigant other than insurance, the Federal Reserve will 
consider whether the operational risk mitigant covers potential 
operational losses in a manner equivalent to holding regulatory capital.

        Section 62. Mechanics of Risk-Weighted Asset Calculation

    (a) If a bank holding company does not qualify to use or does not 
have qualifying operational risk mitigants, the bank holding company's 
dollar risk-based capital requirement for operational risk is its 
operational risk exposure minus eligible operational risk offsets (if 
any).
    (b) If a bank holding company qualifies to use operational risk 
mitigants and has qualifying operational risk mitigants, the bank 
holding company's dollar risk-based capital requirement for operational 
risk is the greater of:
    (1) The bank holding company's operational risk exposure adjusted 
for qualifying operational risk mitigants minus eligible operational 
risk offsets (if any); or
    (2) 0.8 multiplied by the difference between:
    (i) The bank holding company's operational risk exposure; and

[[Page 342]]

    (ii) Eligible operational risk offsets (if any).
    (c) The bank holding company's risk-weighted asset amount for 
operational risk equals the bank holding company's dollar risk-based 
capital requirement for operational risk determined under paragraph (a) 
or (b) of this section multiplied by 12.5.

                          Part VIII. Disclosure

                   Section 71. Disclosure Requirements

    (a) Each bank holding company must publicly disclose each quarter 
its total and tier 1 risk-based capital ratios and their components 
(that is, tier 1 capital, tier 2 capital, total qualifying capital, and 
total risk-weighted assets).\4\
---------------------------------------------------------------------------

    \4\ Other public disclosure requirements continue to apply--for 
example, Federal securities law and regulatory reporting requirements.
---------------------------------------------------------------------------

    (b)(1) Each consolidated bank holding company that is not a 
subsidiary of a non-U.S. banking organization that is subject to 
comparable public disclosure requirements in its home jurisdiction and 
has successfully completed its parallel run must provide timely public 
disclosures each calendar quarter of the information in tables 11.1-
11.11 below. If a significant change occurs, such that the most recent 
reported amounts are no longer reflective of the bank holding company's 
capital adequacy and risk profile, then a brief discussion of this 
change and its likely impact must be provided as soon as practicable 
thereafter. Qualitative disclosures that typically do not change each 
quarter (for example, a general summary of the bank holding company's 
risk management objectives and policies, reporting system, and 
definitions) may be disclosed annually, provided any significant changes 
to these are disclosed in the interim. Management is encouraged to 
provide all of the disclosures required by this appendix in one place on 
the bank holding company's public Web site.\5\ The bank holding company 
must make these disclosures publicly available for each of the last 
three years (that is, twelve quarters) or such shorter period since it 
began its first floor period.
---------------------------------------------------------------------------

    \5\ Alternatively, a bank holding company may provide the 
disclosures in more than one place, as some of them may be included in 
public financial reports (for example, in Management's Discussion and 
Analysis included in SEC filings) or other regulatory reports. The bank 
holding company must provide a summary table on its public Web site that 
specifically indicates where all the disclosures may be found (for 
example, regulatory report schedules, page numbers in annual reports).
---------------------------------------------------------------------------

    (2) Each bank holding company is required to have a formal 
disclosure policy approved by the board of directors that addresses its 
approach for determining the disclosures it makes. The policy must 
address the associated internal controls and disclosure controls and 
procedures. The board of directors and senior management are responsible 
for establishing and maintaining an effective internal control structure 
over financial reporting, including the disclosures required by this 
appendix, and must ensure that appropriate review of the disclosures 
takes place. One or more senior officers of the bank holding company 
must attest that the disclosures meet the requirements of this appendix.
    (3) If a bank holding company believes that disclosure of specific 
commercial or financial information would prejudice seriously its 
position by making public information that is either proprietary or 
confidential in nature, the bank holding company need not disclose those 
specific items, but must disclose more general information about the 
subject matter of the requirement, together with the fact that, and the 
reason why, the specific items of information have not been disclosed.
---------------------------------------------------------------------------

    \6\ Entities include securities, insurance and other financial 
subsidiaries, commercial subsidiaries (where permitted), and significant 
minority equity investments in insurance, financial and commercial 
entities.

                    Table 11.1--Scope of Application
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures...........  (a) The name of the top corporate
                                     entity in the group to which the
                                     appendix applies.
                                    (b) An outline of differences in the
                                     basis of consolidation for
                                     accounting and regulatory purposes,
                                     with a brief description of the
                                     entities \6\ within the group that
                                     are fully consolidated; that are
                                     deconsolidated and deducted; for
                                     which the regulatory capital
                                     requirement is deducted; and that
                                     are neither consolidated nor
                                     deducted (for example, where the
                                     investment is risk-weighted).
                                    (c) Any restrictions, or other major
                                     impediments, on transfer of funds
                                     or regulatory capital within the
                                     group.

[[Page 343]]

 
Quantitative Disclosures..........  (d) The aggregate amount of surplus
                                     capital of insurance subsidiaries
                                     (whether deducted or subjected to
                                     an alternative method) included in
                                     the regulatory capital of the
                                     consolidated group.
                                    (e) The aggregate amount by which
                                     actual regulatory capital is less
                                     than the minimum regulatory capital
                                     requirement in all subsidiaries
                                     with regulatory capital
                                     requirements and the name(s) of the
                                     subsidiaries with such
                                     deficiencies.
------------------------------------------------------------------------


                      Table 11.2--Capital Structure
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures...........  (a) Summary information on the terms
                                     and conditions of the main features
                                     of all capital instruments,
                                     especially in the case of
                                     innovative, complex or hybrid
                                     capital instruments.
Quantitative Disclosures..........  (b) The amount of tier 1 capital,
                                     with separate disclosure of:
                                       Common stock/
                                       surplus;
                                       Retained
                                       earnings;
                                       Minority
                                       interests in the equity of
                                       subsidiaries;
                                       Restricted core
                                       capital elements as defined in 12
                                       CFR part 225, appendix A;
                                       Regulatory
                                       calculation differences deducted
                                       from tier 1 capital; \7\ and
                                       Other amounts
                                       deducted from tier 1 capital,
                                       including goodwill and certain
                                       intangibles.
                                    (c) The total amount of tier 2
                                     capital.
                                    (d) Other deductions from capital.
                                     \8\
                                    (e) Total eligible capital.
------------------------------------------------------------------------

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

    \7\ Representing 50 percent of the amount, if any, by which total 
expected credit losses as calculated within the IRB approach exceed 
eligible credit reserves, which must be deducted from tier 1 capital.
    \8\ Including 50 percent of the amount, if any, by which total 
expected credit losses as calculated within the IRB approach exceed 
eligible credit reserves, which must be deducted from tier 2 capital.
    \9\ Risk-weighted assets determined under [the market risk rule] are 
to be disclosed only for the approaches used.

                      Table 11.3--Capital Adequacy
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures...........  (a) A summary discussion of the bank
                                     holding company's approach to
                                     assessing the adequacy of its
                                     capital to support current and
                                     future activities.
Quantitative disclosures..........  (b) Risk-weighted assets for credit
                                     risk from:
                                       Wholesale
                                       exposures;
                                       Residential
                                       mortgage exposures;
                                       Qualifying
                                       revolving exposures;
                                       Other retail
                                       exposures;
                                       Securitization
                                       exposures;
                                       Equity
                                       exposures
                                        Equity
                                        exposures subject to the simple
                                        risk weight approach; and
                                        Equity
                                        exposures subject to the
                                        internal models approach.
                                    (c) Risk-weighted assets for market
                                     risk as calculated under [the
                                     market risk rule]: \9\
                                       Standardized
                                       approach for specific risk; and
                                       Internal models
                                       approach for specific risk.

[[Page 344]]

 
                                    (d) Risk-weighted assets for
                                     operational risk.
                                    (e) Total and tier 1 risk-based
                                     capital ratios: \10\
                                       For the top
                                       consolidated group; and
                                       For each DI
                                       subsidiary.
------------------------------------------------------------------------

               General Qualitative Disclosure Requirement

    For each separate risk area described in tables 11.4 through 11.11, 
the bank holding company must describe its risk management objectives 
and policies, including:
     Strategies and processes;
     The structure and organization of the relevant 
risk management function;
     The scope and nature of risk reporting and/or 
measurement systems;
     Policies for hedging and/or mitigating risk and 
strategies and processes for monitoring the continuing effectiveness of 
hedges/mitigants.
---------------------------------------------------------------------------

    \10\ Total risk-weighted assets should also be disclosed.
    \11\ Table 4 does not include equity exposures.
    \12\ For example, FASB Interpretations 39 and 41.
    \13\ For example, bank holding companies could apply a breakdown 
similar to that used for accounting purposes. Such a breakdown might, 
for instance, be (a) loans, off-balance sheet commitments, and other 
non-derivative off-balance sheet exposures, (b) debt securities, and (c) 
OTC derivatives.
    \14\ Geographical areas may comprise individual countries, groups of 
countries, or regions within countries. A bank holding company might 
choose to define the geographical areas based on the way the company's 
portfolio is geographically managed. The criteria used to allocate the 
loans to geographical areas must be specified.
    \15\ A bank holding company is encouraged also to provide an 
analysis of the aging of past-due loans.

            Table 11.4\11\--Credit Risk: General Disclosures
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures...........  (a) The general qualitative
                                     disclosure requirement with respect
                                     to credit risk (excluding
                                     counterparty credit risk disclosed
                                     in accordance with Table 11.6),
                                     including:
                                       Definitions of
                                       past due and impaired (for
                                       accounting purposes);
                                       Description of
                                       approaches followed for
                                       allowances, including statistical
                                       methods used where applicable;
                                       and
                                       Discussion of
                                       the bank holding company's credit
                                       risk management policy.
Quantitative Disclosures..........  (b) Total credit risk exposures and
                                     average credit risk exposures,
                                     after accounting offsets in
                                     accordance with GAAP,\12\ and
                                     without taking into account the
                                     effects of credit risk mitigation
                                     techniques (for example, collateral
                                     and netting), over the period
                                     broken down by major types of
                                     credit exposure.\13\
                                    (c) Geographic \14\ distribution of
                                     exposures, broken down in
                                     significant areas by major types of
                                     credit exposure.
                                    (d) Industry or counterparty type
                                     distribution of exposures, broken
                                     down by major types of credit
                                     exposure.
                                    (e) Remaining contractual maturity
                                     breakdown (for example, one year or
                                     less) of the whole portfolio,
                                     broken down by major types of
                                     credit exposure.
                                    (f) By major industry or
                                     counterparty type:
                                       Amount of
                                       impaired loans;
                                       Amount of past
                                       due loans; \15\
                                       Allowances; and
                                       Charge-offs
                                       during the period.

[[Page 345]]

 
                                    (g) Amount of impaired loans and, if
                                     available, the amount of past due
                                     loans broken down by significant
                                     geographic areas including, if
                                     practical, the amounts of
                                     allowances related to each
                                     geographical area.\16\
                                    (h) Reconciliation of changes in the
                                     allowance for loan and lease
                                     losses.\17\
------------------------------------------------------------------------

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

    \16\ The portion of general allowance that is not allocated to a 
geographical area should be disclosed separately.
    \17\ The reconciliation should include the following: A description 
of the allowance; the opening balance of the allowance; charge-offs 
taken against the allowance during the period; amounts provided (or 
reversed) for estimated probable loan losses during the period; any 
other adjustments (for example, exchange rate differences, business 
combinations, acquisitions and disposals of subsidiaries), including 
transfers between allowances; and the closing balance of the allowance. 
Charge-offs and recoveries that have been recorded directly to the 
income statement should be disclosed separately.

Table 11.5--Credit Risk: Disclosures for Portfolios Subject to IRB Risk-
                         Based Capital Formulas
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures...........  (a) Explanation and review of the:
                                       Structure of
                                       internal rating systems and
                                       relation between internal and
                                       external ratings;
                                       Use of risk
                                       parameter estimates other than
                                       for regulatory capital purposes;
                                       Process for
                                       managing and recognizing credit
                                       risk mitigation (see table 11.7);
                                       and
                                       Control
                                       mechanisms for the rating system,
                                       including discussion of
                                       independence, accountability, and
                                       rating systems review.
                                    (b) Description of the internal
                                     ratings process, provided
                                     separately for the following:
                                       Wholesale
                                       category;
                                       Retail
                                       subcategories;
                                        Residential
                                        mortgage exposures;
                                        Qualifying
                                        revolving exposures; and
                                        Other retail
                                        exposures.
                                      For each category and subcategory
                                       the description should include:
                                       The types of
                                       exposure included in the category/
                                       subcategories; and
                                       The
                                       definitions, methods and data for
                                       estimation and validation of PD,
                                       LGD, and EAD, including
                                       assumptions employed in the
                                       derivation of these
                                       variables.\18\
------------------------------------------------------------------------

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

    \18\ This disclosure does not require a detailed description of the 
model in full--it should provide the reader with a broad overview of the 
model approach, describing definitions of the variables and methods for 
estimating and validating those variables set out in the quantitative 
risk disclosures below. This should be done for each of the four 
category/subcategories. The bank holding company should disclose any 
significant differences in approach to estimating these variables within 
each category/subcategories.

[[Page 346]]



Table 11.5--Credit Risk: Disclosures for Portfolios Subject to IRB Risk-
                    Based Capital Formulas--Continued
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Quantitative disclosures: Risk      (c) For wholesale exposures, present
 assessment.                         the following information across a
                                     sufficient number of PD grades
                                     (including default) to allow for a
                                     meaningful differentiation of
                                     credit risk: \19\
                                       Total EAD; \20\
                                       Exposure-
                                       weighted average LGD
                                       (percentage);
                                       Exposure-
                                       weighted average risk weight; and
                                       Amount of
                                       undrawn commitments and exposure-
                                       weighted average EAD for
                                       wholesale exposures.
                                      For each retail subcategory,
                                       present the disclosures outlined
                                       above across a sufficient number
                                       of segments to allow for a
                                       meaningful differentiation of
                                       credit risk.
Quantitative disclosures:           (d) Actual losses in the preceding
 Historical results.                 period for each category and
                                     subcategory and how this differs
                                     from past experience. A discussion
                                     of the factors that impacted the
                                     loss experience in the preceding
                                     period--for example, has the bank
                                     holding company experienced higher
                                     than average default rates, loss
                                     rates or EADs.
                                    (e) Bank holding company's estimates
                                     compared against actual outcomes
                                     over a longer period.\21\ At a
                                     minimum, this should include
                                     information on estimates of losses
                                     against actual losses in the
                                     wholesale category and each retail
                                     subcategory over a period
                                     sufficient to allow for a
                                     meaningful assessment of the
                                     performance of the internal rating
                                     processes for each category/
                                     subcategory.\22\ Where appropriate,
                                     the bank holding company should
                                     further decompose this to provide
                                     analysis of PD, LGD, and EAD
                                     outcomes against estimates provided
                                     in the quantitative risk assessment
                                     disclosures above.\23\
------------------------------------------------------------------------

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

    \19\ The PD, LGD and EAD disclosures in Table 11.5(c) should reflect 
the effects of collateral, qualifying master netting agreements, 
eligible guarantees and eligible credit derivatives as defined in part 
I. Disclosure of each PD grade should include the exposure-weighted 
average PD for each grade. Where a bank holding company aggregates PD 
grades for the purposes of disclosure, this should be a representative 
breakdown of the distribution of PD grades used for regulatory capital 
purposes.
    \20\ Outstanding loans and EAD on undrawn commitments can be 
presented on a combined basis for these disclosures.
    \21\ These disclosures are a way of further informing the reader 
about the reliability of the information provided in the ``quantitative 
disclosures: risk assessment'' over the long run. The disclosures are 
requirements from year-end 2010; in the meantime, early adoption is 
encouraged. The phased implementation is to allow a bank holding company 
sufficient time to build up a longer run of data that will make these 
disclosures meaningful.
    \22\ This regulation is not prescriptive about the period used for 
this assessment. Upon implementation, it might be expected that a bank 
holding company would provide these disclosures for as long run of data 
as possible--for example, if a bank holding company has 10 years of 
data, it might choose to disclose the average default rates for each PD 
grade over that 10-year period. Annual amounts need not be disclosed.
    \23\ A bank holding company should provide this further 
decomposition where it will allow users greater insight into the 
reliability of the estimates provided in the ``quantitative disclosures: 
risk assessment.'' In particular, it should provide this information 
where there are material differences between its estimates of PD, LGD or 
EAD compared to actual outcomes over the long run. The bank holding 
company should also provide explanations for such differences.

[[Page 347]]



   Table 11.6--General Disclosure for Counterparty Credit Risk of OTC
Derivative Contracts, Repo-Style Transactions, and Eligible Margin Loans
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures...........  (a) The general qualitative
                                     disclosure requirement with respect
                                     to OTC derivatives, eligible margin
                                     loans, and repo-style transactions,
                                     including:
                                       Discussion of
                                       methodology used to assign
                                       economic capital and credit
                                       limits for counterparty credit
                                       exposures;
                                       Discussion of
                                       policies for securing collateral,
                                       valuing and managing collateral,
                                       and establishing credit reserves;
                                       Discussion of
                                       the primary types of collateral
                                       taken;
                                       Discussion of
                                       policies with respect to wrong-
                                       way risk exposures; and
                                       Discussion of
                                       the impact of the amount of
                                       collateral the bank holding
                                       company would have to provide if
                                       the bank holding company were to
                                       receive a credit rating
                                       downgrade.
Quantitative Disclosures..........  (b) Gross positive fair value of
                                     contracts, netting benefits, netted
                                     current credit exposure, collateral
                                     held (including type, for example,
                                     cash, government securities), and
                                     net unsecured credit exposure.\24\
                                     Also report measures for EAD used
                                     for regulatory capital for these
                                     transactions, the notional value of
                                     credit derivative hedges purchased
                                     for counterparty credit risk
                                     protection, and, for bank holding
                                     companies not using the internal
                                     models methodology in section 32(d)
                                     of this appendix, the distribution
                                     of current credit exposure by types
                                     of credit exposure.\25\
                                    (c) Notional amount of purchased and
                                     sold credit derivatives, segregated
                                     between use for the bank holding
                                     company's own credit portfolio and
                                     for its intermediation activities,
                                     including the distribution of the
                                     credit derivative products used,
                                     broken down further by protection
                                     bought and sold within each product
                                     group.
                                    (d) The estimate of alpha if the
                                     bank holding company has received
                                     supervisory approval to estimate
                                     alpha.
------------------------------------------------------------------------

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

    \24\ Net unsecured credit exposure is the credit exposure after 
considering the benefits from legally enforceable netting agreements and 
collateral arrangements, without taking into account haircuts for price 
volatility, liquidity, etc.
    \25\ This may include interest rate derivative contracts, foreign 
exchange derivative contracts, equity derivative contracts, credit 
derivatives, commodity or other derivative contracts, repo-style 
transactions, and eligible margin loans.

[[Page 348]]



               Table 11.7--Credit Risk Mitigation 26 27 28
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures...........  (a) The general qualitative
                                     disclosure requirement with respect
                                     to credit risk mitigation
                                     including:
                                       Policies and
                                       processes for, and an indication
                                       of the extent to which the bank
                                       holding company uses, on- and off-
                                       balance sheet netting;
                                       Policies and
                                       processes for collateral
                                       valuation and management;
                                       A description
                                       of the main types of collateral
                                       taken by the bank holding
                                       company;
                                       The main types
                                       of guarantors/credit derivative
                                       counterparties and their
                                       creditworthiness; and
                                       Information
                                       about (market or credit) risk
                                       concentrations within the
                                       mitigation taken.
Quantitative Disclosures..........  (b) For each separately disclosed
                                     portfolio, the total exposure
                                     (after, where applicable, on-or off-
                                     balance sheet netting) that is
                                     covered by guarantees/credit
                                     derivatives.
------------------------------------------------------------------------

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

    \26\ At a minimum, a bank holding company must provide the 
disclosures in Table 11.7 in relation to credit risk mitigation that has 
been recognized for the purposes of reducing capital requirements under 
this appendix. Where relevant, bank holding companies are encouraged to 
give further information about mitigants that have not been recognized 
for that purpose.
    \27\ Credit derivatives that are treated, for the purposes of this 
appendix, as synthetic securitization exposures should be excluded from 
the credit risk mitigation disclosures and included within those 
relating to securitization.
    \28\ Counterparty credit risk-related exposures disclosed pursuant 
to Table 11.6 should be excluded from the credit risk mitigation 
disclosures in Table 11.7.
    \29\ For example: originator, investor, servicer, provider of credit 
enhancement, sponsor of asset backed commercial paper facility, 
liquidity provider, or swap provider.

                       Table 11.8--Securitization
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures...........  (a) The general qualitative
                                     disclosure requirement with respect
                                     to securitization (including
                                     synthetics), including a discussion
                                     of:
                                       The bank
                                       holding company's objectives
                                       relating to securitization
                                       activity, including the extent to
                                       which these activities transfer
                                       credit risk of the underlying
                                       exposures away from the bank
                                       holding company to other
                                       entities;
                                       The roles
                                       played by the bank holding
                                       company in the securitization
                                       process \29\ and an indication of
                                       the extent of the bank holding
                                       company's involvement in each of
                                       them; and
                                       The regulatory
                                       capital approaches (for example,
                                       RBA, IAA and SFA) that the bank
                                       holding company follows for its
                                       securitization activities.
                                    (b) Summary of the bank holding
                                     company's accounting policies for
                                     securitization activities,
                                     including:
                                       Whether the
                                       transactions are treated as sales
                                       or financings;
                                       Recognition of
                                       gain-on-sale;
                                       Key assumptions
                                       for valuing retained interests,
                                       including any significant changes
                                       since the last reporting period
                                       and the impact of such changes;
                                       and
                                       Treatment of
                                       synthetic securitizations.
                                    (c) Names of NRSROs used for
                                     securitizations and the types of
                                     securitization exposure for which
                                     each agency is used.

[[Page 349]]

 
Quantitative disclosures..........  (d) The total outstanding exposures
                                     securitized by the bank holding
                                     company in securitizations that
                                     meet the operational criteria in
                                     section 41 of this appendix (broken
                                     down into traditional/synthetic),
                                     by underlying exposure type.30 31
                                     32
                                    (e) For exposures securitized by the
                                     bank holding company in
                                     securitizations that meet the
                                     operational criteria in Section 41
                                     of this appendix:
                                       Amount of
                                       securitized assets that are
                                       impaired/past due; and
                                       Losses
                                       recognized by the bank holding
                                       company during the current period
                                       \33\ broken down by exposure
                                       type.
                                    (f) Aggregate amount of
                                     securitization exposures broken
                                     down by underlying exposure type.
                                    (g) Aggregate amount of
                                     securitization exposures and the
                                     associated IRB capital requirements
                                     for these exposures broken down
                                     into a meaningful number of risk
                                     weight bands. Exposures that have
                                     been deducted from capital should
                                     be disclosed separately by type of
                                     underlying asset.
                                    (h) For securitizations subject to
                                     the early amortization treatment,
                                     the following items by underlying
                                     asset type for securitized
                                     facilities:
                                       The aggregate
                                       drawn exposures attributed to the
                                       seller's and investors'
                                       interests; and
                                       The aggregate
                                       IRB capital charges incurred by
                                       the bank holding company against
                                       the investors' shares of drawn
                                       balances and undrawn lines.
                                    (i) Summary of current year's
                                     securitization activity, including
                                     the amount of exposures securitized
                                     (by exposure type), and recognized
                                     gain or loss on sale by asset type.
------------------------------------------------------------------------

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

    \30\ Underlying exposure types may include, for example, one- to 
four-family residential loans, home equity lines, credit card 
receivables, and auto loans.
    \31\ Securitization transactions in which the originating bank 
holding company does not retain any securitization exposure should be 
shown separately but need only be reported for the year of inception.
    \32\ Where relevant, a bank holding company is encouraged to 
differentiate between exposures resulting from activities in which they 
act only as sponsors, and exposures that result from all other bank 
holding company securitization activities.
    \33\ For example, charge-offs/allowances (if the assets remain on 
the bank holding company's balance sheet) or write-downs of I/O strips 
and other residual interests.

                      Table 11.9--Operational Risk
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures...........  (a) The general qualitative
                                     disclosure requirement for
                                     operational risk.
                                    (b) Description of the AMA,
                                     including a discussion of relevant
                                     internal and external factors
                                     considered in the bank holding
                                     company's measurement approach.
                                    (c) A description of the use of
                                     insurance for the purpose of
                                     mitigating operational risk.
------------------------------------------------------------------------


          Table 11.10--Equities Not Subject to Market Risk Rule
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative Disclosures...........  (a) The general qualitative
                                     disclosure requirement with respect
                                     to equity risk, including:

[[Page 350]]

 
                                       Differentiation
                                       between holdings on which capital
                                       gains are expected and those held
                                       for other objectives, including
                                       for relationship and strategic
                                       reasons; and
                                       Discussion of
                                       important policies covering the
                                       valuation of and accounting for
                                       equity holdings in the banking
                                       book. This includes the
                                       accounting techniques and
                                       valuation methodologies used,
                                       including key assumptions and
                                       practices affecting valuation as
                                       well as significant changes in
                                       these practices.
Quantitative Disclosures..........  (b) Value disclosed in the balance
                                     sheet of investments, as well as
                                     the fair value of those
                                     investments; for quoted securities,
                                     a comparison to publicly-quoted
                                     share values where the share price
                                     is materially different from fair
                                     value.
                                    (c) The types and nature of
                                     investments, including the amount
                                     that is:
                                       Publicly
                                       traded; and
                                       Non-publicly
                                       traded.
                                    (d) The cumulative realized gains
                                     (losses) arising from sales and
                                     liquidations in the reporting
                                     period.
                                    (e)  Total
                                     unrealized gains (losses) \34\
                                      Total latent
                                     revaluation gains (losses) \35\
                                      Any amounts of
                                     the above included in tier 1 and/or
                                     tier 2 capital.
                                    (f) Capital requirements broken down
                                     by appropriate equity groupings,
                                     consistent with the bank holding
                                     company's methodology, as well as
                                     the aggregate amounts and the type
                                     of equity investments subject to
                                     any supervisory transition
                                     regarding regulatory capital
                                     requirements.\36\
------------------------------------------------------------------------

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

    \34\ Unrealized gains (losses) recognized in the balance sheet but 
not through earnings.
    \35\ Unrealized gains (losses) not recognized either in the balance 
sheet or through earnings.
    \36\ This disclosure should include a breakdown of equities that are 
subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400 
percent, and 600 percent risk weights, as applicable.

       Table 11.11--Interest Rate Risk for Non-trading Activities
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Qualitative disclosures...........  (a) The general qualitative
                                     disclosure requirement, including
                                     the nature of interest rate risk
                                     for non-trading activities and key
                                     assumptions, including assumptions
                                     regarding loan prepayments and
                                     behavior of non-maturity deposits,
                                     and frequency of measurement of
                                     interest rate risk for non-trading
                                     activities.
Quantitative disclosures..........  (b) The increase (decline) in
                                     earnings or economic value (or
                                     relevant measure used by
                                     management) for upward and downward
                                     rate shocks according to
                                     management's method for measuring
                                     interest rate risk for non-trading
                                     activities, broken down by currency
                                     (as appropriate).
------------------------------------------------------------------------


[[Page 351]]


[Reg. Y, 72 FR 69396, 69431, Dec. 7, 2007; 73 FR 21690, Apr. 22, 2008]



PART 226_TRUTH IN LENDING (REGULATION Z)--Table of Contents




                            Subpart A_General

Sec.
226.1 Authority, purpose, coverage, organization, enforcement and 
          liability.
226.2 Definitions and rules of construction.
226.3 Exempt transactions.
226.4 Finance charge.

                        Subpart B_Open-End Credit

226.5 General disclosure requirements.
226.5a Credit and charge card applications and solicitations.
226.5b Requirements for home equity plans.
226.6 Initial disclosure statement.
226.7 Periodic statement.
226.8 Identification of transactions.
226.9 Subsequent disclosure requirements.
226.10 Prompt crediting of payments.
226.11 Treatment of credit balances.
226.12 Special credit card provisions.
226.13 Billing error resolution.
226.14 Determination of annual percentage rate.
226.15 Right of rescission.
226.16 Advertising.

                       Subpart C_Closed-End Credit

226.17 General disclosure requirements.
226.18 Content of disclosures.
226.19 Certain residential mortgage and variable-rate transactions.
226.20 Subsequent disclosure requirements.
226.21 Treatment of credit balances.
226.22 Determination of annual percentage rate.
226.23 Right of rescission.
226.24 Advertising.

                         Subpart D_Miscellaneous

226.25 Record retention.
226.26 Use of annual percentage rate in oral disclosures.
226.27 Language of disclosures.
226.28 Effect on State laws.
226.29 State exemptions.
226.30 Limitation on rates.

     Subpart E_Special Rules for Certain Home Mortgage Transactions

226.31 General rules.
226.32 Requirements for certain closed-end home mortgages.
226.33 Requirements for reverse mortgages.
226.34 Prohibited acts or practices in connection with credit secured by 
          a consumer's dwelling.
226.35 Prohibited acts or practices in connection with higher-priced 
          mortgage loans.
226.36 Prohibited acts or practices in connection with credit secured by 
          a consumer's principal dwelling.

Appendix A to Part 226--Effect on State Laws
Appendix B to Part 226--State Exemptions
Appendix C to Part 226--Issuance of Staff Interpretations
Appendix D to Part 226--Multiple Advance Construction Loans
Appendix E to Part 226--Rules For Card Issuers That Bill On a 
          Transaction-By-Transaction Basis
Appendix F to Part 226--Annual Percentage Rate Computations for Certain 
          Open-End Credit Plans
Appendix G to Part 226--Open-End Model Forms and Clauses
Appendix H to Part 226--Closed-End Model Forms and Clauses
Appendix I to Part 226--Federal Enforcement Agencies
Appendix J to Part 226--Annual Percentage Rate Computations For Closed-
          End Credit Transactions
Appendix K to Part 226--Total Annual Loan Cost Rate Computations for 
          Reverse Mortgage Transactions
Appendix L to Part 226--Assumed Loan Periods for Computations of Total 
          Annual Loan Cost Rates
Supplement I to Part 226--Official Staff Interpretations

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604 and 1637 (c)(5).

    Effective Date Note: At 73 FR 44599, July 30, 2008, the authority 
citation to part 226 was revised, effective Oct. 1, 2009. For the 
convenience of the user, the revised text is set forth below.

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), and 1639(l).

    Source: Reg. Z, 46 FR 20892, Apr. 7, 1981, unless otherwise noted.



                            Subpart A_General



Sec. 226.1  Authority, purpose, coverage, organization, enforcement and 

liability.

    (a) Authority. This regulation, known as Regulation Z, is issued by 
the Board of Governors of the Federal Reserve System to implement the 
Federal Truth in Lending Act, which is contained in title I of the 
Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.). 
This regulation also implements title XII, section 1204 of the 
Competitive Equality Banking Act of

[[Page 352]]

1987 (Pub. L. 100-86, 101 Stat. 552). 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 number 7100-0199.
    (b) Purpose. The purpose of this regulation is to promote the 
informed use of consumer credit by requiring disclosures about its terms 
and cost. The regulation also gives consumers the right to cancel 
certain credit transactions that involve a lien on a consumer's 
principal dwelling, regulates certain credit card practices, and 
provides a means for fair and timely resolution of credit billing 
disputes. The regulation does not govern charges for consumer credit. 
The regulation requires a maximum interest rate to be stated in 
variable-rate contracts secured by the consumer's dwelling. It also 
imposes limitations on home equity plans that are subject to the 
requirements of Sec. 226.5b and mortgages that are subject to the 
requirements of Sec. 226.32. The regulation prohibits certain acts or 
practices in connection with credit secured by a consumer's principal 
dwelling.
    (c) Coverage. (1) In general, this regulation applies to each 
individual or business that offers or extends credit when four 
conditions are met: (i) The credit is offered or extended to consumers; 
(ii) the offering or extension of credit is done regularly;\1\ (iii) the 
credit is subject to a finance charge or is payable by a written 
agreement in more than 4 installments; and (iv) the credit is primarily 
for personal, family, or household purposes.
---------------------------------------------------------------------------

    \1\ The meaning of regularly is explained in the definition of 
creditor in Sec. 226.2(a).
---------------------------------------------------------------------------

    (2) If a credit card is involved, however, certain provisions apply 
even if the credit is not subject to a finance charge, or is not payable 
by a written agreement in more than 4 installments, or if the credit 
card is to be used for business purposes.
    (3) In addition, certain requirements of Sec. 226.5b apply to 
persons who are not creditors but who provide applications for home 
equity plans to consumers.
    (d) Organization. The regulation is divided into subparts and 
appendices as follows:
    (1) Subpart A contains general information. It sets forth: (i) The 
authority, purpose, coverage, and organization of the regulation; (ii) 
the definitions of basic terms; (iii) the transactions that are exempt 
from coverage; and (iv) the method of determining the finance charge.
    (2) Subpart B contains the rules for open-end credit. It requires 
that initial disclosures and periodic statements be provided, as well as 
additional disclosures for credit and charge card applications and 
solicitations and for home equity plans subject to the requirements of 
Sec. Sec. 226.5a and 226.5b, respectively.
    (3) Subpart C relates to closed-end credit. It contains rules on 
disclosures, treatment of credit balances, annual percentage rate 
calculations, rescission requirements, and advertising.
    (4) Subpart D contains rules on oral disclosures, Spanish language 
disclosure in Puerto Rico, record retention, effect on state laws, state 
exemptions, and rate limitations.
    (5) Subpart E contains special rules for mortgage transactions. 
Section 226.32 requires certain disclosures and provides limitations for 
loans that have rates and fees above specified amounts. Section 226.33 
requires disclosures, including the total annual loan cost rate, for 
reverse mortgage transactions. Section 226.34 prohibits specific acts 
and practices in connection with mortgage transactions.
    (6) Several appendices contain information such as the procedures 
for determinations about state laws, state exemptions and issuance of 
staff interpretations, special rules for certain kinds of credit plans, 
a list of enforcement agencies, and the rules for computing annual 
percentage rates in closed-end credit transactions and total annual loan 
cost rates for reverse mortgage transactions.
    (e) Enforcement and liability. Section 108 of the act contains the 
administrative enforcement provisions. Sections 112, 113, 130, 131, and 
134 contain provisions relating to liability for failure to comply with 
the requirements of the act and the regulation. Section 1204(c)

[[Page 353]]

of title XII of the Competitive Equality Banking Act of 1987, Pub. L. 
100-86, 101 Stat. 552, incorporates by reference administrative 
enforcement and civil liability provisions of sections 108 and 130 of 
the act.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 52 FR 43181, Nov. 9, 
1987; 54 FR 13865, Apr. 6, 1989; 54 FR 24686, June 9, 1989; 60 FR 15471, 
Mar. 24, 1995; 66 FR 65617, Dec. 20, 2001]

    Effective Date Note:  At 73 FR 44599, July 30, 2008, Sec. 226.1 was 
amended by revising paragraph (d)(5), effective Oct. 1, 2009. For the 
convenience of the user, the revised text is set forth as follows:



Sec. 226.1  Authority, purpose, coverage, organization, enforcement and 

          liability.

                                * * * * *

    (d) * * *

                                * * * * *

    (5) Subpart E contains special rules for mortgage transactions. 
Section 226.32 requires certain disclosures and provides limitations for 
loans that have rates and fees above specified amounts. Section 226.33 
requires disclosures, including the total annual loan cost rate, for 
reverse mortgage transactions. Section 226.34 prohibits specific acts 
and practices in connection with mortgage transactions that are subject 
to Sec. 226.32. Section 226.35 prohibits specific acts and practices in 
connection with higher-priced mortgage loans, as defined in Sec. 
226.35(a). Section 226.36 prohibits specific acts and practices in 
connection with credit secured by a consumer's principal dwelling.

                                * * * * *



Sec. 226.2  Definitions and rules of construction.

    (a) Definitions. For purposes of this regulation, the following 
definitions apply:
    (1) Act means the Truth in Lending Act (15 U.S.C. 1601 et seq.).
    (2) Advertisement means a commercial message in any medium that 
promotes, directly or indirectly, a credit transaction.
    (3) [Reserved] \2\
---------------------------------------------------------------------------

    \2\ [Reserved]
---------------------------------------------------------------------------

    (4) Billing cycle or cycle means the interval between the days or 
dates of regular periodic statements. These intervals shall be equal and 
no longer than a quarter of a year. An interval will be considered equal 
if the number of days in the cycle does not vary more than 4 days from 
the regular day or date of the periodic statement.
    (5) Board means the Board of Governors of the Federal Reserve 
System.
    (6) Business day means a day on which the creditor's offices are 
open to the public for carrying on substantially all of its business 
functions. However, for purposes of rescission under Sec. Sec. 226.15 
and 226.23, and for purposes of Sec. 226.31, the term means all 
calendar days except Sundays and the legal public holidays specified in 
5 U.S.C. 6103(a), such as New Year's Day, the Birthday of Martin Luther 
King, Jr., Washington's Birthday, Memorial Day, Independence Day, Labor 
Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.
    (7) Card issuer means a person that issues a credit card or that 
person's agent with respect to the card.
    (8) Cardholder means a natural person to whom a credit card is 
issued for consumer credit purposes, or a natural person who has agreed 
with the card issuer to pay consumer credit obligations arising from the 
issuance of a credit card to another natural person. For purposes of 
Sec. 226.12(a) and (b), the term includes any person to whom a credit 
card is issued for any purpose, including business, commercial, or 
agricultural use, or a person who has agreed with the card issuer to pay 
obligations arising from the issuance of such a credit card to another 
person.
    (9) Cash price means the price at which a creditor, in the ordinary 
course of business, offers to sell for cash the property or service that 
is the subject of the transaction. At the creditor's option, the term 
may include the price of accessories, services related to the sale, 
service contracts and taxes and fees for license, title, and 
registration. The term does not include any finance charge.
    (10) Closed-end credit means consumer credit other than open-end 
credit as defined in this section.
    (11) Consumer means a cardholder or a natural person to whom 
consumer credit is offered or extended. However, for purposes of 
rescission under Sec. Sec. 226.15

[[Page 354]]

and 226.23, the term also includes a natural person in whose principal 
dwelling a security interest is or will be retained or acquired, if that 
person's ownership interest in the dwelling is or will be subject to the 
security interest.
    (12) Consumer credit means credit offered or extended to a consumer 
primarily for personal, family, or household purposes.
    (13) Consummation means the time that a consumer becomes 
contractually obligated on a credit transaction.
    (14) Credit means the right to defer payment of debt or to incur 
debt and defer its payment.
    (15) Credit card means any card, plate, coupon book, or other single 
credit device that may be used from time to time to obtain credit. 
Charge card means a credit card on an account for which no periodic rate 
is used to compute a finance charge.
    (16) Credit sale means a sale in which the seller is a creditor. The 
term includes 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.
    (17) Creditor means: (i) A person (A) who regularly extends consumer 
credit \3\ that is subject to a finance charge or is payable by written 
agreement in more than 4 installments (not including a downpayment), and 
(B) to whom the obligation is initially payable, either on the face of 
the note or contract, or by agreement when there is no note or contract.
---------------------------------------------------------------------------

    \3\ A person regularly extends consumer credit only if it extended 
credit (other than credit subject to the requirements of Sec. 226.32) 
more than 25 times (or more than 5 times for transactions secured by a 
dwelling) in the preceding calendar year. If a person did not meet these 
numerical standards in the preceding calendar year, the numerical 
standards shall be applied to the current calendar year. A person 
regularly extends consumer credit if, in any 12-month period, the person 
originates more than one credit extension that is subject to the 
requirements of Sec. 226.32 or one or more such credit extensions 
through a mortgage broker.
---------------------------------------------------------------------------

    (ii) For purposes of Sec. Sec. 226.4(c)(8) (discounts), 226.9(d) 
(Finance charge imposed at time of transaction), and 226.12(e) (Prompt 
notification of returns and crediting of refunds), a person that honors 
a credit card.
    (iii) For purposes of subpart B, any card issuer that extends either 
open-end credit or credit that is not subject to a finance charge and is 
not payable by written agreement in more than 4 installments.
    (iv) For purposes of subpart B (except for the credit and charge 
card disclosures contained in Sec. Sec. 226.5(a) and 226.9 (e) and (f), 
the finance charge disclosures contained in Sec. Sec. 226.6(a) and 
226.7 (d) through (g) and the right of rescission set forth in Sec. 
226.15) and subpart C, any card issuer that extends closed-end credit 
that is subject to a finance charge or is payable by written agreement 
in more than 4 installments.
    (18) Downpayment means an amount, including the value of any 
property used as a trade-in, paid to a seller to reduce the cash price 
of goods or services purchased in a credit sale transaction. A deferred 
portion of a downpayment may be treated as part of the downpayment if it 
is payable not later than the due date of the second otherwise regularly 
scheduled payment and is not subject to a finance charge.
    (19) Dwelling means a residential structure that contains 1 to 4 
units, whether or not that structure is attached to real property. The 
term includes an individual condominium unit, cooperative unit, mobile 
home, and trailer, if it is used as a residence.
    (20) Open-end credit means consumer credit extended by a creditor 
under a plan in which:
    (i) The creditor reasonably contemplates repeated transactions;
    (ii) The creditor may impose a finance charge from time to time on 
an outstanding unpaid balance; and
    (iii) The amount of credit that may be extended to the consumer 
during the term of the plan (up to any limit set by the creditor) is 
generally made available to the extent that any outstanding balance is 
repaid.

[[Page 355]]

    (21) Periodic rate means a rate of finance charge that is or may be 
imposed by a creditor on a balance for a day, week, month, or other 
subdivision of a year.
    (22) Person means a natural person or an organization, including a 
corporation, partnership, proprietorship, association, cooperative, 
estate, trust, or government unit.
    (23) Prepaid finance charge means any finance charge paid separately 
in cash or by check before or at consummation of a transaction, or 
withheld from the proceeds of the credit at any time.
    (24) Residential mortgage transaction means a transaction in which a 
mortgage, deed of trust, purchase money security interest arising under 
an installment sales contract, or equivalent consensual security 
interest is created or retained in the consumer's principal dwelling to 
finance the acquisition or initial construction of that dwelling.
    (25) Security interest means an interest in property that secures 
performance of a consumer credit obligation and that is recognized by 
State or Federal law. It does not include incidental interests such as 
interests in proceeds, accessions, additions, fixtures, insurance 
proceeds (whether or not the creditor is a loss payee or beneficiary), 
premium rebates, or interests in after-acquired property. For purposes 
of disclosure under Sec. Sec. 226.6 and 226.18, the term does not 
include an interest that arises solely by operation of law. However, for 
purposes of the right of rescission under Sec. Sec. 226.15 and 226.23, 
the term does include interests that arise solely by operation of law.
    (26) State means any state, the District of Columbia, the 
Commonwealth of Puerto Rico, and any territory or possession of the 
United States.
    (b) Rules of construction. For purposes of this regulation, the 
following rules of construction apply:
    (1) Where appropriate, the singular form of a word includes the 
plural form and plural includes singular.
    (2) Where the words obligation and transaction are used in this 
regulation, they refer to a consumer credit obligation or transaction, 
depending upon the context. Where the word credit is used in this 
regulation, it means consumer credit unless the context clearly 
indicates otherwise.
    (3) Unless defined in this regulation, the words used have the 
meanings given to them by state law or contract.
    (4) Footnotes have the same legal effect as the text of the 
regulation.
    (5) Where the word ``amount'' is used in this regulation to describe 
disclosure requirements, it refers to a numerical amount.

[Reg. Z, 46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981, as 
amended at 47 FR 7392, Feb. 19, 1982; 48 FR 14886, Apr. 6, 1983; 54 FR 
13865, Apr. 6, 1989; 60 FR 15471, Mar. 24, 1995; 61 FR 49245, Sept. 19, 
1996; 69 FR 16773, Mar. 31, 2004]

    Effective Date Note:  At 73 FR 44599, July 30, 2008, Sec. 226.2 was 
amended by revising paragraph (a)(6), effective Oct. 1, 2009. For the 
convenience of the user, the revised text is set forth as follows:



Sec. 226.2  Definitions and rules of construction.

    (a) * * *
    (6) ``Business Day'' means a day on which the creditor's offices are 
open to the public for carrying on substantially all of its business 
functions. However, for purposes of rescission under Sec. Sec. 226.15 
and 226.23, and for purposes of Sec. 226.19(a)(1)(ii) and Sec. 226.31, 
the term means all calendar days except Sundays and the legal public 
holidays specified in 5 U.S.C. 6103(a), such as New Year's Day, the 
Birthday of Martin Luther King, Jr., Washington's Birthday, Memorial 
Day, Independence Day, Labor Day, Columbus Day, Veterans Day, 
Thanksgiving Day, and Christmas Day.

                                * * * * *



Sec. 226.3  Exempt transactions.

    This regulation does not apply to the following:\4\
---------------------------------------------------------------------------

    \4\ The provisions in Sec. 226.12 (a) and (b) governing the 
issuance of credit cards and the liability for their unauthorized use 
apply to all credit cards, even if the credit cards are issued for use 
in connection with extensions of credit that otherwise are exempt under 
this section.
---------------------------------------------------------------------------

    (a) Business, commercial, agricultural, or organizational credit. 
(1) An extension of credit primarily for a business, commercial or 
agricultural purpose.
    (2) An extension of credit to other than a natural person, including 
credit to government agencies or instrumentalities.
    (b) Credit over $25,000 not secured by real property or a dwelling. 
An extension

[[Page 356]]

of credit not secured by real property, or by personal property used or 
expected to be used as the principal dwelling of the consumer, in which 
the amount financed exceeds $25,000 or in which there is an express 
written commitment to extend credit in excess of $25,000.
    (c) Public utility credit. An extension of credit that involves 
public utility services provided through pipe, wire, other connected 
facilities, or radio or similar transmission (including extensions of 
such facilities), if the charges for service, delayed payment, or any 
discounts for prompt payment are filed with or regulated by any 
government unit. The financing of durable goods or home improvements by 
a public utility is not exempt.
    (d) Securities or commodities accounts. Transactions in securities 
or commodities accounts in which credit is extended by a broker-dealer 
registered with the Securities and Exchange Commission or the Commodity 
Futures Trading Commission.
    (e) Home fuel budget plans. An installment agreement for the 
purchase of home fuels in which no finance charge is imposed.
    (f) Student loan programs. Loans made, insured, or guaranteed 
pursuant to a program authorized by title IV of the Higher Education Act 
of 1965 (20 U.S.C. 1070 et seq.).

[46 FR 20892, Apr. 7, 1981, as amended at 48 FR 14886, Apr. 6, 1983; 49 
FR 46991, Nov. 30, 1984]



Sec. 226.4  Finance charge.

    (a) Definition. The finance charge is the cost of consumer credit as 
a dollar amount. It includes any charge payable directly or indirectly 
by the consumer and imposed directly or indirectly by the creditor as an 
incident to or a condition of the extension of credit. It does not 
include any charge of a type payable in a comparable cash transaction.
    (1) Charges by third parties. The finance charge includes fees and 
amounts charged by someone other than the creditor, unless otherwise 
excluded under this section, if the creditor:
    (i) requires the use of a third party as a condition of or an 
incident to the extension of credit, even if the consumer can choose the 
third party; or
    (ii) retains a portion of the third-party charge, to the extent of 
the portion retained.
    (2) Special rule; closing agent charges. Fees charged by a third 
party that conducts the loan closing (such as a settlement agent, 
attorney, or escrow or title company) are finance charges only if the 
creditor:
    (i) Requires the particular services for which the consumer is 
charged;
    (ii) Requires the imposition of the charge; or
    (iii) Retains a portion of the third-party charge, to the extent of 
the portion retained.
    (3) Special rule; mortgage broker fees. Fees charged by a mortgage 
broker (including fees paid by the consumer directly to the broker or to 
the creditor for delivery to the broker) are finance charges even if the 
creditor does not require the consumer to use a mortgage broker and even 
if the creditor does not retain any portion of the charge.
    (b) Example of finance charge. The finance charge includes the 
following types of charges, except for charges specifically excluded by 
paragraphs (c) through (e) of this section:
    (1) Interest, time price differential, and any amount payable under 
an add-on or discount system of additional charges.
    (2) Service, transaction, activity, and carrying charges, including 
any charge imposed on a checking or other transaction account to the 
extent that the charge exceeds the charge for a similar account without 
a credit feature.
    (3) Points, loan fees, assumption fees, finder's fees, and similar 
charges.
    (4) Appraisal, investigation, and credit report fees.
    (5) Premiums or other charges for any guarantee or insurance 
protecting the creditor against the consumer's default or other credit 
loss.
    (6) Charges imposed on a creditor by another person for purchasing 
or accepting a consumer's obligation, if the consumer is required to pay 
the charges in cash, as an addition to the obligation, or as a deduction 
from the proceeds of the obligation.

[[Page 357]]

    (7) Premiums or other charges for credit life, accident, health, or 
loss-of-income insurance, written in connection with a credit 
transaction.
    (8) Premiums or other charges for insurance against loss of or 
damage to property, or against liability arising out of the ownership or 
use of property, written in connection with a credit transaction.
    (9) Discounts for the purpose of inducing payment by a means other 
than the use of credit.
    (10) Debt cancellation fees. Charges or premiums paid for debt 
cancellation coverage written in connection with a credit transaction, 
whether or not the debt cancellation coverage is insurance under 
applicable law.
    (c) Charges excluded from the finance charge. The following charges 
are not finance charges:
    (1) Application fees charged to all applicants for credit, whether 
or not credit is actually extended.
    (2) Charges for actual unanticipated late payment, for exceeding a 
credit limit, or for delinquency, default, or a similar occurrence.
    (3) Charges imposed by a financial institution for paying items that 
overdraw an account, unless the payment of such items and the imposition 
of the charge were previously agreed upon in writing.
    (4) Fees charged for participation in a credit plan, whether 
assessed on an annual or other periodic basis.
    (5) Seller's points.
    (6) Interest forfeited as a result of an interest reduction required 
by law on a time deposit used as security for an extension of credit.
    (7) Real-estate related fees. The following fees in a transaction 
secured by real property or in a residential mortgage transaction, if 
the fees are bona fide and reasonable in amount:
    (i) Fees for title examination, abstract of title, title insurance, 
property survey, and similar purposes.
    (ii) Fees for preparing loan-related documents, such as deeds, 
mortgages, and reconveyance or settlement documents.
    (iii) Notary and credit report fees.
    (iv) Property appraisal fees or fees for inspections to assess the 
value or condition of the property if the service is performed prior to 
closing, including fees related to pest infestation or flood hazard 
determinations.
    (v) Amounts required to be paid into escrow or trustee accounts if 
the amounts would not otherwise be included in the finance charge.
    (8) Discounts offered to induce payment for a purchase by cash, 
check, or other means, as provided in section 167(b) of the Act.
    (d) Insurance and debt cancellation coverage--(1) Voluntary credit 
insurance premiums. Premiums for credit life, accident, health or loss-
of-income insurance may be excluded from the finance charge if the 
following conditions are met:
    (i) The insurance coverage is not required by the creditor, and this 
fact is disclosed in writing.
    (ii) The premium for the initial term of insurance coverage is 
disclosed. If the term of insurance is less than the term of the 
transaction, the term of insurance also shall be disclosed. The premium 
may be disclosed on a unit-cost basis only in open-end credit 
transactions, closed-end credit transactions by mail or telephone under 
Sec. 226.17(g), and certain closed-end credit transactions involving an 
insurance plan that limits the total amount of indebtedness subject to 
coverage.
    (iii) The consumer signs or initials an affirmative written request 
for the insurance after receiving the disclosures specified in this 
paragraph. Any consumer in the transaction may sign or initial the 
request.
    (2) Premiums for insurance against loss of or damage to property, or 
against liability arising out of the ownership or use of property,\5\ 
may be excluded from the finance charge if the following conditions are 
met:
---------------------------------------------------------------------------

    \5\ This includes single interest insurance if the insurer waives 
all right of subrogation against the consumer.
---------------------------------------------------------------------------

    (i) The insurance coverage may be obtained from a person of the 
consumer's choice,\6\ and this fact is disclosed.
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    \6\ A creditor may reserve the right to refuse to accept, for 
reasonable cause, an insurer offered by the consumer.
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    (ii) If the coverage is obtained from or through the creditor, the 
premium

[[Page 358]]

for the initial term of insurance coverage shall be disclosed. If the 
term of insurance is less than the term of the transaction, the term of 
insurance shall also be disclosed. The premium may be disclosed on a 
unit-cost basis only in open-end credit transactions, closed-end credit 
transactions by mail or telephone under Sec. 226.17(g), and certain 
closed-end credit transactions involving an insurance plan that limits 
the total amount of indebtedness subject to coverage.
    (3) Voluntary debt cancellation fees. (i) Charges or premiums paid 
for debt cancellation coverage of the type specified in paragraph 
(d)(3)(ii) of this section may be excluded from the finance charge, 
whether or not the coverage is insurance, if the following conditions 
are met:
    (A) The debt cancellation agreement or coverage is not required by 
the creditor, and this fact is disclosed in writing;
    (B) The fee or premium for the initial term of coverage is 
disclosed. If the term of coverage is less than the term of the credit 
transaction, the term of coverage also shall be disclosed. The fee or 
premium may be disclosed on a unit-cost basis only in open-end credit 
transactions, closed-end credit transactions by mail or telephone under 
Sec. 226.17(g), and certain closed-end credit transactions involving a 
debt cancellation agreement that limits the total amount of indebtedness 
subject to coverage;
    (C) The consumer signs or initials an affirmative written request 
for coverage after receiving the disclosures specified in this 
paragraph. Any consumer in the transaction may sign or initial the 
request.
    (ii) Paragraph (d)(3)(i) of this section applies to fees paid for 
debt cancellation coverage that provides for cancellation of all or part 
of the debtor's liability for amounts exceeding the value of the 
collateral securing the obligation, or in the event of the loss of life, 
health, or income or in case of accident.
    (e) Certain security interest charges. If itemized and disclosed, 
the following charges may be excluded from the finance charge:
    (1) Taxes and fees prescribed by law that actually are or will be 
paid to public officials for determining the existence of or for 
perfecting, releasing, or satisfying a security interest.
    (2) The premium for insurance in lieu of perfecting a security 
interest to the extent that the premium does not exceed the fees 
described in paragraph (e)(1) of this section that otherwise would be 
payable.
    (3) Taxes on security instruments. Any tax levied on security 
instruments or on documents evidencing indebtedness if the payment of 
such taxes is a requirement for recording the instrument securing the 
evidence of indebtedness.
    (f) Prohibited offsets. Interest, dividends, or other income 
received or to be received by the consumer on deposits or investments 
shall not be deducted in computing the finance charge.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 61 FR 49245, Sept. 19, 
1996]



                        Subpart B_Open-End Credit



Sec. 226.5  General disclosure requirements.

    (a) Form of disclosures. (1) The creditor shall make the disclosures 
required by this subpart clearly and conspicuously in writing,\7\ in a 
form that the consumer may keep.\8\ The disclosures required by this 
subpart may be provided to the consumer in electronic form, subject to 
compliance with the consumer consent and other applicable provisions of 
the Electronic Signatures in Global and National Commerce Act (E-Sign 
Act) (15 U.S.C. Sec. 7001 et seq.). The disclosures required by 
Sec. Sec. 226.5a, 226.5b, and 226.16 may be provided to

[[Page 359]]

the consumer in electronic form without regard to the consumer consent 
or other provisions of the E-Sign Act in the circumstances set forth in 
those sections.
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    \7\ The disclosure required by section 226.9(d) when a finance 
charge is imposed at the time of a transaction need not be written.
    \8\ The disclosures required under Sec. 226.5a for credit and 
charge card applications and solicitations, the home equity disclosures 
required under Sec. 226.5b(d), the alternative summary billing rights 
statement provided for in Sec. 226.9(a)(2s), the credit and charge card 
renewal disclosures required under Sec. 226.9(e), and the disclosures 
made under Sec. 226.10(b) about payment requirements need not be in a 
form that the consumer can keep.
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    (2) The terms finance charge and annual percentage rate, when 
required to be disclosed with a corresponding amount or percentage rate, 
shall be more conspicuous than any other required disclosure.\9\
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    \9\ The terms need not be more conspicuous when used under Sec. 
226.5a generally for credit and charge card applications and 
solicitations under Sec. 226.7(d) on periodic statements, under Sec. 
226.9(e) in credit and charge card renewal disclosures, and under Sec. 
226.16 in advertisements. (But see special rule for annual percentage 
rate for purchases, Sec. 226.5a(b)(1).)
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    (3) Certain disclosures required under Sec. 226.5a for credit and 
charge card applications and solicitations must be provided in a tabular 
format or in a prominent location in accordance with the requirements of 
that section.
    (4) For rules governing the form of disclosures for home equity 
plans, see Sec. 226.5b(a).
    (b) Time of disclosures--(1) Initial disclosures. The creditor shall 
furnish the initial disclosure statement required by Sec. 226.6 before 
the first transaction is made under the plan.
    (2) Periodic statements. (i) The creditor shall mail or deliver a 
periodic statement as required by Sec. 226.7 for each billing cycle at 
the end of which an account has a debit or credit balance of more than 
$1 or on which a finance charge has been imposed. A periodic statement 
need not be sent for an account if the creditor deems it uncollectible, 
or if delinquency collection proceedings have been instituted, or if 
furnishing the statement would violate Federal law.
    (ii) The creditor shall mail or deliver the periodic statement at 
least 14 days prior to any date or the end of any time period required 
to be disclosed under Sec. 226.7(j) in order for the consumer to avoid 
an additional finance or other charge.\10\ A creditor that fails to meet 
this requirement shall not collect any finance or other charge imposed 
as a result of such failure.
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    \10\ This timing requirement does not apply if the creditor is 
unable to meet the requirement because of an act of God, war, civil 
disorder, natural disaster, or strike.
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    (3) Credit and charge card application and solicitation disclosures. 
The card issuer shall furnish the disclosures for credit and charge card 
applications and solicitations in accordance with the timing 
requirements of Sec. 226.5a.
    (4) Home equity plans. Disclosures for home equity plans shall be 
made in accordance with the timing requirements of Sec. 226.5b(b).
    (c) Basis of disclosures and use of estimates. Disclosures shall 
reflect the terms of the legal obligation between the parties. If any 
information necessary for accurate disclosure is unknown to the 
creditor, it shall make the disclosure based on the best information 
reasonably available and shall state clearly that the disclosure is an 
estimate.
    (d) Multiple creditors; multiple consumers. If the credit plan 
involves more than one creditor, only one set of disclosures shall be 
given, and the creditors shall agree among themselves which creditor 
must comply with the requirements that this regulation imposes on any or 
all of them. If there is more than one consumer, the disclosures may be 
made to any consumer who is primarily liable on the account. If the 
right of rescission under Sec. 226.15 is applicable, however, the 
disclosures required by Sec. Sec. 226.6 and 226.15(b) shall be made to 
each consumer having the right to rescind.
    (e) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor mails or delivers the 
disclosures, the resulting inaccuracy is not a violation of this 
regulation, although new disclosures may be required under Sec. 
226.9(c).

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 54 FR 13865, Apr. 6, 
1989; 54 FR 24686, June 9, 1989; 65 FR 58908, Oct. 3, 2000; 66 FR 17338, 
Mar. 30, 2001; 72 FR 63473, Nov. 9, 2007]



Sec. 226.5a  Credit and charge card applications and solicitations.

    (a) General rules. The card issuer shall provide the disclosures 
required under this section on or with a solicitation or an application 
to open a credit or charge card account.

[[Page 360]]

    (1) Definition of solicitation. For purposes of this section, the 
term solicitation means an offer by the card issuer to open a credit or 
charge card account that does not require the consumer to complete an 
application.
    (2) Form of disclosures. (i) The disclosures in paragraphs (b) (1) 
through (7) of this section shall be provided in a prominent location on 
or with an application or a solicitation, or other applicable document, 
and in the form of a table with headings, content, and format 
substantially similar to any of the applicable tables found in appendix 
G.
    (ii) The disclosures in paragraphs (b)(8) through (11) of this 
section shall be provided either in the table containing the disclosures 
in paragraphs (b)(1) through (7), or clearly and conspicuously elsewhere 
on or with the application or solicitation.
    (iii) The disclosure required under paragraph (b)(5) of this section 
shall contain the term grace period.
    (iv) The terminology in the disclosures under paragraph (b) of this 
section shall be consistent with that to be used in the disclosures 
under Sec. Sec. 226.6 and 226.7.
    (v) For an application or a solicitation that is accessed by the 
consumer in electronic form, the disclosures required under this section 
may be provided to the consumer in electronic form on or with the 
application or solicitation.
    (3) Exceptions. This section does not apply to home-equity plans 
accessible by a credit or charge card that are of the type subject to 
the requirements of Sec. 226.5b; overdraft lines of credit tied to 
asset accounts accessed by check-guarantee cards or by debit cards; or 
lines of credit accessed by check-guarantee cards or by debit cards that 
can be used only at automated teller machines.
    (4) Fees based on a percentage. If the amount of any fee required to 
be disclosed under this section is determined on the basis of a 
percentage of another amount, the percentage used and the identification 
of the amount against which the percentage is applied may be disclosed 
instead of the amount of the fee.
    (5) Certain fees that vary by state. If the amount of any fee 
referred to in paragraphs (b)(8) through (11) of this section varies 
from state to state, the card issuer may disclose the range of the fees 
instead of the amount for each state, if the disclosure includes a 
statement that the amount of the fee varies from state to state.
    (b) Required disclosures. The card issuer shall disclose the items 
in this paragraph on or with an application or a solicitation in 
accordance with the requirements of paragraphs (c), (d), or (e) of this 
section. A credit card issuer shall disclose all applicable items in 
this paragraph except for paragraph (b)(7) of this section. A charge 
card issuer shall disclose the applicable items in paragraphs (b)(2), 
(4), and (7) through (11) of this section.
    (1) Annual percentage rate. Each periodic rate that may be used to 
compute the finance charge on an outstanding balance for purchases, a 
cash advance, or a balance transfer, expressed as an annual percentage 
rate (as determined by Sec. 226.14(b)). When more than one rate applies 
for a category of transactions, the range of balances to which each rate 
is applicable shall also be disclosed. The annual percentage rate for 
purchases disclosed pursuant to this paragraph shall be in at least 18-
point type, except for the following: a temporary initial rate that is 
lower than the rate that will apply after the temporary rate expires, 
and a penalty rate that will apply upon the occurrence of one or more 
specific events.
    (i) If the account has a variable rate, the card issuer shall also 
disclose the fact that the rate may vary and how the rate is determined.
    (ii) When variable rate disclosures are provided under paragraph (c) 
of this section, an annual percentage rate disclosure is accurate if the 
rate was in effect within 60 days before mailing the disclosures. When 
variable rate disclosures are provided under paragraph (e) of this 
section, an annual percentage rate disclosure is accurate if the rate 
was in effect within 30 days before printing the disclosures. 
Disclosures provided by electronic communication are subject to 
paragraph (b)(1)(iii) of this section.

[[Page 361]]

    (iii) When variable rate disclosures are provided by electronic 
communication, an annual percentage rate disclosure is accurate if the 
rate was in effect within 30 days before mailing the disclosures to a 
consumer's electronic mail address. If disclosures are made available at 
another location such as the card issuer's Internet web site, the annual 
percentage rate must be one in effect within the last 30 days.
    (2) Fees for issuance or availability. Any annual or other periodic 
fee, expressed as an annualized amount, or any other fee that may be 
imposed for the issuance or availability of a credit or charge card, 
including any fee based on account activity or inactivity.
    (3) Minimum finance charge. Any minimum or fixed finance charge that 
could be imposed during a billing cycle.
    (4) Transaction charges. Any transaction charge imposed for the use 
of the card for purchases.
    (5) Grace period. The date by which or the period within which any 
credit extended for purchases may be repaid without incurring a finance 
charge. If no grace period is provided, that fact must be disclosed. If 
the length of the grace period varies, the card issuer may disclose the 
range of days, the minimum number of days, or the average number of days 
in the grace period, if the disclosure is identified as a range, 
minimum, or average.
    (6) Balance computation method. The name of the balance computation 
method listed in paragraph (g) of this section that is used to determine 
the balance for purchases on which the finance charge is computed, or an 
explanation of the method used if it is not listed. The explanation may 
appear outside the table if the table contains a reference to the 
explanation. In determining which balance computation method to 
disclose, the card issuer shall assume that credit extended for 
purchases will not be repaid within the grace period, if any.
    (7) Statement on charge card payments. A statement that charges 
incurred by use of the charge card are due when the periodic statement 
is received.
    (8) Cash advance fee. Any fee imposed for an extension of credit in 
the form of cash.
    (9) Late payment fee. Any fee imposed for a late payment.
    (10) Over-the-limit fee. Any fee imposed for exceeding a credit 
limit.
    (11) Balance transfer fee. Any fee imposed to transfer an 
outstanding balance.
    (c) Direct-mail and electronic applications and solicitations. The 
card issuer shall disclose the applicable items in paragraph (b) of this 
section on or with an application or solicitation that is mailed to 
consumers or provided by electronic communication.
    (d) Telephone applications and solicitations--(1) Oral disclosure. 
The card issuer shall orally disclose the information in paragraphs (b) 
(1) through (7) of this section, to the extent applicable, in a 
telephone application or solicitation initiated by the card issuer.
    (2) Alternative disclosure. The oral disclosure under paragraph 
(d)(1) of this section need not be given if the card issuer either does 
not impose a fee described in paragraph (b)(2) of this section or does 
not impose such a fee unless the consumer uses the card, and the card 
issuer discloses in writing within 30 days after the consumer requests 
the card (but in no event later than the delivery of the card) the 
following:
    (i) The applicable information in paragraph (b) of this section; and
    (ii) The fact that the consumer need not accept the card or pay any 
fee disclosed unless the consumer uses the card.
    (e) Applications and solicitations made available to general public. 
The card issuer shall provide disclosures, to the extent applicable, on 
or with an application or solicitation that is made available to the 
general public, including one contained in a catalog, magazine, or other 
generally available publication. The disclosures shall be provided in 
accordance with paragraph (e) (1), (2) or (3) of this section.
    (1) Disclosure of required credit information. The card issuer may 
disclose in a prominent location on the application or solicitation the 
following:
    (i) The applicable information in paragraph (b) of this section;
    (ii) The date the required information was printed, including a 
statement

[[Page 362]]

that the required information was accurate as of that date and is 
subject to change after that date; and
    (iii) A statement that the consumer should contact the card issuer 
for any change in the required information since it was printed, and a 
toll-free telephone number or a mailing address for that purpose.
    (2) Inclusion of certain initial disclosures. The card issuer may 
disclose on or with the application or solicitation the following:
    (i) The disclosures required under Sec. 226.6 (a) through (c); and
    (ii) A statement that the consumer should contact the card issuer 
for any change in the required information, and a toll-free telephone 
number or a mailing address for that purpose.
    (3) No disclosure of credit information. If none of the items in 
paragraph (b) of this section is provided on or with the application or 
solicitation, the card issuer may state in a prominent location on the 
application or solicitation the following:
    (i) There are costs associated with the use of the card; and
    (ii) The consumer may contact the card issuer to request specific 
information about the costs, along with a toll-free telephone number and 
a mailing address for that purpose.
    (4) Prompt response to requests for information. Upon receiving a 
request for any of the information referred to in this paragraph, the 
card issuer shall promptly and fully disclose the information requested.
    (f) Special charge card rule--card issuer and person extending 
credit not the same person. If a cardholder may by use of a charge card 
access an open-end credit plan that is not maintained by the charge card 
issuer, the card issuer need not provide the disclosures in paragraphs 
(c), (d) or (e) of this section for the open-end credit plan if the card 
issuer states on or with an application or a solicitation the following:
    (1) The card issuer will make an independent decision whether to 
issue the card;
    (2) The charge card may arrive before the decision is made about 
extending credit under the open-end credit plan; and
    (3) Approval for the charge card does not constitute approval for 
the open-end credit plan.
    (g) Balance computation methods defined. The following methods may 
be described by name. Methods that differ due to variations such as the 
allocation of payments, whether the finance charge begins to accrue on 
the transaction date or the date of posting the transaction, the 
existence or length of a grace period, and whether the balance is 
adjusted by charges such as late fees, annual fees and unpaid finance 
charges do not constitute separate balance computation methods.
    (1)(i) Average daily balance (including new purchases). This balance 
is figured by adding the outstanding balance (including new purchases 
and deducting payments and credits) for each day in the billing cycle, 
and then dividing by the number of days in the billing cycle.
    (ii) Average daily balance (excluding new purchases). This balance 
is figured by adding the outstanding balance (excluding new purchases 
and deducting payments and credits) for each day in the billing cycle, 
and then dividing by the number of days in the billing cycle.
    (2)(i) Two-cycle average daily balance (including new purchases). 
This balance is the sum of the average daily balances for two billing 
cycles. The first balance is for the current billing cycle, and is 
figured by adding the outstanding balance (including new purchases and 
deducting payments and credits) for each day in the billing cycle, and 
then dividing by the number of days in the billing cycle. The second 
balance is for the preceding billing cycle.
    (ii) Two-cycle average daily balance (excluding new purchases). This 
balance is the sum of the average daily balances for two billing cycles. 
The first balance is for the current billing cycle, and is figured by 
adding the outstanding balance (excluding new purchases and deducting 
payments and credits) for each day in the billing cycle, and then 
dividing by the number of days in the billing cycle. The second balance 
is for the preceding billing cycle.
    (3) Adjusted balance. This balance is figured by deducting payments 
and credits made during the billing cycle

[[Page 363]]

from the outstanding balance at the beginning of the billing cycle.
    (4) Previous balance. This balance is the outstanding balance at the 
beginning of the billing cycle.

[Reg. Z, 54 FR 13865, Apr. 6, 1989, as amended at 54 FR 24686, June 9, 
1989; 54 FR 32954, Aug. 11, 1989; 65 FR 17131, Mar. 31, 2000; 65 FR 
58908, Oct. 3, 2000; 66 FR 17338, Mar. 30, 2001; 72 FR 63473, Nov. 9, 
2007]



Sec. 226.5b  Requirements for home equity plans.

    The requirements of this section apply to open-end credit plans 
secured by the consumer's dwelling. For purposes of this section, an 
annual percentage rate is the annual percentage rate corresponding to 
the periodic rate as determined under Sec. 226.14(b).
    (a) Form of disclosures--(1) General. The disclosures required by 
paragraph (d) of this section shall be made clearly and conspicuously 
and shall be grouped together and segregated from all unrelated 
information. The disclosures may be provided on the application form or 
on a separate form. The disclosure described in paragraph (d)(4)(iii), 
the itemization of third-party fees described in paragraph (d)(8), and 
the variable-rate information described in paragraph (d)(12) of this 
section may be provided separately from the other required disclosures.
    (2) Precedence of certain disclosures. The disclosures described in 
paragraph (d)(1) through (4)(ii) of this section shall precede the other 
required disclosures.
    (3) For an application that is accessed by the consumer in 
electronic form, the disclosures required under this section may be 
provided to the consumer in electronic form on or with the application.
    (b) Time of disclosures. The disclosures and brochure required by 
paragraphs (d) and (e) of this section shall be provided at the time an 
application is provided to the consumer. \10a\
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    \10a\ The disclosures and the brochure may be delivered or placed in 
the mail not later than three business days following receipt of a 
consumer's application in the case of applications contained in 
magazines or other publications, or when the application is received by 
telephone or through an intermediary agent or broker.
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    (c) Duties of third parties--Persons other than the creditor who 
provide applications to consumers for home equity plans must provide the 
brochure required under paragraph (e) of this section at the time an 
application is provided. If such persons have the disclosures required 
under paragraph (d) of this section for a creditor's home equity plan, 
they also shall provide the disclosures at such time. \10a\
    (d) Content of disclosures. The creditor shall provide the following 
disclosures, as applicable:
    (1) Retention of information. A statement that the consumer should 
make or otherwise retain a copy of the disclosures.
    (2) Conditions for disclosed terms. (i) A statement of the time by 
which the consumer must submit an application to obtain specific terms 
disclosed and an identification of any disclosed term that is subject to 
change prior to opening the plan.
    (ii) A statement that, if a disclosed term changes (other than a 
change due to fluctuations in the index in a variable-rate plan) prior 
to opening the plan and the consumer therefore elects not to open the 
plan, the consumer may receive a refund of all fees paid in connection 
with the application.
    (3) Security interest and risk to home. A statement that the 
creditor will acquire a security interest in the consumer's dwelling and 
that loss of the dwelling may occur in the event of default.
    (4) Possible actions by creditor. (i) A statement that, under 
certain conditions, the creditor may terminate the plan and require 
payment of the outstanding balance in full in a single payment and 
impose fees upon termination; prohibit additional extensions of credit 
or reduce the credit limit; and, as specified in the initial agreement, 
implement certain changes in the plan.
    (ii) A statement that the consumer may receive, upon request, 
information about the conditions under which such actions may occur.
    (iii) In lieu of the disclosure required under paragraph (d)(4)(ii) 
of this section, a statement of such conditions.
    (5) Payment terms. The payment terms of the plan, including:

[[Page 364]]

    (i) The length of the draw period and any repayment period.
    (ii) An explanation of how the minimum periodic payment will be 
determined and the timing of the payments. If paying only the minimum 
periodic payments may not repay any of the principal or may repay less 
than the outstanding balance, a statement of this fact, as well as a 
statement that a balloon payment may result. \10b\
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    \10b\ A balloon payment results if paying the minimum periodic 
payments does not fully amortize the outstanding balance by a specified 
date or time, and the consumer must repay the entire outstanding balance 
at such time.
---------------------------------------------------------------------------

    (iii) An example, based on a $10,000 outstanding balance and a 
recent annual percentage rate, \10c\ showing the minimum periodic 
payment, any balloon payment, and the time it would take to repay the 
$10,000 outstanding balance if the consumer made only those payments and 
obtained no additional extensions of credit.
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    \10c\ For fixed-rate plans, a recent annual percentage rate is a 
rate that has been in effect under the plan within the twelve months 
preceding the date the disclosures are provided to the consumer. For 
variable-rate plans, a recent annual percentage rate is the most recent 
rate provided in the historical example described in paragraph 
(d)(12)(xi) of this section or a rate that has been in effect under the 
plan since the date of the most recent rate in the table.

If different payment terms may apply to the draw and any repayment 
period, or if different payment terms may apply within either period, 
the disclosures shall reflect the different payment terms.
    (6) Annual percentage rate. For fixed-rate plans, a recent annual 
percentage rate \10c\ imposed under the plan and a statement that the 
rate does not include costs other than interest.
    (7) Fees imposed by creditor. An itemization of any fees imposed by 
the creditor to open, use, or maintain the plan, stated as a dollar 
amount or percentage, and when such fees are payable.
    (8) Fees imposed by third parties to open a plan. A good faith 
estimate, stated as a single dollar amount or range, of any fees that 
may be imposed by persons other than the creditor to open the plan, as 
well as a statement that the consumer may receive, upon request, a good 
faith itemization of such fees. In lieu of the statement, the 
itemization of such fees may be provided.
    (9) Negative amortization. A statement that negative amortization 
may occur and that negative amortization increases the principal balance 
and reduces the consumer's equity in the dwelling.
    (10) Transaction requirements. Any limitations on the number of 
extensions of credit and the amount of credit that may be obtained 
during any time period, as well as any minimum outstanding balance and 
minimum draw requirements, stated as dollar amounts or percentages.
    (11) Tax implications. A statement that the consumer should consult 
a tax advisor regarding the deductibility of interest and charges under 
the plan.
    (12) Disclosures for variable-rate plans. For a plan in which the 
annual percentage rate is variable, the following disclosures, as 
applicable:
    (i) The fact that the annual percentage rate, payment, or term may 
change due to the variable-rate feature.
    (ii) A statement that the annual percentage rate does not include 
costs other than interest.
    (iii) The index used in making rate adjustments and a source of 
information about the index.
    (iv) An explanation of how the annual percentage rate will be 
determined, including an explanation of how the index is adjusted, such 
as by the addition of a margin.
    (v) A statement that the consumer should ask about the current index 
value, margin, discount or premium, and annual percentage rate.
    (vi) A statement that the initial annual percentage rate is not 
based on the index and margin used to make later rate adjustments, and 
the period of time such initial rate will be in effect.
    (vii) The frequency of changes in the annual percentage rate.
    (viii) Any rules relating to changes in the index value and the 
annual percentage rate and resulting changes in the payment amount, 
including, for example, an explanation of payment limitations and rate 
carryover.

[[Page 365]]

    (ix) A statement of any annual or more frequent periodic limitations 
on changes in the annual percentage rate (or a statement that no annual 
limitation exists), as well as a statement of the maximum annual 
percentage rate that may be imposed under each payment option.
    (x) The minimum periodic payment required when the maximum annual 
percentage rate for each payment option is in effect for a $10,000 
outstanding balance, and a statement of the earliest date or time the 
maximum rate may be imposed.
    (xi) An historical example, based on a $10,000 extension of credit, 
illustrating how annual percentage rates and payments would have been 
affected by index value changes implemented according to the terms of 
the plan. The historical example shall be based on the most recent 15 
years of index values (selected for the same time period each year) and 
shall reflect all significant plan terms, such as negative amortization, 
rate carryover, rate discounts, and rate and payment limitations, that 
would have been affected by the index movement during the period.
    (xii) A statement that rate information will be provided on or with 
each periodic statement.
    (e) Brochure. The home equity brochure published by the Board or a 
suitable substitute shall be provided.
    (f) Limitations on home equity plans. No creditor may, by contract 
or otherwise:
    (1) Change the annual percentage rate unless:
    (i) Such change is based on an index that is not under the 
creditor's control; and
    (ii) Such index is available to the general public.
    (2) Terminate a plan and demand repayment of the entire outstanding 
balance in advance of the original term (except for reverse mortgage 
transactions that are subject to paragraph (f)(4) of this section) 
unless:
    (i) There is fraud or material misrepresentation by the consumer in 
connection with the plan;
    (ii) The consumer fails to meet the repayment terms of the agreement 
for any outstanding balance;
    (iii) Any action or inaction by the consumer adversely affects the 
creditor's security for the plan, or any right of the creditor in such 
security; or
    (iv) Federal law dealing with credit extended by a depository 
institution to its executive officers specifically requires that as a 
condition of the plan the credit shall become due and payable on demand, 
provided that the creditor includes such a provision in the initial 
agreement.
    (3) Change any term, except that a creditor may:
    (i) Provide in the initial agreement that it may prohibit additional 
extensions of credit or reduce the credit limit during any period in 
which the maximum annual percentage rate is reached. A creditor also may 
provide in the initial agreement that specified changes will occur if a 
specified event takes place (for example, that the annual percentage 
rate will increase a specified amount if the consumer leaves the 
creditor's employment).
    (ii) Change the index and margin used under the plan if the original 
index is no longer available, the new index has an historical movement 
substantially similar to that of the original index, and the new index 
and margin would have resulted in an annual percentage rate 
substantially similar to the rate in effect at the time the original 
index became unavailable.
    (iii) Make a specified change if the consumer specifically agrees to 
it in writing at that time.
    (iv) Make a change that will unequivocally benefit the consumer 
throughout the remainder of the plan.
    (v) Make an insignificant change to terms.
    (vi) Prohibit additional extensions of credit or reduce the credit 
limit applicable to an agreement during any period in which:
    (A) The value of the dwelling that secures the plan declines 
significantly below the dwelling's appraised value for purposes of the 
plan;
    (B) The creditor reasonably believes that the consumer will be 
unable to fulfill the repayment obligations under the plan because of a 
material change in the consumer's financial circumstances;

[[Page 366]]

    (C) The consumer is in default of any material obligation under the 
agreement;
    (D) The creditor is precluded by government action from imposing the 
annual percentage rate provided for in the agreement;
    (E) The priority of the creditor's security interest is adversely 
affected by government action to the extent that the value of the 
security interest is less than 120 percent of the credit line; or
    (F) The creditor is notified by its regulatory agency that continued 
advances constitute an unsafe and unsound practice.
    (4) For reverse mortgage transactions that are subject to Sec. 
226.33, terminate a plan and demand repayment of the entire outstanding 
balance in advance of the original term except:
    (i) In the case of default;
    (ii) If the consumer transfers title to the property securing the 
note;
    (iii) If the consumer ceases using the property securing the note as 
the primary dwelling; or
    (iv) Upon the consumer's death.
    (g) Refund of fees. A creditor shall refund all fees paid by the 
consumer to anyone in connection with an application if any term 
required to be disclosed under paragraph (d) of this section changes 
(other than a change due to fluctuations in the index in a variable-rate 
plan) before the plan is opened and, as a result, the consumer elects 
not to open the plan.
    (h) Imposition of nonrefundable fees. Neither a creditor nor any 
other person may impose a nonrefundable fee in connection with an 
application until three business days after the consumer receives the 
disclosures and brochure required under this section.\10d\
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    \10d\ If the disclosures and brochure are mailed to the consumer, 
the consumer is considered to have received them three business days 
after they are mailed.

[Reg. Z, 54 FR 24686, June 9, 1989, as amended at 55 FR 38312, Sept. 18, 
1990; 55 FR 42148, Oct. 17, 1990; 57 FR 34681, Aug. 6, 1992; 60 FR 
15471, Mar. 24, 1995; 66 FR 17338, Mar. 30, 2001; 72 FR 63474, Nov. 9, 
2007]



Sec. 226.6  Initial disclosure statement.

    The creditor shall disclose to the consumer, in terminology 
consistent with that to be used on the periodic statement, each of the 
following items, to the extent applicable:
    (a) Finance charge. The circumstances under which a finance charge 
will be imposed and an explanation of how it will be determined, as 
follows:
    (1) A statement of when finance charges begin to accrue, including 
an explanation of whether or not any time period exists within which any 
credit extended may be repaid without incurring a finance charge. If 
such a time period is provided, a creditor may, at its option and 
without disclosure, impose no finance charge when payment is received 
after the time period's expiration.
    (2) A disclosure of each periodic rate that may be used to compute 
the finance charge, the range of balances to which it is applicable,\11\ 
and the corresponding annual percentage rate.\12\ When different 
periodic rates apply to different types of transactions, the types of 
transactions to which the periodic rates apply shall also be disclosed.
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    \11\ A creditor is not required to adjust the range of balances 
disclosure to reflect the balance below which only a minimum charge 
applies.
    \12\ If a creditor is offering a variable rate plan, the creditor 
shall also disclose: (1) The circumstances under which the rate(s) may 
increase; (2) any limitations on the increase; and (3) the effect(s) of 
an increase.
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    (3) An explanation of the method used to determine the balance on 
which the finance charge may be computed.
    (4) An explanation of how the amount of any finance charge will be 
determined,\13\ including a description of how any finance charge other 
than the periodic rate will be determined.
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    \13\ If no finance charge is imposed when the outstanding balance is 
less than a certain amount, no disclosure is required of that fact or of 
the balance below which no finance charge will be imposed.
---------------------------------------------------------------------------

    (b) Other charges. The amount of any charge other than a finance 
charge that may be imposed as part of the plan, or an explanation of how 
the charge will be determined.
    (c) Security interests. The fact that the creditor has or will 
acquire a security

[[Page 367]]

interest in the property purchased under the plan, or in other property 
identified by item or type.
    (d) Statement of billing rights. A statement that outlines the 
consumer's rights and the creditor's responsibilities under Sec. Sec. 
226.12(c) and 226.13 and that is substantially similar to the statement 
found in appendix G.
    (e) Home equity plan information. The following disclosures 
described in Sec. 226.5b(d), as applicable:
    (1) A statement of the conditions under which the creditor may take 
certain action, as described in Sec. 226.5b(d)(4)(i), such as 
terminating the plan or changing the terms.
    (2) The payment information described in Sec. 226.5b(d)(5) (i) and 
(ii) for both the draw period and any repayment period.
    (3) A statement that negative amortization may occur as described in 
Sec. 226.5b(d)(9).
    (4) A statement of any transaction requirements as described in 
Sec. 226.5b(d)(10).
    (5) A statement regarding the tax implications as described in Sec. 
226.5b(d)(11).
    (6) A statement that the annual percentage rate imposed under the 
plan does not include costs other than interest as described in 
Sec. Sec. 226.5b(d)(6) and (d)(12)(ii).
    (7) The variable-rate disclosures described in Sec. 226.5b(d)(12) 
(viii), (x), (xi), and (xii), as well as the disclosure described in 
Sec. 226.5b(d)(5)(iii), unless the disclosures provided with the 
application were in a form the consumer could keep and included a 
representative payment example for the category of payment option chosen 
by the consumer.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 54 FR 24688, June 9, 
1989]



Sec. 226.7  Periodic statement.

    The creditor shall furnish the consumer with a periodic statement 
that discloses the following items, to the extent applicable:
    (a) Previous balance. The account balance outstanding at the 
beginning of the billing cycle.
    (b) Identification of transactions. An identification of each credit 
transaction in accordance with Sec. 226.8.
    (c) Credits. Any credit to the account during the billing cycle, 
including the amount and the date of crediting. The date need not be 
provided if a delay in crediting does not result in any finance or other 
charge.
    (d) Periodic rates. Each periodic rate that may be used to compute 
the finance charge, the range of balances to which it is applicable,\14\ 
and the corresponding annual percentage rate.\15\ If different periodic 
rates apply to different types of transactions, the types of 
transactions to which the periodic rates apply shall also be disclosed.
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    \14\ See footnotes 11 and 13.
    \15\ If a variable rate plan is involved, the creditor shall 
disclose the fact that the periodic rate(s) may vary.
---------------------------------------------------------------------------

    (e) Balance on which finance charge computed. The amount of the 
balance to which a periodic rate was applied and an explanation of how 
that balance was determined. When a balance is determined without first 
deducting all credits and payments made during the billing cycle, that 
fact and the amount of the credits and payments shall be disclosed.
    (f) Amount of finance charge. The amount of any finance charge 
debited or added to the account during the billing cycle, using the term 
finance charge. The components of the finance charge shall be 
individually itemized and identified to show the amount(s) due to the 
appliction of any periodic rates and the amount(s) of any other type of 
finance charge. If there is more than one periodic rate, the amount of 
the finance charge attributable to each rate need not be separately 
itemized and identified.
    (g) Annual percentage rate. When a finance charge is imposed during 
the billing cycle, the annual percentage rate(s) determined under Sec. 
226.14, using the term annual percentage rate.
    (h) Other charges. The amounts, itemized and identified by type, of 
any charges other than finance charges debited to the account during the 
billing cycle.
    (i) Closing date of billing cycle; new balance. The closing date of 
the billing cycle and the account balance outstanding on that date.
    (j) Free-ride period. The date by which or the time period within 
which the

[[Page 368]]

new balance or any portion of the new balance must be paid to avoid 
additional finance charges. If such a time period is provided, a 
creditor may, at its option and without disclosure, impose no finance 
charge when payment is received after the time period's expiration.
    (k) Address for notice of billing errors. The address to be used for 
notice of billing errors. Alternatively, the address may be provided on 
the billing rights statement permitted by Sec. 226.9(a)(2).

[46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981]



Sec. 226.8  Identification of transactions.

    The creditor shall identify credit transactions on or with the first 
periodic statement that reflects the transaction by furnishing the 
following information, as applicable.\16\
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    \16\ Failure to disclose the information required by this section 
shall not be deemed a failure to comply with the regulation if: (1) The 
creditor maintains procedures reasonably adapted to obtain and provide 
the information; and (2) the creditor treats an inquiry for 
clarification or documentation as a notice of a billing error, including 
correcting the account in accordance with Sec. 226.13(e). This applies 
to transactions that take place outside a state, as defined in Sec. 
226.2(a), whether or not the creditor maintains procedures reasonably 
adapted to obtain the required information.
---------------------------------------------------------------------------

    (a) Sale credit. For each credit transaction involving the sale of 
property or services, the following rules shall apply:
    (1) Copy of credit document provided. When an actual copy of the 
receipt or other credit document is provided with the first periodic 
statement reflecting the transaction, the transaction is sufficiently 
identified if the amount of the transaction and either the date of the 
transaction or the date of debiting the transaction to the consumer's 
account are disclosed on the copy or on the periodic statement.
    (2) Copy of credit document not provided--creditor and seller same 
or related person(s). When the creditor and the seller are the same 
person or related persons, and an actual copy of the receipt or other 
credit document is not provided with the periodic statement, the 
creditor shall disclose the amount and date of the transaction, and a 
brief identification \17\ of the property or services purchased.\18\
---------------------------------------------------------------------------

    \17\ As an alternative to the brief identification, the creditor may 
disclose a number or symbol that also appears on the receipt or other 
credit document given to the consumer, if the number or symbol 
reasonably identifies that transaction with that creditor, and if the 
creditor treats an inquiry for clarification or documentation as a 
notice of a billing error, including correcting the account in 
accordance with Sec. 226.13(e).
    \18\ An identification of property or services may be replaced by 
the seller's name and location of the transaction when: (1) The creditor 
and the seller are the same person; (2) the creditor's open-end plan has 
fewer than 15,000 accounts; (3) the creditor provides the consumer with 
point-of-sale documentation for that transaction; and (4) the creditor 
treats an inquiry for clarification or documentation as a notice of a 
billing error, including correcting the account in accordance with Sec. 
226.13(e).
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    (3) Copy of credit document not provided--creditor and seller not 
same or related person(s). When the creditor and seller are not the same 
person or related persons, and an actual copy of the receipt or other 
credit document is not provided with the periodic statement, the 
creditor shall disclose the amount and date of the transaction; the 
seller's name; and the city, and state or foreign country where the 
transaction took place.\19\
---------------------------------------------------------------------------

    \19\ The creditor may omit the address or provide any suitable 
designation that helps the consumer to identify the transaction when the 
transaction (1) took place at a location that is not fixed; (2) took 
place in the consumer's home; or (3) was a mail or telephone order.
---------------------------------------------------------------------------

    (b) Nonsale credit. A nonsale credit transaction is sufficiently 
identified if the first periodic statement reflecting the transaction 
discloses a brief identification of the transaction;\20\ the amount of 
the transaction; and at least one of the following dates: the date of 
the transaction, the date of debiting the transaction to the consumer's 
account, or, if the consumer signed the credit document, the date 
appearing on the document. If an actual copy of the receipt or other 
credit document is provided and that copy shows the amount and at least 
one of the specified dates,

[[Page 369]]

the brief identification may be omitted.
---------------------------------------------------------------------------

    \20\ See Footnote 17.

[46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981]



Sec. 226.9  Subsequent disclosure requirements.

    (a) Furnishing statement of billing rights--(1) Annual statement. 
The creditor shall mail or deliver the billing rights statement required 
by Sec. 226.6(d) at least once per calendar year, at intervals of not 
less than 6 months nor more than 18 months, either to all consumers or 
to each consumer entitled to receive a periodic statement under Sec. 
226.5(b)(2) for any one billing cycle.
    (2) Alternative summary statement. As an alternative to paragraph 
(a)(1) of this section, the creditor may mail or deliver, on or with 
each periodic statement, a statement substantially similar to that in 
appendix G.
    (b) Disclosures for supplemental credit devices and additional 
features--(1) If a creditor, within 30 days after mailing or delivering 
the initial disclosures under Sec. 226.6(a), adds a credit feature to 
the consumer's account or mails or delivers to the consumer a credit 
device for which the finance charge terms are the same as those 
previously disclosed, no additional disclosures are necessary. After 30 
days, if the creditor adds a credit feature or furnishes a credit device 
(other than as a renewal, resupply, or the original issuance of a credit 
card) on the same finance charge terms, the creditor shall disclose, 
before the consumer uses the feature or device for the first time, that 
it is for use in obtaining credit under the terms previously disclosed.
    (2) Whenever a credit feature is added or a credit device is mailed 
or delivered, and the finance charge terms for the feature or device 
differ from disclosures previously given, the disclosures required by 
Sec. 226.6(a) that are applicable to the added feature or device shall 
be given before the consumer uses the feature or device for the first 
time.
    (c) Change in terms--(1) Written notice required. Whenever any term 
required to be disclosed under Sec. 226.6 is changed or the required 
minimum periodic payment is increased, the creditor shall mail or 
deliver written notice of the change to each consumer who may be 
affected. The notice shall be mailed or delivered at least 15 days prior 
to the effective date of the change. The 15-day timing requirement does 
not apply if the change has been agreed to by the consumer, or if a 
periodic rate or other finance charge is increased because of the 
consumer's delinquency or default; the notice shall be given, however, 
before the effective date of the change.
    (2) Notice not required. No notice under this section is required 
when the change involves late payment charges, charges for documentary 
evidence, or over-the-limit charges; a reduction of any component of a 
finance or other charge; suspension of future credit privileges or 
termination of an account or plan; or when the change results from an 
agreement involving a court proceeding, or from the consumer's default 
or delinquency (other than an increase in the periodic rate or other 
finance charge).
    (3) Notice for home equity plans. If a creditor prohibits additional 
extensions of credit or reduces the credit limit applicable to a home 
equity plan pursuant to Sec. 226.5b(f)(3)(i) or Sec. 226.5b(f)(3)(vi), 
the creditor shall mail or deliver written notice of the action to each 
consumer who will be affected. The notice must be provided not later 
than three business days after the action is taken and shall contain 
specific reasons for the action. If the creditor requires the consumer 
to request reinstatement of credit privileges, the notice also shall 
state that fact.
    (d) Finance charge imposed at time of transaction. (1) Any person, 
other than the card issuer, who imposes a finance charge at the time of 
honoring a consumer's credit card, shall disclose the amount of that 
finance charge prior to its imposition.
    (2) The card issuer, if other than the person honoring the 
consumer's credit card, shall have no responsibility for the disclosure 
required by paragraph (d)(1) of this section, and shall not consider any 
such charge for purposes of Sec. Sec. 226.5a, 226.6 and 226.7.
    (e) Disclosures upon renewal of credit or charge card--(1) Notice 
prior to renewal. Except as provided in paragraph (e)(2) of this 
section, a card issuer that imposes any annual or other periodic

[[Page 370]]

fee to renew a credit or charge card account of the type subject to 
Sec. 226.5a, including any fee based on account activity or inactivity, 
shall mail or deliver written notice of the renewal to the cardholder. 
The notice shall be provided at least 30 days or one billing cycle, 
whichever is less, before the mailing or the delivery of the periodic 
statement on which the renewal fee is initially charged to the account. 
The notice shall contain the following information:
    (i) The disclosures contained in Sec. 226.5a(b) (1) through (7) 
that would apply if the account were renewed;\20a\ and
---------------------------------------------------------------------------

    \20a\ These disclosures need not be provided in tabular format or in 
a prominent location.
---------------------------------------------------------------------------

    (ii) How and when the cardholder may terminate credit availability 
under the account to avoid paying the renewal fee.
    (2) Delayed notice. The disclosures required by paragraph (e)(1) of 
this section may be provided later than the time in paragraph (e)(1) of 
this section, but no later than the mailing or the delivery of the 
periodic statement on which the renewal fee is initially charged to the 
account, if the card issuer also discloses at that time that:
    (i) The cardholder has 30 days from the time the periodic statement 
is mailed or delivered to avoid paying the fee or to have the fee 
recredited if the cardholder terminates credit availability under the 
account; and
    (ii) The cardholder may use the card during the interim period 
without having to pay the fee.
    (3) Notification on periodic statements. The disclosures required by 
this paragraph may be made on or with a periodic statement. If any of 
the disclosures are provided on the back of a periodic statement, the 
card issuer shall include a reference to those disclosures on the front 
of the statement.
    (f) Change in credit card account insurance provided--(1) Notice 
prior to change. If a credit card issuer plans to change the provider of 
insurance for repayment of all or part of the outstanding balance of an 
open-end credit card account of the type subject to Sec. 226.5a, the 
card issuer shall mail or deliver the cardholder written notice of the 
change not less than 30 days before the change in providers occurs. The 
notice shall also include the following items, to the extent applicable:
    (i) Any increase in the rate that will result from the change;
    (ii) Any substantial decrease in coverage that will result from the 
change; and
    (iii) A statement that the cardholder may discontinue the insurance.
    (2) Notice when change in provider occurs. If a change described in 
paragraph (f)(1) of this section occurs, the card issuer shall provide 
the cardholder with a written notice no later than 30 days after the 
change, including the following items, to the extent applicable:
    (i) The name and address of the new insurance provider;
    (ii) A copy of the new policy or group certificate containing the 
basic terms of the insurance, including the rate to be charged; and
    (iii) A statement that the cardholder may discontinue the insurance.
    (3) Substantial decrease in coverage. For purposes of this 
paragraph, a substantial decrease in coverage is a decrease in a 
significant term of coverage that might reasonably be expected to affect 
the cardholder's decision to continue the insurance. Significant terms 
of coverage include, for example, the following:
    (i) Type of coverage provided;
    (ii) Age at which coverage terminates or becomes more restrictive;
    (iii) Maximum insurable loan balance, maximum periodic benefit 
payment, maximum number of payments, or other term affecting the dollar 
amount of coverage or benefits provided;
    (iv) Eligibility requirements and number and identity of persons 
covered;
    (v) Definition of a key term of coverage such as disability;
    (vi) Exclusions from or limitations on coverage; and
    (vii) Waiting periods and whether coverage is retroactive.
    (4) Combined notification. The notices required by paragraph (f) (1) 
and (2) of this section may be combined provided the timing requirement 
of paragraph (f)(1) of this section is met. The notices

[[Page 371]]

may be provided on or with a periodic statement.

[Reg. Z, 46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981, as 
amended at 54 FR 13867, Apr. 6, 1989; 54 FR 24688, June 9, 1989; 54 FR 
32954, Aug. 11, 1989; 55 FR 38312, Sept. 18, 1990; 55 FR 42148, Oct. 17, 
1990]



Sec. 226.10  Prompt crediting of payments.

    (a) General rule. A creditor shall credit a payment to the 
consumer's account as of the date of receipt, except when a delay in 
crediting does not result in a finance or other charge or except as 
provided in paragraph (b) of this section.
    (b) Specific requirements for payments. If a creditor specifies, on 
or with the periodic statement, requirements for the consumer to follow 
in making payments, but accepts a payment that does not conform to the 
requirements, the creditor shall credit the payment within 5 days of 
receipt.
    (c) Adjustment of account. If a creditor fails to credit a payment, 
as required by paragraphs (a) and (b) of this section, in time to avoid 
the imposition of finance or other charges, the creditor shall adjust 
the consumer's account so that the charges imposed are credited to the 
consumer's account during the next billing cycle.



Sec. 226.11  Treatment of credit balances.

    When a credit balance in excess of $1 is created on a credit account 
(through transmittal of funds to a creditor in excess of the total 
balance due on an account, through rebates of unearned finance charges 
or insurance premiums, or through amounts otherwise owed to or held for 
the benefit of a consumer), the creditor shall:
    (a) Credit the amount of the credit balance to the consumer's 
account;
    (b) Refund any part of the remaining credit balance within 7 
business days from receipt of a written request from the consumer; and
    (c) Make a good faith effort to refund to the consumer by cash, 
check, or money order, or credit to a deposit account of the consumer, 
any part of the credit balance remaining in the account for more than 6 
months. No further action is required if the consumer's current location 
is not known to the creditor and cannot be traced through the consumer's 
last known address or telephone number.



Sec. 226.12  Special credit card provisions.

    (a) Issuance of credit cards. Regardless of the purpose for which a 
credit card is to be used, including business, commercial, or 
agricultural use, no credit card shall be issued to any person except:
    (1) In response to an oral or written request or application for the 
card; or
    (2) As a renewal of, or substitute for, an accepted credit card.\21\
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    \21\ For purposes of this section, accepted credit card means any 
credit card that a cardholder has requested or applied for and received, 
or has signed, used, or authorized another person to use to obtain 
credit. Any credit card issued as a renewal or substitute in accordance 
with this paragraph becomes an accepted credit card when received by the 
cardholder.
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    (b) Liability of cardholder for unauthorized use--(1) Limitation on 
amount. The liability of a cardholder for unauthorized use \22\ of a 
credit card shall not exceed the lesser of $50 or the amount of money, 
property, labor, or services obtained by the unauthorized use before 
notification to the card issuer under paragraph (b)(3) of this section.
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    \22\ Unauthorized use means the use of a credit card by a person, 
other than the cardholder, who does not have actual, implied, or 
apparent authority for such use, and from which the cardholder receives 
no benefit.
---------------------------------------------------------------------------

    (2) Conditions of liability. A cardholder shall be liable for 
unauthorized use of a credit card only if:
    (i) The credit card is an accepted credit card;
    (ii) The card issuer has provided adequate notice \23\ of the 
cardholder's maximum potential liability and of means by which the card 
issuer may be notified of loss or theft of the card. The notice shall 
state that the cardholder's liability shall not exceed $50 (or any 
lesser amount) and that the cardholder may give oral or written 
notification,

[[Page 372]]

and shall describe a means of notification (for example, a telephone 
number, an address, or both); and
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    \23\ Adequate notice means a printed notice to a cardholder that 
sets forth clearly the pertinent facts so that the cardholder may 
reasonably be expected to have noticed it and understood its meaning. 
The notice may be given by any means reasonably assuring receipt by the 
cardholder.
---------------------------------------------------------------------------

    (iii) The card issuer has provided a means to identify the 
cardholder on the account or the authorized user of the card.
    (3) Notification to card issuer. Notification to a card issuer is 
given when steps have been taken as may be reasonably required in the 
ordinary course of business to provide the card issuer with the 
pertinent information about the loss, theft, or possible unauthorized 
use of a credit card, regardless of whether any particular officer, 
employee, or agent of the card issuer does, in fact, receive the 
information. Notification may be given, at the option of the person 
giving it, in person, by telephone, or in writing. Notification in 
writing is considered given at the time of receipt or, whether or not 
received, at the expiration of the time ordinarily required for 
transmission, whichever is earlier.
    (4) Effect of other applicable law or agreement. If state law or an 
agreement between a cardholder and the card issuer imposes lesser 
liability than that provided in this paragraph, the lesser liability 
shall govern.
    (5) Business use of credit cards. If 10 or more credit cards are 
issued by one card issuer for use by the employees of an organization, 
this section does not prohibit the card issuer and the organization from 
agreeing to liability for unauthorized use without regard to this 
section. However, liability for unauthorized use may be imposed on an 
employee of the organization, by either the card issuer or the 
organization, only in accordance with this section.
    (c) Right of cardholder to assert claims or defenses against card 
issuer \24\--(1) General rule. When a person who honors a credit card 
fails to resolve satisfactorily a dispute as to property or services 
purchased with the credit card in a consumer credit transaction, the 
cardholder may assert against the card issuer all claims (other than 
tort claims) and defenses arising out of the transaction and relating to 
the failure to resolve the dispute. The cardholder may withhold payment 
up to the amount of credit outstanding for the property or services that 
gave rise to the dispute and any finance or other charges imposed on 
that amount.\25\
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    \24\ This paragraph does not apply to the use of a check guarantee 
card or a debit card in connection with an overdraft credit plan, or to 
a check guarantee card used in connection with cash advance checks.
    \25\ The amount of the claim or defense that the cardholder may 
assert shall not exceed the amount of credit outstanding for the 
disputed transaction at the time the cardholder first notifies the card 
issuer or the person honoring the credit card of the existence of the 
claim or defense. To determine the amount of credit outstanding for 
purposes of this section, payments and other credits shall be applied 
to: (1) Late charges in the order of entry to the account; then to (2) 
finance charges in the order of entry to the account; and then to (3) 
any other debits in the order of entry to the account. If more than one 
item is included in a single extension of credit, credits are to be 
distributed pro rata according to prices and applicable taxes.
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    (2) Adverse credit reports prohibited. If, in accordance with 
paragraph (c)(1) of this section, the cardholder withholds payment of 
the amount of credit outstanding for the disputed transaction, the card 
issuer shall not report that amount as delinquent until the dispute is 
settled or judgment is rendered.
    (3) Limitations. The rights stated in paragraphs (c)(1) and (2) of 
this section apply only if:
    (i) The cardholder has made a good faith attempt to resolve the 
dispute with the person honoring the credit card; and
    (ii) The amount of credit extended to obtain the property or 
services that result in the assertion of the claim or defense by the 
cardholder exceeds $50, and the disputed transaction occurred in the 
same state as the cardholder's current designated address or, if not 
within the same state, within 100 miles from that address.\26\
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    \26\ The limitations stated in paragraph (c)(3)(ii) of this section 
shall not apply when the person honoring the credit card: (1) Is the 
same person as the card issuer; (2) is controlled by the card issuer 
directly or indirectly; (3) is under the direct or indirect control of a 
third person that also directly or indirectly controls the card issuer; 
(4) controls the card issuer directly or indirectly; (5) is a franchised 
dealer in the card issuer's products or services; or (6) has obtained 
the order for the disputed transaction through a mail solicitation made 
or participated in by the card issuer.

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[[Page 373]]

    (d) Offsets by card issuer prohibited. (1) A card issuer may not 
take any action, either before or after termination of credit card 
privileges, to offset a cardholder's indebtedness arising from a 
consumer credit transaction under the relevant credit card plan against 
funds of the cardholder held on deposit with the card issuer.
    (2) This paragraph does not alter or affect the right of a card 
issuer acting under state or Federal law to do any of the following with 
regard to funds of a cardholder held on deposit with the card issuer if 
the same procedure is constitutionally available to creditors generally: 
obtain or enforce a consensual security interest in the funds; attach or 
otherwise levy upon the funds; or obtain or enforce a court order 
relating to the funds.
    (3) This paragraph does not prohibit a plan, if authorized in 
writing by the cardholder, under which the card issuer may periodically 
deduct all or part of the cardholder's credit card debt from a deposit 
account held with the card issuer (subject to the limitations in Sec. 
226.13(d)(1)).
    (e) Prompt notification of returns and crediting of refunds. (1) 
When a creditor other than the card issuer accepts the return of 
property or forgives a debt for services that is to be reflected as a 
credit to the consumer's credit card account, that creditor shall, 
within 7 business days from accepting the return or forgiving the debt, 
transmit a credit statement to the card issuer through the card issuer's 
normal channels for credit statements.
    (2) The card issuer shall, within 3 business days from receipt of a 
credit statement, credit the consumer's account with the amount of the 
refund.
    (3) If a creditor other than a card issuer routinely gives cash 
refunds to consumers paying in cash, the creditor shall also give credit 
or cash refunds to consumers using credit cards, unless it discloses at 
the time the transaction is consummated that credit or cash refunds for 
returns are not given. This section does not require refunds for returns 
nor does it prohibit refunds in kind.
    (f) Discounts; tie-in arrangements. No card issuer may, by contract 
or otherwise:
    (1) Prohibit any person who honors a credit card from offering a 
discount to a consumer to induce the consumer to pay by cash, check, or 
similar means rather than by use of a credit card or its underlying 
account for the purchase of property or services; or
    (2) Require any person who honors the card issuer's credit card to 
open or maintain any account or obtain any other service not essential 
to the operation of the credit card plan from the card issuer or any 
other person, as a condition of participation in a credit card plan. If 
maintenance of an account for clearing purposes is determined to be 
essential to the operation of the credit card plan, it may be required 
only if no service charges or minimum balance requirements are imposed.
    (g) Relation to Electronic Fund Transfer Act and Regulation E. For 
guidance on whether Regulation Z (12 CFR part 226) or Regulation E (12 
CFR part 205) applies in instances involving both credit and electronic 
fund transfer aspects, refer to Regulation E, 12 CFR 205.12(a) regarding 
issuance and liability for unauthorized use. On matters other than 
issuance and liability, this section applies to the credit aspects of 
combined credit/electronic fund transfer transactions, as applicable.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 65 FR 17131, Mar. 31, 
2000]



Sec. 226.13  Billing error resolution.\27\
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    \27\ A creditor shall not accelerate any part of the consumer's 
indebtedness or restrict or close a consumer's account solely because 
the consumer has exercised in good faith rights provided by this 
section. A creditor may be subject to the forfeiture penalty under 
section 161(e) of the Act for failure to comply with any of the 
requirements of this section.
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    (a) Definition of billing error. For purposes of this section, the 
term billing error means:
    (1) A reflection on or with a periodic statement of an extension of 
credit that is not made to the consumer or to a person who has actual, 
implied, or apparent authority to use the consumer's credit card or 
open-end credit plan.
    (2) A reflection on or with a periodic statement of an extension of 
credit

[[Page 374]]

that is not identified in accordance with the requirements of Sec. Sec. 
226.7(b) and 226.8.
    (3) A reflection on or with a periodic statement of an extension of 
credit for property or services not accepted by the consumer or the 
consumer's designee, or not delivered to the consumer or the consumer's 
designee as agreed.
    (4) A reflection on a periodic statement of the creditor's failure 
to credit properly a payment or other credit issued to the consumer's 
account.
    (5) A reflection on a periodic statement of a computational or 
similar error of an accounting nature that is made by the creditor.
    (6) A reflection on a periodic statement of an extension of credit 
for which the consumer requests additional clarification, including 
documentary evidence.
    (7) The creditor's failure to mail or deliver a periodic statement 
to the consumer's last known address if that address was received by the 
creditor, in writing, at least 20 days before the end of the billing 
cycle for which the statement was required.
    (b) Billing error notice.\28\ A billing error notice is a written 
notice \29\ from a consumer that:
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    \28\ The creditor need not comply with the requirements of 
paragraphs (c) through (g) of this section if the consumer concludes 
that no billing error occurred and voluntarily withdraws the billing 
error notice.
    \29\ The creditor may require that the written notice not be made on 
the payment medium or other material accompanying the periodic statement 
if the creditor so stipulates in the billing rights statement required 
by Sec. Sec. 226.6(d) and 226.9(a).
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    (1) Is received by a creditor at the address disclosed under Sec. 
226.7(k) no later than 60 days after the creditor transmitted the first 
periodic statement that reflects the alleged billing error;
    (2) Enables the creditor to identify the consumer's name and account 
number; and
    (3) To the extent possible, indicates the consumer's belief and the 
reasons for the belief that a billing error exists, and the type, date, 
and amount of the error.
    (c) Time for resolution; general procedures. (1) The creditor shall 
mail or deliver written acknowledgment to the consumer within 30 days of 
receiving a billing error notice, unless the creditor has complied with 
the appropriate resolution procedures of paragraphs (e) and (f) of this 
section, as applicable, within the 30-day period; and
    (2) The creditor shall comply with the appropriate resolution 
procedures of paragraphs (e) and (f) of this section, as applicable, 
within 2 complete billing cycles (but in no event later than 90 days) 
after receiving a billing error notice.
    (d) Rules pending resolution. Until a billing error is resolved 
under paragraph (e) or (f) of this section, the following rules apply:
    (1) Consumer's right to withhold disputed amount; collection action 
prohibited. The consumer need not pay (and the creditor may not try to 
collect) any portion of any required payment that the consumer believes 
is related to the disputed amount (including related finance or other 
charges).\30\ If the cardholder maintains a deposit account with the 
card issuer and has agreed to pay the credit card indebtedness by 
periodic deductions from the cardholder's deposit account, the card 
issuer shall not deduct any part of the disputed amount or related 
finance or other charges if a billing error notice is received any time 
up to 3 business days before the scheduled payment date.
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    \30\ A creditor is not prohibited from taking action to collect any 
undisputed portion of the item or bill; from deducting any disputed 
amount and related finance or other charges from the consumer's credit 
limit on the account; or from reflecting a disputed amount and related 
finance or other charges on a periodic statement, provided that the 
creditor indicates on or with the periodic statement that payment of any 
disputed amount and related finance or other charges is not required 
pending the creditor's compliance with this section.
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    (2) Adverse credit reports prohibited. The creditor or its agent 
shall not (directly or indirectly) make or threaten to make an adverse 
report to any person about the consumer's credit standing, or report 
that an amount or account is delinquent, because the consumer failed to 
pay the disputed amount or related finance or other charges.

[[Page 375]]

    (e) Procedures if billing error occurred as asserted. If a creditor 
determines that a billing error occurred as asserted, it shall within 
the time limits in paragraph (c)(2) of this section:
    (1) Correct the billing error and credit the consumer's account with 
any disputed amount and related finance or other charges, as applicable; 
and
    (2) Mail or deliver a correction notice to the consumer.
    (f) Procedures if different billing error or no billing error 
occurred. If, after conducting a reasonable investigation,\31\ a 
creditor determines that no billing error occurred or that a different 
billing error occurred from that asserted, the creditor shall within the 
time limits in paragraph (c)(2) of this section:
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    \31\ If a consumer submits a billing error notice alleging either 
the nondelivery of property or services under paragraph (a)(3) of this 
section or that information appearing on a periodic statement is 
incorrect because a person honoring the consumer's credit card has made 
an incorrect report to the card issuer, the creditor shall not deny the 
assertion unless it conducts a reasonable investigation and determines 
that the property or services were actually delivered, mailed, or sent 
as agreed or that the information was correct.
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    (1) Mail or deliver to the consumer an explanation that sets forth 
the reasons for the creditor's belief that the billing error alleged by 
the consumer is incorrect in whole or in part;
    (2) Furnish copies of documentary evidence of the consumer's 
indebtedness, if the consumer so requests; and
    (3) If a different billing error occurred, correct the billing error 
and credit the consumer's account with any disputed amount and related 
finance or other charges, as applicable.
    (g) Creditor's rights and duties after resolution. If a creditor, 
after complying with all of the requirements of this section, determines 
that a consumer owes all or part of the disputed amount and related 
finance or other charges, the creditor:
    (1) Shall promptly notify the consumer in writing of the time when 
payment is due and the portion of the disputed amount and related 
finance or other charges that the consumer still owes;
    (2) Shall allow any time period disclosed under Sec. Sec. 
226.6(a)(1) and 226.7(j), during which the consumer can pay the amount 
due under paragraph (g)(1) of this section without incurring additional 
finance or other charges;
    (3) May report an account or amount as delinquent because the amount 
due under paragraph (g)(1) of this section remains unpaid after the 
creditor has allowed any time period disclosed under Sec. Sec. 
226.6(a)(1) and 266.7(j) or 10 days (whichever is longer) during which 
the consumer can pay the amount; but
    (4) May not report that an amount or account is delinquent because 
the amount due under paragraph (g)(1) of the section remains unpaid, if 
the creditor receives (within the time allowed for payment in paragraph 
(g)(3) of this section) further written notice from the consumer that 
any portion of the billing error is still in dispute, unless the 
creditor also:
    (i) Promptly reports that the amount or account is in dispute;
    (ii) Mails or delivers to the consumer (at the same time the report 
is made) a written notice of the name and address of each person to whom 
the creditor makes a report; and
    (iii) Promptly reports any subsequent resolution of the reported 
delinquency to all persons to whom the creditor has made a report.
    (h) Reassertion of billing error. A creditor that has fully complied 
with the requirements of this section has no further responsibilities 
under this section (other than as provided in paragraph (g)(4) of this 
section) if a consumer reasserts substantially the same billing error.
    (i) Relation to Electronic Fund Transfer Act and Regulation E. If an 
extension of credit is incident to an electronic fund transfer, under an 
agreement between a 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, the creditor shall 
comply with the requirements of Regulation E, 12 CFR 205.11 governing 
error resolution rather than those of paragraphs (a), (b), (c), (e), 
(f), and (h) of this section.

[[Page 376]]



Sec. 226.14  Determination of annual percentage rate.

    (a) General rule. The annual percentage rate is a measure of the 
cost of credit, expressed as a yearly rate. An annual percentage rate 
shall be considered accurate if it is not more than \1/8\ of 1 
percentage point above or below the annual percentage rate determined in 
accordance with this section.\31a\
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    \31a\ An error in disclosure of the annual percentage rate or 
finance charge shall not, in itself, be considered a violation of this 
regulation if: (1) The error resulted from a corresponding error in a 
calculation tool used in good faith by the creditor; and (2) upon 
discovery of the error, the creditor promptly discontinues use of that 
calculation tool for disclosure purposes, and notifies the Board in 
writing of the error in the calculation tool.
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    (b) Annual percentage rate for Sec. Sec. 226.5a and 226.5b 
disclosures, for initial disclosures and for advertising purposes. Where 
one or more periodic rates may be used to compute the finance charge, 
the annual percentage rate(s) to be disclosed for purposes of Sec. Sec. 
226.5a, 226.5b, 226.6, and 226.16 shall be computed by multiplying each 
periodic rate by the number of periods in a year.
    (c) Annual percentage rate for periodic statements. The annual 
percentage rate(s) to be disclosed for purposes of Sec. 226.7(d) shall 
be computed by multiplying each periodic rate by the number of periods 
in a year and, for purposes of Sec. 226.7(g), shall be determined as 
follows:
    (1) If the finance charge is determined solely by applying one or 
more periodic rates, at the creditor's option, either:
    (i) By multiplying each periodic rate by the number of periods in a 
year; or
    (ii) By dividing the total finance charge for the billing cycle by 
the sum of the balances to which the periodic rates were applied and 
multiplying the quotient (expressed as a percentage) by the number of 
billing cycles in a year.
    (2) If the finance charge imposed during the billing cycle is or 
includes a minimum, fixed, or other charge not due to the application of 
a periodic rate, other than a charge with respect to any specific 
transaction during the billing cycle, by dividing the total finance 
charge for the billing cycle by the amount of the balance(s) to which it 
is applicable \32\ and multiplying the quotient (expressed as a 
percentage) by the number of billing cycles in a year.\33\
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    \32\ If there is no balance to which the finance charge is 
applicable, an annual percentage rate cannot be determined under this 
section.
    \33\ Where the finance charge imposed during the billing cycle is or 
includes a loan fee, points, or similar charge that relates to the 
opening of the account, the amount of such charge shall not be included 
in the calculation of the annual percentage rate.
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    (3) If the finance charge imposed during the billing cycle is or 
includes a charge relating to a specific transaction during the billing 
cycle (even if the total finance charge also includes any other minimum, 
fixed, or other charge not due to the application of a periodic rate), 
by dividing the total finance charge imposed during the billing cycle by 
the total of all balances and other amounts on which a finance charge 
was imposed during the billing cycle without duplication, and 
multiplying the quotient (expressed as a percentage) by the number of 
billing cycles in a year,\34\ except that the annual percentage rate 
shall not be less than the largest rate determined by multiplying each 
periodic rate imposed during the billing cycle by the number of periods 
in a year.\35\
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    \34\ See appendix F regarding determination of the denominator of 
the fraction under this paragraph.
    \35\ See footnote 33.
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    (4) If the finance charge imposed during the billing cycle is or 
includes a minimum, fixed, or other charge not due to the application of 
a periodic rate and the total finance charge imposed during the billing 
cycle does not exceed 50 cents for a monthly or longer billing cycle, or 
the pro rata part of 50 cents for a billing cycle shorter than monthly, 
at the creditor's option, by multiplying each applicable periodic rate 
by the number of periods in a year, notwithstanding the provisions of 
paragraphs (c)(2) and (3) of this section.
    (d) Calculations where daily periodic rate applied. If the 
provisions of paragraph (c)(1)(ii) or (2) of this section apply and all 
or a portion of the finance charge is determined by the application of 
one or more daily periodic

[[Page 377]]

rates, the annual percentage rate may be determined either:
    (1) By dividing the total finance charge by the average of the daily 
balances and multiplying the quotient by the number of billing cycles in 
a year; or
    (2) By dividing the total finance charge by the sum of the daily 
balances and multiplying the quotient by 365.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 47 FR 756, Jan. 7, 
1982; 48 FR 14886, Apr. 6, 1983; 54 FR 24688, June 9, 1989]



Sec. 226.15  Right of rescission.

    (a) Consumer's right to rescind. (1)(i) Except as provided in 
paragraph (a)(1)(ii) of this section, in a credit plan in which a 
security interest is or will be retained or acquired in a consumer's 
principal dwelling, each consumer whose ownership interest is or will be 
subject to the security interest shall have the right to rescind: each 
credit extension made under the plan; the plan when the plan is opened; 
a security interest when added or increased to secure an existing plan; 
and the increase when a credit limit on the plan is increased.
    (ii) As provided in section 125(e) of the Act, the consumer does not 
have the right to rescind each credit extension made under the plan if 
such extension is made in accordance with a previously established 
credit limit for the plan.
    (2) To exercise the right to rescind, the consumer shall notify the 
creditor of the rescission by mail, telegram, or other means of written 
communication. Notice is considered given when mailed, or when filed for 
telegraphic transmission, or, if sent by other means, when delivered to 
the creditor's designated place of business.
    (3) The consumer may exercise the right to rescind until midnight of 
the third business day following the occurrence described in paragraph 
(a)(1) of this section that gave rise to the right of rescission, 
delivery of the notice required by paragraph (b) of this section, or 
delivery of all material disclosures,\36\ whichever occurs last. If the 
required notice and material disclosures are not delivered, the right to 
rescind shall expire 3 years after the occurrence giving rise to the 
right of rescission, or upon transfer of all of the consumer's interest 
in the property, or upon sale of the property, whichever occurs first. 
In the case of certain administrative proceedings, the rescission period 
shall be extended in accordance with section 125(f) of the Act.
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    \36\ The term material disclosures means the information that must 
be provided to satisfy the requirements in Sec. 226.6 with regard to 
the method of determining the finance charge and the balance upon which 
a finance charge will be imposed, the annual percentage rate, the amount 
or method of determining the amount of any membership or participation 
fee that may be imposed as part of the plan, and the payment information 
described in Sec. 226.5b(d)(5)(i) and (ii) that is required under Sec. 
226.6(e)(2).
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    (4) When more than one consumer has the right to rescind, the 
exercise of the right by one consumer shall be effective as to all 
consumers.
    (b) Notice of right to rescind. In any transaction or occurrence 
subject to rescission, a creditor shall deliver two copies of the notice 
of the right to rescind to each consumer entitled to rescind (one copy 
to each if the notice is delivered in electronic form in accordance with 
the consumer consent and other applicable provisions of the E-Sign Act). 
The notice shall identify the transaction or occurrence and clearly and 
conspicuously disclose the following:
    (1) The retention or acquisition of a security interest in the 
consumer's principal dwelling.
    (2) The consumer's right to rescind, as described in paragraph 
(a)(1) of this section.
    (3) How to exercise the right to rescind, with a form for that 
purpose, designating the address of the creditor's place of business.
    (4) The effects of rescission, as described in paragraph (d) of this 
section.
    (5) The date the rescission period expires.
    (c) Delay of creditor's performance. Unless a consumer waives the 
right to rescind under paragraph (e) of this section, no money shall be 
disbursed other than in escrow, no services shall be performed, and no 
materials delivered until after the rescission period has expired and 
the creditor is reasonably

[[Page 378]]

satisfied that the consumer has not rescinded. A creditor does not 
violate this section if a third party with no knowledge of the event 
activating the rescission right does not delay in providing materials or 
services, as long as the debt incurred for those materials or services 
is not secured by the property subject to rescission.
    (d) Effects of rescission. (1) When a consumer rescinds a 
transaction, the security interest giving rise to the right of 
rescission becomes void, and the consumer shall not be liable for any 
amount, including any finance charge.
    (2) Within 20 calendar days after receipt of a notice of rescission, 
the creditor shall return any money or property that has been given to 
anyone in connection with the transaction and shall take any action 
necessary to reflect the termination of the security interest.
    (3) If the creditor has delivered any money or property, the 
consumer may retain possession until the creditor has met its obligation 
under paragraph (d)(2) of this section. When the creditor has complied 
with that paragraph, the consumer shall tender the money or property to 
the creditor or, where the latter would be impracticable or inequitable, 
tender its reasonable value. At the consumer's option, tender of 
property may be made at the location of the property or at the 
consumer's residence. Tender of money must be made at the creditor's 
designated place of business. If the creditor does not take possession 
of the money or property within 20 calendar days after the consumer's 
tender, the consumer may keep it without further obligation.
    (4) The procedures outlined in paragraphs (d)(2) and (3) of this 
section may be modified by court order.
    (e) Consumer's waiver of right to rescind. (1) The consumer may 
modify or waive the right to rescind if the consumer determines that the 
extension of credit is needed to meet a bona fide personal financial 
emergency. To modify or waive the right, the consumer shall give the 
creditor a dated written statement that describes the emergency, 
specifically modifies or waives the right to rescind, and bears the 
signature of all the consumers entitled to rescind. Printed forms for 
this purpose are prohibited, except as provided in paragraph (e)(2) of 
this section.
    (2) The need of the consumer to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1993, pursuant to 42 U.S.C. 5170, to be a 
major disaster area because of severe storms and flooding in the 
Midwest.\36a\ In this instance, creditors may use printed forms for the 
consumer to waive the right to rescind. This exemption to paragraph 
(e)(1) of this section shall expire one year from the date an area was 
declared a major disaster.
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    \36a\ A list of the affected areas will be maintained by the Board.
---------------------------------------------------------------------------

    (3) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1994 to be a major disaster area, pursuant 
to 42 U.S.C. 5170, because of severe storms and flooding in the 
South.\36b\ In this instance, creditors may use printed forms for the 
consumer to waive the right to rescind. This exemption to paragraph 
(e)(1) of this section shall expire one year from the date an area was 
declared a major disaster.
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    \36b\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include parts of Alabama, Florida, and 
Georgia.
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    (4) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during October 1994 to be a major disaster area, pursuant to 42 U.S.C. 
5170, because of severe storms and flooding in Texas.\36c\ In this 
instance, creditors may use printed

[[Page 379]]

forms for the consumer to waive the right to rescind. This exemption to 
paragraph (e)(1) of this section shall expire one year from the date an 
area was declared a major disaster.
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    \36c\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include the following counties in Texas: 
Angelina, Austin, Bastrop, Brazos, Brazoria, Burleson, Chambers, 
Fayette, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jackson, 
Jasper, Jefferson, Lee, Liberty, Madison, Matagorda, Montgomery, 
Nacagdoches, Orange, Polk, San Augustine, San Jacinto, Shelby, Trinity, 
Victoria, Washington, Waller, Walker, and Wharton.
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    (f) Exempt transactions. The right to rescind does not apply to the 
following:
    (1) A residential mortgage transaction.
    (2) A credit plan in which a state agency is a creditor.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 54 FR 24688, June 9, 
1989; 58 FR 40583, July 29, 1993; 59 FR 40204, Aug. 5, 1994; 59 FR 
63715, Dec. 9, 1994; 66 FR 17338, Mar. 30, 2001; 72 FR 63474, Nov. 9, 
2007]



Sec. 226.16  Advertising.

    (a) Actually available terms. If an advertisement for credit states 
specific credit terms, it shall state only those terms that actually are 
or will be arranged or offered by the creditor.
    (b) Advertisement of terms that require additional disclosures. If 
any of the terms required to be disclosed under Sec. 226.6 is set forth 
in an advertisement, the advertisement shall also clearly and 
conspicuously set forth the following:\36d\
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    \36d\ The disclosures given in accordance with Sec. 226.5a do not 
constitute advertising terms for purposes of the requirements of this 
section.
---------------------------------------------------------------------------

    (1) Any minimum, fixed, transaction, activity or similar charge that 
could be imposed.
    (2) Any periodic rate that may be applied expressed as an annual 
percentage rate as determined under Sec. 226.14(b). If the plan 
provides for a variable periodic rate, that fact shall be disclosed.
    (3) Any membership or participation fee that could be imposed.
    (c) Catalogs or other multiple-page advertisements; electronic 
advertisements. (1) If a catalog or other multiple-page advertisement, 
or an electronic advertisement (such as an advertisement appearing on an 
Internet Web site), gives information in a table or schedule in 
sufficient detail to permit determination of the disclosures required by 
paragraph (b) of this section, it shall be considered a single 
advertisement if:
    (i) The table or schedule is clearly and conspicuously set forth; 
and
    (ii) Any statement of terms set forth in Sec. 226.6 appearing 
anywhere else in the catalog or advertisement clearly refers to the page 
or location where the table or schedule begins.
    (2) A catalog or other multiple-page advertisement or an electronic 
advertisement (such as an advertisement appearing on an Internet Web 
site) complies with this paragraph if the table or schedule of terms 
includes all appropriate disclosures for a representative scale of 
amounts up to the level of the more commonly sold higher-priced property 
or services offered.
    (d) Additional requirements for home equity plans--(1) Advertisement 
of terms that require additional disclosures. If any of the terms 
required to be disclosed under Sec. 226.6(a) or (b) or the payment 
terms of the plan are set forth, affirmatively or negatively, in an 
advertisement for a home equity plan subject to the requirements of 
Sec. 226.5b, the advertisement also shall clearly and conspicuously set 
forth the following:
    (i) Any loan fee that is a percentage of the credit limit under the 
plan and an estimate of any other fees imposed for opening the plan, 
stated as a single dollar amount or a reasonable range.
    (ii) Any periodic rate used to compute the finance charge, expressed 
as an annual percentage rate as determined under section Sec. 
226.14(b).
    (iii) The maximum annual percentage rate that may be imposed in a 
variable-rate plan.
    (2) Discounted and premium rates. If an advertisement states an 
initial annual percentage rate that is not based on the index and margin 
used to make later rate adjustments in a variable-rate plan, the 
advertisement also shall state the period of time such rate will be in 
effect, and, with equal prominence to the initial rate, a reasonably 
current annual percentage rate that would have been in effect using the 
index and margin.
    (3) Balloon payment. If an advertisement contains a statement about 
any minimum periodic payment, the advertisement also shall state, if 
applicable, that a balloon payment may result.\36e\
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    \36e\ See footnote 10b.
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    (4) Tax implications. An advertisement that states that any interest 
expense

[[Page 380]]

incurred under the home equity plan is or may be tax deductible may not 
be misleading in this regard.
    (5) Misleading terms. An advertisement may not refer to a home 
equity plan as ``free money'' or contain a similarly misleading term.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 54 FR 13867, Apr. 6, 
1989; 54 FR 24688, June 9, 1989; 54 FR 28665, July 7, 1989; 58 FR 40583, 
July 29, 1993; 59 FR 40204, Aug. 5, 1994; 59 FR 63715, Dec. 9, 1994; 66 
FR 17338, Mar. 30, 2001; 72 FR 63474, Nov. 9, 2007]



--Table of Contents




    Effective Date Note:  At 73 FR 44599, July 30, 2008, Sec. 226.16 
was amended by revising paragraph (d)(2) through (d)(4), and adding new 
paragraphs (d)(6) and (e), effective Oct. 1, 2009. For the convenience 
of the user, the added and revised text is set forth as follows:



Sec. 226.16  Advertising.

                                * * * * *

    (d) * * *

                                * * * * *

    (2) Discounted and premium rates. If an advertisement states an 
initial annual percentage rate that is not based on the index and margin 
used to make later rate adjustments in a variable-rate plan, the 
advertisement also shall state with equal prominence and in close 
proximity to the initial rate:
    (i) The period of time such initial rate will be in effect; and
    (ii) A reasonably current annual percentage rate that would have 
been in effect using the index and margin.
    (3) Balloon payment. If an advertisement contains a statement of any 
minimum periodic payment and a balloon payment may result if only the 
minimum periodic payments are made, even if such a payment is uncertain 
or unlikely, the advertisement also shall state with equal prominence 
and in close proximity to the minimum periodic payment statement that a 
balloon payment may result, if applicable.\36e\ A balloon payment 
results if paying the minimum periodic payments does not fully amortize 
the outstanding balance by a specified date or time, and the consumer is 
required to repay the entire outstanding balance at such time. If a 
balloon payment will occur when the consumer makes only the minimum 
payments required under the plan, an advertisement for such a program 
which contains any statement of any minimum periodic payment shall also 
state with equal prominence and in close proximity to the minimum 
periodic payment statement:
---------------------------------------------------------------------------

    \36e\ [Reserved]
---------------------------------------------------------------------------

    (i) That a balloon payment will result; and
    (ii) The amount and timing of the balloon payment that will result 
if the consumer makes only the minimum payments for the maximum period 
of time that the consumer is permitted to make such payments.
    (4) Tax implications. An advertisement that states that any interest 
expense incurred under the home-equity plan is or may be tax deductible 
may not be misleading in this regard. If an advertisement distributed in 
paper form or through the Internet (rather than by radio or television) 
is for a home-equity plan secured by the consumer's principal dwelling, 
and the advertisement states that the advertised extension of credit may 
exceed the fair market value of the dwelling, the advertisement shall 
clearly and conspicuously state that:
    (i) The interest on the portion of the credit extension that is 
greater than the fair market value of the dwelling is not tax deductible 
for Federal income tax purposes; and
    (ii) The consumer should consult a tax adviser for further 
information regarding the deductibility of interest and charges.

                                * * * * *

    (6) Promotional rates and payments--(i) Definitions. The following 
definitions apply for purposes of paragraph (d)(6) of this section:
    (A) Promotional rate. The term ``promotional rate'' means, in a 
variable-rate plan, any annual percentage rate that is not based on the 
index and margin that will be used to make rate adjustments under the 
plan, if that rate is less than a reasonably current annual percentage 
rate that would be in effect under the index and margin that will be 
used to make rate adjustments under the plan.
    (B) Promotional payment. The term ``promotional payment'' means--
    (1) For a variable-rate plan, any minimum payment applicable for a 
promotional period that:
    (i) Is not derived by applying the index and margin to the 
outstanding balance when such index and margin will be used to determine 
other minimum payments under the plan; and
    (ii) Is less than other minimum payments under the plan derived by 
applying a reasonably current index and margin that will be used to 
determine the amount of such payments, given an assumed balance.
    (2) For a plan other than a variable-rate plan, any minimum payment 
applicable for a promotional period if that payment is less than other 
payments required under the plan given an assumed balance.
    (C) Promotional period. A ``promotional period'' means a period of 
time, less than the

[[Page 381]]

full term of the loan, that the promotional rate or promotional payment 
may be applicable.
    (ii) Stating the promotional period and post-promotional rate or 
payments. If any annual percentage rate that may be applied to a plan is 
a promotional rate, or if any payment applicable to a plan is a 
promotional payment, the following must be disclosed in any 
advertisement, other than television or radio advertisements, in a clear 
and conspicuous manner with equal prominence and in close proximity to 
each listing of the promotional rate or payment:
    (A) The period of time during which the promotional rate or 
promotional payment will apply;
    (B) In the case of a promotional rate, any annual percentage rate 
that will apply under the plan. If such rate is variable, the annual 
percentage rate must be disclosed in accordance with the accuracy 
standards in Sec. Sec. 226.5b, or 226.16(b)(1)(ii) as applicable; and
    (C) In the case of a promotional payment, the amounts and time 
periods of any payments that will apply under the plan. In variable-rate 
transactions, payments that will be determined based on application of 
an index and margin shall be disclosed based on a reasonably current 
index and margin.
    (iii) Envelope excluded. The requirements in paragraph (d)(6)(ii) of 
this section do not apply to an envelope in which an application or 
solicitation is mailed, or to a banner advertisement or pop-up 
advertisement linked to an application or solicitation provided 
electronically.
    (e) Alternative disclosures--television or radio advertisements. An 
advertisement for a home-equity plan subject to the requirements of 
Sec. 226.5b made through television or radio stating any of the terms 
requiring additional disclosures under paragraph (b) or (d)(1) of this 
section may alternatively comply with paragraph (b) or (d)(1) of this 
section by stating the information required by paragraph (b)(2) of this 
section or paragraph (d)(1)(ii) of this section, as applicable, and 
listing a toll-free telephone number, or any telephone number that 
allows a consumer to reverse the phone charges when calling for 
information, along with a reference that such number may be used by 
consumers to obtain additional cost information.



                       Subpart C_Closed-End Credit



Sec. 226.17  General disclosure requirements.

    (a) Form of disclosures. (1) The creditor shall make the disclosures 
required by this subpart clearly and conspicuously in writing, in a form 
that the consumer may keep. The disclosures required by this subpart may 
be provided to the consumer in electronic form, subject to compliance 
with the consumer consent and other applicable provisions of the 
Electronic Signatures in Global and National Commerce Act (E-Sign Act) 
(15 U.S.C. 7001 et seq.). The disclosures required by Sec. Sec. 
226.17(g), 226.19(b), and 226.24 may be provided to the consumer in 
electronic form without regard to the consumer consent or other 
provisions of the E-Sign Act in the circumstances set forth in those 
sections. The disclosures shall be grouped together, shall be segregated 
from everything else, and shall not contain any information not directly 
related \37\ to the disclosures required under Sec. 226.18. \38\ The 
itemization of the amount financed under Sec. 226.18(c)(1) must be 
separate from the other disclosures under that section.
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    \37\ The disclosures may include an acknowledgment of receipt, the 
date of the transaction, and the consumer's name, address, and account 
number.
    \38\ The following disclosures may be made together with or 
separately from other required disclosures: the creditor's identity 
under Sec. 226.18(a), the variable rate example under Sec. 
226.18(f)(1)(iv), insurance or debt cancellation under Sec. 226.18(n), 
and certain security interest charges under Sec. 226.18(o).
---------------------------------------------------------------------------

    (2) The terms finance charge and annual percentage rate, when 
required to be disclosed under Sec. 226.18 (d) and (e) together with a 
corresponding amount or percentage rate, shall be more conspicuous than 
any other disclosure, except the creditor's identity under Sec. 
226.18(a).
    (b) Time of disclosures. The creditor shall make disclosures before 
consummation of the transaction. In certain residential mortgage 
transactions, special timing requirements are set forth in Sec. 
226.19(a). In certain variable-rate transactions, special timing 
requirements for variable-rate disclosures are set forth in Sec. 
226.19(b) and Sec. 226.20(c). In certain transactions involving mail or 
telephone orders or a series of sales, the timing of disclosures may be 
delayed in accordance with paragraphs (g) and (h) of this section.
    (c) Basis of disclosures and use of estimates. (1) The disclosures 
shall reflect the terms of the legal obligation between the parties.

[[Page 382]]

    (2)(i) If any information necessary for an accurate disclosure is 
unknown to the creditor, the creditor shall make the disclosure based on 
the best information reasonably available at the time the disclosure is 
provided to the consumer, and shall state clearly that the disclosure is 
an estimate.
    (ii) For a transaction in which a portion of the interest is 
determined on a per-diem basis and collected at consummation, any 
disclosure affected by the per-diem interest shall be considered 
accurate if the disclosure is based on the information known to the 
creditor at the time that the disclosure documents are prepared for 
consummation of the transaction.
    (3) The creditor may disregard the effects of the following in 
making calculations and disclosures.
    (i) That payments must be collected in whole cents.
    (ii) That dates of scheduled payments and advances may be changed 
because the scheduled date is not a business day.
    (iii) That months have different numbers of days.
    (iv) The occurrence of leap year.
    (4) In making calculations and disclosures, the creditor may 
disregard any irregularity in the first period that falls within the 
limits described below and any payment schedule irregularity that 
results from the irregular first period:
    (i) For transactions in which the term is less than 1 year, a first 
period not more than 6 days shorter or 13 days longer than a regular 
period;
    (ii) For transactions in which the term is at least 1 year and less 
than 10 years, a first period not more than 11 days shorter or 21 days 
longer than a regular period; and
    (iii) For transactions in which the term is at least 10 years, a 
first period shorter than or not more than 32 days longer than a regular 
period.
    (5) If an obligation is payable on demand, the creditor shall make 
the disclosures based on an assumed maturity of 1 year. If an alternate 
maturity date is stated in the legal obligation between the parties, the 
disclosures shall be based on that date.
    (6)(i) A series of advances under an agreement to extend credit up 
to a certain amount may be considered as one transaction.
    (ii) When a multiple-advance loan to finance the construction of a 
dwelling may be permanently financed by the same creditor, the 
construction phase and the permanent phase may be treated as either one 
transaction or more than one transaction.
    (d) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor must 
comply with the requirements that this regulation imposes on any or all 
of them. If there is more than one consumer, the disclosures may be made 
to any consumer who is primarily liable on the obligation. If the 
transaction is rescindable under Sec. 226.23, however, the disclosures 
shall be made to each consumer who has the right to rescind.
    (e) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor delivers the required 
disclosures, the inaccuracy is not a violation of this regulation, 
although new disclosures may be required under paragraph (f) of this 
section, Sec. 226.19, or Sec. 226.20.
    (f) Early disclosures. If disclosures required by this subpart are 
given before the date of consummation of a transaction and a subsequent 
event makes them inaccurate, the creditor shall disclose before 
consummation:\39\
---------------------------------------------------------------------------

    \39\ For certain residential mortgage transactions, Sec. 
226.19(a)(2) permits redisclosure no later than consummation or 
settlement, whichever is later.
---------------------------------------------------------------------------

    (1) Any changed term unless the term was based on an estimate in 
accordance with Sec. 226.17(c)(2) and was labelled an estimate;
    (2) All changed terms, if the annual percentage rate at the time of 
consummation varies from the annual percentage rate disclosed earlier by 
more than \1/8\ of 1 percentage point in a regular transaction, or more 
than \1/4\ of 1 percentage point in an irregular transaction, as defined 
in Sec. 226.22(a).
    (g) Mail or telephone orders--delay in disclosures. If a creditor 
receives a purchase order or a request for an extension of credit by 
mail, telephone, or

[[Page 383]]

facsimile machine without face-to-face or direct telephone solicitation, 
the creditor may delay the disclosures until the due date of the first 
payment, if the following information for representative amounts or 
ranges of credit is made available in written form or in electronic form 
to the consumer or to the public before the actual purchase order or 
request:
    (1) The cash price or the principal loan amount.
    (2) The total sale price.
    (3) The finance charge.
    (4) The annual percentage rate, and if the rate may increase after 
consummation, the following disclosures:
    (i) The circumstances under which the rate may increase.
    (ii) Any limitations on the increase.
    (iii) The effect of an increase.
    (5) The terms of repayment.
    (h) Series of sales--delay in disclosures. If a credit sale is one 
of a series made under an agreement providing that subsequent sales may 
be added to an outstanding balance, the creditor may delay the required 
disclosures until the due date of the first payment for the current 
sale, if the following two conditions are met:
    (1) The consumer has approved in writing the annual percentage rate 
or rates, the range of balances to which they apply, and the method of 
treating any unearned finance charge on an existing balance.
    (2) The creditor retains no security interest in any property after 
the creditor has received payments equal to the cash price and any 
finance charge attributable to the sale of that property. For purposes 
of this provision, in the case of items purchased on different dates, 
the first purchased is deemed the first item paid for; in the case of 
items purchased on the same date, the lowest priced is deemed the first 
item paid for.
    (i) Interim student credit extensions. For each transaction 
involving an interim credit extension under a student credit program, 
the creditor need not make the following disclosures: the finance charge 
under Sec. 226.18(d), the payment schedule under Sec. 226.18(g), the 
total of payments under Sec. 226.18(h), or the total sale price under 
Sec. 226.18(j).

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 52 FR 48670, Dec. 24, 
1987; 61 FR 49246, Sept. 19, 1996; 66 FR 17338, Mar. 30, 2001; 67 FR 
16982, Apr. 9, 2002; 72 FR 63474, Nov. 9, 2007]

    Effective Date Note:  At 73 FR 44600, July 30, 2008, Sec. 226.17 
was amended by revising paragraphs (b) and (f), effective Oct. 1, 2009. 
For the convenience of the user, the revised text is set forth as 
follows:



Sec. 226.17  General disclosure requirements.

                                * * * * *

    (b) Time of disclosures. The creditor shall make disclosures before 
consummation of the transaction. In certain mortgage transactions, 
special timing requirements are set forth in Sec. 226.19(a). In certain 
variable-rate transactions, special timing requirements for variable-
rate disclosures are set forth in Sec. 226.19(b) and Sec. 226.20(c). 
In certain transactions involving mail or telephone orders or a series 
of sales, the timing of the disclosures may be delayed in accordance 
with paragraphs (g) and (h) of this section.

                                * * * * *

    (f) Early disclosures. If disclosures required by this subpart are 
given before the date of consummation of a transaction and a subsequent 
event makes them inaccurate, the creditor shall disclose before 
consummation (except that, for certain mortgage transactions, Sec. 
226.19(a)(2) permits redisclosure no later than consummation or 
settlement, whichever is later).\39\
---------------------------------------------------------------------------

    \39\ [Reserved]
---------------------------------------------------------------------------

                                * * * * *



Sec. 226.18  Content of disclosures.

    For each transaction, the creditor shall disclose the following 
information as applicable:
    (a) Creditor. The identity of the creditor making the disclosures.
    (b) Amount financed. The amount financed, using that term, and a 
brief description such as the amount of credit provided to you or on 
your behalf. The amount financed is calculated by:
    (1) Determining the principal loan amount or the cash price 
(subtracting any downpayment);
    (2) Adding any other amounts that are financed by the creditor and 
are not part of the finance charge; and

[[Page 384]]

    (3) Subtracting any prepaid finance charge.
    (c) Itemization of amount financed. (1) A separate written 
itemization of the amount financed, including:\40\
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    \40\ Good faith estimates of settlement costs provided for 
transactions subject to the Real Estate Settlement Procedures Act (12 
U.S.C. 2601 et seq.) may be substituted for the disclosures required by 
paragraph (c) of this section.
---------------------------------------------------------------------------

    (i) The amount of any proceeds distributed directly to the consumer.
    (ii) The amount credited to the consumer's account with the 
creditor.
    (iii) Any amounts paid to other persons by the creditor on the 
consumer's behalf. The creditor shall identify those persons.\41\
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    \41\ The following payees may be described using generic or other 
general terms and need not be further identified: public officials or 
government agencies, credit reporting agencies, appraisers, and 
insurance companies.
---------------------------------------------------------------------------

    (iv) The prepaid finance charge.
    (2) The creditor need not comply with paragraph (c)(1) of this 
section if the creditor provides a statement that the consumer has the 
right to receive a written itemization of the amount financed, together 
with a space for the consumer to indicate whether it is desired, and the 
consumer does not request it.
    (d) Finance charge. The finance charge, using that term, and a brief 
description such as ``the dollar amount the credit will cost you.''
    (1) Mortgage loans. In a transaction secured by real property or a 
dwelling, the disclosed finance charge and other disclosures affected by 
the disclosed finance charge (including the amount financed and the 
annual percentage rate) shall be treated as accurate if the amount 
disclosed as the finance charge:
    (i) Is understated by no more than $100; or
    (ii) Is greater than the amount required to be disclosed.
    (2) Other credit. In any other transaction, the amount disclosed as 
the finance charge shall be treated as accurate if, in a transaction 
involving an amount financed of $1,000 or less, it is not more than $5 
above or below the amount required to be disclosed; or, in a transaction 
involving an amount financed of more than $1,000, it is not more than 
$10 above or below the amount required to be disclosed.
    (e) Annual percentage rate. The annual percentage rate, using that 
term, and a brief description such as ``the cost of your credit as a 
yearly rate.'' \42\
---------------------------------------------------------------------------

    \42\ For any transaction involving a finance charge of $5 or less on 
an amount financed of $75 or less, or a finance charge of $7.50 or less 
on an amount financed of more than $75, the creditor need not disclose 
the annual percentage rate.
---------------------------------------------------------------------------

    (f) Variable rate. (1) If the annual percentage rate may increase 
after consummation in a transaction not secured by the consumer's 
principal dwelling or in a transaction secured by the consumer's 
principal dwelling with a term of one year or less, the following 
disclosures:\43\
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    \43\ Information provided in accordance with Sec. Sec. 226.18(f)(2) 
and 226.19(b) may be substituted for the disclosures required by 
paragraph (f)(1) of this section.
---------------------------------------------------------------------------

    (i) The circumstances under which the rate may increase.
    (ii) Any limitations on the increase.
    (iii) The effect of an increase.
    (iv) An example of the payment terms that would result from an 
increase.
    (2) If the annual percentage rate may increase after consummation in 
a transaction secured by the consumer's principal dwelling with a term 
greater than one year, the following disclosures:
    (i) The fact that the transaction contains a variable-rate feature.
    (ii) A statement that variable-rate disclosures have been provided 
earlier.
    (g) Payment schedule. The number, amounts, and timing of payments 
scheduled to repay the obligation.
    (1) In a demand obligation with no alternate maturity date, the 
creditor may comply with this paragraph by disclosing the due dates or 
payment periods of any scheduled interest payments for the first year.
    (2) In a transaction in which a series of payments varies because a 
finance charge is applied to the unpaid principal balance, the creditor 
may comply with this paragraph by disclosing the following information:

[[Page 385]]

    (i) The dollar amounts of the largest and smallest payments in the 
series.
    (ii) A reference to the variations in the other payments in the 
series.
    (h) Total of payments. The total of payments, using that term, and a 
descriptive explanation such as ``the amount you will have paid when you 
have made all scheduled payments.'' \44\
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    \44\ In any transaction involving a single payment, the creditor 
need not disclose the total of payments.
---------------------------------------------------------------------------

    (i) Demand feature. If the obligation has a demand feature, that 
fact shall be disclosed. When the disclosures are based on an assumed 
maturity of 1 year as provided in Sec. 226.17(c)(5), that fact shall 
also be disclosed.
    (j) Total sale price. In a credit sale, the total sale price, using 
that term, and a descriptive explanation (including the amount of any 
downpayment) such as ``the total price of your purchase on credit, 
including your downpayment of $----.'' The total sale price is the sum 
of the cash price, the items described in paragraph (b)(2), and the 
finance charge disclosed under paragraph (d) of this section.
    (k) Prepayment. (1) When an obligation includes a finance charge 
computed from time to time by application of a rate to the unpaid 
principal balance, a statement indicating whether or not a penalty may 
be imposed if the obligation is prepaid in full.
    (2) When an obligation includes a finance charge other than the 
finance charge described in paragraph (k)(1) of this section, a 
statement indicating whether or not the consumer is entitled to a rebate 
of any finance charge if the obligation is prepaid in full.
    (l) Late payment. Any dollar or percentage charge that may be 
imposed before maturity due to a late payment, other than a deferral or 
extension charge.
    (m) Security interest. The fact that the creditor has or will 
acquire a security interest in the property purchased as part of the 
transaction, or in other property identified by item or type.
    (n) Insurance and debt cancellation. The items required by Sec. 
226.4(d) in order to exclude certain insurance premiums and debt 
cancellation fees from the finance charge.
    (o) Certain security interest charges. The disclosures required by 
Sec. 226.4(e) in order to exclude from the finance charge certain fees 
prescribed by law or certain premiums for insurance in lieu of 
perfecting a security interest.
    (p) Contract reference. A statement that the consumer should refer 
to the appropriate contract document for information about nonpayment, 
default, the right to accelerate the maturity of the obligation, and 
prepayment rebates and penalties. At the creditor's option, the 
statement may also include a reference to the contract for further 
information about security interests and, in a residential mortgage 
transaction, about the creditor's policy regarding assumption of the 
obligation.
    (q) Assumption policy. In a residential mortgage transaction, a 
statement whether or not a subsequent purchaser of the dwelling from the 
consumer may be permitted to assume the remaining obligation on its 
original terms.
    (r) Required deposit. If the creditor requires the consumer to 
maintain a deposit as a condition of the specific transaction, a 
statement that the annual percentage rate does not reflect the effect of 
the required deposit.\45\
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    \45\ A required deposit need not include, for example: (1) An escrow 
account for items such as taxes, insurance or repairs; (2) a deposit 
that earns not less than 5 percent per year; or (3) payments under a 
Morris Plan.

[46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981, as amended at 52 
FR 48670, Dec. 24, 1987; 61 FR 49246, Sept. 19, 1996]



Sec. 226.19  Certain residential mortgage and variable-rate transactions.

    (a) Residential mortgage transactions subject to RESPA--(1) Time of 
disclosures. In a residential mortgage transaction subject to the Real 
Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.) the creditor 
shall make good faith estimates of the disclosures required by Sec. 
226.18 before consummation, or shall deliver or place them in the mail 
not later than three business days after the creditor receives the 
consumer's written application, whichever is earlier.
    (2) Redisclosure required. If the annual percentage rate at the time 
of consummation varies from the annual percentage rate disclosed earlier 
by more

[[Page 386]]

than \1/8\ of 1 percentage point in a regular transaction or more than 
\1/4\ of 1 percentage point in an irregular transaction, as defined in 
Sec. 226.22, the creditor shall disclose all the changed terms no later 
than consummation or settlement.
    (b) Certain variable-rate transactions.\45a\ If the annual 
percentage rate may increase after consummation in a transaction secured 
by the consumer's principal dwelling with a term greater than one year, 
the following disclosures must be provided at the time an application 
form is provided or before the consumer pays a non-refundable fee, 
whichever is earlier:\45b\
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    \45a\ Information provided in accordance with variable-rate 
regulations of other federal agencies may be substituted for the 
disclosures required by paragraph (b) of this section.
    \45b\ Disclosures may be delivered or placed in the mail not later 
than three business days following receipt of a consumer's application 
when the application reaches the creditor by telephone, or through an 
intermediary agent or broker.
---------------------------------------------------------------------------

    (1) The booklet titled Consumer Handbook on Adjustable Rate 
Mortgages published by the Board and the Federal Home Loan Bank Board, 
or a suitable substitute.
    (2) A loan program disclosure for each variable-rate program in 
which the consumer expresses an interest. The following disclosures, as 
applicable, shall be provided:
    (i) The fact that the interest rate, payment, or term of the loan 
can change.
    (ii) The index or formula used in making adjustments, and a source 
of information about the index or formula.
    (iii) An explanation of how the interest rate and payment will be 
determined, including an explanation of how the index is adjusted, such 
as by the addition of a margin.
    (iv) A statement that the consumer should ask about the current 
margin value and current interest rate.
    (v) The fact that the interest rate will be discounted, and a 
statement that the consumer should ask about the amount of the interest 
rate discount.
    (vi) The frequency of interest rate and payment changes.
    (vii) Any rules relating to changes in the index, interest rate, 
payment amount, and outstanding loan balance including, for example, an 
explanation of interest rate or payment limitations, negative 
amortization, and interest rate carryover.
    (viii) At the option of the creditor, either of the following:
    (A) A historical example, based on a $10,000 loan amount, 
illustrating how payments and the loan balance would have been affected 
by interest rate changes implemented according to the terms of the loan 
program disclosure. The example shall reflect the most recent 15 years 
of index values. The example shall reflect all significant loan program 
terms, such as negative amortization, interest rate carryover, interest 
rate discounts, and interest rate and payment limitations, that would 
have been affected by the index movement during the period.
    (B) The maximum interest rate and payment for a $10,000 loan 
originated at the initial interest rate (index value plus margin, 
adjusted by the amount of any discount or premium) in effect as of an 
identified month and year for the loan program disclosure assuming the 
maximum periodic increases in rates and payments under the program; and 
the initial interest rate and payment for that loan and a statement that 
the periodic payment may increase or decrease substantially depending on 
changes in the rate.
    (ix) An explanation of how the consumer may calculate the payments 
for the loan amount to be borrowed based on either:
    (A) The most recent payment shown in the historical example in 
paragraph (b)(2)(viii)(A) of this section; or
    (B) The initial interest rate used to calculate the maximum interest 
rate and payment in paragraph (b)(2)(viii)(B) of this section.
    (x) The fact that the loan program contains a demand feature.
    (xi) The type of information that will be provided in notices of 
adjustments and the timing of such notices.
    (xii) A statement that disclosure forms are available for the 
creditor's other variable-rate loan programs.

[[Page 387]]

    (c) Electronic disclosures. For an application that is accessed by 
the consumer in electronic form, the disclosures required by paragraph 
(b) of this section may be provided to the consumer in electronic form 
on or with the application.

[Reg. Z, 52 FR 48670, Dec. 24, 1987; 53 FR 467, Jan. 7, 1988, as amended 
at 61 FR 49246, Sept. 19, 1996; 62 FR 63443, Dec. 1, 1997; 72 FR 63474, 
Nov. 9, 2007]

    Effective Date Note:  At 73 FR 44600, July 30, 2008, Sec. 226.19 
was amended by revising the heading and paragraph (a)(1), effective Oct. 
1, 2009. For the convenience of the user, the revised text is set forth 
as follows:



Sec. 226.19  Certain mortgage and variable-rate transactions.

    (a) Mortgage transactions subject to RESPA--(1)(i) Time of 
disclosures. In a mortgage transaction subject to the Real Estate 
Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is secured by 
the consumer's principal dwelling, other than a home equity line of 
credit subject to Sec. 226.5b, the creditor shall make good faith 
estimates of the disclosures required by Sec. 226.18 before 
consummation, or shall deliver or place them in the mail not later than 
three business days after the creditor receives the consumer's written 
application, whichever is earlier.
    (ii) Imposition of fees. Except as provided in paragraph (a)(1)(iii) 
of this section, neither a creditor nor any other person may impose a 
fee on the consumer in connection with the consumer's application for a 
mortgage transaction subject to paragraph (a)(1)(i) of this section 
before the consumer has received the disclosures required by paragraph 
(a)(1)(i) of this section. If the disclosures are mailed to the 
consumer, the consumer is considered to have received them three 
business days after they are mailed.
    (iii) Exception to fee restriction. A creditor or other person may 
impose a fee for obtaining the consumer's credit history before the 
consumer has received the disclosures required by paragraph (a)(1)(i) of 
this section, provided the fee is bona fide and reasonable in amount.

                                * * * * *



Sec. 226.20  Subsequent disclosure requirements.

    (a) Refinancings. A refinancing occurs when an existing obligation 
that was subject to this subpart is satisfied and replaced by a new 
obligation undertaken by the same consumer. A refinancing is a new 
transaction requiring new disclosures to the consumer. The new finance 
charge shall include any unearned portion of the old finance charge that 
is not credited to the existing obligation. The following shall not be 
treated as a refinancing:
    (1) A renewal of a single payment obligation with no change in the 
original terms.
    (2) A reduction in the annual percentage rate with a corresponding 
change in the payment schedule.
    (3) An agreement involving a court proceeding.
    (4) A change in the payment schedule or a change in collateral 
requirements as a result of the consumer's default or delinquency, 
unless the rate is increased, or the new amount financed exceeds the 
unpaid balance plus earned finance charge and premiums for continuation 
of insurance of the types described in Sec. 226.4(d).
    (5) The renewal of optional insurance purchased by the consumer and 
added to an existing transaction, if disclosures relating to the initial 
purchase were provided as required by this subpart.
    (b) Assumptions. An assumption occurs when a creditor expressly 
agrees in writing with a subsequent consumer to accept that consumer as 
a primary obligor on an existing residential mortgage transaction. 
Before the assumption occurs, the creditor shall make new disclosures to 
the subsequent consumer, based on the remaining obligation. If the 
finance charge originally imposed on the existing obligation was an add-
on or discount finance charge, the creditor need only disclose:
    (1) The unpaid balance of the obligation assumed.
    (2) The total charges imposed by the creditor in connection with the 
assumption.
    (3) The information required to be disclosed under Sec. 226.18(k), 
(l), (m), and (n).
    (4) The annual percentage rate originally imposed on the obligation.
    (5) The payment schedule under Sec. 226.18(g) and the total of 
payments under Sec. 226.18(h) based on the remaining obligation.

[[Page 388]]

    (c) Variable-rate adjustments. \45c\ An adjustment to the interest 
rate with or without a corresponding adjustment to the payment in a 
variable-rate transaction subject to Sec. 226.19(b) is an event 
requiring new disclosures to the consumer. At least once each year 
during which an interest rate adjustment is implemented without an 
accompanying payment change, and at least 25, but no more than 120, 
calendar days before a payment at a new level is due, the following 
disclosures, as applicable, must be delivered or placed in the mail:
---------------------------------------------------------------------------

    \45c\ Information provided in accordance with variable-rate 
subsequent disclosure regulations of other federal agencies may be 
substituted for the disclosure required by paragraph (c) of this 
section.
---------------------------------------------------------------------------

    (1) The current and prior interest rates.
    (2) The index values upon which the current and prior interest rates 
are based.
    (3) The extent to which the creditor has foregone any increase in 
the interest rate.
    (4) The contractual effects of the adjustment, including the payment 
due after the adjustment is made, and a statement of the loan balance.
    (5) The payment, if different from that referred to in paragraph 
(c)(4) of this section, that would be required to fully amortize the 
loan at the new interest rate over the remainder of the loan term.

[46 FR 20892, Apr. 7, 1981, as amended at 52 FR 48671, Dec. 24, 1987]



Sec. 226.21  Treatment of credit balances.

    When a credit balance in excess of $1 is created in connection with 
a transaction (through transmittal of funds to a creditor in excess of 
the total balance due on an account, through rebates of unearned finance 
charges or insurance premiums, or through amounts otherwise owed to or 
held for the benefit of a consumer), the creditor shall:
    (a) Credit the amount of the credit balance to the consumer's 
account;
    (b) Refund any part of the remaining credit balance, upon the 
written request of the consumer; and
    (c) Make a good faith effort to refund to the consumer by cash, 
check, or money order, or credit to a deposit account of the consumer, 
any part of the credit balance remaining in the account for more than 6 
months, except that no further action is required if the consumer's 
current location is not known to the creditor and cannot be traced 
through the consumer's last known address or telephone number.



Sec. 226.22  Determination of annual percentage rate.

    (a) Accuracy of annual percentage rate. (1) The annual percentage 
rate is a measure of the cost of credit, expressed as a yearly rate, 
that relates the amount and timing of value received by the consumer to 
the amount and timing of payments made. The annual percentage rate shall 
be determined in accordance with either the actuarial method or the 
United States Rule method. Explanations, equations and instructions for 
determining the annual percentage rate in accordance with the actuarial 
method are set forth in appendix J to this regulation.\45d\
---------------------------------------------------------------------------

    \45d\ An error in disclosure of the annual percentage rate or 
finance charge shall not, in itself, be considered a violation of this 
regulation if: (1) The error resulted from a corresponding error in a 
calculation tool used in good faith by the creditor; and (2) upon 
discovery of the error, the creditor promptly discontinues use of that 
calculation tool for disclosure purposes and notifies the Board in 
writing of the error in the calculation tool.
---------------------------------------------------------------------------

    (2) As a general rule, the annual percentage rate shall be 
considered accurate if it is not more than \1/8\ of 1 percentage point 
above or below the annual percentage rate determined in accordance with 
paragraph (a)(1) of this section.
    (3) In an irregular transaction, the annual percentage rate shall be 
considered accurate if it is not more than \1/4\ of 1 percentage point 
above or below the annual percentage rate determined in accordance with 
paragraph (a)(1) of this section.\46\
---------------------------------------------------------------------------

    \46\ For purposes of paragraph (a)(3) of this section, an irregular 
transaction is one that includes one or more of the following features: 
multiple advances, irregular payment periods, or irregular payment 
amounts (other than an irregular first period or an irregular first or 
final payment).
---------------------------------------------------------------------------

    (4) Mortgage loans. If the annual percentage rate disclosed in a 
transaction secured by real property or a dwelling

[[Page 389]]

varies from the actual rate determined in accordance with paragraph 
(a)(1) of this section, in addition to the tolerances applicable under 
paragraphs (a)(2) and (3) of this section, the disclosed annual 
percentage rate shall also be considered accurate if:
    (i) The rate results from the disclosed finance charge; and
    (ii)(A) The disclosed finance charge would be considered accurate 
under Sec. 226.18(d)(1); or
    (B) For purposes of rescission, if the disclosed finance charge 
would be considered accurate under Sec. 226.23(g) or (h), whichever 
applies.
    (5) Additional tolerance for mortgage loans. In a transaction 
secured by real property or a dwelling, in addition to the tolerances 
applicable under paragraphs (a)(2) and (3) of this section, if the 
disclosed finance charge is calculated incorrectly but is considered 
accurate under Sec. 226.18(d)(1) or Sec. 226.23(g) or (h), the 
disclosed annual percentage rate shall be considered accurate:
    (i) If the disclosed finance charge is understated, and the 
disclosed annual percentage rate is also understated but it is closer to 
the actual annual percentage rate than the rate that would be considered 
accurate under paragraph (a)(4) of this section;
    (ii) If the disclosed finance charge is overstated, and the 
disclosed annual percentage rate is also overstated but it is closer to 
the actual annual percentage rate than the rate that would be considered 
accurate under paragraph (a)(4) of this section.
    (b) Computation tools. (1) The Regulation Z Annual Percentage Rate 
Tables produced by the Board may be used to determine the annual 
percentage rate, and any rate determined from those tables in accordance 
with the accompanying instructions complies with the requirements of 
this section. Volume I of the tables applies to single advance 
transactions involving up to 480 monthly payments or 104 weekly 
payments. It may be used for regular transactions and for transactions 
with any of the following irregularities: an irregular first period, an 
irregular first payment, and an irregular final payment. Volume II of 
the tables applies to transactions involving multiple advances and any 
type of payment or period irregularity.
    (2) Creditors may use any other computation tool in determining the 
annual percentage rate if the rate so determined equals the rate 
determined in accordance with appendix J, within the degree of accuracy 
set forth in paragraph (a) of this section.
    (c) Single add-on rate transactions. If a single add-on rate is 
applied to all transactions with maturities up to 60 months and if all 
payments are equal in amount and period, a single annual percentage rate 
may be disclosed for all those transactions, so long as it is the 
highest annual percentage rate for any such transaction.
    (d) Certain transactions involving ranges of balances. For purposes 
of disclosing the annual percentage rate referred to in Sec. 
226.17(g)(4) (Mail or telephone orders--delay in disclosures) and (h) 
(Series of sales--delay in disclosures), if the same finance charge is 
imposed on all balances within a specified range of balances, the annual 
percentage rate computed for the median balance may be disclosed for all 
the balances. However, if the annual percentage rate computed for the 
median balance understates the annual percentage rate computed for the 
lowest balance by more than 8 percent of the latter rate, the annual 
percentage rate shall be computed on whatever lower balance will produce 
an annual percentage rate that does not result in an understatement of 
more than 8 percent of the rate determined on the lowest balance.

[46 FR 20892, Apr. 7, 1981, as amended at 47 FR 756, Jan. 7, 1982; 48 FR 
14886, Apr. 6, 1983; 61 FR 49246, Sept. 19, 1996]



Sec. 226.23  Right of rescission.

    (a) Consumer's right to rescind. (1) In a credit transaction in 
which a security interest is or will be retained or acquired in a 
consumer's principal dwelling, each consumer whose ownership interest is 
or will be subject to the security interest shall have the right to 
rescind the transaction, except for

[[Page 390]]

transactions described in paragraph (f) of this section.\47\
---------------------------------------------------------------------------

    \47\ For purposes of this section, the addition to an existing 
obligation of a security interest in a consumer's principal dwelling is 
a transaction. The right of rescission applies only to the addition of 
the security interest and not the existing obligation. The creditor 
shall deliver the notice required by paragraph (b) of this section but 
need not deliver new material disclosures. Delivery of the required 
notice shall begin the rescission period.
---------------------------------------------------------------------------

    (2) To exercise the right to rescind, the consumer shall notify the 
creditor of the rescission by mail, telegram or other means of written 
communication. Notice is considered given when mailed, when filed for 
telegraphic transmission or, if sent by other means, when delivered to 
the creditor's designated place of business.
    (3) The consumer may exercise the right to rescind until midnight of 
the third business day following consummation, delivery of the notice 
required by paragraph (b) of this section, or delivery of all material 
disclosures,\48\ whichever occurs last. If the required notice or 
material disclosures are not delivered, the right to rescind shall 
expire 3 years after consummation, upon transfer of all of the 
consumer's interest in the property, or upon sale of the property, 
whichever occurs first. In the case of certain administrative 
proceedings, the rescission period shall be extended in accordance with 
section 125(f) of the Act.
---------------------------------------------------------------------------

    \48\ The term ``material disclosures'' means the required 
disclosures of the annual percentage rate, the finance charge, the 
amount financed, the total payments, the payment schedule, and the 
disclosures and limitations referred to in Sec. 226.32 (c) and (d).
---------------------------------------------------------------------------

    (4) When more than one consumer in a transaction has the right to 
rescind, the exercise of the right by one consumer shall be effective as 
to all consumers.
    (b)(1) Notice of right to rescind. In a transaction subject to 
rescission, a creditor shall deliver two copies of the notice of the 
right to rescind to each consumer entitled to rescind (one copy to each 
if the notice is delivered in electronic form in accordance with the 
consumer consent and other applicable provisions of the E-Sign Act). The 
notice shall be on a separate document that identifies the transaction 
and shall clearly and conspicuously disclose the following:
    (i) The retention or acquisition of a security interest in the 
consumer's principal dwelling.
    (ii) The consumer's right to rescind the transaction.
    (iii) How to exercise the right to rescind, with a form for that 
purpose, designating the address of the creditor's place of business.
    (iv) The effects of rescission, as described in paragraph (d) of 
this section.
    (v) The date the rescission period expires.
    (2) Proper form of notice. To satisfy the disclosure requirements of 
paragraph (b)(1) of this section, the creditor shall provide the 
appropriate model form in Appendix H of this part or a substantially 
similar notice.
    (c) Delay of creditor's performance. Unless a consumer waives the 
right of rescission under paragraph (e) of this section, no money shall 
be disbursed other than in escrow, no services shall be performed and no 
materials delivered until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not rescinded.
    (d) Effects of rescission. (1) When a consumer rescinds a 
transaction, the security interest giving rise to the right of 
rescission becomes void and the consumer shall not be liable for any 
amount, including any finance charge.
    (2) Within 20 calendar days after receipt of a notice of rescission, 
the creditor shall return any money or property that has been given to 
anyone in connection with the transaction and shall take any action 
necessary to reflect the termination of the security interest.
    (3) If the creditor has delivered any money or property, the 
consumer may retain possession until the creditor has met its obligation 
under paragraph (d)(2) of this section. When the creditor has complied 
with that paragraph, the consumer shall tender the money or property to 
the creditor or, where the latter would be impracticable or inequitable, 
tender its reasonable value. At the consumer's option, tender of 
property may be made at the location of the property or at the 
consumer's

[[Page 391]]

residence. Tender of money must be made at the creditor's designated 
place of business. If the creditor does not take possession of the money 
or property within 20 calendar days after the consumer's tender, the 
consumer may keep it without further obligation.
    (4) The procedures outlined in paragraphs (d) (2) and (3) of this 
section may be modified by court order.
    (e) Consumer's waiver of right to rescind. (1) The consumer may 
modify or waive the right to rescind if the consumer determines that the 
extension of credit is needed to meet a bona fide personal financial 
emergency. To modify or waive the right, the consumer shall give the 
creditor a dated written statement that describes the emergency, 
specifically modifies or waives the right to rescind, and bears the 
signature of all the consumers entitled to rescind. Printed forms for 
this purpose are prohibited, except as provided in paragraph (e)(2) of 
this section.
    (2) The need of the consumer to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1993, pursuant to 42 U.S.C. 5170, to be a 
major disaster area because of severe storms and flooding in the 
Midwest.\48a\ In this instance, creditors may use printed forms for the 
consumer to waive the right to rescind. This exemption to paragraph 
(e)(1) of this section shall expire one year from the date an area was 
declared a major disaster.
---------------------------------------------------------------------------

    \48a\ A list of the affected areas will be maintained by the Board.
---------------------------------------------------------------------------

    (3) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during June through September 1994 to be a major disaster area, pursuant 
to 42 U.S.C. 5170, because of severe storms and flooding in the 
South.\48b\ In this instance, creditors may use printed forms for the 
consumer to waive the right to rescind. This exemption to paragraph 
(e)(1) of this section shall expire one year from the date an area was 
declared a major disaster.
---------------------------------------------------------------------------

    \48b\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include parts of Alabama, Florida, and 
Georgia.
---------------------------------------------------------------------------

    (4) The consumer's need to obtain funds immediately shall be 
regarded as a bona fide personal financial emergency provided that the 
dwelling securing the extension of credit is located in an area declared 
during October 1994 to be a major disaster area, pursuant to 42 U.S.C. 
5170, because of severe storms and flooding in Texas.\48c\ In this 
instance, creditors may use printed forms for the consumer to waive the 
right to rescind. This exemption to paragraph (e)(1) of this section 
shall expire one year from the date an area was declared a major 
disaster.
---------------------------------------------------------------------------

    \48c\ A list of the affected areas will be maintained and published 
by the Board. Such areas now include the following counties in Texas: 
Angelina, Austin, Bastrop, Brazos, Brazoria, Burleson, Chambers, 
Fayette, Fort Bend, Galveston, Grimes, Hardin, Harris, Houston, Jackson, 
Jasper, Jefferson, Lee, Liberty, Madison, Matagorda, Montgomery, 
Nacagdoches, Orange, Polk, San Augustine, San Jacinto, Shelby, Trinity, 
Victoria, Washington, Waller, Walker, and Wharton.
---------------------------------------------------------------------------

    (f) Exempt transactions. The right to rescind does not apply to the 
following:
    (1) A residential mortgage transaction.
    (2) A refinancing or consolidation by the same creditor of an 
extension of credit already secured by the consumer's principal 
dwelling. The right of rescission shall apply, however, to the extent 
the new amount financed exceeds the unpaid principal balance, any earned 
unpaid finance charge on the existing debt, and amounts attributed 
solely to the costs of the refinancing or consolidation.
    (3) A transaction in which a state agency is a creditor.
    (4) An advance, other than an initial advance, in a series of 
advances or in a series of single-payment obligations that is treated as 
a single transaction under Sec. 226.17(c)(6), if the notice required by 
paragraph (b) of this section and all material disclosures have been 
given to the consumer.
    (5) A renewal of optional insurance premiums that is not considered 
a refinancing under Sec. 226.20(a)(5).

[[Page 392]]

    (g) Tolerances for accuracy--(1) One-half of 1 percent tolerance. 
Except as provided in paragraphs (g)(2) and (h)(2) of this section, the 
finance charge and other disclosures affected by the finance charge 
(such as the amount financed and the annual percentage rate) shall be 
considered accurate for purposes of this section if the disclosed 
finance charge:
    (i) is understated by no more than \1/2\ of 1 percent of the face 
amount of the note or $100, whichever is greater; or
    (ii) is greater than the amount required to be disclosed.
    (2) One percent tolerance. In a refinancing of a residential 
mortgage transaction with a new creditor (other than a transaction 
covered by Sec. 226.32), if there is no new advance and no 
consolidation of existing loans, the finance charge and other 
disclosures affected by the finance charge (such as the amount financed 
and the annual percentage rate) shall be considered accurate for 
purposes of this section if the disclosed finance charge:
    (i) is understated by no more than 1 percent of the face amount of 
the note or $100, whichever is greater; or
    (ii) is greater than the amount required to be disclosed.
    (h) Special rules for foreclosures--(1) Right to rescind. After the 
initiation of foreclosure on the consumer's principal dwelling that 
secures the credit obligation, the consumer shall have the right to 
rescind the transaction if:
    (i) A mortgage broker fee that should have been included in the 
finance charge was not included; or
    (ii) The creditor did not provide the properly completed appropriate 
model form in appendix H of this part, or a substantially similar notice 
of rescission.
    (2) Tolerance for disclosures. After the initiation of foreclosure 
on the consumer's principal dwelling that secures the credit obligation, 
the finance charge and other disclosures affected by the finance charge 
(such as the amount financed and the annual percentage rate) shall be 
considered accurate for purposes of this section if the disclosed 
finance charge:
    (i) is understated by no more than $35; or
    (ii) is greater than the amount required to be disclosed.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 51 FR 45299, Dec. 18, 
1986; 58 FR 40583, July 29, 1993; 59 FR 40204, Aug. 5, 1994; 59 FR 
63715, Dec. 9, 1994; 60 FR 15471, Mar. 24, 1995; 61 FR 49247, Sept. 19, 
1996; 66 FR 17338, Mar. 30, 2001; 72 FR 63474, Nov. 9, 2007]

    Effective Date Note:  At 73 FR 44601, July 30, 2008, Sec. 226.23 
was amended by revising footnote 48 to paragraph (a)(3) to read ``The 
term ``material disclosures'' means the required disclosures of the 
annual percentage rate, the finance charge, the amount financed, the 
total of payments, the payment schedule, and the disclosures and 
limitations referred to in Sec. Sec. 226.32(c) and (d) and 
226.35(b)(2)'', effective Oct. 1, 2009.



Sec. 226.24  Advertising.

    (a) Actually available terms. If an advertisement for credit states 
specific credit terms, it shall state only those terms that actually are 
or will be arranged or offered by the creditor.
    (b) Advertisement of rate of finance charge. If an advertisement 
states a rate of finance charge, it shall state the rate as an ``annual 
percentage rate,'' using that term. If the annual percentage rate may be 
increased after consummation, the advertisement shall state that fact. 
The advertisement shall not state any other rate, except that a simple 
annual rate or periodic rate that is applied to an unpaid balance may be 
stated in conjunction with, but not more conspicuously than, the annual 
percentage rate.
    (c) Advertisement of terms that require additional disclosures. (1) 
If any of the following terms is set forth in an advertisement, the 
advertisement shall meet the requirements of paragraph (c)(2) of this 
section:
    (i) The amount or percentage of any downpayment.
    (ii) The number of payments or period of repayment.
    (iii) The amount of any payment.
    (iv) The amount of any finance charge.
    (2) An advertisement stating any of the terms in paragraph (c)(1) of 
this section shall state the following terms,\49\ as applicable:
---------------------------------------------------------------------------

    \49\ An example of one or more typical extensions of credit with a 
statement of all the terms applicable to each may be used.

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

[[Page 393]]

    (i) The amount or percentage of the downpayment.
    (ii) The terms of repayment.
    (iii) The annual percentage rate, using that term, and, if the rate 
may be increased after consummation, that fact.
    (d) Catalogs or other multiple-page advertisements; electronic 
advertisements. (1) If a catalog or other multiple-page advertisement, 
or an electronic advertisement (such as an advertisement appearing on an 
Internet Web site), gives information in a table or schedule in 
sufficient detail to permit determination of the disclosures required by 
paragraph (c)(2) of this section, it shall be considered a single 
advertisement if:
    (i) The table or schedule is clearly and conspicuously set forth; 
and
    (ii) Any statement of terms of the credit terms in paragraph (c)(1) 
of this section appearing anywhere else in the catalog or advertisement 
clearly refers to the page or location where the table or schedule 
begins.
    (2) A catalog or other multiple-page advertisement or an electronic 
advertisement (such as an advertisement appearing on an Internet Web 
site) complies with paragraph (c)(2) of this section if the table or 
schedule of terms includes all appropriate disclosures for a 
representative scale of amounts up to the level of the more commonly 
sold higher-priced property or services offered.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 66 FR 17338, Mar. 30, 
2001; 72 FR 63474, Nov. 9, 2007]

    Effective Date Note:  At 73 FR 44601, July 30, 2008, Sec. 226.24 
was amended by redesignating paragraphs (b) through (d) as paragraphs 
(c) through (e), respectively, adding new paragraph (b), revising newly 
designated paragraphs (c) through (e), removing and reserving footnote 
49, and adding new paragraphs (f) through (i), effective Oct. 1, 2009. 
For the convenience of the user, the added and revised text is set forth 
as follows:







Sec. 226.24  Advertising.

                                * * * * *

    (b) Clear and conspicuous standard. Disclosures required by this 
section shall be made clearly and conspicuously.
    (c) Advertisement of rate of finance charge. If an advertisement 
states a rate of finance charge, it shall state the rate as an ``annual 
percentage rate,'' using that term. If the annual percentage rate may be 
increased after consummation, the advertisement shall state that fact. 
If an advertisement is for credit not secured by a dwelling, the 
advertisement shall not state any other rate, except that a simple 
annual rate or periodic rate that is applied to an unpaid balance may be 
stated in conjunction with, but not more conspicuously than, the annual 
percentage rate. If an advertisement is for credit secured by a 
dwelling, the advertisement shall not state any other rate, except that 
a simple annual rate that is applied to an unpaid balance may be stated 
in conjunction with, but not more conspicuously than, the annual 
percentage rate.
    (d) Advertisement of terms that require additional disclosures--(1) 
Triggering terms. If any of the following terms is set forth in an 
advertisement, the advertisement shall meet the requirements of 
paragraph (d)(2) of this section:
    (i) The amount or percentage of any downpayment.
    (ii) The number of payments or period of repayment.
    (iii) The amount of any payment.
    (iv) The amount of any finance charge.
    (2) Additional terms. An advertisement stating any of the terms in 
paragraph (d)(1) of this section shall state the following terms,\49\ as 
applicable (an example of one or more typical extensions of credit with 
a statement of all the terms applicable to each may be used):
---------------------------------------------------------------------------

    \49\ [Reserved]
---------------------------------------------------------------------------

    (i) The amount or percentage of the downpayment.
    (ii) The terms of repayment, which reflect the repayment obligations 
over the full term of the loan, including any balloon payment.
    (iii) The ``annual percentage rate,'' using that term, and, if the 
rate may be increased after consummation, that fact.
    (e) Catalogs or other multiple-page advertisements; electronic 
advertisements--(1) If a catalog or other multiple-page advertisement, 
or an electronic advertisement (such as an advertisement appearing on an 
Internet Web site), gives information in a table or schedule in 
sufficient detail to permit determination of the disclosures required by 
paragraph (d)(2) of this section, it shall be considered a single 
advertisement if--
    (i) The table or schedule is clearly and conspicuously set forth; 
and
    (ii) Any statement of the credit terms in paragraph (d)(1) of this 
section appearing anywhere else in the catalog or advertisement clearly 
refers to the page or location where the table or schedule begins.
    (2) A catalog or other multiple-page advertisement or an electronic 
advertisement

[[Page 394]]

(such as an advertisement appearing on an Internet Web site) complies 
with paragraph (d)(2) of this section if the table or schedule of terms 
includes all appropriate disclosures for a representative scale of 
amounts up to the level of the more commonly sold higher-priced property 
or services offered.
    (f) Disclosure of Rates and Payments in Advertisements for Credit 
Secured by a Dwelling--(1) Scope. The requirements of this paragraph 
apply to any advertisement for credit secured by a dwelling, other than 
television or radio advertisements, including promotional materials 
accompanying applications.
    (2) Disclosure of rates--(i) In general. If an advertisement for 
credit secured by a dwelling states a simple annual rate of interest and 
more than one simple annual rate of interest will apply over the term of 
the advertised loan, the advertisement shall disclose in a clear and 
conspicuous manner:
    (A) Each simple annual rate of interest that will apply. In 
variable-rate transactions, a rate determined by adding an index and 
margin shall be disclosed based on a reasonably current index and 
margin;
    (B) The period of time during which each simple annual rate of 
interest will apply; and
    (C) The annual percentage rate for the loan. If such rate is 
variable, the annual percentage rate shall comply with the accuracy 
standards in Sec. Sec. 226.17(c) and 226.22.
    (ii) Clear and conspicuous requirement. For purposes of paragraph 
(f)(2)(i) of this section, clearly and conspicuously disclosed means 
that the required information in paragraphs (f)(2)(i)(A) through (C) 
shall be disclosed with equal prominence and in close proximity to any 
advertised rate that triggered the required disclosures. The required 
information in paragraph (f)(2)(i)(C) may be disclosed with greater 
prominence than the other information.
    (3) Disclosure of payments--(i) In general. In addition to the 
requirements of paragraph (c) of this section, if an advertisement for 
credit secured by a dwelling states the amount of any payment, the 
advertisement shall disclose in a clear and conspicuous manner:
    (A) The amount of each payment that will apply over the term of the 
loan, including any balloon payment. In variable-rate transactions, 
payments that will be determined based on the application of the sum of 
an index and margin shall be disclosed based on a reasonably current 
index and margin;
    (B) The period of time during which each payment will apply; and
    (C) In an advertisement for credit secured by a first lien on a 
dwelling, the fact that the payments do not include amounts for taxes 
and insurance premiums, if applicable, and that the actual payment 
obligation will be greater.
    (ii) Clear and conspicuous requirement. For purposes of paragraph 
(f)(3)(i) of this section, a clear and conspicuous disclosure means that 
the required information in paragraphs (f)(3)(i)(A) and (B) shall be 
disclosed with equal prominence and in close proximity to any advertised 
payment that triggered the required disclosures, and that the required 
information in paragraph (f)(3)(i)(C) shall be disclosed with prominence 
and in close proximity to the advertised payments.
    (4) Envelope excluded. The requirements in paragraphs (f)(2) and 
(f)(3) of this section do not apply to an envelope in which an 
application or solicitation is mailed, or to a banner advertisement or 
pop-up advertisement linked to an application or solicitation provided 
electronically.
    (g) Alternative disclosures--television or radio advertisements. An 
advertisement made through television or radio stating any of the terms 
requiring additional disclosures under paragraph (d)(2) of this section 
may comply with paragraph (d)(2) of this section either by:
    (1) Stating clearly and conspicuously each of the additional 
disclosures required under paragraph (d)(2) of this section; or
    (2) Stating clearly and conspicuously the information required by 
paragraph (d)(2)(iii) of this section and listing a toll-free telephone 
number, or any telephone number that allows a consumer to reverse the 
phone charges when calling for information, along with a reference that 
such number may be used by consumers to obtain additional cost 
information.
    (h) Tax implications. If an advertisement distributed in paper form 
or through the Internet (rather than by radio or television) is for a 
loan secured by the consumer's principal dwelling, and the advertisement 
states that the advertised extension of credit may exceed the fair 
market value of the dwelling, the advertisement shall clearly and 
conspicuously state that:
    (1) The interest on the portion of the credit extension that is 
greater than the fair market value of the dwelling is not tax deductible 
for Federal income tax purposes; and
    (2) The consumer should consult a tax adviser for further 
information regarding the deductibility of interest and charges.
    (i) Prohibited acts or practices in advertisements for credit 
secured by a dwelling. The following acts or practices are prohibited in 
advertisements for credit secured by a dwelling:
    (1) Misleading advertising of ``fixed'' rates and payments. Using 
the word ``fixed'' to refer to rates, payments, or the credit 
transaction in an advertisement for variable-rate transactions or other 
transactions where the payment will increase, unless:
    (i) In the case of an advertisement solely for one or more variable-
rate transactions,
    (A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate 
Mortgage,'' or ``ARM'' appears in the advertisement before the first use 
of the word ``fixed'' and is at least as

[[Page 395]]

conspicuous as any use of the word ``fixed'' in the advertisement; and
    (B) Each use of the word ``fixed'' to refer to a rate or payment is 
accompanied by an equally prominent and closely proximate statement of 
the time period for which the rate or payment is fixed, and the fact 
that the rate may vary or the payment may increase after that period;
    (ii) In the case of an advertisement solely for non-variable-rate 
transactions where the payment will increase (e.g., a stepped-rate 
mortgage transaction with an initial lower payment), each use of the 
word ``fixed'' to refer to the payment is accompanied by an equally 
prominent and closely proximate statement of the time period for which 
the payment is fixed, and the fact that the payment will increase after 
that period; or
    (iii) In the case of an advertisement for both variable-rate 
transactions and non-variable-rate transactions,
    (A) The phrase ``Adjustable-Rate Mortgage,'' ``Variable-Rate 
Mortgage,'' or ``ARM'' appears in the advertisement with equal 
prominence as any use of the term ``fixed,'' ``Fixed-Rate Mortgage,'' or 
similar terms; and
    (B) Each use of the word ``fixed'' to refer to a rate, payment, or 
the credit transaction either refers solely to the transactions for 
which rates are fixed and complies with paragraph (i)(1)(ii) of this 
section, if applicable, or, if it refers to the variable-rate 
transactions, is accompanied by an equally prominent and closely 
proximate statement of the time period for which the rate or payment is 
fixed, and the fact that the rate may vary or the payment may increase 
after that period.
    (2) Misleading comparisons in advertisements. Making any comparison 
in an advertisement between actual or hypothetical credit payments or 
rates and any payment or simple annual rate that will be available under 
the advertised product for a period less than the full term of the loan, 
unless:
    (i) In general. The advertisement includes a clear and conspicuous 
comparison to the information required to be disclosed under sections 
226.24(f)(2) and (3); and
    (ii) Application to variable-rate transactions. If the advertisement 
is for a variable-rate transaction, and the advertised payment or simple 
annual rate is based on the index and margin that will be used to make 
subsequent rate or payment adjustments over the term of the loan, the 
advertisement includes an equally prominent statement in close proximity 
to the payment or rate that the payment or rate is subject to adjustment 
and the time period when the first adjustment will occur.
    (3) Misrepresentations about government endorsement. Making any 
statement in an advertisement that the product offered is a ``government 
loan program'', ``government-supported loan'', or is otherwise endorsed 
or sponsored by any federal, state, or local government entity, unless 
the advertisement is for an FHA loan, VA loan, or similar loan program 
that is, in fact, endorsed or sponsored by a federal, state, or local 
government entity.
    (4) Misleading use of the current lender's name. Using the name of 
the consumer's current lender in an advertisement that is not sent by or 
on behalf of the consumer's current lender, unless the advertisement:
    (i) Discloses with equal prominence the name of the person or 
creditor making the advertisement; and
    (ii) Includes a clear and conspicuous statement that the person 
making the advertisement is not associated with, or acting on behalf of, 
the consumer's current lender.
    (5) Misleading claims of debt elimination. Making any misleading 
claim in an advertisement that the mortgage product offered will 
eliminate debt or result in a waiver or forgiveness of a consumer's 
existing loan terms with, or obligations to, another creditor.
    (6) Misleading use of the term ``counselor''. Using the term 
``counselor'' in an advertisement to refer to a for-profit mortgage 
broker or mortgage creditor, its employees, or persons working for the 
broker or creditor that are involved in offering, originating or selling 
mortgages.
    (7) Misleading foreign-language advertisements. Providing 
information about some trigger terms or required disclosures, such as an 
initial rate or payment, only in a foreign language in an advertisement, 
but providing information about other trigger terms or required 
disclosures, such as information about the fully-indexed rate or fully 
amortizing payment, only in English in the same advertisement.



                         Subpart D_Miscellaneous



Sec. 226.25  Record retention.

    (a) General rule. A creditor shall retain evidence of compliance 
with this regulation (other than advertising requirements under 
Sec. Sec. 226.16 and 226.24) for 2 years after the date disclosures are 
required to be made or action is required to be taken. The 
administrative agencies responsible for enforcing the regulation may 
require creditors under their jurisdictions to retain records for a 
longer period if necessary to carry out their enforcement 
responsibilities under section 108 of the act.
    (b) Inspection of records. A creditor shall permit the agency 
responsible for enforcing this regulation with respect to that creditor 
to inspect its relevant records for compliance.

[[Page 396]]



Sec. 226.26  Use of annual percentage rate in oral disclosures.

    (a) Open-end credit. In an oral response to a consumer's inquiry 
about the cost of open-end credit, only the annual percentage rate or 
rates shall be stated, except that the periodic rate or rates also may 
be stated. If the annual percentage rate cannot be determined in advance 
because there are finance charges other than a periodic rate, the 
corresponding annual percentage rate shall be stated, and other cost 
information may be given.
    (b) Closed-end credit. In an oral response to a consumer's inquiry 
about the cost of closed-end credit, only the annual percentage rate 
shall be stated, except that a simple annual rate or periodic rate also 
may be stated if it is applied to an unpaid balance. If the annual 
percentage rate cannot be determined in advance, the annual percentage 
rate for a sample transaction shall be stated, and other cost 
information for the consumer's specific transaction may be given.



Sec. 226.27  Language of disclosures.

    Disclosures required by this regulation may be made in a language 
other than English, provided that the disclosures are made available in 
English upon the consumer's request. This requirement for providing 
English disclosures on request does not apply to advertisements subject 
to Sec. Sec. 226.16 and 226.24.

[66 FR 17339, Mar. 30, 2001]



Sec. 226.28  Effect on State laws.

    (a) Inconsistent disclosure requirements. (1) Except as provided in 
paragraph (d) of this section, State law requirements that are 
inconsistent with the requirements contained in chapter 1 (General 
Provisions), chapter 2 (Credit Transactions), or chapter 3 (Credit 
Advertising) of the act and the implementing provisions of this 
regulation are preempted to the extent of the inconsistency. A State law 
is inconsistent if it requires a creditor to make disclosures or take 
actions that contradict the requirements of the Federal law. A State law 
is contradictory if it requires the use of the same term to represent a 
different amount or a different meaning than the Federal law, or if it 
requires the use of a term different from that required in the Federal 
law to describe the same item. A creditor, State, or other interested 
party may request the Board to determine whether a State law requirement 
is inconsistent. After the Board determines that a State law is 
inconsistent, a creditor may not make disclosures using the inconsistent 
term or form.
    (2)(i) State law requirements are inconsistent with the requirements 
contained in sections 161 (Correction of billing errors) or 162 
(Regulation of credit reports) of the Act and the implementing 
provisions of this regulation and are preempted if they provide rights, 
responsibilities, or procedures for consumers or creditors that are 
different from those required by the Federal law. However, a State law 
that allows a consumer to inquire about an open-end credit account and 
imposes on the creditor an obligation to respond to such inquiry after 
the time allowed in the Federal law for the consumer to submit written 
notice of a billing error shall not be preempted in any situation where 
the time period for making written notice under this regulation has 
expired. If a creditor gives written notice of a consumer's rights under 
such State law, the notice shall state that reliance on the longer time 
period available under State law may result in the loss of important 
rights that could be preserved by acting more promptly under Federal 
law; it shall also explain that the State law provisions apply only 
after expiration of the time period for submitting a proper written 
notice of a billing error under the Federal law. If the State 
disclosures are made on the same side of a page as the required Federal 
disclosures, the State disclosures shall appear under a demarcation line 
below the Federal disclosures, and the Federal disclosures shall be 
identified by a heading indicating that they are made in compliance with 
Federal law.
    (ii) State law requirements are inconsistent with the requirements 
contained in chapter 4 (Credit billing) of the Act (other than section 
161 or 162) and the implementing provisions of this regulation and are 
preempted if

[[Page 397]]

the creditor cannot comply with State law without violating Federal law.
    (iii) A State may request the Board to determine whether its law is 
inconsistent with chapter 4 of the Act and its implementing provisions.
    (b) Equivalent disclosure requirements. If the Board determines that 
a disclosure required by state law (other than a requirement relating to 
the finance charge, annual percentage rate, or the disclosures required 
under Sec. 226.32) is substantially the same in meaning as a disclosure 
required under the act or this regulation, creditors in that state may 
make the state disclosure in lieu of the federal disclosure. A creditor, 
State, or other interested party may request the Board to determine 
whether a State disclosure is substantially the same in meaning as a 
Federal disclosure.
    (c) Request for determination. The procedures under which a request 
for a determination may be made under this section are set forth in 
appendix A.
    (d) Special rule for credit and charge cards. State law requirements 
relating to the disclosure of credit information in any credit or charge 
card application or solicitation that is subject to the requirements of 
section 127(c) of chapter 2 of the act (Sec. 226.5a of the regulation) 
or in any renewal notice for a credit or charge card that is subject to 
the requirements of section 127(d) of chapter 2 of the act (Sec. 
226.9(e) of the regulation) are preempted. State laws relating to the 
enforcement of section 127 (c) and (d) of the act are not preempted.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 54 FR 13867, Apr. 6, 
1989; 54 FR 32954, Aug. 11, 1989; 60 FR 15471, Mar. 24, 1995]



Sec. 226.29  State exemptions.

    (a) General rule. Any State may apply to the Board to exempt a class 
of transactions within the State from the requirements of chapter 2 
(Credit transactions) or chapter 4 (Credit billing) of the Act and the 
corresponding provisions of this regulation. The Board shall grant an 
exemption if it determines that:
    (1) The State law is substantially similar to the Federal law or, in 
the case of chapter 4, affords the consumer greater protection than the 
Federal law; and
    (2) There is adequate provision for enforcement.
    (b) Civil liability. (1) No exemptions granted under this section 
shall extend to the civil liability provisions of sections 130 and 131 
of the Act.
    (2) If an exemption has been granted, the disclosures required by 
the applicable State law (except any additional requirements not imposed 
by Federal law) shall constitute the disclosures required by this Act.
    (c) Applications. The procedures under which a State may apply for 
an exemption under this section are set forth in appendix B.

[46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981]



Sec. 226.30  Limitation on rates.

    A creditor shall include in any consumer credit contract secured by 
a dwelling and subject to the act and this regulation the maximum 
interest rate that may be imposed during the term of the obligation \50\ 
when:
---------------------------------------------------------------------------

    \50\ Compliance with this section will constitute compliance with 
the disclosure requirements on limitations on increases in footnote 12 
to Sec. Sec. 226.6(a)(2) and 226.18(f)(2) until October 1, 1988.
---------------------------------------------------------------------------

    (a) In the case of closed-end credit, the annual percentage rate may 
increase after consummation, or
    (b) In the case of open-end credit, the annual percentage rate may 
increase during the plan.

[52 FR 43181, Nov. 9, 1987]



     Subpart E_Special Rules for Certain Home Mortgage Transactions

    Source: Reg. Z, 60 FR 15471, Mar. 24, 1995, unless otherwise noted.



Sec. 226.31  General rules.

    (a) Relation to other subparts in this part. The requirements and 
limitations of this subpart are in addition to and not in lieu of those 
contained in other subparts of this part.
    (b) Form of disclosures. The creditor shall make the disclosures 
required by this subpart clearly and conspicuously

[[Page 398]]

in writing, in a form that the consumer may keep. The disclosures 
required by this subpart may be provided to the consumer in electronic 
form, subject to compliance with the consumer consent and other 
applicable provisions of the Electronic Signatures in Global and 
National Commerce Act (E-Sign Act) (15 U.S.C. Sec. 7001 et seq.).
    (c) Timing of disclosure--(1) Disclosures for certain closed-end 
home mortgages. The creditor shall furnish the disclosures required by 
Sec. 226.32 at least three business days prior to consummation of a 
mortgage transaction covered by Sec. 226.32.
    (i) Change in terms. After complying with paragraph (c)(1) of this 
section and prior to consummation, if the creditor changes any term that 
makes the disclosures inaccurate, new disclosures shall be provided in 
accordance with the requirements of this subpart.
    (ii) Telephone disclosures. A creditor may provide new disclosures 
by telephone if the consumer initiates the change and if, at 
consummation:
    (A) The creditor provides new written disclosures; and
    (B) The consumer and creditor sign a statement that the new 
disclosures were provided by telephone at least three days prior to 
consummation.
    (iii) Consumer's waiver of waiting period before consummation. The 
consumer may, after receiving the disclosures required by paragraph 
(c)(1) of this section, modify or waive the three-day waiting period 
between delivery of those disclosures and consummation if the consumer 
determines that the extension of credit is needed to meet a bona fide 
personal financial emergency. To modify or waive the right, the consumer 
shall give the creditor a dated written statement that describes the 
emergency, specifically modifies or waives the waiting period, and bears 
the signature of all the consumers entitled to the waiting period. 
Printed forms for this purpose are prohibited, except when creditors are 
permitted to use printed forms pursuant to Sec. 226.23(e)(2).
    (2) Disclosures for reverse mortgages. The creditor shall furnish 
the disclosures required by Sec. 226.33 at least three business days 
prior to:
    (i) Consummation of a closed-end credit transaction; or
    (ii) The first transaction under an open-end credit plan.
    (d) Basis of disclosures and use of estimates--(1) Legal Obligation. 
Disclosures shall reflect the terms of the legal obligation between the 
parties.
    (2) Estimates. If any information necessary for an accurate 
disclosure is unknown to the creditor, the creditor shall make the 
disclosure based on the best information reasonably available at the 
time the disclosure is provided, and shall state clearly that the 
disclosure is an estimate.
    (3) Per-diem interest. For a transaction in which a portion of the 
interest is determined on a per-diem basis and collected at 
consummation, any disclosure affected by the per-diem interest shall be 
considered accurate if the disclosure is based on the information known 
to the creditor at the time that the disclosure documents are prepared.
    (e) Multiple creditors; multiple consumers. If a transaction 
involves more than one creditor, only one set of disclosures shall be 
given and the creditors shall agree among themselves which creditor must 
comply with the requirements that this part imposes on any or all of 
them. If there is more than one consumer, the disclosures may be made to 
any consumer who is primarily liable on the obligation. If the 
transaction is rescindable under Sec. 226.15 or Sec. 226.23, however, 
the disclosures shall be made to each consumer who has the right to 
rescind.
    (f) Effect of subsequent events. If a disclosure becomes inaccurate 
because of an event that occurs after the creditor delivers the required 
disclosures, the inaccuracy is not a violation of Regulation Z (12 CFR 
part 226), although new disclosures may be required for mortgages 
covered by Sec. 226.32 under paragraph (c) of this section, Sec. 
226.9(c), Sec. 226.19, or Sec. 226.20.
    (g) Accuracy of annual percentage rate. For purposes of Sec. 
226.32, the annual percentage rate shall be considered accurate, and may 
be used in determining whether a transaction is covered by Sec. 226.32, 
if it is accurate according to the requirements and within the 
tolerances under Sec. 226.22. The finance charge tolerances for 
rescission under

[[Page 399]]

Sec. 226.23(g) or (h) shall not apply for this purpose.

[Reg. Z, 60 FR 15471, Mar. 24, 1995, as amended at 60 FR 29969, June 7, 
1995; 61 FR 49247, Sept. 19, 1996; 66 FR 17339, Mar. 30, 2001; 72 FR 
63475, Nov. 9, 2007]



Sec. 226.32  Requirements for certain closed-end home mortgages.

    (a) Coverage. (1) Except as provided in paragraph (a)(2) of this 
section, the requirements of this section apply to a consumer credit 
transaction that is secured by the consumer's principal dwelling, and in 
which either:
    (i) The annual percentage rate at consummation will exceed by more 
than 8 percentage points for first-lien loans, or by more than 10 
percentage points for subordinate-lien loans, the yield on Treasury 
securities having comparable periods of maturity to the loan maturity as 
of the fifteenth day of the month immediately preceding the month in 
which the application for the extension of credit is received by the 
creditor; or
    (ii) The total points and fees payable by the consumer at or before 
loan closing will exceed the greater of 8 percent of the total loan 
amount, or $400; the $400 figure shall be adjusted annually on January 1 
by the annual percentage change in the Consumer Price Index that was 
reported on the preceding June 1.
    (2) This section does not apply to the following:
    (i) A residential mortgage transaction.
    (ii) A reverse mortgage transaction subject to Sec. 226.33.
    (iii) An open-end credit plan subject to subpart B of this part.
    (b) Definitions. For purposes of this subpart, the following 
definitions apply:
    (1) For purposes of paragraph (a)(1)(ii) of this section, points and 
fees means:
    (i) All items required to be disclosed under Sec. 226.4(a) and 
226.4(b), except interest or the time-price differential;
    (ii) All compensation paid to mortgage brokers;
    (iii) All items listed in Sec. 226.4(c)(7) (other than amounts held 
for future payment of taxes) unless the charge is reasonable, the 
creditor receives no direct or indirect compensation in connection with 
the charge, and the charge is not paid to an affiliate of the creditor; 
and
    (iv) Premiums or other charges for credit life, accident, health, or 
loss-of-income insurance, or debt-cancellation coverage (whether or not 
the debt-cancellation coverage is insurance under applicable law) that 
provides for cancellation of all or part of the consumer's liability in 
the event of the loss of life, health, or income or in the case of 
accident, written in connection with the credit transaction.
    (2) Affiliate means any company that controls, is controlled by, or 
is under common control with another company, as set forth in the Bank 
Holding Company Act of 1956 (12 U.S.C. 1841 et seq.).
    (c) Disclosures. In addition to other disclosures required by this 
part, in a mortgage subject to this section, the creditor shall disclose 
the following in conspicuous type size:
    (1) Notices. The following statement: ``You are not required to 
complete this agreement merely because you have received these 
disclosures or have signed a loan application. If you obtain this loan, 
the lender will have a mortgage on your home. You could lose your home, 
and any money you have put into it, if you do not meet your obligations 
under the loan.''
    (2) Annual percentage rate. The annual percentage rate.
    (3) Regular payment; balloon payment. The amount of the regular 
monthly (or other periodic) payment and the amount of any balloon 
payment. The regular payment disclosed under this paragraph shall be 
treated as accurate if it is based on an amount borrowed that is deemed 
accurate and is disclosed under paragraph (c)(5) of this section.
    (4) Variable-rate. For variable-rate transactions, a statement that 
the interest rate and monthly payment may increase, and the amount of 
the single maximum monthly payment, based on the maximum interest rate 
required to be disclosed under Sec. 226.30.
    (5) Amount borrowed. For a mortgage refinancing, the total amount 
the consumer will borrow, as reflected by the face amount of the note; 
and where the

[[Page 400]]

amount borrowed includes premiums or other charges for optional credit 
insurance or debt-cancellation coverage, that fact shall be stated, 
grouped together with the disclosure of the amount borrowed. The 
disclosure of the amount borrowed shall be treated as accurate if it is 
not more than $100 above or below the amount required to be disclosed.
    (d) Limitations. A mortgage transaction subject to this section 
shall not include the following terms:
    (1)(i) Balloon payment. For a loan with a term of less than five 
years, a payment schedule with regular periodic payments that when 
aggregated do not fully amortize the outstanding principal balance.
    (ii) Exception. The limitations in paragraph (d)(1)(i) of this 
section do not apply to loans with maturities of less than one year, if 
the purpose of the loan is a ``bridge'' loan connected with the 
acquisition or construction of a dwelling intended to become the 
consumer's principal dwelling.
    (2) Negative amortization. A payment schedule with regular periodic 
payments that cause the principal balance to increase.
    (3) Advance payments. A payment schedule that consolidates more than 
two periodic payments and pays them in advance from the proceeds.
    (4) Increased interest rate. An increase in the interest rate after 
default.
    (5) Rebates. A refund calculated by a method less favorable than the 
actuarial method (as defined by section 933(d) of the Housing and 
Community Development Act of 1992, 15 U.S.C. 1615(d)), for rebates of 
interest arising from a loan acceleration due to default.
    (6) Prepayment penalties. Except as allowed under paragraph (d)(7) 
of this section, a penalty for paying all or part of the principal 
before the date on which the principal is due. A prepayment penalty 
includes computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined by 
section 933(d) of the Housing and Community Development Act of 1992.
    (7) Prepayment penalty exception. A mortgage transaction subject to 
this section may provide for a prepayment penalty otherwise permitted by 
law (including a refund calculated according to the rule of 78s) if:
    (i) The penalty can be exercised only for the first five years 
following consummation;
    (ii) The source of the prepayment funds is not a refinancing by the 
creditor or an affiliate of the creditor; and
    (iii) At consummation, the consumer's total monthly debts (including 
amounts owed under the mortgage) do not exceed 50 percent of the 
consumer's monthly gross income, as verified by the consumer's signed 
financial statement, a credit report, and payment records for employment 
income.
    (8) Due-on-demand clause. A demand feature that permits the creditor 
to terminate the loan in advance of the original maturity date and to 
demand repayment of the entire outstanding balance, except in the 
following circumstances:
    (i) There is fraud or material misrepresentation by the consumer in 
connection with the loan;
    (ii) The consumer fails to meet the repayment terms of the agreement 
for any outstanding balance; or
    (iii) There is any action or inaction by the consumer that adversely 
affects the creditor's security for the loan, or any right of the 
creditor in such security.

[Reg. Z, 60 FR 15472, Mar. 24, 1995, as amended at 60 FR 29969, June 7, 
1995; 66 FR 65617, Dec. 20, 2001]

    Effective Date Note:  At 73 FR 44602, July 30, 2008, Sec. 226.32 
was amended by revising paragraphs (d)(6) and (7), effective Oct. 1, 
2009. For the convenience of the user, the revised text is set forth as 
follows:



Sec. 226.32  Requirements for certain closed-end home mortgages.

                                * * * * *

    (d) * * *
    (6) Prepayment penalties. Except as allowed under paragraph (d)(7) 
of this section, a penalty for paying all or part of the principal 
before the date on which the principal is due. A prepayment penalty 
includes computing a refund of unearned interest by a method that is 
less favorable to the consumer than the actuarial method, as defined by 
section 933(d) of the Housing and Community Development Act of 1992, 15 
U.S.C. 1615(d).
    (7) Prepayment penalty exception. A mortgage transaction subject to 
this section may

[[Page 401]]

provide for a prepayment penalty (including a refund calculated 
according to the rule of 78s) otherwise permitted by law if, under the 
terms of the loan:
    (i) The penalty will not apply after the two-year period following 
consummation;
    (ii) The penalty will not apply if the source of the prepayment 
funds is a refinancing by the creditor or an affiliate of the creditor;
    (iii) At consummation, the consumer's total monthly debt payments 
(including amounts owed under the mortgage) do not exceed 50 percent of 
the consumer's monthly gross income, as verified in accordance with 
Sec. 226.34(a)(4)(ii); and
    (iv) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.

                                * * * * *



Sec. 226.33  Requirements for reverse mortgages.

    (a) Definition. For purposes of this subpart, reverse mortgage 
transaction means a nonrecourse consumer credit obligation in which:
    (1) A mortgage, deed of trust, or equivalent consensual security 
interest securing one or more advances is created in the consumer's 
principal dwelling; and
    (2) Any principal, interest, or shared appreciation or equity is due 
and payable (other than in the case of default) only after:
    (i) The consumer dies;
    (ii) The dwelling is transferred; or
    (iii) The consumer ceases to occupy the dwelling as a principal 
dwelling.
    (b) Content of disclosures. In addition to other disclosures 
required by this part, in a reverse mortgage transaction the creditor 
shall provide the following disclosures in a form substantially similar 
to the model form found in paragraph (d) of appendix K of this part:
    (1) Notice. A statement that the consumer is not obligated to 
complete the reverse mortgage transaction merely because the consumer 
has received the disclosures required by this section or has signed an 
application for a reverse mortgage loan.
    (2) Total annual loan cost rates. A good-faith projection of the 
total cost of the credit, determined in accordance with paragraph (c) of 
this section and expressed as a table of ``total annual loan cost 
rates,'' using that term, in accordance with appendix K of this part.
    (3) Itemization of pertinent information. An itemization of loan 
terms, charges, the age of the youngest borrower and the appraised 
property value.
    (4) Explanation of table. An explanation of the table of total 
annual loan cost rates as provided in the model form found in paragraph 
(d) of appendix K of this part.
    (c) Projected total cost of credit. The projected total cost of 
credit shall reflect the following factors, as applicable:
    (1) Costs to consumer. All costs and charges to the consumer, 
including the costs of any annuity the consumer purchases as part of the 
reverse mortgage transaction.
    (2) Payments to consumer. All advances to and for the benefit of the 
consumer, including annuity payments that the consumer will receive from 
an annuity that the consumer purchases as part of the reverse mortgage 
transaction.
    (3) Additional creditor compensation. Any shared appreciation or 
equity in the dwelling that the creditor is entitled by contract to 
receive.
    (4) Limitations on consumer liability. Any limitation on the 
consumer's liability (such as nonrecourse limits and equity conservation 
agreements).
    (5) Assumed annual appreciation rates. Each of the following assumed 
annual appreciation rates for the dwelling:
    (i) 0 percent.
    (ii) 4 percent.
    (iii) 8 percent.
    (6) Assumed loan period. (i) Each of the following assumed loan 
periods, as provided in appendix L of this part:
    (A) Two years.
    (B) The actuarial life expectancy of the consumer to become 
obligated on the reverse mortgage transaction (as of that consumer's 
most recent birthday). In the case of multiple consumers, the period 
shall be the actuarial life expectancy of the youngest consumer (as of 
that consumer's most recent birthday).
    (C) The actuarial life expectancy specified by paragraph 
(c)(6)(i)(B) of this section, multiplied by a factor of

[[Page 402]]

1.4 and rounded to the nearest full year.
    (ii) At the creditor's option, the actuarial life expectancy 
specified by paragraph (c)(6)(i)(B) of this section, multiplied by a 
factor of .5 and rounded to the nearest full year.



Sec. 226.34  Prohibited acts or practices in connection with credit secured by 

a consumer's dwelling.

    (a) Prohibited acts or practices for loans subject to Sec. 226.32. 
A creditor extending mortgage credit subject to Sec. 226.32 shall not--
    (1) Home improvement contracts. Pay a contractor under a home 
improvement contract from the proceeds of a mortgage covered by Sec. 
226.32, other than:
    (i) By an instrument payable to the consumer or jointly to the 
consumer and the contractor; or
    (ii) At the election of the consumer, through a third-party escrow 
agent in accordance with terms established in a written agreement signed 
by the consumer, the creditor, and the contractor prior to the 
disbursement.
    (2) Notice to assignee. Sell or otherwise assign a mortgage subject 
to Sec. 226.32 without furnishing the following statement to the 
purchaser or assignee: ``Notice: This is a mortgage subject to special 
rules under the federal Truth in Lending Act. Purchasers or assignees of 
this mortgage could be liable for all claims and defenses with respect 
to the mortgage that the borrower could assert against the creditor.''
    (3) Refinancings within one-year period. Within one year of having 
extended credit subject to Sec. 226.32, refinance any loan subject to 
Sec. 226.32 to the same borrower into another loan subject to Sec. 
226.32, unless the refinancing is in the borrower's interest. An 
assignee holding or servicing an extension of mortgage credit subject to 
Sec. 226.32, shall not, for the remainder of the one-year period 
following the date of origination of the credit, refinance any loan 
subject to Sec. 226.32 to the same borrower into another loan subject 
to Sec. 226.32, unless the refinancing is in the borrower's interest. A 
creditor (or assignee) is prohibited from engaging in acts or practices 
to evade this provision, including a pattern or practice of arranging 
for the refinancing of its own loans by affiliated or unaffiliated 
creditors, or modifying a loan agreement (whether or not the existing 
loan is satisfied and replaced by the new loan) and charging a fee.
    (4) Repayment ability. Engage in a pattern or practice of extending 
credit subject to Sec. 226.32 to a consumer based on the consumer's 
collateral without regard to the consumer's repayment ability, including 
the consumer's current and expected income, current obligations, and 
employment. There is a presumption that a creditor has violated this 
paragraph (a)(4) if the creditor engages in a pattern or practice of 
making loans subject to Sec. 226.32 without verifying and documenting 
consumers' repayment ability.
    (b) Prohibited acts or practices for dwelling-secured loans; open-
end credit. In connection with credit secured by the consumer's dwelling 
that does not meet the definition in Sec. 226.2(a)(20), a creditor 
shall not structure a home-secured loan as an open-end plan to evade the 
requirements of Sec. 226.32.

[Reg. Z, 66 FR 65618, Dec. 20, 2001]

    Effective Date Note:  At 73 FR 44603, July 30, 2008, Sec. 226.34 
was amended by revising the heading and paragraph (a)(4), effective Oct. 
1, 2009. For the convenience of the user, the revised text is set forth 
as follows:



Sec. 226.34  Prohibited acts or practices in connection with credit 

          subject to Sec. 226.32.

    (a) * * *
    (4) Repayment ability. Extend credit subject to Sec. 226.32 to a 
consumer based on the value of the consumer's collateral without regard 
to the consumer's repayment ability as of consummation, including the 
consumer's current and reasonably expected income, employment, assets 
other than the collateral, current obligations, and mortgage-related 
obligations.
    (i) Mortgage-related obligations. For purposes of this paragraph 
(a)(4), mortgage-related obligations are expected property taxes, 
premiums for mortgage-related insurance required by the creditor as set 
forth in Sec. 226.35(b)(3)(i), and similar expenses.
    (ii) Verification of repayment ability. Under this paragraph (a)(4) 
a creditor must verify the consumer's repayment ability as follows:
    (A) A creditor must verify amounts of income or assets that it 
relies on to determine repayment ability, including expected income or 
assets, by the consumer's Internal Revenue Service Form W-2, tax 
returns, payroll receipts, financial institution records, or

[[Page 403]]

other third-party documents that provide reasonably reliable evidence of 
the consumer's income or assets.
    (B) Notwithstanding paragraph (a)(4)(ii)(A), a creditor has not 
violated paragraph (a)(4)(ii) if the amounts of income and assets that 
the creditor relied upon in determining repayment ability are not 
materially greater than the amounts of the consumer's income or assets 
that the creditor could have verified pursuant to paragraph 
(a)(4)(ii)(A) at the time the loan was consummated.
    (C) A creditor must verify the consumer's current obligations.
    (iii) Presumption of compliance. A creditor is presumed to have 
complied with this paragraph (a)(4) with respect to a transaction if the 
creditor:
    (A) Verifies the consumer's repayment ability as provided in 
paragraph (a)(4)(ii);
    (B) Determines the consumer's repayment ability using the largest 
payment of principal and interest scheduled in the first seven years 
following consummation and taking into account current obligations and 
mortgage-related obligations as defined in paragraph (a)(4)(i); and
    (C) Assesses the consumer's repayment ability taking into account at 
least one of the following: The ratio of total debt obligations to 
income, or the income the consumer will have after paying debt 
obligations.
    (iv) Exclusions from presumption of compliance. Notwithstanding the 
previous paragraph, no presumption of compliance is available for a 
transaction for which:
    (A) The regular periodic payments for the first seven years would 
cause the principal balance to increase; or
    (B) The term of the loan is less than seven years and the regular 
periodic payments when aggregated do not fully amortize the outstanding 
principal balance.
    (v) Exemption. This paragraph (a)(4) does not apply to temporary or 
``bridge'' loans with terms of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months.

                                * * * * *



Sec. 226.35  Prohibited acts or practices in connection with higher-priced 

mortgage loans.

    (a) Higher-priced mortgage loans--(1) For purposes of this section, 
a higher-priced mortgage loan is a consumer credit transaction secured 
by the consumer's principal dwelling with an annual percentage rate that 
exceeds the average prime offer rate for a comparable transaction as of 
the date the interest rate is set by 1.5 or more percentage points for 
loans secured by a first lien on a dwelling, or by 3.5 or more 
percentage points for loans secured by a subordinate lien on a dwelling.
    (2) ``Average prime offer rate'' means an annual percentage rate 
that is derived from average interest rates, points, and other loan 
pricing terms currently offered to consumers by a representative sample 
of creditors for mortgage transactions that have low-risk pricing 
characteristics. The Board publishes average prime offer rates for a 
broad range of types of transactions in a table updated at least weekly 
as well as the methodology the Board uses to derive these rates.
    (3) Notwithstanding paragraph (a)(1) of this section, the term 
``higher-priced mortgage loan'' does not include a transaction to 
finance the initial construction of a dwelling, a temporary or 
``bridge'' loan with a term of twelve months or less, such as a loan to 
purchase a new dwelling where the consumer plans to sell a current 
dwelling within twelve months, a reverse-mortgage transaction subject to 
Sec. 226.33, or a home equity line of credit subject to Sec. 226.5b.
    (b) Rules for higher-priced mortgage loans. Higher-priced mortgage 
loans are subject to the following restrictions:
    (1) Repayment ability. A creditor shall not extend credit based on 
the value of the consumer's collateral without regard to the consumer's 
repayment ability as of consummation as provided in Sec. 226.34(a)(4).
    (2) Prepayment penalties. A loan may not include a penalty described 
by Sec. 226.32(d)(6) unless:
    (i) The penalty is otherwise permitted by law, including Sec. 
226.32(d)(7) if the loan is a mortgage transaction described in Sec. 
226.32(a); and
    (ii) Under the terms of the loan--
    (A) The penalty will not apply after the two-year period following 
consummation;
    (B) The penalty will not apply if the source of the prepayment funds 
is a refinancing by the creditor or an affiliate of the creditor; and
    (C) The amount of the periodic payment of principal or interest or 
both may not change during the four-year period following consummation.

[[Page 404]]

    (3) Escrows--(i) Failure to escrow for property taxes and insurance. 
Except as provided in paragraph (b)(3)(ii) of this section, a creditor 
may not extend a loan secured by a first lien on a principal dwelling 
unless an escrow account is established before consummation for payment 
of property taxes and premiums for mortgage-related insurance required 
by the creditor, such as insurance against loss of or damage to 
property, or against liability arising out of the ownership or use of 
the property, or insurance protecting the creditor against the 
consumer's default or other credit loss.
    (ii) Exemptions for loans secured by shares in a cooperative and for 
certain condominium units--(A) Escrow accounts need not be established 
for loans secured by shares in a cooperative; and
    (B) Insurance premiums described in paragraph (b)(3)(i) of this 
section need not be included in escrow accounts for loans secured by 
condominium units, where the condominium association has an obligation 
to the condominium unit owners to maintain a master policy insuring 
condominium units.
    (iii) Cancellation. A creditor or servicer may permit a consumer to 
cancel the escrow account required in paragraph (b)(3)(i) of this 
section only in response to a consumer's dated written request to cancel 
the escrow account that is received no earlier than 365 days after 
consummation.
    (iv) Definition of escrow account. For purposes of this section, 
``escrow account'' shall have the same meaning as in 24 CFR 3500.17(b) 
as amended.
    (4) Evasion; open-end credit. In connection with credit secured by a 
consumer's principal dwelling that does not meet the definition of open-
end credit in Sec. 226.2(a)(20), a creditor shall not structure a home-
secured loan as an open-end plan to evade the requirements of this 
section.

[Reg. Z, 73 FR 44603, July 30, 2008]

    Effective Date Note: By Reg. Z, 73 FR 44603, July 30, 2008, Sec. 
226.35 was added, effective October 1, 2009, except for (b)(3) which is 
effective on April 1, 2010.



Sec. 226.36  Prohibited acts or practices in connection with credit secured by 

a consumer's principal dwelling.

    (a) Mortgage broker defined. For purposes of this section, the term 
``mortgage broker'' means a person, other than an employee of a 
creditor, who for compensation or other monetary gain, or in expectation 
of compensation or other monetary gain, arranges, negotiates, or 
otherwise obtains an extension of consumer credit for another person. 
The term includes a person meeting this definition, even if the consumer 
credit obligation is initially payable to such person, unless the person 
provides the funds for the transaction at consummation out of the 
person's own resources, out of deposits held by the person, or by 
drawing on a bona fide warehouse line of credit.
    (b) Misrepresentation of value of consumer's dwelling--(1) Coercion 
of appraiser. In connection with a consumer credit transaction secured 
by a consumer's principal dwelling, no creditor or mortgage broker, and 
no affiliate of a creditor or mortgage broker shall directly or 
indirectly coerce, influence, or otherwise encourage an appraiser to 
misstate or misrepresent the value of such dwelling.
    (i) Examples of actions that violate this paragraph (b)(1) include:
    (A) Implying to an appraiser that current or future retention of the 
appraiser depends on the amount at which the appraiser values a 
consumer's principal dwelling;
    (B) Excluding an appraiser from consideration for future engagement 
because the appraiser reports a value of a consumer's principal dwelling 
that does not meet or exceed a minimum threshold;
    (C) Telling an appraiser a minimum reported value of a consumer's 
principal dwelling that is needed to approve the loan;
    (D) Failing to compensate an appraiser because the appraiser does 
not value a consumer's principal dwelling at or above a certain amount; 
and
    (E) Conditioning an appraiser's compensation on loan consummation.
    (ii) Examples of actions that do not violate this paragraph (b)(1) 
include:

[[Page 405]]

    (A) Asking an appraiser to consider additional information about a 
consumer's principal dwelling or about comparable properties;
    (B) Requesting that an appraiser provide additional information 
about the basis for a valuation;
    (C) Requesting that an appraiser correct factual errors in a 
valuation;
    (D) Obtaining multiple appraisals of a consumer's principal 
dwelling, so long as the creditor adheres to a policy of selecting the 
most reliable appraisal, rather than the appraisal that states the 
highest value;
    (E) Withholding compensation from an appraiser for breach of 
contract or substandard performance of services as provided by contract; 
and
    (F) Taking action permitted or required by applicable federal or 
state statute, regulation, or agency guidance.
    (2) When extension of credit prohibited. In connection with a 
consumer credit transaction secured by a consumer's principal dwelling, 
a creditor who knows, at or before loan consummation, of a violation of 
paragraph (b)(1) of this section in connection with an appraisal shall 
not extend credit based on such appraisal unless the creditor documents 
that it has acted with reasonable diligence to determine that the 
appraisal does not materially misstate or misrepresent the value of such 
dwelling.
    (3) Appraiser defined. As used in this paragraph (b), an appraiser 
is a person who engages in the business of providing assessments of the 
value of dwellings. The term ``appraiser'' includes persons that employ, 
refer, or manage appraisers and affiliates of such persons.
    (c) Servicing practices. (1) In connection with a consumer credit 
transaction secured by a consumer's principal dwelling, no servicer 
shall--
    (i) Fail to credit a payment to the consumer's loan account as of 
the date of receipt, except when a delay in crediting does not result in 
any charge to the consumer or in the reporting of negative information 
to a consumer reporting agency, or except as provided in paragraph 
(c)(2) of this section;
    (ii) Impose on the consumer any late fee or delinquency charge in 
connection with a payment, when the only delinquency is attributable to 
late fees or delinquency charges assessed on an earlier payment, and the 
payment is otherwise a full payment for the applicable period and is 
paid on its due date or within any applicable grace period; or
    (iii) Fail to provide, within a reasonable time after receiving a 
request from the consumer or any person acting on behalf of the 
consumer, an accurate statement of the total outstanding balance that 
would be required to satisfy the consumer's obligation in full as of a 
specified date.
    (2) If a servicer specifies in writing requirements for the consumer 
to follow in making payments, but accepts a payment that does not 
conform to the requirements, the servicer shall credit the payment as of 
5 days after receipt.
    (3) For purposes of this paragraph (c), the terms ``servicer'' and 
``servicing'' have the same meanings as provided in 24 CFR 3500.2(b), as 
amended.
    (d) This section does not apply to a home equity line of credit 
subject to Sec. 226.5b.

[Reg. Z, 73 FR 44604, July 30, 2008]

    Effective Date Note: By Reg. Z, 73 FR 44604, July 30, 2008, Sec. 
226.36 was added, effective October 1, 2009.



            Sec. Appendix A to Part 226--Effect on State Laws

                        Request for Determination

    A request for a determination that a State law is inconsistent or 
that a State law is substantially the same as the Act and regulation 
shall be in writing and addressed to the Secretary, Board of Governors 
of the Federal Reserve System, Washington, DC 20551. The request shall 
be made pursuant to the procedures herein and the Board's Rules of 
Procedure (12 CFR Part 262).

                          Supporting Documents

    A request for a determination shall include the following items:
    (1) The text of the State statute, regulation, or other document 
that is the subject of the request.
    (2) Any other statute, regulation, or judicial or administrative 
opinion that implements, interprets, or applies the relevant provision.
    (3) A comparison of the State law with the corresponding provision 
of the Federal law, including a full discussion of the basis for

[[Page 406]]

the requesting party's belief that the State provision is either 
inconsistent or substantially the same.
    (4) Any other information that the requesting party believes may 
assist the Board in its determination.

                     Public Notice of Determination

    Notice that the Board intends to make a determination (either on 
request or on its own motion) will be published in the Federal Register, 
with an opportunity for public comment, unless the Board finds that 
notice and opportunity for comment would be impracticable, unnecessary, 
or contrary to the public interest and publishes its reasons for such 
decision.
    Subject to the Board's Rules Regarding Availability of Information 
(12 CFR Part 261), all requests made, including any documents and other 
material submitted in support of the requests, will be made available 
for public inspection and copying.

                       Notice After Determination

    Notice of a final determination will be published in the Federal 
Register, and the Board will furnish a copy of such notice to the party 
who made the request and to the appropriate State official.

                        Reversal of Determination

    The Board reserves the right to reverse a determination for any 
reason bearing on the coverage or effect of State or Federal law.
    Notice of reversal of a determination will be published in the 
Federal Register and a copy furnished to the appropriate State official.

[Reg. Z, 46 FR 20892, Apr. 7, 1981; 46 FR 29246, June 1, 1981]



              Sec. Appendix B to Part 226--State Exemptions

                               Application

    Any State may apply to the Board for a determination that a class of 
transactions subject to State law is exempt from the requirements of the 
Act and this regulation. An application shall be in writing and 
addressed to the Secretary, Board of Governors of the Federal Reserve 
System, Washington, DC 20551, and shall be signed by the appropriate 
State official. The application shall be made pursuant to the procedures 
herein and the Board's Rules of Procedure (12 CFR Part 262).

                          Supporting Documents

    An application shall be accompanied by:
    (1) The text of the State statute or regulation that is the subject 
of the application, and any other statute, regulation, or judicial or 
administrative opinion that implements, interprets, or applies it.
    (2) A comparison of the State law with the corresponding provisions 
of the Federal law.
    (3) The text of the State statute or regulation that provides for 
civil and criminal liability and administrative enforcement of the State 
law.
    (4) A statement of the provisions for enforcement, including an 
identification of the State office that administers the relevant law, 
information on the funding and the number and qualifications of 
personnel engaged in enforcement, and a description of the enforcement 
procedures to be followed, including information on examination 
procedures, practices, and policies. If an exemption application extends 
to federally chartered institutions, the applicant must furnish evidence 
that arrangements have been made with the appropriate Federal agencies 
to ensure adequate enforcement of State law in regard to such creditors.
    (5) A statement of reasons to support the applicant's claim that an 
exemption should be granted.

                      Public Notice of Application

    Notice of an application will be published, with an opportunity for 
public comment, in the Federal Register, unless the Board finds that 
notice and opportunity for comment would be impracticable, unnecessary, 
or contrary to the public interest and publishes its reasons for such 
decision.
    Subject to the Board's Rules Regarding Availability of Information 
(12 CFR Part 261), all applications made, including any documents and 
other material submitted in support of the applications, will be made 
available for public inspection and copying. A copy of the application 
also will be made available at the Federal Reserve Bank of each district 
in which the applicant is situated.

                         Favorable Determination

    If the Board determines on the basis of the information before it 
that an exemption should be granted, notice of the exemption will be 
published in the Federal Register, and a copy furnished to the applicant 
and to each Federal official responsible for administrative enforcement.
    The appropriate State official shall inform the Board within 30 days 
of any change in its relevant law or regulations. The official shall 
file with the Board such periodic reports as the Board may require.
    The Board will inform the appropriate State official of any 
subsequent amendments to the Federal law, regulation, interpretations, 
or enforcement policies that might require an amendment to State law, 
regulation, interpretations, or enforcement procedures.

[[Page 407]]

                          Adverse Determination

    If the Board makes an initial determination that an exemption should 
not be granted, the Board will afford the applicant a reasonable 
opportunity to demonstrate further that an exemption is proper. If the 
Board ultimately finds that an exemption should not be granted, notice 
of an adverse determination will be published in the Federal Register 
and a copy furnished to the applicant.

                         Revocation of Exemption

    The Board reserves the right to revoke an exemption if at any time 
it determines that the standards required for an exemption are not met.
    Before taking such action, the Board will notify the appropriate 
State official of its intent, and will afford the official such 
opportunity as it deems appropriate in the circumstances to demonstrate 
that revocation is improper. If the Board ultimately finds that 
revocation is proper, notice of the Board's intention to revoke such 
exemption will be published in the Federal Register with a reasonable 
period of time for interested persons to comment.
    Notice of revocation of an exemption will be published in the 
Federal Register. A copy of such notice will be furnished to the 
appropriate State official and to the Federal officials responsible for 
enforcement. Upon revocation of an exemption, creditors in that State 
shall then be subject to the requirements of the Federal law.



     Sec. Appendix C to Part 226--Issuance of Staff Interpretations

                     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 130(f) 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.

         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, 
DC 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 creditors' forms, 
statements, or calculation tools or methods. This restriction does not 
apply to forms, statements, tools, or methods whose use is required or 
sanctioned by a government agency.



    Sec. Appendix D to Part 226--Multiple Advance Construction Loans

    Section 226.17(c)(6) permits creditors to treat multiple advance 
loans to finance construction of a dwelling that may be permanently 
financed by the same creditor either as a single transaction or as more 
than one transaction. If the actual schedule of advances is not known, 
the following methods may be used to estimate the interest portion of 
the finance charge and the annual percentage rate and to make 
disclosures. If the creditor chooses to disclose the construction phase 
separately, whether interest is payable periodically or at the end of 
construction, part I may be used. If the creditor chooses to disclose 
the construction and the permanent financing as one transaction, part II 
may be used.

            Part I--Construction Period Disclosed Separately

    A. If interest is payable only on the amount actually advanced for 
the time it is outstanding:
    1. Estimated interest--Assume that one-half of the commitment amount 
is outstanding at the contract interest rate for the entire construction 
period.
    2. Estimated annual percentage rate--Assume a single payment loan 
that matures at the end of the construction period. The finance charge 
is the sum of the estimated interest and any prepaid finance charge. The 
amount financed for computation purposes is determined by subtracting 
any prepaid finance charge from one-half of the commitment amount.
    3. Repayment schedule--The number and amounts of any interest 
payments may be omitted in disclosing the payment schedule under Sec. 
226.18(g). The fact that interest payments are required and the timing 
of such payments shall be disclosed.
    4. Amount financed--The amount financed for disclosure purposes is 
the entire commitment amount less any prepaid finance charge.
    B. If interest is payable on the entire commitment amount without 
regard to the dates or amounts of actual disbursement:
    1. Estimated interest--Assume that the entire commitment amount is 
outstanding at the contract interest rate for the entire construction 
period.
    2. Estimated annual percentage rate--Assume a single payment loan 
that matures at

[[Page 408]]

the end of the construction period. The finance charge is the sum of the 
estimated interest and any prepaid finance charge. The amount financed 
for computation purposes is determined by subtracting any prepaid 
finance charge from one-half of the commitment amount.
    3. Repayment schedule--Interest payments shall be disclosed in 
making the repayment schedule disclosure under Sec. 226.18(g).
[GRAPHIC] [TIFF OMITTED] TC27SE91.000


[[Page 409]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.001


[[Page 410]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.002



   Sec. Appendix E to Part 226--Rules For Card Issuers That Bill on a 
                    Transaction-By-Transaction Basis

    The following provisions of Subpart B apply if credit cards are 
issued and (1) the card issuer and the seller are the same or related 
persons; (2) no finance charge is imposed; (3) consumers are billed in 
full for each use of the card on a transaction-by-transaction basis, by 
means of an invoice or other statement reflecting each use of the card; 
and (4) no cumulative account is maintained which reflects the 
transactions by each consumer during a period of time, such as a month:
    Section 226.6(d), and, as applicable, Sec. 226.6(b) and (c). The 
disclosure required by Sec. 226.6(b) shall be limited to those charges 
that are or may be imposed as a result of the deferral of payment by use 
of the card, such as late payment or delinquency charges.
    Section 226.7(b) and Sec. 226.7(k). Creditors may comply by placing 
the required disclosures on the invoice or statement sent to the 
consumer for each transaction.
    Section 226.9(a). Creditors may comply by mailing or delivering the 
statement required by Sec. 226.6(d) (See appendix G-3) to each consumer 
receiving a transaction invoice during a one-month period chosen by the 
card issuer or by sending either the statement prescribed by Sec. 
226.6(d) or an alternative billing error rights statement substantially 
similar

[[Page 411]]

to that in appendix G-4, with each invoice sent to a consumer.
    Section 226.9(c).
    Section 226.10.
    Section 226.11. This section applies when a card issuer receives a 
payment or other credit that exceeds by more than $1 the amount due, as 
shown on the transaction invoice. The requirement to credit amounts to 
an account may be complied with by other reasonable means, such as by a 
credit memorandum. Since no periodic statement is provided, a notice of 
the credit balance shall be sent to the consumer within a reasonable 
period of time following its occurrence unless a refund of the credit 
balance is mailed or delivered to the consumer within 7 business days of 
its receipt by the card issuer.
    Section 226.12 including Sec. 226.12(c) and (d), as applicable. 
Section 226.12(e) is inapplicable.
    Section 226.13, as applicable. All references to periodic statement 
shall be read to indicate the invoice or other statement for the 
relevant transaction. All actions with regard to correcting and 
adjusting a consumer's account may be taken by issuing a refund or a new 
invoice, or by other appropriate means consistent with the purposes of 
the section.
    Section 226.15, as applicable.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 60190, Dec. 9, 
1981]



  Sec. Appendix F to Part 226--Annual Percentage Rate Computations for 
                      Certain Open-End Credit Plans

    In determining the denominator of the fraction under Sec. 
226.14(c)(3), no amount will be used more than once when adding the sum 
of the balances \1\ subject to periodic rates to the sum of the amounts 
subject to specific transaction charges. In every case, the full amount 
of transactions subject to specific transaction charges shall be 
included in the denominator. Other balances or parts of balances shall 
be included according to the manner of determining the balance subject 
to a periodic rate, as illustrated in the following examples of accounts 
on monthly billing cycles:
---------------------------------------------------------------------------

    \1\ Where a portion of the finance charge is determined by 
application of one or more daily periodic rates, the phrase sum of the 
balances shall also mean the average of daily balances.
---------------------------------------------------------------------------

    1. Previous balance--none.
    A specific transaction of $100 occurs on the first day of the 
billing cycle. The average daily balance is $100. A specific transaction 
charge of 3% is applicable to the specific transaction. The periodic 
rate is 1\1/2\% applicable to the average daily balance. The numerator 
is the amount of the finance charge, which is $4.50. The denominator is 
the amount of the transaction (which is $100), plus the amount by which 
the balance subject to the periodic rate exceeds the amount of the 
specific transactions (such excess in this case is 0), totaling $100.
    The annual percentage rate is the quotient (which is 4\1/2\%) 
multiplied by 12 (the number of months in a year), i.e., 54%.
    2. Previous balance--$100.
    A specific transaction of $100 occurs at the midpoint of the billing 
cycle. The average daily balance is $150. A specific transaction charge 
of 3% is applicable to the specific transaction. The periodic rate is 
1\1/2\% applicable to the average daily balance. The numerator is the 
amount of the finance charge which is $5.25. The denominator is the 
amount of the transaction (which is $100), plus the amount by which the 
balance subject to the periodic rate exceeds the amount of the specific 
transaction (such excess in this case is $50), totaling $150. As 
explained in example 1, the annual percentage rate is 3\1/2\% x 12 = 
42%.
    3. If, in example 2, the periodic rate applies only to the previous 
balance, the numerator is $4.50 and the denominator is $200 (the amount 
of the transaction, $100, plus the balance subject only to the periodic 
rate, the $100 previous balance). As explained in example 1, the annual 
percentage rate is 2\1/4\% x 12 = 27%.
    4. If, in example 2, the periodic rate applies only to an adjusted 
balance (previous balance less payments and credits) and the consumer 
made a payment of $50 at the midpoint of the billing cycle, the 
numerator is $3.75 and the denominator is $150 (the amount of the 
transaction, $100, plus the balance subject to the periodic rate, the 
$50 adjusted balance). As explained in example 1, the annual percentage 
rate is 2\1/2\% x 12 = 30%.
    5. Previous balance--$100.
    A specific transaction (check) of $100 occurs at the midpoint of the 
billing cycle. The average daily balance is $150. The specific 
transaction charge is $.25 per check. The periodic rate is 1\1/2\% 
applied to the average daily balance. The numerator is the amount of the 
finance charge, which is $2.50 and includes the $.25 check charge and 
the $2.25 resulting from the application of the periodic rate. The 
denominator is the full amount of the specific transaction (which is 
$100) plus the amount by which the average daily balance exceeds the 
amount of the specific transaction (which in this case is $50), totaling 
$150. As explained in example 1, the annual percentage rate would be 
1\2/3\% x 12 = 20%.
    6. Previous balance--none.
    A specific transaction of $100 occurs at the midpoint of the billing 
cycle. The average daily balance is $50. The specific transaction charge 
is 3% of the transaction amount or

[[Page 412]]

$3.00. The periodic rate is 1\1/2\% per month applied to the average 
daily balance. The numerator is the amount of the finance charge, which 
is $3.75, including the $3.00 transaction charge and $.75 resulting from 
application of the periodic rate. The denominator is the full amount of 
the specific transaction ($100) plus the amount by which the balance 
subject to the periodic rate exceeds the amount of the transaction ($0). 
Where the specific transaction amount exceeds the balance subject to the 
periodic rate, the resulting number is considered to be zero rather than 
a negative number ($50-$100=-$50). The denominator, in this case, is 
$100. As explained in example 1, the annual percentage rate is 3\3/4\% x 
12 = 45%.



      Sec. Appendix G to Part 226--Open-End Model Forms and Clauses

G-1 Balance-Computation Methods Model Clauses (Sec. Sec. 226.6 and 
          226.7)
G-2 Liability for Unauthorized Use Model Clause (Sec. 226.12)
G-3 Long-Form Billing-Error Rights Model Form (Sec. Sec. 226.6 and 
          226.9)
G-4 Alternative Billing-Error Rights Model Form (Sec. 226.9)
G-5 Rescission Model Form (When Opening an Account) (Sec. 226.15)
G-6 Rescission Model Form (For Each Transaction) (Sec. 226.15)
G-7 Rescission Model Form (When Increasing the Credit Limit) (Sec. 
          226.15)
G-8 Rescission Model Form (When Adding a Security Interest) (Sec. 
          226.15)
G-9 Rescission Model Form (When Increasing the Security) (Sec. 226.15)
G-10(A) Applications and Solicitations Model Forms (Credit Cards) (Sec. 
          226.5a(b))
G-10(B) Applications and Solicitations Sample (Credit Card) (Sec. 
          226.5a(b))
G-10(C) Applications and Solicitations Model Form (Charge Cards) (Sec. 
          226.5a(b))
G-11 Applications and Solicitations Made Available to General Public 
          Model Clauses (Sec. 226.5a(e))
G-12 Charge Card Model Clause (When Access to Plan Offered by Another) 
          (Sec. 226.5a(f))
G-13(A) Change in Insurance Provider Model Form (Combined Notice) (Sec. 
          226.9(f))
G-13(B) Change in Insurance Provider Model Form (Sec. 226.9(f)(2))
G-14A Home Equity Sample
G-14B Home Equity Sample
G-15 Home Equity Model Clauses

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[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 60191, Dec. 9, 
1981; 54 FR 13868, Apr. 6, 1989; 54 FR 24689, June 9, 1989; 55 FR 38312, 
Sept. 18, 1990; 65 FR 58908, Oct. 3, 2000]



     Sec. Appendix H to Part 226--Closed-End Model Forms and Clauses

H-1--Credit Sale Model Form (Sec. 226.18)
H-2--Loan Model Form (Sec. 226.18)
H-3--Amount Financed Itemization Model Form (Sec. 226.18(c))
H-4(A)--Variable-Rate Model Clauses (Sec. 226.18(f)(1))
H-4(B)--Variable-Rate Model Clauses (Sec. 226.18(f)(2))
H-4(C)--Variable-Rate Model Clauses (Sec. 226.19(b))
H-4(D)--Variable-Rate Model Clauses (Sec. 226.20(c))
H-5--Demand Feature Model Clauses (Sec. 226.18(I))
H-6--Assumption Policy Model Clause (Sec. 226.18(q))
H-7--Required Deposit Model Clause (Sec. 226.18(r))
H-8--Rescission Model Form (General) (Sec. 226.23)
H-9--Rescission Model Form (Refinancing With Original Creditor) (Sec. 
          226.23)
H-10--Credit Sale Sample
H-11--Installment Loan Sample
H-12--Refinancing Sample
H-13--Mortgage with Demand Feature Sample
H-14--Variable-Rate Mortgage Sample (Sec. 226.19(b))
H-15--Graduated Payment Mortgage Sample
H-16--Mortgage Sample (Sec. 226.32)

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                   H-4(C)--Variable-Rate Model Clauses

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.

            How Your Interest Rate and Payment Are Determined

     Your interest rate will be based on [an index 
plus a margin] [a formula].
     Your payment will be based on the interest rate, 
loan balance, and loan term.
--[The interest rate will be based on (identification of index) plus our 
margin. Ask for our current interest rate and margin.]
--[The interest rate will be based on (identification of formula). Ask 
us for our current interest rate.]
--Information about the index [formula for rate adjustments] is 
published [can be found] ----------------.
--[The initial interest rate is not based on the (index) (formula) used 
to make later adjustments. Ask us for the amount of current interest 
rate discounts.]

                    How Your Interest Rate Can Change

     Your interest rate can change (frequency).
     [Your interest rate cannot increase or decrease 
more than ------ percentage points at each adjustment.]
     Your interest rate cannot increase [or decrease] 
more than ------ percentage points over the term of the loan.

                       How Your Payment Can Change

     Your payment can change (frequency) based on 
changes in the interest rate.
     [Your payment cannot increase more than (amount 
or percentage) at each adjustment.]
     You will be notified in writing -------- days 
before the due date of a payment at a new level. This notice will 
contain information about your interest rates, payment amount, and loan 
balance.
     [You will be notified once each year during which 
interest rate adjustments, but no payment adjustments, have been made to 
your loan. This notice will contain information about your interest 
rates, payment amount, and loan balance.]
     [For example, on a $10,000 [term] loan with an 
initial interest rate of -------- [(the rate shown in the interest rate 
column below for the year 19 --------)] [(in effect (month) (year)], the 
maximum amount that the interest rate can rise under this program is --
------ percentage points, to --------%, and the monthly payment can rise 
from a first-year payment of $-------- to a maximum of $-------- in the 
---------- year. To see what your payments would be, divide your 
mortgage amount by $10,000; then multiply the monthly payment by that 
amount. (For example, the monthly payment for a mortgage amount of 
$60,000 would be: $60,000 / $10,000 = 6; 6 x -------- = $-------- per 
month.)]

                                [Example

    The example below shows how your payments would have changed under 
this ARM program based on actual changes in the index from 1982 to 1996. 
This does not necessarily indicate how your index will change in the 
future.
    The example is based on the following assumptions:

 
 
 
Amount...................................  $10,000
Term.....................................  ----------
Change date..............................  ----------
Payment adjustment.......................  (frequency)
Interest adjustment......................  (frequency)
[Margin] *...............................  --------
Caps -------- [periodic interest rate
 cap]
 -------- [lifetime interest rate cap
 -------- [payment cap]
[Interest rate carryover]
[Negative amortization]
[Interest rate discount] **
Index.......(identification of index or
 formula)
 
* This is a margin we have used recently, your margin may be different.
** This is the amount of a discount we have provided recently; your loan
  may be discounted by a different amount.]


----------------------------------------------------------------------------------------------------------------
                                                             Margin
                   Year                      Index  (%)    (Percentage    Interest       Monthly      Remaining
                                                             points)      Rate  (%)   Payment  ($)  Balance  ($)
----------------------------------------------------------------------------------------------------------------
1982......................................  ............  ............  ............  ............  ............
1983......................................  ............  ............  ............  ............  ............
1984......................................  ............  ............  ............  ............  ............
1985......................................  ............  ............  ............  ............  ............
1986......................................  ............  ............  ............  ............  ............
1987......................................  ............  ............  ............  ............  ............
1988......................................  ............  ............  ............  ............  ............
1989......................................  ............  ............  ............  ............  ............
1990......................................  ............  ............  ............  ............  ............
1991......................................  ............  ............  ............  ............  ............
1992......................................  ............  ............  ............  ............  ............

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1993......................................  ............  ............  ............  ............  ............
1994......................................  ............  ............  ............  ............  ............
1995......................................  ............  ............  ............  ............  ............
1996......................................  ............  ............  ............  ............  ............
----------------------------------------------------------------------------------------------------------------
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
  multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount
  of $60,000 taken out in 1982 would be: $60,000/$10,000=6; 6x--------=$-------- per month.)

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     H-9--Rescission Model Form (Refinancing with Original Creditor)

                        NOTICE OF RIGHT TO CANCEL

                          Your Right To Cancel

    You are entering into a new transaction to increase the amount of 
credit previously provided to you. Your home is the security for this 
new transaction. You have a legal right under federal law to cancel this 
new transaction, without cost, within three business days from whichever 
of the following events occurs last:
    (1) the date of this new transaction, which is ----------------; or
    (2) the date you received your new Truth in Lending disclosures; or
    (3) the date you received this notice of your right to cancel.
    If you cancel this new transaction, it will not affect any amount 
that you presently owe. Your home is the security for that amount. 
Within 20 calendar days after we receive your notice of cancellation of 
this new transaction, we must take the steps necessary to reflect the 
fact that your home does not secure the increase of credit. We must also 
return any money you have given to us or anyone else in connection with 
this new transaction.
    You may keep any money we have given you in this new transaction 
until we have done the things mentioned above, but you must then offer 
to return the money at the address below.
    If we do not take possession of the money within 20 calendar days of 
your offer, you may keep it without further obligation.

                              How To Cancel

    If you decide to cancel this new transaction, you may do so by 
notifying us in writing, at

________________________________________________________________________
(Creditor's name and business address).
    You may use any written statement that is signed and dated by you 
and states your intention to cancel, or you may use this notice by 
dating and signing below. Keep one copy of this notice because it 
contains important information about your rights.
    If you cancel by mail or telegram, you must send the notice no later 
than midnight of

________________________________________________________________________

(Date)__________________________________________________________________

(or midnight of the third business day following the latest of the three 
events listed above).
    If you send or deliver your written notice to cancel some other way, 
it must be delivered to the above address no later than that time.

I WISH TO CANCEL

________________________________________________________________________

Consumer's Signature
________________________________________________________________________

Date

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                   H-14--Variable-Rate Mortgage Sample

    This disclosure describes the features of the adjustable-rate 
mortgage (ARM) program you are considering. Information on other ARM 
programs is available upon request.

            How Your Interest Rate and Payment Are Determined

     Your interest rate will be based on an index rate 
plus a margin.
     Your payment will be based on the interest rate, 
loan balance, and loan term.

--The interest rate will be based on the weekly average yield on United 
States Treasury securities adjusted to a constant maturity of 1 year 
(your index), plus our margin. Ask us for our current interest rate and 
margin.
--Information about the index rate is published weekly in the Wall 
Street Journal.
     Your interest rate will equal the index rate plus 
our margin unless your interest rate ``caps'' limit the amount of change 
in the interest rate.

                    How Your Interest Rate Can Change

     Your interest rate can change yearly.
     Your interest rate cannot increase or decrease 
more than 2 percentage points per year.
     Your interest rate cannot increase or decrease 
more than 5 percentage points over the term of the loan.

[[Page 443]]

                   How Your Monthly Payment Can Change

     Your monthly payment can increase or decrease 
substantially based on annual changes in the interest rate.
     [For example, on a $10,000, 30-year loan with an 
initial interest rate of 12.41 percent in effect in July 1996, the 
maximum amount that the interest rate can rise under this program is 5 
percentage points, to 17.41 percent, and the monthly payment can rise 
from a first-year payment of $106.03 to a maximum of $145.34 in the 
fourth year. To see what your payment is, divide your mortgage amount by 
$10,000; then multiply the monthly payment by that amount. (For example, 
the monthly payment for a mortgage amount of $60,000 would be: $60,000/
$10,000=6; 6x106.03=$636.18 per month.)
     You will be notified in writing 25 days before 
the annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan balance.]

                                [Example

    The example below shows how your payments would have changed under 
this ARM program based on actual changes in the index from 1982 to 1996. 
This does not necessarily indicate how your index will change in the 
future. The example is based on the following assumptions:

Amount.................................  $10,000
Term...................................  30 years
Payment adjustment.....................  1 year
Interest adjustment....................  1 year
Margin.................................  3 percentage points
Caps-------- 2 percentage points annual interest rate
 -------- 5 percentage points lifetime interest rate
Index-------- Weekly average yield on U.S. Treasury securities adjusted
 to a constant maturity of one year.
 


----------------------------------------------------------------------------------------------------------------
                                                             Margin*
   Year  (as of 1st week ending in July)     Index  (%)    (percentage    Interest       Monthly      Remaining
                                                             points)      Rate  (%)   Payment  ($)  Balance  ($)
----------------------------------------------------------------------------------------------------------------
1982......................................         14.41             3         17.41        145.90      9,989.37
1983......................................          9.78             3       **15.41        129.81      9,969.66
1984......................................         12.17             3         15.17        127.91      9,945.51
1985......................................          7.66             3       **13.17        112.43      9,903.70
1986......................................          6.36             3      ***12.41        106.73      9,848.94
1987......................................          6.71             3      ***12.41        106.73      9,786.98
1988......................................          7.52             3      ***12.41        106.73      9,716.88
1989......................................          7.97             3      ***12.41        106.73      9,637.56
1990......................................          8.06             3      ***12.41        106.73      9,547.83
1991......................................          6.40             3      ***12.41        106.73      9,446.29
1992......................................          3.96             3      ***12.41        106.73      9,331.56
1993......................................          3.42             3      ***12.41        106.73      9,201.61
1994......................................          5.47             3      ***12.41        106.73      9,054.72
1995......................................          5.53             3      ***12.41        106.73      8,888.52
1996......................................          5.82             3      ***12.41        106.73      8,700.37
----------------------------------------------------------------------------------------------------------------
*This is a margin we have used recently; your margin may be different.
**This interest rate reflects a 2 percentage point annual interest rate cap.
***This interest rate reflects a 5 percentage point lifetime interest rate cap.
Note: To see what your payments would have been during that period, divide your mortgage amount by $10,000; then
  multiply the monthly payment by that amount. (For example, in 1996 the monthly payment for a mortgage amount
  of $60,000 taken out in 1982 would be: $60,000/$10,000=6; 6x$106.73=$640.38.)

     You will be notified in writing 25 days before 
the annual payment adjustment may be made. This notice will contain 
information about your interest rates, payment amount and loan balance.]

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[46 FR 20892, Apr. 7, 1981, as amended at 46 FR 29246, June 1, 1981; 52 
FR 52 FR 48671, Dec. 24, 1987; 53 FR 467, Jan. 7, 1988; Reg. Z, 60 FR 
15473, Mar. 24, 1995; 61 FR 49247, Sept. 19, 1996; 62 FR 63444, 63445, 
Dec. 1, 1997; 62 FR 66179, Dec. 17, 1997; Reg. Z, 63 FR 2723, Jan. 16, 
1998; 66 FR 65618, Dec. 20, 2001]



        Sec. Appendix I to Part 226--Federal Enforcement Agencies

    The following list indicates which federal agency enforces 
Regulation Z for particular classes of businesses. 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).

[[Page 446]]

  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.

 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.

  Non-member 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

    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 Packers and Stockyards Act

    Nearest Packers and Stockyards Administration area supervisor.

Federal Land Banks, Federal Land Bank Associations, Federal Intermediate 
            Credit Banks and Production Credit Associations.

    Farm Credit Administration, 490 L'Enfant Plaza, SW., Washington, DC 
20578.

    Retail, Department Stores, Consumer Finance Companies, All Other 
Creditors, and All Nonbank Credit Card Issuers (Creditors 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.

[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 50 FR 8708, Mar. 5, 
1985; 54 FR 53539, Dec. 29, 1989; 56 FR 51322, Oct. 11, 1991; 57 FR 
20400, May 13, 1992]



  Sec. Appendix J to Part 226--Annual Percentage Rate Computations for 
                     Closed-End Credit Transactions

                            (a) Introduction

    (1) Section 226.22(a) of Regulation Z provides that the annual 
percentage rate for other than open end credit transactions shall be 
determined in accordance with either the actuarial method or the United 
States Rule method. This appendix contains an explanation of the 
actuarial method as well as equations, instructions and examples of how 
this method applies to single advance and multiple advance transactions.
    (2) Under the actuarial method, at the end of each unit-period (or 
fractional unit-period) the unpaid balance of the amount financed is 
increased by the finance charge earned during that period and is 
decreased by the total payment (if any) made at the end of that period. 
The determination of unit-periods and fractional unit-periods shall be 
consistent with the definitions and rules in paragraphs (b) (3), (4) and 
(5) of this section and the general equation in paragraph (b)(8) of this 
section.
    (3) In contrast, under the United States Rule method, at the end of 
each payment period, the unpaid balance of the amount financed is 
increased by the finance charge earned during that payment period and is 
decreased by the payment made at the end of that payment period. If the 
payment is less than the finance charge earned, the adjustment of the 
unpaid balance of the amount financed is postponed until the end of the 
next payment period. If at that time the sum of the two payments is 
still less than the total earned finance charge for the two payment 
periods, the adjustment of the unpaid balance of the amount financed is 
postponed still another payment period, and so forth.

         (b) Instructions and Equations for the Actuarial Method

                            (1) General Rule

    The annual percentage rate shall be the nominal annual percentage 
rate determined

[[Page 447]]

by multiplying the unit-period rate by the number of unit-periods in a 
year.

                       (2) Term of the Transaction

    The term of the transaction begins on the date of its consummation, 
except that if the finance charge or any portion of it is earned 
beginning on a later date, the term begins on the later date. The term 
ends on the date the last payment is due, except that if an advance is 
scheduled after that date, the term ends on the later date. For 
computation purposes, the length of the term shall be equal to the time 
interval between any point in time on the beginning date to the same 
point in time on the ending date.

                    (3) Definitions of Time Intervals

    (i) A period is the interval of time between advances or between 
payments and includes the interval of time between the date the finance 
charge begins to be earned and the date of the first advance thereafter 
or the date of the first payment thereafter, as applicable.
    (ii) A common period is any period that occurs more than once in a 
transaction.
    (iii) A standard interval of time is a day, week, semimonth, month, 
or a multiple of a week or a month up to, but not exceeding, 1 year.
    (iv) All months shall be considered equal. Full months shall be 
measured from any point in time on a given date of a given month to the 
same point in time on the same date of another month. If a series of 
payments (or advances) is scheduled for the last day of each month, 
months shall be measured from the last day of the given month to the 
last day of another month. If payments (or advances) are scheduled for 
the 29th or 30th of each month, the last day of February shall be used 
when applicable.

                             (4) Unit-period

    (i) In all transactions other than a single advance, single payment 
transaction, the unit-period shall be that common period, not to exceed 
1 year, that occurs most frequently in the transaction, except that
    (A) If 2 or more common periods occur with equal frequency, the 
smaller of such common periods shall be the unit-period; or
    (B) If there is no common period in the transaction, the unit-period 
shall be that period which is the average of all periods rounded to the 
nearest whole standard interval of time. If the average is equally near 
2 standard intervals of time, the lower shall be the unit-period.
    (ii) In a single advance, single payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed 1 
year.

            (5) Number of Unit-periods Between 2 Given Dates

    (i) The number of days between 2 dates shall be the number of 24-
hour intervals between any point in time on the first date to the same 
point in time on the second date.
    (ii) If the unit-period is a month, the number of full unit-periods 
between 2 dates shall be the number of months measured back from the 
later date. The remaining fraction of a unit-period shall be the number 
of days measured forward from the earlier date to the beginning of the 
first full unit-period, divided by 30. If the unit-period is a month, 
there are 12 unit-periods per year.
    (iii) If the unit-period is a semimonth or a multiple of a month not 
exceeding 11 months, the number of days between 2 dates shall be 30 
times the number of full months measured back from the later date, plus 
the number of remaining days. The number of full unit-periods and the 
remaining fraction of a unit-period shall be determined by dividing such 
number of days by 15 in the case of a semimonthly unit-period or by the 
appropriate multiple of 30 in the case of a multimonthly unit-period. If 
the unit-period is a semimonth, the number of unit-periods per year 
shall be 24. If the number of unit-periods is a multiple of a month, the 
number of unit-periods per year shall be 12 divided by the number of 
months per unit-period.
    (iv) If the unit-period is a day, a week, or a multiple of a week, 
the number of full unit-periods and the remaining fractions of a unit-
period shall be determined by dividing the number of days between the 2 
given dates by the number of days per unit-period. If the unit-period is 
a day, the number of unit-periods per year shall be 365. If the unit-
period is a week or a multiple of a week, the number of unit-periods per 
year shall be 52 divided by the number of weeks per unit-period.
    (v) If the unit-period is a year, the number of full unit-periods 
between 2 dates shall be the number of full years (each equal to 12 
months) measured back from the later date. The remaining fraction of a 
unit-period shall be
    (A) The remaining number of months divided by 12 if the remaining 
interval is equal to a whole number of months, or
    (B) The remaining number of days divided by 365 if the remaining 
interval is not equal to a whole number of months.
    (vi) In a single advance, single payment transaction in which the 
term is less than a year and is equal to a whole number of months, the 
number of unit-periods in the term shall be 1, and the number of unit-
periods per year shall be 12 divided by the number of months in the term 
or 365 divided by the number of days in the term.
    (vii) In a single advance, single payment transaction in which the 
term is less than a year and is not equal to a whole number of

[[Page 448]]

months, the number of unit-periods in the term shall be 1, and the 
number of unit-periods per year shall be 365 divided by the number of 
days in the term.

           (6) Percentage Rate for a Fraction of a Unit-period

    The percentage rate of finance charge for a fraction (less than 1) 
of a unit-period shall be equal to such fraction multiplied by the 
percentage rate of finance charge per unit-period.
[GRAPHIC] [TIFF OMITTED] TC27SE91.038


[[Page 449]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.039


[[Page 450]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.040


[[Page 451]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.041


[[Page 452]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.042


[[Page 453]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.043


[[Page 454]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.044


[[Page 455]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.045


[[Page 456]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.046


[[Page 457]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.047


[Reg. Z, 46 FR 20892, Apr. 7, 1981, as amended at 46 FR 29246, June 1, 
1981]

[[Page 458]]



 Sec. Appendix K to Part 226--Total Annual Loan Cost Rate Computations 
                    for Reverse Mortgage Transactions

    (a) Introduction. Creditors are required to disclose a series of 
total annual loan cost rates for each reverse mortgage transaction. This 
appendix contains the equations creditors must use in computing the 
total annual loan cost rate for various transactions, as well as 
instructions, explanations, and examples for various transactions. This 
appendix is modeled after appendix J of this part (Annual Percentage 
Rates Computations for Closed-end Credit Transactions); creditors should 
consult appendix J of this part for additional guidance in using the 
formulas for reverse mortgages.
    (b) Instructions and equations for the total annual loan cost rate--
(1) General rule. The total annual loan cost rate shall be the nominal 
total annual loan cost rate determined by multiplying the unit-period 
rate by the number of unit-periods in a year.
    (2) Term of the transaction. For purposes of total annual loan cost 
disclosures, the term of a reverse mortgage transaction is assumed to 
begin on the first of the month in which consummation is expected to 
occur. If a loan cost or any portion of a loan cost is initially 
incurred beginning on a date later than consummation, the term of the 
transaction is assumed to begin on the first of the month in which that 
loan cost is incurred. For purposes of total annual loan cost 
disclosures, the term ends on each of the assumed loan periods specified 
in Sec. 226.33(c)(6).
    (3) Definitions of time intervals.
    (i) A period is the interval of time between advances.
    (ii) A common period is any period that occurs more than once in a 
transaction.
    (iii) A standard interval of time is a day, week, semimonth, month, 
or a multiple of a week or a month up to, but not exceeding, 1 year.
    (iv) All months shall be considered to have an equal number of days.
    (4) Unit-period. (i) In all transactions other than single-advance, 
single-payment transactions, the unit-period shall be that common 
period, not to exceed one year, that occurs most frequently in the 
transaction, except that:
    (A) If two or more common periods occur with equal frequency, the 
smaller of such common periods shall be the unit-period; or
    (B) If there is no common period in the transaction, the unit-period 
shall be that period which is the average of all periods rounded to the 
nearest whole standard interval of time. If the average is equally near 
two standard intervals of time, the lower shall be the unit-period.
    (ii) In a single-advance, single-payment transaction, the unit-
period shall be the term of the transaction, but shall not exceed one 
year.
    (5) Number of unit-periods between two given dates. (i) The number 
of days between two dates shall be the number of 24-hour intervals 
between any point in time on the first date to the same point in time on 
the second date.
    (ii) If the unit-period is a month, the number of full unit-periods 
between two dates shall be the number of months. If the unit-period is a 
month, the number of unit-periods per year shall be 12.
    (iii) If the unit-period is a semimonth or a multiple of a month not 
exceeding 11 months, the number of days between two dates shall be 30 
times the number of full months. The number of full unit-periods shall 
be determined by dividing the number of days by 15 in the case of a 
semimonthly unit-period or by the appropriate multiple of 30 in the case 
of a multimonthly unit-period. If the unit-period is a semimonth, the 
number of unit-periods per year shall be 24. If the number of unit-
periods is a multiple of a month, the number of unit-periods per year 
shall be 12 divided by the number of months per unit-period.
    (iv) If the unit-period is a day, a week, or a multiple of a week, 
the number of full unit-periods shall be determined by dividing the 
number of days between the two given dates by the number of days per 
unit-period. If the unit-period is a day, the number of unit-periods per 
year shall be 365. If the unit-period is a week or a multiple of a week, 
the number of unit-periods per year shall be 52 divided by the number of 
weeks per unit-period.
    (v) If the unit-period is a year, the number of full unit-periods 
between two dates shall be the number of full years (each equal to 12 
months).
    (6) Symbols. The symbols used to express the terms of a transaction 
in the equation set forth in paragraph (b)(8) of this appendix are 
defined as follows:

Aj=The amount of each periodic or lump-sum advance to the 
consumer under the reverse mortgage transaction.
i=Percentage rate of the total annual loan cost per unit-period, 
expressed as a decimal equivalent.
j=The number of unit-periods until the jth advance.
n=The number of unit-periods between consummation and repayment of the 
debt.
Pn=Min (Baln, Valn). This is the 
maximum amount that the creditor can be repaid at the specified loan 
term.
Baln=Loan balance at time of repayment, including all costs 
and fees incurred by the consumer (including any shared appreciation or 
shared equity amount) compounded to time n at the creditor's contract 
rate of interest.
Valn=Val0 (1 + [sigma])\y\, where Val0 
is the property value at consummation, [sigma] is the assumed

[[Page 459]]

annual rate of appreciation for the dwelling, and y is the number of 
years in the assumed term. Valn must be reduced by the amount 
of any equity reserved for the consumer by agreement between the 
parties, or by 7 percent (or the amount or percentage specified in the 
credit agreement), if the amount required to be repaid is limited to the 
net proceeds of sale.
[sigma] = The summation operator.
    Symbols used in the examples shown in this appendix are defined as 
follows:
[GRAPHIC] [TIFF OMITTED] TR24MR95.015

[GRAPHIC] [TIFF OMITTED] TR24MR95.007

w=The number of unit-periods per year.
I=wi x 100=the nominal total annual loan cost rate.
    (7) General equation. The total annual loan cost rate for a reverse 
mortgage transaction must be determined by first solving the following 
formula, which sets forth the relationship between the advances to the 
consumer and the amount owed to the creditor under the terms of the 
reverse mortgage agreement for the loan cost rate per unit-period (the 
loan cost rate per unit-period is then multiplied by the number of unit-
periods per year to obtain the total annual loan cost rate I; that is, I 
= wi):
[GRAPHIC] [TIFF OMITTED] TR24MR95.008

    (8) Solution of general equation by iteration process. (i) The 
general equation in paragraph (b)(7) of this appendix, when applied to a 
simple transaction for a reverse mortgage loan of equal monthly advances 
of $350 each, and with a total amount owed of $14,313.08 at an assumed 
repayment period of two years, takes the special form:
[GRAPHIC] [TIFF OMITTED] TR24MR95.009

Using the iteration procedures found in steps 1 through 4 of (b)(9)(i) 
of appendix J of this part, the total annual loan cost rate, correct to 
two decimals, is 48.53%.
    (ii) In using these iteration procedures, it is expected that 
calculators or computers will be programmed to carry all available 
decimals throughout the calculation and that enough iterations will be 
performed to make virtually certain that the total annual loan cost rate 
obtained, when rounded to two decimals, is correct. Total annual loan 
cost rates in the examples below were obtained by using a 10-digit 
programmable calculator and the iteration procedure described in 
appendix J of this part.
    (9) Assumption for discretionary cash advances. If the consumer 
controls the timing of advances made after consummation (such as in a 
credit line arrangement), the creditor must use the general formula in 
paragraph (b)(7) of this appendix. The total annual loan cost rate shall 
be based on the assumption that 50 percent of the principal loan amount 
is advanced at closing, or in the case of an open-end transaction, at 
the time the consumer becomes obligated under the plan. Creditors shall 
assume the advances are made at the interest rate then in effect and 
that no further advances are made to, or repayments made by, the 
consumer during the term of the transaction or plan.
    (10) Assumption for variable-rate reverse mortgage transactions. If 
the interest rate for a reverse mortgage transaction may increase during 
the loan term and the amount or timing is not known at consummation, 
creditors shall base the disclosures on the initial interest rate in 
effect at the time the disclosures are provided.
    (11) Assumption for closing costs. In calculating the total annual 
loan cost rate, creditors shall assume all closing and other consumer 
costs are financed by the creditor.
    (c) Examples of total annual loan cost rate computations--(1) Lump-
sum advance at consummation.

Lump-sum advance to consumer at consummation: $30,000
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 11.60%
Estimated time of repayment (based on life expectancy of a consumer at 
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 4%
P10 = Min (103,385.84, 137,662.72)

[[Page 460]]

[GRAPHIC] [TIFF OMITTED] TR29SE95.004

i = .1317069438
Total annual loan cost rate (100(.1317069438 x 1)) = 13.17%
    (2) Monthly advance beginning at consummation.

Monthly advance to consumer, beginning at consummation: $492.51
Total of consumer's loan costs financed at consummation: $4,500
Contract interest rate: 9.00%
Estimated time of repayment (based on life expectancy of a consumer at 
age 78): 10 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR24MR95.011

Total annual loan cost rate (100(.009061140 x 12))=10.87%
    (3) Lump sum advance at consummation and monthly advances 
thereafter.
Lump sum advance to consumer at consummation: $10,000
Monthly advance to consumer, beginning at consummation: $725
Total of consumer's loan costs financed at consummation: $4,500
Contract rate of interest: 8.5%
Estimated time of repayment (based on life expectancy of a consumer at 
age 75): 12 years
Appraised value of dwelling at consummation: $100,000
Assumed annual dwelling appreciation rate: 8%
[GRAPHIC] [TIFF OMITTED] TR24MR95.012

Total annual loan cost rate (100(.007708844 x 12)) = 9.25%
    (d) Reverse mortgage model form and sample form--(1) Model form.

                       Total Annual Loan Cost Rate

                               Loan Terms

Age of youngest borrower:
Appraised property value:
Interest rate:
Monthly advance:
Initial draw:
Line of credit:

                          Initial Loan Charges

Closing costs:
Mortgage insurance premium:
Annuity cost:

                          Monthly Loan Charges

Servicing fee:

                             Other Charges:

Mortgage insurance:
Shared Appreciation:

                            Repayment Limits

[[Page 461]]



----------------------------------------------------------------------------------------------------------------
                                                                          Total annual loan cost rate
                                                             ---------------------------------------------------
                 Assumed annual appreciation                  2-year loan    [ ]-year     [ ]-year     [ ]-year
                                                                  term      loan term]   loan term    loan term
----------------------------------------------------------------------------------------------------------------
0%..........................................................  ...........          [ ]
4%..........................................................  ...........          [ ]
8%..........................................................  ...........          [ ]
----------------------------------------------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you keep 
the loan and how much your house appreciates in value. Generally, the 
longer you keep a reverse mortgage, the lower the total annual loan cost 
rate will be.
    This table shows the estimated cost of your reverse mortgage loan, 
expressed as an annual rate. It illustrates the cost for three [four] 
loan terms: 2 years, [half of life expectancy for someone your age,] 
that life expectancy, and 1.4 times that life expectancy. The table also 
shows the cost of the loan, assuming the value of your home appreciates 
at three different rates: 0%, 4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically include 
principal, interest, closing costs, mortgage insurance premiums, annuity 
costs, and servicing costs (but not costs when you sell the home).
    The rates in this table are estimates. Your actual cost may differ 
if, for example, the amount of your loan advances varies or the interest 
rate on your mortgage changes.

 Signing an Application or Receiving These Disclosures Does Not Require 
                        You To Complete This Loan

    (2) Sample Form.

                       Total Annual Loan Cost Rate

                               Loan Terms

Age of youngest borrower: 75
Appraised property value: $100,000
Interest rate: 9%
Monthly advance: $301.80
Initial draw: $1,000
Line of credit: $4,000

                          Initial Loan Charges

Closing costs: $5,000
Mortgage insurance premium: None
Annuity cost: None

                          Monthly Loan Charges

Servicing fee: None

                              Other Charges

Mortgage insurance: None
Shared Appreciation: None

                            Repayment Limits

Net proceeds estimated at 93% of projected home sale

----------------------------------------------------------------------------------------------------------------
                                                                          Total annual loan cost rate
                                                             ---------------------------------------------------
                 Assumed annual appreciation                  2-year loan    [6-year      12-year      17-year
                                                                  term      loan term]   loan term    loan term
----------------------------------------------------------------------------------------------------------------
0%..........................................................       39.00%     [14.94%]        9.86%        3.87%
4%..........................................................       39.00%     [14.94%]       11.03%       10.14%
8%..........................................................       39.00%     [14.94%]       11.03%       10.20%
----------------------------------------------------------------------------------------------------------------

    The cost of any reverse mortgage loan depends on how long you keep 
the loan and how much your house appreciates in value. Generally, the 
longer you keep a reverse mortgage, the lower the total annual loan cost 
rate will be.
    This table shows the estimated cost of your reverse mortgage loan, 
expressed as an annual rate. It illustrates the cost for three [four] 
loan terms: 2 years, [half of life expectancy for someone your age,] 
that life expectancy, and 1.4 times that life expectancy. The table also 
shows the cost of the loan, assuming the value of your home appreciates 
at three different rates: 0%,4% and 8%.
    The total annual loan cost rates in this table are based on the 
total charges associated with this loan. These charges typically include 
principal, interest, closing costs, mortgage insurance premiums, annuity 
costs, and servicing costs (but not disposition costs--costs when you 
sell the home).
    The rates in this table are estimates. Your actual cost may differ 
if, for example, the amount of your loan advances varies or the interest 
rate on your mortgage changes.

[[Page 462]]

 Signing an Application or Receiving These Disclosures Does Not Require 
                        You To Complete This Loan

[Reg. Z, 60 FR 15474, Mar. 24, 1995, as amended at 60 FR 50400, Sept. 
29, 1995]



 Sec. Appendix L to Part 226--Assumed Loan Periods for Computations of 
                      Total Annual Loan Cost Rates

    (a) Required tables. In calculating the total annual loan cost rates 
in accordance with appendix K of this part, creditors shall assume three 
loan periods, as determined by the following table.
    (b) Loan periods.
    (1) Loan Period 1 is a two-year loan period.
    (2) Loan Period 2 is the life expectancy in years of the youngest 
borrower to become obligated on the reverse mortgage loan, as shown in 
the U.S. Decennial Life Tables for 1979-1981 for females, rounded to the 
nearest whole year.
    (3) Loan Period 3 is the life expectancy figure in Loan Period 3, 
multiplied by 1.4 and rounded to the nearest full year (life expectancy 
figures at .5 have been rounded up to 1).
    (4) At the creditor's option, an additional period may be included, 
which is the life expectancy figure in Loan Period 2, multiplied by .5 
and rounded to the nearest full year (life expectancy figures at .5 have 
been rounded up to 1).

----------------------------------------------------------------------------------------------------------------
                                                                                        Loan period
                                                              Loan period   [Optional     2 (life    Loan period
                  Age of youngest borrower                       1 (in     loan period  expectancy)     3 (in
                                                                 years)    (in years)]   (in years)     years)
----------------------------------------------------------------------------------------------------------------
62..........................................................            2         [11]           21           29
63..........................................................            2         [10]           20           28
64..........................................................            2         [10]           19           27
65..........................................................            2          [9]           18           25
66..........................................................            2          [9]           18           25
67..........................................................            2          [9]           17           24
68..........................................................            2          [8]           16           22
69..........................................................            2          [8]           16           22
70..........................................................            2          [8]           15           21
71..........................................................            2          [7]           14           20
72..........................................................            2          [7]           13           18
73..........................................................            2          [7]           13           18
74..........................................................            2          [6]           12           17
75..........................................................            2          [6]           12           17
76..........................................................            2          [6]           11           15
77..........................................................            2          [5]           10           14
78..........................................................            2          [5]           10           14
79..........................................................            2          [5]            9           13
80..........................................................            2          [5]            9           13
81..........................................................            2          [4]            8           11
82..........................................................            2          [4]            8           11
83..........................................................            2          [4]            7           10
84..........................................................            2          [4]            7           10
85..........................................................            2          [3]            6            8
86..........................................................            2          [3]            6            8
87..........................................................            2          [3]            6            8
88..........................................................            2          [3]            5            7
89..........................................................            2          [3]            5            7
90..........................................................            2          [3]            5            7
91..........................................................            2          [2]            4            6
92..........................................................            2          [2]            4            6
93..........................................................            2          [2]            4            6
94..........................................................            2          [2]            4            6
95 and over.................................................            2          [2]            3            4
----------------------------------------------------------------------------------------------------------------


[60 FR 15476, Mar. 24, 1995]



      Sec. Supplement I to Part 226--Official Staff Interpretations

                              Introduction

    1. Official status. This commentary is the vehicle by which the 
staff of the Division of Consumer and Community Affairs of the Federal 
Reserve Board issues official staff interpretations of Regulation Z, as 
revised effective April 1, 1981. Good faith compliance with this 
commentary affords protection from liability under 130(f) of the Truth 
in Lending Act. Section 130(f) (15 U.S.C. 1640) protects creditors 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.

[[Page 463]]

    2. Procedure for requesting interpretations. Under appendix C of the 
regulation, 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. Status of previous interpretations. All statements and opinions 
issued by the Federal Reserve Board and its staff interpreting previous 
Regulation Z remain effective until October 1, 1982, only insofar as 
they interpret that regulation. When compliance with revised Regulation 
Z becomes mandatory on October 1, 1982, the Board and staff 
interpretations of the previous regulation will be entirely superseded 
by the revised regulation and this commentary except with regard to 
liability under the previous regulation.
    4. Rules of construction. (a) Lists that appear in the commentary 
may be exhaustive or illustrative; the appropriate construction should 
be clear from the context. In most cases, illustrative lists are 
introduced by phrases such as ``including, but not limited to,'' ``among 
other things,'' ``for example,'' or ``such as.''
    (b) Throughout the commentary and regulation, reference to the 
regulation should be construed to refer to revised Regulation Z, unless 
the context indicates that a reference to previous Regulation Z is also 
intended.
    (c) Throughout the commentary, reference to ``this section'' or 
``this paragraph'' means the section or paragraph in the regulation that 
is the subject of the comment.
    5. Comment designations. Each comment in the commentary is 
identified by a number and the regulatory section or paragraph which 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. 226.18(b) are further divided by 
paragraph, such as Comment 18(b)(1)-1 and Comment 18(b)(2)-1. In other 
cases, comments have more general application and are designated, for 
example, as Comment 18-1 or Comment 18(b)-1. This introduction may be 
cited as Comments I-1 through I-7. Comments to the appendices may be 
cited, for example, as Comment app. A-1.
    6. Cross-references. The following cross-references to related 
material appear at the end of each section of the commentary:
    (a) ``Statute''--those sections of the Truth in Lending Act on which 
the regulatory provision is based (and any other relevant statutes);
    (b) ``Other sections''--other provisions in the regulation necessary 
to understand that section;
    (c) ``Previous regulation''--parallel provisions in previous 
Regulation Z; and
    (d) ``1981 changes''--a brief description of the major changes made 
by the 1981 revisions to Regulation Z.

Where appropriate a fifth category (``Other regulations'') provides 
cross-references to other regulations.
    7. Transition rules. (a) Though compliance with the revised 
regulation is not mandatory until April 1, 1982, creditors may begin 
complying as of April 1, 1981. During the intervening year, a creditor 
may convert its entire operation to the new requirements at one time, or 
it may convert to the new requirements in stages. In general, however, a 
creditor may not mix the regulatory requirements when making disclosures 
for a particular closed-end transaction or open-end account; all the 
disclosures for a single closed-end transaction (or open-end account) 
must be made in accordance with the previous regulation, or all the 
disclosures must be made in accordance with the revised regulation. As 
an exception to the general rule, the revised rescission rules and the 
revised advertising rules may be followed even if the disclosures are 
based on the previous regulation. For purposes of this regulation, the 
creditor is not required to take any particular action beyond the 
requirements of the revised regulation to indicate its conversion to the 
revised regulation.
    (b) The revised regulation may be relied on to determine if any 
disclosures are required for a particular transaction or to determine if 
a person is a creditor subject to Truth in Lending requirements, whether 
or not other operations have been converted to the revised regulation. 
For example, layaway plans are not subject to the revised regulation, 
nor are oral agreements to lend money if there is no finance charge. 
These provisions may be relied on even if the creditor is making other 
disclosures under the previous regulation. The new rules governing 
whether or not disclosures must be made for refinancings and assumptions 
are also available to a creditor that has not yet converted its 
operations to the revised regulation.
    (c) In addition to the above rules, applicable to both open-end and 
closed-end credit, the following guidelines are relevant to open-end 
credit:

     The creditor need not remake initial disclosures 
that were made under the previous regulation, even if the revised 
periodic statements contain terminology that is inconsistent with those 
initial disclosures.
     A creditor may add inserts to its old open-end 
forms in order to convert them to the revised rules until such time as 
the old forms are used up.
     No change-in-terms notice is required for changes 
resulting from the conversion to the revised regulation.

[[Page 464]]

     The previous billing rights statements are 
substantially similar to the revised billing rights statements and may 
continue to be used, except that, if the creditor has an automatic debit 
program, it must use the revised automatic debit provision.
     For those creditors wishing to use the annual 
billing rights statement, the creditor may count from the date on which 
it sent its last statement under the previous regulation in determining 
when to give the first statement under the new regulation. For example, 
if the creditor sent a semi-annual statement in June 1981, and converts 
to the new regulation in October 1981, the creditor must give the 
billing rights statement sometime in 1982, and it must not be fewer than 
6 nor more than 18 months after the June statement.
     Section 226.11 of the revised regulation affects 
only credit balances that are created on or after the date the creditor 
converts the account to the revised regulation.

                           Subpart A--General

 Section 226.1--Authority, Purpose, Coverage, Organization, Enforcement 
                              and Liability

    1(c) Coverage.
    1. Foreign applicability. Regulation Z applies to all persons 
(including branches of foreign banks and sellers located in the United 
States) that extend consumer credit to residents (including resident 
aliens) of any state as defined in Sec. 226.2. If an account is located 
in the United States and credit is extended to a U.S. resident, the 
transaction is subject to the regulation. This will be the case whether 
or not a particular advance or purchase on the account takes place in 
the United States and whether or not the extender of credit is chartered 
or based in the United States or a foreign country. Thus, a U.S. 
resident's use in Europe of a credit card issued by a bank in the 
consumer's home town is covered by the regulation. The regulation does 
not apply to a foreign branch of a U.S. bank when the foreign branch 
extends credit to a U.S. citizen residing or visiting abroad or to a 
foreign national abroad.

                               References

    Statute: Section 102.
    Other sections: None.
    Previous regulation: Sec. 226.1.
    1981 changes: A discussion of coverage has been added to Sec. 226.1 
so that the reader will understand from the start what is subject to the 
regulation. Language has also been added to explain the reorganization 
of the regulation into subparts that group together the provisions 
relating to general matters, open-end credit, closed-end credit, and 
miscellaneous rules. The provisions on consumer leasing have been issued 
by the Board as a separate regulation, Regulation M (12 CFR part 213).

          Section 226.2--Definitions and Rules of Construction

    2(a) Definitions.
    2(a)(2) Advertisement.
    1. Coverage. Only commercial messages that promote consumer credit 
transactions requiring disclosures are advertisements. Messages 
inviting, offering, or otherwise announcing generally to prospective 
customers the availability of credit transactions, whether in visual, 
oral, or print media, are covered by Regulation Z (12 CFR part 226).

    i. Examples include:
    A. Messages in a newspaper, magazine, leaflet, promotional flyer, or 
catalog.
    B. Announcements on radio, television, or public address system.
    C. On-line messages, such as on the Internet.
    D. Direct mail literature or other printed material on any exterior 
or interior sign.
    E. Point-of-sale displays.
    F. Telephone solicitations.
    G. Price tags that contain credit information.
    H. Letters sent to customers as part of an organized solicitation of 
business.
    I. Messages on checking account statements offering auto loans at a 
stated annual percentage rate.
    J. Communications promoting a new open-end plan or closed-end 
transaction.
    ii. The term does not include:
    A. Direct personal contacts, such as follow-up letters, cost 
estimates for individual consumers, or oral or written communication 
relating to the negotiation of a specific transaction.
    B. Informational material, for example, interest rate and loan term 
memos, distributed only to business entities.
    C. Notices required by federal or state law, if the law mandates 
that specific information be displayed and only the information so 
mandated is included in the notice.
    D. News articles the use of which is controlled by the news medium.
    E. Market research or educational materials that do not solicit 
business.
    F. Communications about an existing credit account (for example, a 
promotion encouraging additional or different uses of an existing credit 
card account).

    2. Persons covered. All persons must comply with the advertising 
provisions in Sec. Sec. 226.16 and 226.24, not just those that meet the 
definition of creditor in Sec. 226.2(a)(17). Thus, home builders, 
merchants, and others who are not themselves creditors must comply with 
the advertising provisions of the regulation if they advertise consumer 
credit transactions. However, under section 145 of the act, the owner 
and the personnel of the medium, in which an advertisement appears, or 
through which it is disseminated, are not subject to civil liability for 
violations.

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    2(a)(3) [Reserved]
    2(a)(4) Billing cycle or cycle.
    1. Intervals. In open-end credit plans, the billing cycle determines 
the intervals for which periodic disclosure statements are required; 
these intervals are also used as measuring points for other duties of 
the creditor. Typically, billing cycles are monthly, but they may be 
more frequent or less frequent (but not less frequent than quarterly).
    2. Creditors that do not bill. The term cycle is interchangeable 
with billing cycle for definitional purposes, since some creditors' 
cycles do not involve the sending of bills in the traditional sense but 
only statements of account activity. This is commonly the case with 
financial institutions when periodic payments are made through payroll 
deduction or through automatic debit of the consumer's asset account.
    3. Equal cycles. Although cycles must be equal, there is a 
permissible variance to account for weekends, holidays, and differences 
in the number of days in months. If the actual date of each statement 
does not vary by more than 4 days from a fixed day (for example, the 
third Thursday of each month) or date (for example, the 15th of each 
month) that the creditor regularly uses, the intervals between 
statements are considered equal. The requirement that cycles be equal 
applies even if the creditor applies a daily periodic rate to determine 
the finance charge. The requirement that intervals be equal does not 
apply to the transitional billing cycle that can occur when the creditor 
occasionally changes its billing cycles so as to establish a new 
statement day or date. (See the commentary to Sec. 226.9(c).)
    4. Payment reminder. The sending of a regular payment reminder 
(rather than a late payment notice) establishes a cycle for which the 
creditor must send periodic statements.
    2(a)(6) Business day.
    1. Business function test. Activities that indicate that the 
creditor is open for substantially all of its business functions include 
the availability of personnel to make loan disbursements, to open new 
accounts, and to handle credit transaction inquiries. Activities that 
indicate that the creditor is not open for substantially all of its 
business functions include a retailer merely accepting credit cards for 
purchases or a bank having its customer-service windows open only for 
limited purposes such as deposits and withdrawals, bill paying, and 
related services.
    2. Rescission rule. A more precise rule for what is a business day 
(all calendar days except Sundays and the federal legal holidays listed 
in 5 U.S.C. 6103(a)) applies when the right of rescission or mortgages 
subject to Sec. 226.32 are involved. (See also comment 31(c)(1)-1.) 
Four federal legal holidays are identified in 5 U.S.C. 6103(a) by a 
specific date: New Year's Day, January 1; Independence Day, July 4; 
Veterans Day, November 11; and Christmas Day, December 25. When one of 
these holidays (July 4, for example) falls on a Saturday, federal 
offices and other entities might observe the holiday on the preceding 
Friday (July 3). The observed holiday (in the example, July 3) is a 
business day for purposes of rescission or the delivery of disclosures 
for certain high-cost mortgages covered by Sec. 226.32.
    2(a)(7) Card issuer.
    1. Agent. An agent of a card issuer is considered a card issuer. 
Because agency relationships are traditionally defined by contract and 
by state or other applicable law, the regulation does not define agent. 
Merely providing services relating to the production of credit cards or 
data processing for others, however, does not make one the agent of the 
card issuer. In contrast, a financial institution may become the agent 
of the card issuer if an agreement between the institution and the card 
issuer provides that the cardholder may use a line of credit with the 
financial institution to pay obligations incurred by use of the credit 
card.
    2(a)(8) Cardholder.
    1. General rule. A cardholder is a natural person at whose request a 
card is issued for consumer credit purposes or who is a co-obligor or 
guarantor for such a card issued to another. The second category does 
not include an employee who is a co-obligor or guarantor on a card 
issued to the employer for business purposes, nor does it include a 
person who is merely the authorized user of a card issued to another.
    2. Limited application of regulation. For the limited purposes of 
the rules on issuance of credit cards and liability for unauthorized 
use, a cardholder includes any person, including an organization, to 
whom a card is issued for any purpose--including a business, 
agricultural, or commercial purpose.
    3. Issuance. See the commentary to Sec. 226.12(a).
    4. Dual-purpose cards and dual-card systems. Some card issuers offer 
dual-purpose cards that are for business as well as consumer purposes. 
If a card is issued to an individual for consumer purposes, the fact 
that an organization has guaranteed to pay the debt does not make it 
business credit. On the other hand, if a card is issued for business 
purposes, the fact that an individual sometimes uses it for consumer 
purchases does not subject the card issuer to the provisions on periodic 
statements, billing error resolution, and other protections afforded to 
consumer credit. Some card issuers offer dual-card systems--that is, 
they issue two cards to the same individual, one intended for business 
use, the other for consumer or personal use. With such a system, the 
same person may be a cardholder for general purposes when using the card 
issued for consumer use, and a cardholder only for the limited purposes 
of the

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restrictions on issuance and liability when using the card issued for 
business purposes.
    2(a)(9) Cash price.
    1. Components. This amount is a starting point in computing the 
amount financed and the total sale price under Sec. 226.18 for credit 
sales. Any charges imposed equally in cash and credit transactions may 
be included in the cash price, or they may be treated as other amounts 
financed under Sec. 226.18(b)(2).
    2. Service contracts. Service contracts include contracts for the 
repair or the servicing of goods, such as mechanical breakdown coverage, 
even if such a contract is characterized as insurance under state law.
    3. Rebates. The creditor has complete flexibility in the way it 
treats rebates for purposes of disclosure and calculation. See the 
commentary to Sec. 226.18(b).
    2(a)(10) Closed-end credit.
    1. General. The coverage of this term is defined by exclusion. That 
is, it includes any credit arrangement that does not fall within the 
definition of open-end credit. Subpart C contains the disclosure rules 
for closed-end credit when the obligation is subject to a finance charge 
or is payable by written agreement in more than 4 installments.
    2(a)(11) Consumer.
    1. Scope. Guarantors, endorsers, and sureties are not generally 
consumers for purposes of the regulation, but they may be entitled to 
rescind under certain circumstances and they may have certain rights if 
they are obligated on credit card plans.
    2. Rescission rules. For purposes of rescission under Sec. Sec. 
226.15 and 226.23, a consumer includes any natural person whose 
ownership interest in his or her principal dwelling is subject to the 
risk of loss. Thus, if a security interest is taken in A's ownership 
interest in a house and that house is A's principal dwelling, A is a 
consumer for purposes of rescission, even if A is not liable, either 
primarily or secondarily, on the underlying consumer credit transaction. 
An ownership interest does not include, for example, leaseholds or 
inchoate rights, such as dower.
    3. Land trusts. Credit extended to land trusts, as described in the 
commentary to Sec. 226.3(a), is considered to be extended to a natural 
person for purposes of the definition of consumer.
    2(a)(12) Consumer credit.
    1. Primary purpose. There is no precise test for what constitutes 
credit offered or extended for personal, family, or household purposes, 
nor for what constitutes the primary purpose. See, however, the 
discussion of business purposes in the commentary to Sec. 226.3(a).
    2(a)(13) Consummation.
    1. State law governs. When a contractual obligation on the 
consumer's part is created is a matter to be determined under applicable 
law; Regulation Z does not make this determination. A contractual 
commitment agreement, for example, that under applicable law binds the 
consumer to the credit terms would be consummation. Consummation, 
however, does not occur merely because the consumer has made some 
financial investment in the transaction (for example, by paying a 
nonrefundable fee) unless, of course, applicable law holds otherwise.
    2. Credit v. sale. Consummation does not occur when the consumer 
becomes contractually committed to a sale transaction, unless the 
consumer also becomes legally obligated to accept a particular credit 
arrangement. For example, when a consumer pays a nonrefundable deposit 
to purchase an automobile, a purchase contact may be created, but 
consummation for purposes of the regulation does not occur unless the 
consumer also contracts for financing at that time.
    2(a)(14) Credit.
    1. Exclusions. The following situations are not considered credit 
for purposes of the regulation:
     Layaway plans, unless the consumer is 
contractually obligated to continue making payments. Whether the 
consumer is so obligated is a matter to be determined under applicable 
law. The fact that the consumer is not entitled to a refund of any 
amounts paid towards the cash price of the merchandise does not bring 
layaways within the definition of credit.
     Tax liens, tax assessments, court judgments, and 
court approvals of reaffirmation of debts in bankruptcy. However, third-
party financing of such obligations (for example, a bank loan obtained 
to pay off a tax lien) is credit for purposes of the regulation.
     Insurance premium plans that involve payment in 
installments with each installment representing the payment for 
insurance coverage for a certain future period of time, unless the 
consumer is contractually obligated to continue making payments.
     Home improvement transactions that involve 
progress payments, if the consumer pays, as the work progresses, only 
for work completed and has no contractual obligation to continue making 
payments.
     Borrowing against the accrued cash value of an 
insurance policy or a pension account, if there is no independent 
obligation to repay.
     Letters of credit.
     The execution of option contracts. However, there 
may be an extension of credit when the option is exercised, if there is 
an agreement at that time to defer payment of a debt.
     Investment plans in which the party extending 
capital to the consumer risks the loss of the capital advanced. This 
includes, for example, an arrangement with a home purchaser in which the 
investor pays a portion of the downpayment and of the periodic

[[Page 467]]

mortgage payments in return for an ownership interest in the property, 
and shares in any gain or loss of property value.
     Mortgage assistance plans administered by a 
government agency in which a portion of the consumer's monthly payment 
amount is paid by the agency. No finance charge is imposed on the 
subsidy amount and that amount is due in a lump-sum payment on a set 
date or upon the occurrence of certain events. (If payment is not made 
when due, a new note imposing a finance charge may be written, which may 
then be subject to the regulation.)
    2. Payday loans; deferred presentment. Credit includes a transaction 
in which a cash advance is made to a consumer in exchange for the 
consumer's personal check, or in exchange for the consumer's 
authorization to debit the consumer's deposit account, and where the 
parties agree either that the check will not be cashed or deposited, or 
that the consumer's deposit account will not be debited, until a 
designated future date. This type of transaction is often referred to as 
a ``payday loan'' or ``payday advance'' or ``deferred presentment 
loan.'' A fee charged in connection with such a transaction may be a 
finance charge for purposes of Sec. 226.4, regardless of how the fee is 
characterized under state law. Where the fee charged constitutes a 
finance charge under Sec. 226.4 and the person advancing funds 
regularly extends consumer credit, that person is a creditor and is 
required to provide disclosures consistent with the requirements of 
Regulation Z. See Sec. 226.2(a)(17).
    2(a)(15) Credit card.
    1. Usable from time to time. A credit card must be usable from time 
to time. Since this involves the possibility of repeated use of a single 
device, checks and similar instruments that can be used only once to 
obtain a single credit extension are not credit cards.
    2. Examples. i. Examples of credit cards include:
    A. A card that guarantees checks or similar instruments, if the 
asset account is also tied to an overdraft line or if the instrument 
directly accesses a line of credit.
    B. A card that accesses both a credit and an asset account (that is, 
a debit-credit card).
    C. An identification card that permits the consumer to defer payment 
on a purchase.
    D. An identification card indicating loan approval that is presented 
to a merchant or to a lender, whether or not the consumer signs a 
separate promissory note for each credit extension.
    E. A card or device that can be activated upon receipt to access 
credit, even if the card has a substantive use other than credit, such 
as a purchase-price discount card. Such a card or device is a credit 
card notwithstanding the fact that the recipient must first contact the 
card issuer to access or activate the credit feature.
    ii. In contrast, a credit card does not include, for example:
    A. A check-guarantee or debit card with no credit feature or 
agreement, even if the creditor occasionally honors an inadvertent 
overdraft.
    B. Any card, key, plate, or other device that is used in order to 
obtain petroleum products for business purposes from a wholesale 
distribution facility or to gain access to that facility, and that is 
required to be used without regard to payment terms.
    3. Charge card. Generally, charge cards are cards used in connection 
with an account on which outstanding balances cannot be carried from one 
billing cycle to another and are payable when a periodic statement is 
received. Under the regulation, a reference to credit cards generally 
includes charge cards. The term charge card is, however, distinguished 
from credit card in Sec. Sec. 226.5a, 226.9(e), 226.9(f), and 
226.28(d), and appendices G-10 through G-13. When the term credit card 
is used in those provisions, it refers to credit cards other than charge 
cards.
    2(a)(16) Credit sale.
    1. Special disclosure. If the seller is a creditor in the 
transaction, the transaction is a credit sale and the special credit 
sale disclosures (that is, the disclosures under Sec. 226.18(j)) must 
be given. This applies even if there is more than one creditor in the 
transaction and the creditor making the disclosures is not the seller. 
See the commentary to Sec. 226.17(d).
    2. Sellers who arrange credit. If the seller of the property or 
services involved arranged for financing but is not a creditor as to 
that sale, the transaction is not a credit sale. Thus, if a seller 
assists the consumer in obtaining a direct loan from a financial 
institution and the consumer's note is payable to the financial 
institution, the transaction is a loan and only the financial 
institution is a creditor.
    3. Refinancings. Generally, when a credit sale is refinanced within 
the meaning of Sec. 226.20(a), loan disclosures should be made. 
However, if a new sale of goods or services is also involved, the 
transaction is a credit sale.
    4. Incidental sales. Some lenders sell a product or service--such as 
credit, property, or health insurance--as part of a loan transaction. 
Section 226.4 contains the rules on whether the cost of credit life, 
disability or property insurance is part of the finance charge. If the 
insurance is financed, it may be disclosed as a separate credit sale 
transaction or disclosed as part of the primary transaction; if the 
latter approach is taken, either loan or credit sale disclosures may be 
made. See the commentary to Sec. 226.17(c)(1) for further discussion of 
this point.

[[Page 468]]

    5. Credit extensions for educational purposes. A credit extension 
for educational purposes in which an educational institution is the 
creditor may be treated as either a credit sale or a loan, regardless of 
whether the funds are given directly to the student, credited to the 
student's account, or disbursed to other persons on the student's 
behalf. The disclosure of the total sale price need not be given if the 
transaction is treated as a loan.
    2(a)(17) Creditor.
    1. General. The definition contains four independent tests. If any 
one of the tests is met, the person is a creditor for purposes of that 
particular test.
    Paragraph 2(a)(17)(i).
    1. Prerequisites. This test is composed of 2 requirements, both of 
which must be met in order for a particular credit extension to be 
subject to the regulation and for the credit extension to count towards 
satisfaction of the numerical tests mentioned in footnote 3 to Sec. 
226.2(a)(17). First, there must be either or both of the following:
     A written (rather than oral) agreement to pay in 
more than 4 installments. A letter that merely confirms an oral 
agreement does not constitute a written agreement for purposes of the 
definition.
     A finance charge imposed for the credit. The 
obligation to pay the finance charge need not be in writing.
    Second, the obligation must be payable to the person in order for 
that person to be considered a creditor. If an obligation is made 
payable to bearer, the creditor is the one who initially accepts the 
obligation.
    2. Assignees. If an obligation is initially payable to one person, 
that person is the creditor even if the obligation by its terms is 
simultaneously assigned to another person. For example:

     An auto dealer and a bank have a business 
relationship in which the bank supplies the dealer with credit sale 
contracts that are initially made payable to the dealer and provide for 
the immediate assignment of the obligation to the bank. The dealer and 
purchaser execute the contract only after the bank approves the 
creditworthiness of the purchaser. Because the obligation is initially 
payable on its face to the dealer, the dealer is the only creditor in 
the transaction.
    3. Numerical tests. The examples below illustrate how the numerical 
tests of footnote 3 are applied. The examples assume that consumer 
credit with a finance charge or written agreement for more than 4 
installments was extended in the years in question and that the person 
did not extend such credit in 1982.
    4. Counting transactions. For purposes of closed-end credit, the 
creditor counts each credit transaction. For open-end credit, 
transactions means accounts, so that outstanding accounts are counted 
instead of individual credit extensions. Normally the number of 
transactions is measured by the preceding calendar year; if the 
requisite number is met, then the person is a creditor for all 
transactions in the current year. However, if the person did not meet 
the test in the preceding year, the number of transactions is measured 
by the current calendar year. For example, if the person extends 
consumer credit 26 times in 1983, it is a creditor for purposes of the 
regulation for the last extension of credit in 1983 and for all 
extensions of consumer credit in 1984. On the other hand, if a business 
begins in 1983 and extends consumer credit 20 times, it is not a 
creditor for purposes of the regulation in 1983. If it extends consumer 
credit 75 times in 1984, however, it becomes a creditor for purposes of 
the regulation (and must begin making disclosures) after the 25th 
extension of credit in that year and is a creditor for all extensions of 
consumer credit in 1985.
    5. Relationship between consumer credit in general and credit 
secured by a dwelling. Extensions of credit secured by a dwelling are 
counted towards the 25-extensions test. For example, if in 1983 a person 
extends unsecured consumer credit 23 times and consumer credit secured 
by a dwelling twice, it becomes a creditor for the succeeding extensions 
of credit, whether or not they are secured by a dwelling. On the other 
hand, extensions of consumer credit not secured by a dwelling are not 
counted towards the number of credit extensions secured by a dwelling. 
For example, if in 1983 a person extends credit not secured by a 
dwelling 8 times and credit secured by a dwelling 3 times, it is not a 
creditor.
    6. Effect of satisfying one test. Once one of the numerical tests is 
satisfied, the person is also a creditor for the other type of credit. 
For example, in 1983 a person extends consumer credit secured by a 
dwelling 5 times. That person is a creditor for all succeeding credit 
extensions, whether they involve credit secured by a dwelling or not.
    7. Trusts. In the case of credit extended by trusts, each individual 
trust is considered a separate entity for purposes of applying the 
criteria. For example:

     A bank is the trustee for 3 trusts: Trust A makes 
15 extensions of consumer credit annually; Trust B makes 10 extensions 
of consumer credit annually; and Trust C makes 30 extensions of consumer 
credit annually. Only Trust C is a creditor for purposes of the 
regulation.
    8. Loans from employee savings plan. Some employee savings plans 
permit participants to borrow money up to a certain percentage of their 
account balances, and use a trust to administer the receipt and 
disbursement of funds. Unless each participant's account is an 
individual plan and trust, the creditor should apply the numerical tests 
to the plan as a whole rather than to the individual account, even if 
the loan amount is determined

[[Page 469]]

by reference to the balance in the individual account and the repayments 
are credited to the individual account. The person to whom the 
obligation is originally made payable (whether the plan, the trust, or 
the trustee) is the creditor for purposes of the act and regulation.

    Paragraph 2(a)(17)(ii). [Reserved]
    Paragraph 2(a)(17)(iii).
    1. Card issuers subject to Subpart B. Section 226.2(a)(17)(iii) 
makes certain card issuers creditors for purposes of the open-end credit 
provisions of the regulation. This includes, for example, the issuers of 
so-called travel and entertainment cards that expect repayment at the 
first billing and do not impose a finance charge. Since all disclosures 
are to be made only as applicable, such card issuers would omit finance 
charge disclosures. Other provisions of the regulation regarding such 
areas as scope, definitions, determination of which charges are finance 
charges, Spanish language disclosures, record retention, and use of 
model forms, also apply to such card issuers.
    Paragraph 2(a)(17)(iv).
    1. Card issuers subject to Subparts B and C. Section 
226.2(a)(17)(iv) includes as creditors card issuers extending closed-end 
credit in which there is a finance charge or an agreement to pay in more 
than 4 installments. These card issuers are subject to the appropriate 
provisions of Subparts B and C, as well as to the general provisions.
    2(a)(18) Downpayment.
    1. Allocation. If a consumer makes a lump-sum payment, partially to 
reduce the cash price and partially to pay prepaid finance charges, only 
the portion attributable to reducing the cash price is part of the 
downpayment. (See the commentary to Sec. 226.2(a)(23).)
    2. Pick-up payments. Creditors may treat the deferred portion of the 
down-payment, often referred to as pick-up payments, in a number of 
ways. If the pick-up payment is treated as part of the downpayment:

     It is subtracted in arriving at the amount 
financed under Sec. 226.18(b).
     It may, but need not, be reflected in the payment 
schedule under Sec. 226.18(g).

    If the pick-up payment does not meet the definition (for example, if 
it is payable after the second regularly scheduled payment) or if the 
creditor chooses not to treat it as part of the downpayment:

     It must be included in the amount financed.
     It must be shown in the payment schedule.

    Whichever way the pick-up payment is treated, the total of payments 
under Sec. 226.18(h) must equal the sum of the payments disclosed under 
Sec. 226.18(g).
    3. Effect of existing liens. i. No cash payment. In a credit sale, 
the ``downpayment'' may only be used to reduce the cash price. For 
example, when a trade-in is used as the downpayment and the existing 
lien on an automobile to be traded in exceeds the value of the 
automobile, creditors must disclose a zero on the downpayment line 
rather than a negative number. To illustrate, assume a consumer owes 
$10,000 on an existing automobile loan and that the trade-in value of 
the automobile is only $8,000, leaving a $2,000 deficit. The creditor 
should disclose a downpayment of $0, not -$2,000.
    ii. Cash payment. If the consumer makes a cash payment, creditors 
may, at their option, disclose the entire cash payment as the 
downpayment, or apply the cash payment first to any excess lien amount 
and disclose any remaining cash as the downpayment. In the above 
example:
    A. If the downpayment disclosed is equal to the cash payment, the 
$2,000 deficit must be reflected as an additional amount financed under 
Sec. 226.18(b)(2).
    B. If the consumer provides $1,500 in cash (which does not 
extinguish the $2,000 deficit), the creditor may disclose a downpayment 
of $1,500 or of $0.
    C. If the consumer provides $3,000 in cash, the creditor may 
disclose a downpayment of $3,000 or of $1,000.
    2(a)(19) Dwelling.
    1. Scope. A dwelling need not be the consumer's principal residence 
to fit the definition and thus a vacation or second home could be a 
dwelling. However, for purposes of the definition of residential 
mortgage transaction and the right to rescind, a dwelling must be the 
principal residence of the consumer. See the commentary to Sec. Sec. 
226.2(a)(24), 226.15, and 226.23.
    2. Use as a residence. Mobile homes, boats, and trailers are 
dwellings if they are in fact used as residences, just as are 
condominium and cooperative units. Recreational vehicles, campers, and 
the like not used as residences are not dwellings.
    3. Relation to exemptions. Any transaction involving a security 
interest in a consumer's principal dwelling (as well as in any real 
property) remains subject to the regulation despite the general 
exemption in Sec. 226.3(b) for credit extensions over $25,000.
    2(a)(20) Open-end credit.
    1. General. This definition describes the characteristics of open-
end credit (for which the applicable disclosure and other rules are 
contained in Subpart B), as distinct from closed-end credit. Open-end 
credit is consumer credit that is extended under a plan and meets all 3 
criteria set forth in the definition.
    2. Existence of a plan. The definition requires that there be a 
plan, which connotes a contractual arrangement between the creditor and 
the consumer. Some creditors offer programs containing a number of 
different credit features. The consumer has a single account with the 
institution that can be

[[Page 470]]

accessed repeatedly via a number of sub-accounts established for the 
different program features and rate structures. Some features of the 
program might be used repeatedly (for example, an overdraft line) while 
others might be used infrequently (such as the part of the credit line 
available for secured credit). If the program as a whole is subject to 
prescribed terms and otherwise meets the definition of open-end credit, 
such a program would be considered a single, multi-featured plan.
    3. Repeated transactions. Under this criterion, the creditor must 
reasonably contemplate repeated transactions. This means that the credit 
plan must be usable from time to time and the creditor must legitimately 
expect that there will be repeat business rather than a one-time credit 
extension. The creditor must expect repeated dealings with consumers 
under the credit plan as a whole and need not believe a consumer will 
reuse a particular feature of the plan. The determination of whether a 
creditor can reasonably contemplate repeated transactions requires an 
objective analysis. Information that much of the creditor's customer 
base with accounts under the plan make repeated transactions over some 
period of time is relevant to the determination, particularly when the 
plan is opened primarily for the financing of infrequently purchased 
products or services. A standard based on reasonable belief by a 
creditor necessarily includes some margin for judgmental error. The fact 
that particular consumers do not return for further credit extensions 
does not prevent a plan from having been properly characterized as open-
end. For example, if much of the customer base of a clothing store makes 
repeat purchases, the fact that some consumers use the plan only once 
would not affect the characterization of the store's plan as open-end 
credit. The criterion regarding repeated transactions is a question of 
fact to be decided in the context of the creditor's type of business and 
the creditor's relationship with its customers. For example:
    i. It would be more reasonable for a thrift institution chartered 
for the benefit of its members to contemplate repeated transactions with 
a member than for a seller of aluminum siding to make the same 
assumption about its customers.
    ii. It would be more reasonable for a financial institution to make 
advances from a line of credit for the purchase of an automobile than 
for an automobile dealer to sell a car under an open-end plan.

    4. Finance charge on an outstanding balance. The requirement that a 
finance charge may be computed and imposed from time to time on the 
outstanding balance means that there is no specific amount financed for 
the plan for which the finance charge, total of payments, and payment 
schedule can be calculated. A plan may meet the definition of open-end 
credit even though a finance charge is not normally imposed, provided 
the creditor has the right, under the plan, to impose a finance charge 
from time to time on the outstanding balance. For example, in some 
plans, such as certain china club plans, a finance charge is not imposed 
if the consumer pays all or a specified portion of the outstanding 
balance within a given time period. Such a plan could meet the finance 
charge criterion, if the creditor has the right to impose a finance 
charge, even though the consumer actually pays no finance charges during 
the existence of the plan because the consumer takes advantage of the 
option to pay the balance (either in full or in installments) within the 
time necessary to avoid finance charges.
    5. Reusable line. The total amount of credit that may be extended 
during the existence of an open-end plan is unlimited because available 
credit is generally replenished as earlier advances are repaid. A line 
of credit is self-replenishing even though the plan itself has a fixed 
expiration date, as long as during the plan's existence the consumer may 
use the line, repay, and reuse the credit. The creditor may verify 
credit information such as the consumer's continued income and 
employment status or information for security purposes. This criterion 
of unlimited credit distinguishes open-end credit from a series of 
advances made pursuant to a close-end credit loan commitment. For 
example:

     Under a closed-end commitment, the creditor might 
agree to lend a total of $10,000 in a series of advances as needed by 
the consumer. When a consumer has borrowed the full $10,000, no more is 
advanced under that particular agreement, even if there has been 
repayment of a portion of the debt.

    This criterion does not mean that the creditor must establish a 
specific credit limit for the line of credit or that the line of credit 
must always be replenished to its original amount. The creditor may 
reduce a credit limit or refuse to extend new credit in a particular 
case due to changes in the economy, the creditor's financial condition, 
or the consumer's creditworthiness. (The rules in Sec. 226.5b(f), 
however, limit the ability of a creditor to suspend credit advances for 
home equity plans.) While consumers should have a reasonable expectation 
of obtaining credit as long as they remain current and within any preset 
credit limits, further extensions of credit need not be an absolute 
right in order for the plan to meet the self-replenishing criterion.
    6. Open-end real estate mortgages. Some credit plans call for 
negotiated advances under so-called open-end real estate mortgages. Each 
such plan must be independently measured against the definition of open-
end credit, regardless of the terminology used in the industry to 
describe the plan. The fact

[[Page 471]]

that a particular plan is called an open-end real estate mortgage, for 
example, does not, by itself, mean that it is open-end credit under the 
regulation.
    2(a)(21) Periodic rate.
    1. Basis. The periodic rate may be stated as a percentage (for 
example, 1\1/2\% per month) or as a decimal equivalent (for example, 
.015 monthly). It may be based on any portion of a year the creditor 
chooses. Some creditors use \1/360\ of an annual rate as their periodic 
rate. These creditors:

     May disclose a \1/360\ rate as a daily periodic 
rate, without further explanation, if it is in fact only applied 360 
days per year. But if the creditor applies that rate for 365 days, the 
creditor must note that fact and, of course, disclose the true annual 
percentage rate.
     Would have to apply the rate to the balance to 
disclose the annual percentage rate with the degree of accuracy required 
in the regulation (that is, within \1/8\ of 1 percentage point of the 
rate based on the actual 365 days in the year).

    2. Transaction charges. Periodic rate does not include initial one-
time transaction charges, even if the charge is computed as a percentage 
of the transaction amount.
    2(a)(22) Person.
    1. Joint ventures. A joint venture is an organization and is 
therefore a person.
    2. Attorneys. An attorney and his or her client are considered to be 
the same person for purposes of this regulation when the attorney is 
acting within the scope of the attorney-client relationship with regard 
to a particular transaction.
    3. Trusts. A trust and its trustee are considered to be the same 
person for purposes of this regulation.
    2(a)(23) Prepaid finance charge.
    1. General. Prepaid finance charges must be taken into account under 
Sec. 226.18(b) in computing the disclosed amount financed, and must be 
disclosed if the creditor provides an itemization of the amount financed 
under Sec. 226.18(c).
    2. Examples. Common examples of prepaid finance charges include:

 Buyer's points.
 Service fees.
 Loan fees.
 Finder's fees.
 Loan guarantee insurance.
 Credit investigation fees.

However, in order for these or any other finance charges to be 
considered prepaid, they must be either paid separately in cash or check 
or withheld from the proceeds. Prepaid finance charges include any 
portion of the finance charge paid prior to or at closing or settlement.

    3. Exclusions. Add-on and discount finance charges are not prepaid 
finance charges for purposes of this regulation. Finance charges are not 
prepaid merely because they are precomputed, whether or not a portion of 
the charge will be rebated to the consumer upon prepayment. See the 
commentary to Sec. 226.18(b).
    4. Allocation of lump-sum payments. In a credit sale transaction 
involving a lump-sum payment by the consumer and a discount or other 
item that is a finance charge under Sec. 226.4, the discount or other 
item is a prepaid finance charge to the extent the lump-sum payment is 
not applied to the cash price. For example, a seller sells property to a 
consumer for $10,000, requires the consumer to pay $3,000 at the time of 
the purchase, and finances the remainder as a closed-end credit 
transaction. The cash price of the property is $9,000. The seller is the 
creditor in the transaction and therefore the $1,000 difference between 
the credit and cash prices (the discount) is a finance charge. (See the 
commentary to Sec. Sec. 226.4(b)(9) and 226.4(c)(5).) If the creditor 
applies the entire $3,000 to the cash price and adds the $1,000 finance 
charge to the interest on the $6,000 to arrive at the total finance 
charge, all of the $3,000 lump-sum payment is a downpayment and the 
discount is not a prepaid finance charge. However, if the creditor only 
applies $2,000 of the lump-sum payment to the cash price, then $2,000 of 
the $3,000 is a downpayment and the $1,000 discount is a prepaid finance 
charge.

    2(a)(24) Residential mortgage transaction.
    1. Relation to other sections. This term is important in six 
provisions in the regulation:

 Section 226.4(c)(7)--exclusions from the finance 
charge.
 Section 226.15(f)--exemption from the right of 
rescission.
 Section 226.18(q)--whether or not the obligation is 
assumable.
 Section 226.19--special timing rules.
 Section 226.20(b)--disclosure requirements for 
assumptions.
 Section 226.23(f)--exemption from the right of 
rescission.

    2. Lien status. The definition is not limited to first lien 
transactions. For example, a consumer might assume a paid-down first 
mortgage (or borrow part of the purchase price) and borrow the balance 
of the purchase price from a creditor who takes a second mortgage. The 
second mortgage transaction is a residential mortgage transaction if the 
dwelling purchased is the consumer's principal residence.
    3. Principal dwelling. A consumer can only have one principal 
dwelling at a time. Thus, a vacation or other second home would not be a 
principal dwelling. However, if a consumer buys or builds a new dwelling 
that will become the consumer's principal dwelling within a year or upon 
the completion of construction, the new dwelling is considered

[[Page 472]]

the principal dwelling for purposes of applying this definition to a 
particular transaction. See the commentary to Sec. Sec. 226.15(a) and 
226.23(a).
    4. Construction financing. If a transaction meets the definition of 
a residential mortgage transaction and the creditor chooses to disclose 
it as several transactions under Sec. 226.17(c)(6), each one is 
considered to be a residential mortgage transaction, even if different 
creditors are involved. For example:
     The creditor makes a construction loan to finance 
the initial construction of the consumer's principal dwelling, and the 
loan will be disbursed in 5 advances. The creditor gives 6 sets of 
disclosures (5 for the construction phase and 1 for the permanent 
phase). Each one is a residential mortgage transaction.
     One creditor finances the initial construction of 
the consumer's principal dwelling and another creditor makes a loan to 
satisfy the construction loan and provide permanent financing. Both 
transactions are residential mortgage transactions.
    5. Acquisition. i. A residential mortgage transaction finances the 
acquisition of a consumer's principal dwelling. The term does not 
include a transaction involving a consumer's principal dwelling if the 
consumer had previously purchased and acquired some interest to the 
dwelling, even though the consumer had not acquired full legal title.
    ii. Examples of new transactions involving a previously acquired 
dwelling include the financing of a balloon payment due under a land 
sale contract and an extension of credit made to a joint owner of 
property to buy out the other joint owner's interest. In these 
instances, disclosures are not required under Sec. 226.18(q) or Sec. 
226.19(a) (assumability policies and early disclosures for residential 
mortgage transactions). However, the rescission rules of Sec. Sec. 
226.15 and 226.23 do apply to these new transactions.
    iii. In other cases, the disclosure and rescission rules do not 
apply. For example, where a buyer enters into a written agreement with 
the creditor holding the seller's mortgage, allowing the buyer to assume 
the mortgage, if the buyer had previously purchased the property and 
agreed with the seller to make the mortgage payments, Sec. 226.20(b) 
does not apply (assumptions involving residential mortgages).
    6. Multiple purpose transactions. A transaction meets the definition 
of this section if any part of the loan proceeds will be used to finance 
the acquisition or initial construction of the consumer's principal 
dwelling. For example, a transaction to finance the initial construction 
of the consumer's principal dwelling is a residential mortgage 
transaction even if a portion of the funds will be disbursed directly to 
the consumer or used to satisfy a loan for the purchase of the land on 
which the dwelling will be built.
    7. Construction on previously acquired vacant land. A residential 
mortgage transaction includes a loan to finance the construction of a 
consumer's principal dwelling on a vacant lot previously acquired by the 
consumer.

    2(a)(25) Security interest.
    1. Threshold test. The threshold test is whether a particular 
interest in property is recognized as a security interest under 
applicable law. The regulation does not determine whether a particular 
interest is a security interest under applicable law. If the creditor is 
unsure whether a particular interest is a security interest under 
applicable law (for example, if statutes and case law are either silent 
or inconclusive on the issue), the creditor may at its option consider 
such interests as security interests for Truth in Lending purposes. 
However, the regulation and the commentary do exclude specific 
interests, such as after-acquired property and accessories, from the 
scope of the definition regardless of their categorization under 
applicable law, and these named exclusions may not be disclosed as 
security interests under the regulation. (But see the discussion of 
exclusions elsewhere in the commentary to Sec. 226.2(a)(25).)
    2. Exclusions. The general definition of security interest excludes 
three groups of interests: Incidental interests, interests in after-
acquired property, and interests that arise solely by operation of law. 
These interests may not be disclosed with the disclosures required under 
Sec. 226.18, but the creditor is not precluded from preserving these 
rights elsewhere in the contract documents, or invoking and enforcing 
such rights, if it is otherwise lawful to do so. If the creditor is 
unsure whether a particular interest is one of the excluded interests, 
the creditor may, at its option, consider such interests as security 
interests for Truth in Lending purposes.
    3. Incidental interests. Incidental interests in property that are 
not security interests include, among other things:

     Assignment of rents.
     Right to condemnation proceeds.
     Interests in accessories and replacements.
     Interests in escrow accounts, such as for taxes 
and insurance.
     Waiver of homestead or personal property rights.

    The notion of an incidental interest does not encompass an explicit 
security interest in an insurance policy if that policy is the primary 
collateral for the transaction--for example, in an insurance premium 
financing transaction.
    4. Operation of law. Interests that arise solely by operation of law 
are excluded from the general definition. Also excluded are interests 
arising by operation of law that are

[[Page 473]]

merely repeated or referred to in the contract. However, if the creditor 
has an interest that arises by operation of law, such as a vendor's 
lien, and takes an independent security interest in the same property, 
such as a UCC security interest, the latter interest is a disclosable 
security interest unless otherwise provided.
    5. Rescission rules. Security interests that arise solely by 
operation of law are security interests for purposes of rescission. 
Examples of such interests are mechanics' and materialmen's liens.
    6. Specificity of disclosure. A creditor need not separately 
disclose multiple security interests that it may hold in the same 
collateral. The creditor need only disclose that the transaction is 
secured by the collateral, even when security interests from prior 
transactions remain of record and a new security interest is taken in 
connection with the transaction. In disclosing the fact that the 
transaction is secured by the collateral, the creditor also need not 
disclose how the security interest arose. For example, in a closed-end 
credit transaction, a rescission notice need not specifically state that 
a new security interest is ``acquired'' or an existing security interest 
is ``retained'' in the transaction.
    The acquisition or retention of a security interest in the 
consumer's principal dwelling instead may be disclosed in a rescission 
notice with a general statement such as the following: ``Your home is 
the security for the new transaction.''
    2(b) Rules of construction.
    1. Footnotes. Footnotes are used extensively in the regulation to 
provide special exceptions and more detailed explanations and examples. 
Material that appears in a footnote has the same legal weight as 
material in the body of the regulation.
    2. Amount. The numerical amount must be a dollar amount unless 
otherwise indicated. For example, in a closed-end transaction (Subpart 
C), the amount financed and the amount of any payment must be expressed 
as a dollar amount. In some cases, an amount should be expressed as a 
percentage. For example, in disclosures provided before the first 
transaction under an open-end plan (Subpart B), creditors are permitted 
to explain how the amount of any finance charge will be determined; 
where a cash advance fee (which is a finance charge) is a percentage of 
each cash advance, the amount of the finance charge for that fee is 
expressed as a percentage.

                               References

    Statute: Section 103.
    Other sections: None.
    Other regulations: Regulation E (12 CFR 205.2(d)).
    Previous regulation: Sections 226.2, 226.8, and 226.9.
    1981 changes: Section 226.2 implements amended section 103 of the 
act. Separate definitions for comparative index of credit cost, 
discount, organization, period, real property, real property 
transaction, regular price, and surcharge have been deleted. The 
definitions relating specifically to consumer leases are now found in 
the separate consumer leasing regulation, Regulation M (12 CFR Part 
213).
    Several terms are now defined elsewhere in the regulation or 
commentary rather than in Sec. 226.2. For example, finance charge is 
described and explained in Sec. 226.4, and agricultural purpose is 
discussed in the commentary to Sec. 226.3. Some terms, such as 
unauthorized use, are now defined as part of the substantive sections to 
which they apply. Other terms previously defined, such as customer and 
organization, are merged into new definitions. Section 226.2 contains 
new definitions for arranger of credit, business day, closed-end credit, 
consumer, consummation, downpayment, prepaid finance charge, and 
residential mortgage transaction.
    The major changes in the definitions are as follows:
    Arranger of credit has a significantly different meaning. It 
reflects the statutory amendment that limits arrangers to those who 
regularly arrange credit extensions for persons who are not themselves 
creditors. This definition was deleted effective October 1, 1982.
    Billing cycle largely restates the prior definition, but requires 
cycles to be regular, and allows the four-day variance to be measured 
from a regular day as well as date. The definition also incorporates an 
interpretation that cycles may be no longer than quarterly.
    Business day is new in the sense that the term previously appeared 
only in a footnote to the rescission provision, but it is now of general 
applicability. The general rule that it is a day when the creditor is 
open for business is new, but the rule for rescission purposes is the 
same as in the previous regulation.
    Cash price now explicitly permits inclusion of various incidental 
charges imposed equally in cash and credit transactions.
    Consumer has a narrower meaning in that guarantors, sureties, and 
endorsers are excluded from the general definition.
    Consumer credit reflects the new statutory exemption for 
agricultural credit.
    Consummation is a significant departure from longstanding 
interpretations of the previous definition. It now focuses only on the 
time the consumer becomes contractually obligated, rather than the time 
the consumer pays a nonrefundable fee or suffers an economic penalty for 
failing to go forward with the credit transaction.
    Credit generally parallels the previous definition, but modifies the 
previous interpretations of the definition by excluding more 
transactions.

[[Page 474]]

    Creditor reflects the statutory amendments to the act that were 
intended to eliminate the problem of multiple creditors in a 
transaction. The regularly standard is still used, but it is now defined 
in terms of the frequency of the credit extensions. The new definition 
also requires that there be a written agreement to pay in more than 4 
installments if no finance charge is imposed. Finally, the obligation 
must be initially payable to a person for that person to be the 
creditor.
    Dwelling reflects the statutory amendment that expanded the scope of 
the definition to include any residential structure, whether or not it 
is real property under state law.
    Open-end credit reflects the amended statutory definition requiring 
that the creditor reasonably contemplate repeated transactions. The new 
definition no longer requires the consumer to have the privilege of 
paying either in installments or in full.
    Periodic rate combines the previous definitions of period and 
periodic rate with clarification in the commentary concerning 
transaction charges and 360-day-year factors.
    Security interest is much narrower than the previous definition. 
Reflecting the legislative history of the simplification amendments, 
incidental interests are expressly excluded from the definition. Except 
for purposes of rescission, interests that arise solely by operation of 
law are also excluded.

                   Section 226.3--Exempt Transactions

    3(a) Business, commercial, agricultural, or organizational credit.
    1. Primary purposes. A creditor must determine in each case if the 
transaction is primarily for an exempt purpose. If some question exists 
as to the primary purpose for a credit extension, the creditor is, of 
course, free to make the disclosures, and the fact that disclosures are 
made under such circumstances is not controlling on the question of 
whether the transaction was exempt.
    2. Factors. In determining whether credit to finance an 
acquisition--such as securities, antiques, or art--is primarily for 
business or commercial purposes (as opposed to a consumer purpose), the 
following factors should be considered:

     The relationship of the borrower's primary 
occupation to the acquisition. The more closely related, the more likely 
it is to be business purpose.
     The degree to which the borrower will personally 
manage the acquisition. The more personal involvement there is, the more 
likely it is to be business purpose.
     The ratio of income from the acquisition to the 
total income of the borrower. The higher the ratio, the more likely it 
is to be business purpose.
     The size of the transaction. The larger the 
transaction, the more likely it is to be business purpose.
     The borrower's statement of purpose for the loan.
    Examples of business-purpose credit include:

     A loan to expand a business, even if it is 
secured by the borrower's residence or personal property.
     A loan to improve a principal residence by 
putting in a business office.
     A business account used occasionally for consumer 
purposes.

    Examples of consumer-purpose credit include:

     Credit extensions by a company to its employees 
or agents if the loans are used for personal purposes.
     A loan secured by a mechanic's tools to pay a 
child's tuition.
     A personal account used occasionally for business 
purposes.

    3. Non-owner-occupied rental property. Credit extended to acquire, 
improve, or maintain rental property (regardless of the number of 
housing units) that is not owner-occupied is deemed to be for business 
purposes. This includes, for example, the acquisition of a warehouse 
that will be leased or a single-family house that will be rented to 
another person to live in. If the owner expects to occupy the property 
for more than 14 days during the coming year, the property cannot be 
considered non-owner-occupied and this special rule will not apply. For 
example, a beach house that the owner will occupy for a month in the 
coming summer and rent out the rest of the year is owner occupied and is 
not governed by this special rule. See Comment 3(a)-4, however, for 
rules relating to owner-occupied rental property.
    4. Owner-occupied rental property. If credit is extended to acquire, 
improve, or maintain rental property that is or will be owner-occupied 
within the coming year, different rules apply:

     Credit extended to acquire the rental property is 
deemed to be for business purposes if it contains more than 2 housing 
units.
     Credit extended to improve or maintain the rental 
property is deemed to be for business purposes if it contains more than 
4 housing units. Since the amended statute defines dwelling to include 1 
to 4 housing units, this rule preserves the right of rescission for 
credit extended for purposes other than acquisition.

    Neither of these rules means that an extension of credit for 
property containing fewer than the requisite number of units is 
necessarily consumer credit. In such cases, the determination of whether 
it is business or

[[Page 475]]

consumer credit should be made by considering the factors listed in 
Comment 3(a)-2.
    5. Business credit later refinanced. Business-purpose credit that is 
exempt from the regulation may later be rewritten for consumer purposes. 
Such a transaction is consumer credit requiring disclosures only if the 
existing obligation is satisfied and replaced by a new obligation made 
for consumer purposes undertaken by the same obligor.
    6. Agricultural purpose. An agricultural purpose includes the 
planting, propagating, nurturing, harvesting, catching, storing, 
exhibiting, marketing, transporting, processing, or manufacturing of 
food, beverages (including alcoholic beverages), flowers, trees, 
livestock, poultry, bees, wildlife, fish, or shellfish by a natural 
person engaged in farming, fishing, or growing crops, flowers, trees, 
livestock, poultry, bees, or wildlife. The exemption also applies to a 
transaction involving real property that includes a dwelling (for 
example, the purchase of a farm with a homestead) if the transaction is 
primarily for agricultural purposes.
    7. Organizational credit. The exemption for transactions in which 
the borrower is not a natural person applies, for example, to loans to 
corporations, partnerships, associations, churches, unions, and 
fraternal organizations. The exemption applies regardless of the purpose 
of the credit extension and regardless of the fact that a natural person 
may guarantee or provide security for the credit.
    8. Land trusts. Credit extended for consumer purposes to a land 
trust is considered to be credit extended to a natural person rather 
than credit extended to an organization. In some jurisdictions, a 
financial institution financing a residential real estate transaction 
for an individual uses a land trust mechanism. Title to the property is 
conveyed to the land trust for which the financial institution itself is 
trustee. The underlying installment note is executed by the financial 
institution in its capacity as trustee and payment is secured by a trust 
deed, reflecting title in the financial institution as trustee. In some 
instances, the consumer executes a personal guaranty of the 
indebtedness. The note provides that it is payable only out of the 
property specifically described in the trust deed and that the trustee 
has no personal liability on the note. Assuming the transactions are for 
personal, family, or household purposes, these transactions are subject 
to the regulation since in substance (if not form) consumer credit is 
being extended.
    3(b) Credit over $25,000 not secured by real property or a dwelling.
    1. Coverage. Since a mobile home can be a dwelling under Sec. 
226.2(a)(19), this exemption does not apply to a credit extension 
secured by a mobile home used or expected to be used as the principal 
dwelling of the consumer, even if the credit exceeds $25,000. A loan 
commitment for closed-end credit in excess of $25,000 is exempt even 
though the amounts actually drawn never actually reach $25,000.
    2. Open-end credit. An open-end credit plan is exempt under Sec. 
226.3(b) (unless secured by real property or personal property used or 
expected to be used as the consumer's principal dwelling) if either of 
the following conditions is met:

     The creditor makes a firm commitment to lend over 
$25,000 with no requirement of additional credit information for any 
advances.
     The initial extension of credit on the line 
exceeds $25,000.

If a security interest is taken at a later time in any real property, or 
in personal property used or expected to be used as the consumer's 
principal dwelling, the plan would no longer be exempt. The creditor 
must comply with all of the requirements of the regulation including, 
for example, providing the consumer with an initial disclosure 
statement. If the security interest being added is in the consumer's 
principal dwelling, the creditor must also give the consumer the right 
to rescind the security interest. (See the commentary to Sec. 226.15 
concerning the right of rescission.)
    3. Closed-end credit--subsequent changes. A closed-end loan for over 
$25,000 may later be rewritten for $25,000 or less, or a security 
interest in real property or in personal property used or expected to be 
used as the consumer's principal dwelling may be added to an extension 
of credit for over $25,000. Such a transaction is consumer credit 
requiring disclosures only if the existing obligation is satisfied and 
replaced by a new obligation made for consumer purposes undertaken by 
the same obligor. (See the commentary to Sec. 226.23(a)(1) regarding 
the right of rescission when a security interest in a consumer's 
principal dwelling is added to a previously exempt transaction.)
    3(c) Public utility credit.
    1. Examples. Examples of public utility services include:

     Gas, water, or electrical services.
     Cable television services.
     Installation of new sewer lines, water lines, 
conduits, telephone poles, or metering equipment in an area not already 
serviced by the utility.

    The exemption does not apply to extensions of credit, for example:

     To purchase appliances such as gas or electric 
ranges, grills, or telephones.
     To finance home improvements such as new heating 
or air conditioning systems.

    3(d) Securities or commodities accounts.
    1. Coverage. This exemption does not apply to a transaction with a 
broker registered solely with the state, or to a separate credit

[[Page 476]]

extension in which the proceeds are used to purchase securities.
    3(e) Home fuel budget plans.
    1. Definition. Under a typical home fuel budget plan, the fuel 
dealer estimates the total cost of fuel for the season, bills the 
customer for an average monthly payment, and makes an adjustment in the 
final payment for any difference between the estimated and the actual 
cost of the fuel. Fuel is delivered as needed, no finance charge is 
assessed, and the customer may withdraw from the plan at any time. Under 
these circumstances, the arrangement is exempt from the regulation, even 
if a charge to cover the billing costs is imposed.
    3(f) Student loan programs.
    1. Coverage. This exemption applies to the Guaranteed Student Loan 
program (administered by the Federal government, State, and private non-
profit agencies), the Auxiliary Loans to Assist Students (also known as 
PLUS) program, and the National Direct Student Loan program.

                               References

    Statute: Sections 103 (s) and (t) and 104.
    Other sections: Section 226.12 (a) and (b).
    Previous regulation: Section 226.3 and Interpretations Sec. Sec. 
226.301 and 226.302.
    1981 changes: The business credit exemption has been expanded to 
include credit for agricultural purposes. The rule of Interpretation 
Sec. 226.302, concerning credit relating to structures containing more 
than 4 housing units, has been modified and somewhat expanded by 
providing more exclusions for transactions involving rental property.
    The exemption for transactions above $25,000 secured by real estate 
has been narrowed; all transactions secured by the consumer's principal 
dwelling (even if not considered real property) are now subject to the 
regulation.
    The public utility exemption now covers the financing of the 
extension of a utility into an area not earlier served by the utility, 
in addition to the financing of services.
    The securities credit exemption has been extended to broker-dealers 
registered with the CFTC as well as the SEC.
    A new exemption has been created for home fuel budget plans.

                      Section 226.4--Finance Charge

    4(a) Definition.
    1. Charges in comparable cash transactions. Charges imposed 
uniformly in cash and credit transactions are not finance charges. In 
determining whether an item is a finance charge, the creditor should 
compare the credit transaction in question with a similar cash 
transaction. A creditor financing the sale of property or services may 
compare charges with those payable in a similar cash transaction by the 
seller of the property or service.
    i. For example, the following items are not finance charges:
    A. Taxes, license fees, or registration fees paid by both cash and 
credit customers.
    B. Discounts that are available to cash and credit customers, such 
as quantity discounts.
    C. Discounts available to a particular group of consumers because 
they meet certain criteria, such as being members of an organization or 
having accounts at a particular financial institution. This is the case 
even if an individual must pay cash to obtain the discount, provided 
that credit customers who are members of the group and do not qualify 
for the discount pay no more than the nonmember cash customers.
    D. Charges for a service policy, auto club membership, or policy of 
insurance against latent defects offered to or required of both cash and 
credit customers for the same price.
    ii. In contrast, the following items are finance charges:
    A. Inspection and handling fees for the staged disbursement of 
construction loan proceeds.
    B. Fees for preparing a Truth in Lending disclosure statement, if 
permitted by law (for example, the Real Estate Settlement Procedures Act 
prohibits such charges in certain transactions secured by real 
property).
    C. Charges for a required maintenance or service contract imposed 
only in a credit transaction.
    iii. If the charge in a credit transaction exceeds the charge 
imposed in a comparable cash transaction, only the difference is a 
finance charge. For example:
    A. If an escrow agent is used in both cash and credit sales of real 
estate and the agent's charge is $100 in a cash transaction and $150 in 
a credit transaction, only $50 is a finance charge.
    2. Costs of doing business. Charges absorbed by the creditor as a 
cost of doing business are not finance charges, even though the creditor 
may take such costs into consideration in determining the interest rate 
to be charged or the cash price of the property or service sold. 
However, if the creditor separately imposes a charge on the consumer to 
cover certain costs, the charge is a finance charge if it otherwise 
meets the definition. For example:

     A discount imposed on a credit obligation when it 
is assigned by a seller-creditor to another party is not a finance 
charge as long as the discount is not separately imposed on the 
consumer. (See Sec. 226.4(b)(6).)
     A tax imposed by a state or other governmental 
body on a creditor is not a finance charge if the creditor absorbs the 
tax as a cost of doing business and does not separately impose the tax 
on the consumer. (For

[[Page 477]]

additional discussion of the treatment of taxes, see other commentary to 
Sec. 226.4(a).)

    3. Forfeitures of interest. If the creditor reduces the interest 
rate it pays or stops paying interest on the consumer's deposit account 
or any portion of it for the term of a credit transaction (including, 
for example, an overdraft on a checking account or a loan secured by a 
certificate of deposit), the interest lost is a finance charge. (See the 
commentary to Sec. 226.4(c)(6).) For example:

     A consumer borrows $5,000 for 90 days and secures 
it with a $10,000 certificate of deposit paying 15% interest. The 
creditor charges the consumer an interest rate of 6% on the loan and 
stops paying interest on $5,000 of the $10,000 certificate for the term 
of the loan. The interest lost is a finance charge and must be reflected 
in the annual percentage rate on the loan.

    However, the consumer must be entitled to the interest that is not 
paid in order for the lost interest to be a finance charge. For example:

     A consumer wishes to buy from a financial 
institution a $10,000 certificate of deposit paying 15% interest but has 
only $4,000. The financial institution offers to lend the consumer 
$6,000 at an interest rate of 6%, but will pay the 15% interest only on 
the amount of the consumer's deposit, $4,000. The creditor's failure to 
pay interest on the $6,000 does not result in an additional finance 
charge on the extension of credit, provided the consumer is entitled by 
the deposit agreement with the financial institution to interest only on 
the amount of the consumer's deposit.
     A consumer enters into a combined time deposit/
credit agreement with a financial institution that establishes a time 
deposit account and an open-end line of credit. The line of credit may 
be used to borrow against the funds in the time deposit. The agreement 
provides for an interest rate on any credit extension of, for example, 
1%. In addition, the agreement states that the creditor will pay 0% 
interest on the amount of the time deposit that corresponds to the 
amount of the credit extension(s). The interest that is not paid on the 
time deposit by the financial institution is not a finance charge (and 
therefore does not affect the annual percentage rate computation).

    4. Treatment of fees for use of automated teller machines. Any 
charge imposed on a cardholder by a card issuer for the use of an 
automated teller machine (ATM) to obtain a cash advance (whether in a 
proprietary, shared, interchange, or other system) is not a finance 
charge to the extent that it does not exceed the charge imposed by the 
card issuer on its cardholders for using the ATM to withdraw cash from a 
consumer asset account, such as a checking or savings account. (See the 
commentary to Sec. 226.6(b).)
    5. Taxes. i. Generally, a tax imposed by a state or other 
governmental body solely on a creditor is a finance charge if the 
creditor separately imposes the charge on the consumer.
    ii. In contrast, a tax is not a finance charge (even if the tax is 
collected by the creditor) if applicable law imposes the tax:
    A. Solely on the consumer;
    B. On the creditor and the consumer jointly;
    C. On the credit transaction, without indicating which party is 
liable for the tax; or
    D. On the creditor, if applicable law directs or authorizes the 
creditor to pass the tax on to the consumer. (For purposes of this 
section, if applicable law is silent as to passing on the tax, the law 
is deemed not to authorize passing it on.)
    iii. For example, a stamp tax, property tax, intangible tax, or any 
other state or local tax imposed on the consumer, or on the credit 
transaction, is not a finance charge even if the tax is collected by the 
creditor.
    iv. In addition, a tax is not a finance charge if it is excluded 
from the finance charge by an other provision of the regulation or 
commentary (for example, if the tax is imposed uniformly in cash and 
credit transactions).

    4(a)(1) Charges by third parties.
    1. Choosing the provider of a required service. An example of a 
third-party charge included in the finance charge is the cost of 
required mortgage insurance, even if the consumer is allowed to choose 
the insurer.
    2. Annuities associated with reverse mortgages. Some creditors offer 
annuities in connection with a reverse mortgage transaction. The amount 
of the premium is a finance charge if the creditor requires the purchase 
of the annuity incident to the credit. Examples include the following:
    i. The credit documents reflect the purchase of an annuity from a 
specific provider or providers.
    ii. The creditor assesses an additional charge on consumers who do 
not purchase an annuity from a specific provider.
    iii. The annuity is intended to replace in whole or in part the 
creditor's payments to the consumer either immediately or at some future 
date.

    4(a)(2) Special rule; closing agent charges.
    1. General. This rule applies to charges by a third party serving as 
the closing agent for the particular loan. An example of a closing agent 
charge included in the finance charge is a courier fee where the 
creditor requires the use of a courier.
    2. Required closing agent. If the creditor requires the use of a 
closing agent, fees charged by the closing agent are included in the 
finance charge only if the creditor requires the particular service, 
requires the imposition of the charge, or retains a portion

[[Page 478]]

of the charge. Fees charged by a third-party closing agent may be 
otherwise excluded from the finance charge under Sec. 226.4. For 
example, a fee that would be paid in a comparable cash transaction may 
be excluded under Sec. 226.4(a). A charge for conducting or attending a 
closing is a finance charge and may be excluded only if the charge is 
included in and is incidental to a lump-sum closing fee excluded under 
Sec. 226.4(c)(7).

    4(a)(3) Special rule; mortgage broker fees.
    1. General. A fee charged by a mortgage broker is excluded from the 
finance charge if it is the type of fee that is also excluded when 
charged by the creditor. For example, to exclude an application fee from 
the finance charge under Sec. 226.4(c)(1), a mortgage broker must 
charge the fee to all applicants for credit, whether or not credit is 
extended.
    2. Coverage. This rule applies to charges paid by consumers to a 
mortgage broker in connection with a consumer credit transaction secured 
by real property or a dwelling.
    3. Compensation by lender. The rule requires all mortgage broker 
fees to be included in the finance charge. Creditors sometimes 
compensate mortgage brokers under a separate arrangement with those 
parties. Creditors may draw on amounts paid by the consumer, such as 
points or closing costs, to fund their payment to the broker. 
Compensation paid by a creditor to a mortgage broker under an agreement 
is not included as a separate component of a consumer's total finance 
charge (although this compensation may be reflected in the finance 
charge if it comes from amounts paid by the consumer to the creditor 
that are finance charges, such as points and interest).
    4(b) Examples of finance charges.
    1. Relationship to other provisions. Charges or fees shown as 
examples of finance charges in Sec. 226.4(b) may be excludable under 
Sec. 226.4(c), (d), or (e). For example:

     Premiums for credit life insurance, shown as an 
example of a finance charge under Sec. 226.4(b)(7), may be excluded if 
the requirements of Sec. 226.4(d)(1) are met.
     Appraisal fees mentioned in Sec. 226.4(b)(4) are 
excluded for real property or residential mortgage transactions under 
Sec. 226.4(c)(7).

    Paragraph 4(b)(2).
    1. Checking account charges. A checking or transaction account 
charge imposed in connection with a credit feature is a finance charge 
under Sec. 226.4(b)(2) to the extent the charge exceeds the charge for 
a similar account without a credit feature. If a charge for an account 
with a credit feature does not exceed the charge for an account without 
a credit feature, the charge is not a finance charge under Sec. 
226.4(b)(2). To illustrate:
    i. A $5 service charge is imposed on an account with an overdraft 
line of credit (where the institution has agreed in writing to pay an 
overdraft), while a $3 service charge is imposed on an account without a 
credit feature; the $2 difference is a finance charge. (If the 
difference is not related to account activity, however, it may be 
excludable as a participation fee. See the commentary to Sec. 
226.4(c)(4).)
    ii. A $5 service charge is imposed for each item that results in an 
overdraft on an account with an overdraft line of credit, while a $25 
service charge is imposed for paying or returning each item on a similar 
account without a credit feature; the $5 charge is not a finance charge.

    Paragraph 4(b)(3).
    1. Assumption fees. The assumption fees mentioned in Sec. 
226.4(b)(3) are finance charges only when the assumption occurs and the 
fee is imposed on the new buyer. The assumption fee is a finance charge 
in the new buyer's transaction.
    Paragraph 4(b)(5).
    1. Credit loss insurance. Common examples of the insurance against 
credit loss mentioned in Sec. 226.4(b)(5) are mortgage guaranty 
insurance, holder in due course insurance, and repossession insurance. 
Such premiums must be included in the finance charge only for the period 
that the creditor requires the insurance to be maintained.
    2. Residual value insurance. Where a creditor requires a consumer to 
maintain residual value insurance or where the creditor is a beneficiary 
of a residual value insurance policy written in connection with an 
extension of credit (as is the case in some forms of automobile balloon 
payment financing, for example), the premiums for the insurance must be 
included in the finance charge for the period that the insurance is to 
be maintained. If a creditor pays for residual value insurance and 
absorbs the payment as a cost of doing business, such costs are not 
considered finance charges. (See comment 4(a)-2.)
    Paragraphs 4(b) (7) and (8).
    1. Pre-existing insurance policy. The insurance discussed in Sec. 
226.4(b) (7) and (8) does not include an insurance policy (such as a 
life or an automobile collision insurance policy) that is already owned 
by the consumer, even if the policy is assigned to or otherwise made 
payable to the creditor to satisfy an insurance requirement. Such a 
policy is not ``written in connection with'' the transaction, as long as 
the insurance was not purchased for use in that credit extension, since 
it was previously owned by the consumer.
    2. Insurance written in connection with a transaction. Insurance 
sold after consummation in closed-end credit transactions or after the 
opening of a plan in open-end credit transactions is not ``written in 
connection with'' the credit transaction if the insurance is written 
because of the consumer's default (for example, by failing to obtain or 
maintain required property insurance) or because

[[Page 479]]

the consumer requests insurance after consummation or the opening of a 
plan (although credit sale disclosures may be required for the insurance 
sold after consummation if it is financed).
    3. Substitution of life insurance. The premium for a life insurance 
policy purchased and assigned to satisfy a credit life insurance 
requirement must be included in the finance charge, but only to the 
extent of the cost of the credit life insurance if purchased from the 
creditor or the actual cost of the policy (if that is less than the cost 
of the insurance available from the creditor). If the creditor does not 
offer the required insurance, the premium to be included in the finance 
charge is the cost of a policy of insurance of the type, amount, and 
term required by the creditor.
    4. Other insurance. Fees for required insurance not of the types 
described in Sec. 226.4(b) (7) and (8) are finance charges and are not 
excludable. For example:
     The premium for a hospitalization insurance 
policy, if it is required to be purchased only in a credit transaction, 
is a finance charge.

    Paragraph 4(b)(9).
    1. Discounts for payment by other than credit. The discounts to 
induce payment by other than credit mentioned in Sec. 226.4(b)(9) 
include, for example, the following situation:

     The seller of land offers individual tracts for 
$10,000 each. If the purchaser pays cash, the price is $9,000, but if 
the purchaser finances the tract with the seller the price is $10,000. 
The $1,000 difference is a finance charge for those who buy the tracts 
on credit.

    2. Exception for cash discounts. Discounts offered to induce 
consumers to pay for property or services by cash, check, or other means 
not involving the use of either an open-end credit plan or a credit card 
(whether open-end or closed-end credit is extended on the card) may be 
excluded from the finance charge under section 167(b) of the Act (as 
amended by Pub. L. 97-25, July 27, 1981). The discount may be in 
whatever amount the seller desires, either as a percentage of the 
regular price (as defined in section 103(z) of the Act, as amended) or a 
dollar amount. This provision applies only to transactions involving an 
open-end credit plan or a credit card. The merchant must offer the 
discount to prospective buyers whether or not they are cardholders or 
members of the open-end credit plan. The merchant may, however, make 
other distinctions. For example:

     The merchant may limit the discount to payment by 
cash, and not offer it for payment by check or by use of a debit card.
     The merchant may establish a discount plan that 
allows a 15% discount for payment by cash, a 10% discount for payment by 
check, and a 5% discount for payment by a particular credit card. None 
of these discounts is a finance charge.

    Section 171(c) of the Act excludes section 167(b) discounts from 
treatment as a finance charge or other charge for credit under any state 
usury or disclosure laws.
    3. Determination of the regular price. The regular price is critical 
in determining whether the difference between the price charged to cash 
customers and credit customers is a discount or a surcharge, as these 
terms are defined in amended section 103 of the Act. The regular price 
is defined in section 103 of the Act as--

    . . . the tag or posted price charged for the property or service if 
a single price is tagged or posted, or the price charged for the 
property or service when payment is made by use of an open-end credit 
account or a credit card if either (1) no price is tagged or posted, or 
(2) two prices are tagged or posted. . . .

    For example, in the sale of motor vehicle fuel, the tagged or posted 
price is the price displayed at the pump. As a result, the higher price 
(the open-end credit or credit card price) must be displayed at the 
pump, either alone or along with the cash price. Service station 
operators may designate separate pumps or separate islands as being for 
either cash or credit purchases and display only the appropriate prices 
at the various pumps. If a pump is capable of displaying on its meter 
either a cash or a credit price depending upon the consumer's means of 
payment, both the cash price and the credit price must be displayed at 
the pump. A service station operator may display the cash price of fuel 
by itself on a curb sign, as long as the sign clearly indicates that the 
price is limited to cash purchases.
    4(b)(10) Debt cancellation fees.
    1. Definition. Debt cancellation coverage provides for payment or 
satisfaction of all or part of a debt when a specified event occurs. The 
term includes guaranteed automobile protection or ``GAP'' agreements, 
which pay or satisfy the remaining debt after property insurance 
benefits are exhausted.
    4(c) Charges excluded from the finance charge.
    Paragraph 4(c)(1).
    1. Application fees. An application fee that is excluded from the 
finance charge is a charge to recover the costs associated with 
processing applications for credit. The fee may cover the costs of 
services such as credit reports, credit investigations, and appraisals. 
The creditor is free to impose the fee in only certain of its loan 
programs, such as mortgage loans, However, if the fee is to be excluded 
from the finance charge under Sec. 226.4(c)(1), it must be charged to 
all applicants, not just to applicants who are approved or who actually 
receive credit.

    Paragraph 4(c)(2).

[[Page 480]]

    1. Late payment charges. Late payment charges can be excluded from 
the finance charge under Sec. 226.4(c)(2) whether or not the person 
imposing the charge continues to extend credit on the account or 
continues to provide property or services to the consumer. In 
determining whether a charge is for actual unanticipated late payment on 
a 30-day account, for example, factors to be considered include:
     The terms of the account. For example, is the 
consumer required by the account terms to pay the account balance in 
full each month? If not, the charge may be a finance charge.
     The practices of the creditor in handling the 
accounts. For example, regardless of the terms of the account, does the 
creditor allow consumers to pay the accounts over a period of time 
without demanding payment in full or taking other action to collect? If 
no effort is made to collect the full amount due, the charge may be a 
finance charge.
    Section 226.4(c)(2) applies to late payment charges imposed for 
failure to make payments as agreed, as well as failure to pay an account 
in full when due.
    2. Other excluded charges. Charges for ``delinquency, default, or a 
similar occurrence'' include, for example, charges for reinstatement of 
credit privileges or for summitting as payment a check that is later 
returned unpaid.

    Paragraph 4(c)(3).
    1. Assessing interest on an overdraft balance. A charge on an 
overdraft balance computed by applying a rate of interest to the amount 
of the overdraft is not a finance charge, even though the consumer 
agrees to the charge in the account agreement, unless the financial 
institution agrees in writing that it will pay such items.

    Paragraph 4(c)(4).
    1. Participation fees--periodic basis. The participation fees 
mentioned in Sec. 226.4(c)(4) do not necessarily have to be formal 
membership fees, nor are they limited to credit card plans. The 
provision applies to any credit plan in which payment of a fee is a 
condition of access to the plan itself, but it does not apply to fees 
imposed separately on individual closed-end transactions. The fee may be 
charged on a monthly, annual, or other periodic basis; a one-time, non-
recurring fee imposed at the time an account is opened is not a fee that 
is charged on a periodic basis, and may not be treated as a 
participation fee.
    2. Participation fees--exclusions. Minimum monthly charges, charges 
for non-use of a credit card, and other charges based on either account 
activity or the amount of credit available under the plan are not 
excluded from the finance charge by Sec. 226.4(c)(4). Thus, for 
example, a fee that is charged and then refunded to the consumer based 
on the extent to which the consumer uses the credit available would be a 
finance charge. (See the commentary to Sec. 226.4(b)(2). Also, see 
comment 14(c)-7 for treatment of certain types of fees excluded in 
determining the annual percentage rate for the periodic statement.)

    Paragraph 4(c)(5).
    1. Seller's points. The seller's points mentioned in Sec. 
226.4(c)(5) include any charges imposed by the creditor upon the non-
creditor seller of property for providing credit to the buyer or for 
providing credit on certain terms. These charges are excluded from the 
finance charge even if they are passed on to the buyer, for example, in 
the form of a higher sales price. Seller's points are frequently 
involved in real estate transactions guaranteed or insured by 
governmental agencies. A commitment fee paid by a non-creditor seller 
(such as a real estate developer) to the creditor should be treated as 
seller's points. Buyer's points (that is, points charged to the buyer by 
the creditor), however, are finance charges.
    2. Other seller-paid amounts. Mortgage insurance premiums and other 
finance charges are sometimes paid at or before consummation or 
settlement on the borrower's behalf by a noncreditor seller. The 
creditor should treat the payment made by the seller as seller's points 
and exclude it from the finance charge if, based on the seller's 
payment, the consumer is not legally bound to the creditor for the 
charge. A creditor who gives disclosures before the payment has been 
made should base them on the best information reasonably available.

    Paragraph 4(c)(6).
    1. Lost interest. Certain federal and state laws mandate a 
percentage differential between the interest rate paid on a deposit and 
the rate charged on a loan secured by that deposit. In some situations 
because of usury limits the creditor must reduce the interest rate paid 
on the deposit and, as a result, the consumer loses some of the interest 
that would otherwise have been earned. Under Sec. 226.4(c)(6), such 
lost interest need not be included in the finance charge. This rule 
applies only to an interest reduction imposed because a rate 
differential is required by law and a usury limit precludes compliance 
by any other means. If the creditor imposes a differential that exceeds 
that required, only the lost interest attributable to the excess amount 
is a finance charge. (See the commentary to Sec. 226.4(a).)

    Paragraph 4(c)(7).
    1. Real estate or residential mortgage transaction charges. The list 
of charges in Sec. 226.4(c)(7) applies both to residential mortgage 
transactions (which may include, for example, the purchase of a mobile 
home) and to other transactions secured by real estate. The fees are 
excluded from the finance charge even if the services for which the fees

[[Page 481]]

are imposed are performed by the creditor's employees rather than by a 
third party. In addition, the cost of verifying or confirming 
information connected to the item is also excluded. For example, credit 
report fees cover not only the cost of the report, but also the cost of 
verifying information in the report. In all cases, charges excluded 
under Sec. 226.4(c)(7) must be bona fide and reasonable.
    2. Lump sum charges. If a lump sum charged for several services 
includes a charge that is not excludable, a portion of the total should 
be allocated to that service and included in the finance charge. 
However, a lump sum charged for conducting or attending a closing (for 
example, by a lawyer or a title company) is excluded from the finance 
charge if the charge is primarily for services related to items listed 
in Sec. 226.4(c)(7) (for example, reviewing or completing documents), 
even if other incidental services such as explaining various documents 
or disbursing funds for the parties are performed. The entire charge is 
excluded even if a fee for the incidental services would be a finance 
charge if it were imposed separately.
    3. Charges assessed during the loan term. Real estate or residential 
mortgage transaction charges excluded under Sec. 226.4(c)(7) are those 
charges imposed solely in connection with the initial decision to grant 
credit. This would include, for example, a fee to search for tax liens 
on the property or to determine if flood insurance is required. The 
exclusion does not apply to fees for services to be performed 
periodically during the loan term, regardless of when the fee is 
collected. For example, a fee for one or more determinations during the 
loan term of the current tax lien status or flood insurance requirements 
is a finance charge, regardless of whether the fee is imposed at 
closing, or when the service is performed. If a creditor is uncertain 
about what portion of a fee to be paid at consummation or loan closing 
is related to the initial decision to grant credit, the entire fee may 
be treated as a finance charge.

    4(d) Insurance and debt cancellation coverage.
    1. General. Section 226.4(d) permits insurance premiums and charges 
and debt-cancellation charges to be excluded from the finance charge. 
The required disclosures must be made in writing. The rules on location 
of insurance and debt-cancellation disclosures for closed-end 
transactions are in Sec. 226.17(a). For purposes of Sec. 226.4(d), all 
references to insurance also include debt cancellation coverage unless 
the context indicates otherwise.
    2. Timing of disclosures. If disclosures are given early, for 
example under Sec. 226.17(f) or Sec. 226.19(a), the creditor need not 
redisclose if the actual premium is different at the time of 
consummation. If insurance disclosures are not given at the time of 
early disclosure and insurance is in fact written in connection with the 
transaction, the disclosures under Sec. 226.4(d) must be made in order 
to exclude the premiums from the finance charge.
    3. Premium rate increases. The creditor should disclose the premium 
amount based on the rates currently in effect and need not designate it 
as an estimate even if the premium rates may increase. An increase in 
insurance rates after consummation of a closed-end credit transaction or 
during the life of an open-end credit plan does not require redisclosure 
in order to exclude the additional premium from treatment as a finance 
charge.
    4. Unit-cost disclosures. i. Open-end credit. The premium or fee for 
insurance or debt cancellation for the initial term of coverage may be 
disclosed on a unit-cost basis in open-end credit transactions. The cost 
per unit should be based on the initial term of coverage, unless one of 
the options under comment 4(d)-12 is available.
    ii. Closed-end credit. One of the transactions for which unit-cost 
disclosures (such as 50 cents per year for each $100 of the amount 
financed) may be used in place of the total insurance premium involves a 
particular kind of insurance plan. For example, a consumer with a 
current indebtedness of $8,000 is covered by a plan of credit life 
insurance coverage with a maximum of $10,000. The consumer requests an 
additional $4,000 loan to be covered by the same insurance plan. Since 
the $4,000 loan exceeds, in part, the maximum amount of indebtedness 
that can be covered by the plan, the creditor may properly give the 
insurance cost disclosures on the $4,000 loan on a unit-cost basis.
    5. Required credit life insurance. Credit life, accident, health, or 
loss-of-income insurance must be voluntary in order for the premium or 
charges to be excluded from the finance charge. Whether the insurance is 
in fact required or optional is a factual question. If the insurance is 
required, the premiums must be included in the finance charge, whether 
the insurance is purchased from the creditor or from a third party. If 
the consumer is required to elect one of several options--such as to 
purchase credit life insurance, or to assign an existing life insurance 
policy, or to pledge security such as a certificate of deposit--and the 
consumer purchases the credit life insurance policy, the premium must be 
included in the finance charge. (If the consumer assigns a preexisting 
policy or pledges security instead, no premium is included in the 
finance charge. The security interest would be disclosed under Sec. 
226.6(c) or Sec. 226.18(m). See the commentary to Sec. 226.4(b) (7) 
and (8).)
    6. Other types of voluntary insurance. Insurance is not credit life, 
accident, health, or loss-of-income insurance if the creditor or the 
credit account of the consumer is not the beneficiary of the insurance 
coverage. If

[[Page 482]]

such insurance is not required by the creditor as an incident to or a 
condition of credit, it is not covered by Sec. 226.4.
    7. Signatures. If the creditor offers a number of insurance options 
under Sec. 226.4(d), the creditor may provide a means for the consumer 
to sign or initial for each option, or it may provide for a single 
authorizing signature or initial with the options selected designated by 
some other means, such as a check mark. The insurance authorization may 
be signed or initialed by any consumer, as defined in Sec. 
226.2(a)(11), or by an authorized user on a credit card account.
    8. Property insurance. To exclude property insurance premiums or 
charges from the finance charge, the creditor must allow the consumer to 
choose the insurer and disclose that fact. This disclosure must be made 
whether or not the property insurance is available from or through the 
creditor. The requirement that an option be given does not require that 
the insurance be readily available from other sources. The premium or 
charge must be disclosed only if the consumer elects to purchase the 
insurance from the creditor; in such a case, the creditor must also 
disclose the term of the property insurance coverage if it is less than 
the term of the obligation.
    9. Single interest insurance. Blanket and specific single interest 
coverage are treated the same for purposes of the regulation. A charge 
for either type of single interest insurance may be excluded from the 
finance charge if:
     The insurer waives any right of subrogation.
     The other requirements of Sec. 226.4(d)(2) are 
met. This includes, of course, giving the consumer the option of 
obtaining the insurance from a person of the consumer's choice. The 
creditor need not ascertain whether the consumer is able to purchase the 
insurance from someone else.

    10. Single-interest insurance defined. The term single-interest 
insurance as used in the regulation refers only to the types of coverage 
traditionally included in the term vendor's single-interest insurance 
(or VSI), that is, protection of tangible property against normal 
property damage, concealment, confiscation, conversion, embezzlement, 
and skip. Some comprehensive insurance policies may include a variety of 
additional coverages, such as repossession insurance and holder-in-due-
course insurance. These types of coverage do not constitute single-
interest insurance for purposes of the regulation, and premiums for them 
do not qualify for exclusion from the finance charge under Sec. 
226.4(d). If a policy that is primarily VSI also provides coverages that 
are not VSI or other property insurance, a portion of the premiums must 
be allocated to the nonexcludable coverages and included in the finance 
charge. However, such allocation is not required if the total premium in 
fact attributable to all of the non-VSI coverages included in the policy 
is $1.00 or less (or $5.00 or less in the case of a multi-year policy).
    11. Initial term. i. The initial term of the insurance or debt 
cancellation coverage determines the period for which a premium amount 
or fee must be disclosed, unless one of the options discussed under 
comment 4(d)-12 is available. For purposes of Sec. 226.4(d), the 
initial term is the period for which the insurer or creditor is 
obligated to provide coverage, even though the consumer may be allowed 
to cancel the coverage or coverage may end due to nonpayment before that 
term expires.
    ii. For example:
    A. The initial term of a property insurance policy on an automobile 
that is written for one year is one year even though premiums are paid 
monthly and the term of the credit transaction is four years.
    B. The initial term of an insurance policy is the full term of the 
credit transaction if the consumer pays or finances a single premium in 
advance.
    12. Initial term; alternative. i. General. A creditor has the option 
of providing cost disclosures on the basis of an assumed initial term of 
one year of insurance or debt-cancellation coverage instead of a longer 
initial term (provided the premium or fee is clearly labeled as being 
for one year) if:
    A. The initial term is indefinite or not clear, or
    B. The consumer has agreed to pay a premium or fee that is assessed 
periodically but the consumer is under no obligation to continue the 
coverage, whether or not the consumer has made an initial payment.
    ii. Open-end plans. For open-end plans, a creditor also has the 
option of providing unit-cost disclosure on the basis of a period that 
is less than one year if the consumer has agreed to pay a premium or fee 
that is assessed periodically, for example monthly, but the consumer is 
under no obligation to continue the coverage.
    iii. Examples. To illustrate:
    A. A credit life insurance policy providing coverage for a 30-year 
mortgage loan has an initial term of 30 years, even though premiums are 
paid monthly and the consumer is not required to continue the coverage. 
Disclosures may be based on the initial term, but the creditor also has 
the option of making disclosures on the basis of coverage for an assumed 
initial term of one year.
    13. Loss-of-income insurance. The loss-of-income insurance mentioned 
in Sec. 226.4(d) includes involuntary unemployment insurance, which 
provides that some or all of the consumer's payments will be made if the 
consumer becomes unemployed involuntarily.
    4(d)(3) Voluntary debt cancellation fees.
    1. General. Fees charged for the specialized form of debt 
cancellation agreement known

[[Page 483]]

as guaranteed automobile protection (``GAP'') agreements must be 
disclosed according to Sec. 226.4(d)(3) rather than according to Sec. 
226.4(d)(2) for property insurance.
    2. Disclosures. Creditors can comply with Sec. 226.4(d)(3) by 
providing a disclosure that refers to debt cancellation coverage whether 
or not the coverage is considered insurance. Creditors may use the model 
credit insurance disclosures only if the debt cancellation coverage 
constitutes insurance under state law.
    4(e) Certain security interest charges.
    1. Examples.
    i. Excludable charges. Sums must be actually paid to public 
officials to be excluded from the finance charge under Sec. 226.4(e) 
(1) and (3). Examples are charges or other fees required for filing or 
recording security agreements, mortgages, continuation statements, 
termination statements, and similar documents, as well as intangible 
property or other taxes even when the charges or fees are imposed by the 
state solely on the creditor and charged to the consumer (if the tax 
must be paid to record a security interest). (See comment 4(a)-5 
regarding the treatment of taxes, generally.)
    ii. Charges not excludable. If the obligation is between the 
creditor and a third party (an assignee, for example), charges or other 
fees for filing or recording security agreements, mortgages, 
continuation statements, termination statements, and similar documents 
relating to that obligation are not excludable from the finance charge 
under this section.
    2. Itemization. The various charges described in Sec. 226.4(e) (1) 
and (3) may be totaled and disclosed as an aggregate sum, or they may be 
itemized by the specific fees and taxes imposed. If an aggregate sum is 
disclosed, a general term such as security interest fees or filing fees 
may be used.
    3. Notary fees. In order for a notary fee to be excluded under Sec. 
226.4(e)(1), all of the following conditions must be met:
     The document to be notarized is one used to 
perfect, release, or continue a security interest.
     The document is required by law to be notarized.
     A notary is considered a public official under 
applicable law.
     The amount of the fee is set or authorized by 
law.
    4. Non-filing insurance. The exclusion in Sec. 226.4(e)(2) is 
available only if non-filing insurance is purchased. If the creditor 
collects and simply retains a fee as a sort of self-insurance against 
non-filing it may not be excluded from the finance charge. If the non-
filing insurance premium exceeds the amount of the fees excludable from 
the finance charge under Sec. 226.4(e)(1), only the excess is a finance 
charge. For example:
     The fee for perfecting a security interest is 
$5.00 and the fee for releasing the security interest is $3.00. The 
creditor charges $10.00 for non-filing insurance. Only $8.00 of the 
$10.00 is excludable from the finance charge.
    4(f) Prohibited offsets.
    1. Earnings on deposits or investments. The rule that the creditor 
shall not deduct any earnings by the consumer or deposits or investments 
applies whether or not the creditor has a security interest in the 
property.

                               References

    Statute: Sections 106, 167, and 171(c).
    Other sections: Sections 226.9(d) and 226.12.
    Previous regulation: Section 226.4 and Interpretations Sec. Sec. 
226.401 through 226.407.
    1981 changes: While generally continuing the rules under the 
previous regulation, Sec. 226.4 reflects amendments to section 106 of 
the act and makes certain other changes in the rules for determining the 
finance charge. For example, Sec. 226.4(a) expressly excludes from the 
finance charge amounts payable in comparable cash transactions. Section 
226.8(o) of the previous regulation, dealing with discounts for prompt 
payment of a credit sale, was deleted in the revised regulation since 
the general test for a finance charge now focuses on a comparison of 
cash and credit transactions. With respect to various exclusions from 
the finance charge: application fees imposed on all applicants are no 
longer finance charges; continuing to extend credit to a consumer is no 
longer a controlling test for determining whether a late payment charge 
is bona fide; seller's points are not to be included in the finance 
charge; and the special exclusions for real estate transactions apply to 
all residential mortgage transactions.
    The simplified rules for excluding insurance from the finance charge 
allow unit-cost disclosure in certain closed-end credit transactions; 
permit initials as well as signatures on the authorization; permit any 
consumer to authorize insurance for other consumers; and delete the 
requirement that the authorization be separately dated.

                       Subpart B--Open-End Credit

             Section 226.5--General Disclosure Requirements

    5(a) Form of disclosures.
    Paragraph 5(a)(1).
    1. Clear and conspicuous. The clear and conspicuous standard 
requires that disclosures be in a reasonably understandable form. Except 
where otherwise provided, the standard does not require that disclosures 
be segregated from other material or located in any particular place on 
the disclosure statement, or that numerical amounts or percentages be in 
any particular type size. (But see comments 5a(a)(2)-1 and -2 for 
special rules concerning Sec. 226.5a disclosures for credit card

[[Page 484]]

applications and solicitations.) The standard does not prohibit:

     Pluralizing required terminology (finance charge 
and annual percentage rate).
     Adding to the required disclosures such items as 
contractual provisions, explanations of contract terms, state 
disclosures, and translations.
     Sending promotional material with the required 
disclosures.
     Using commonly accepted or readily understandable 
abbreviations (such as mo. for month or TX for Texas) in making any 
required disclosures.
     Using codes or symbols such as APR (for annual 
percentage rate), FC (for finance charge), or Cr (for credit balance), 
so long as a legend or description of the code or symbol is provided on 
the disclosure statement.

    2. Integrated document. The creditor may make both the initial 
disclosures (Sec. 226.6) and the periodic statement disclosures (Sec. 
226.7) on more than one page, and use both the front and the reverse 
sides, so long as the pages constitute an integrated document. An 
integrated document would not include disclosure pages provided to the 
consumer at different times or disclosures interspersed on the same page 
with promotional material. An integrated document would include, for 
example:

     Multiple pages provided in the same envelope that 
cover related material and are folded together, numbered consecutively, 
or clearly labelled to show that they relate to one another.
     A brochure that contains disclosures and 
explanatory material about a range of services the creditor offers, such 
as credit, checking account, and electronic fund transfer features.

    Paragraph 5(a)(2).
    1. When disclosures must be more conspicuous. The term finance 
charge and annual percentage rate, when required to be used with a 
number, must be disclosed more conspicuously than other required 
disclosures, except in the cases provided in footnote 9. At the 
creditor's option, finance charge and annual percentage rate may also be 
disclosed more conspicuously than the other required disclosures even 
when the regulation does not so require. The following examples 
illustrate these rules:

     In disclosing the annual percentage rate as 
required by Sec. 226.6(a)(2), the term annual percentage rate is 
subject to the more conspicuous rule.
     In disclosing the amount of the finance charge, 
required by Sec. 226.7(f), the term finance charge is subject to the 
more conspicuous rule.
     Although neither finance charge nor annual 
percentage rate need be emphasized when used as part of general 
informational material or in textual descriptions of other terms, 
emphasis is permissible in such cases. For example, when the terms 
appear as part of the explanations required under Sec. 226.6(a) (3) and 
(4), they may be equally conspicuous as the disclosures required under 
Sec. Sec. 226.6(a)(2) and 226.7(g).

    2. Making disclosures more conspicuous. In disclosing the terms 
finance charge and annual percentage rate more conspicuously, only the 
words finance charge and annual percentage rate should be accentuated. 
For example, if the term total finance charge is used, only finance 
charge should be emphasized. The disclosures may be made more 
conspicuous by, for example:

     Capitalizing the words when other disclosures are 
printed in lower case.
     Putting them in bold print or a contrasting 
color.
     Underlining them.
     Setting them off with asterisks.
     Printing them in larger type.

    3. Disclosure of figures--exception to more conspicuous rule. The 
terms annual percentage rate and finance charge need not be more 
conspicuous than figures (including, for example, numbers, percentages, 
and dollar signs).
    5(b) Time of disclosures.
    5(b)(1) Initial disclosures.
    1. Disclosure before the first transaction. The rule that the 
initial disclosure statement must be furnished ``before the first 
transaction'' requires delivery of the initial disclosure statement 
before the consumer becomes obligated on the plan. For example, the 
initial disclosures must be given before the consumer makes the first 
purchase (such as when a consumer opens a credit plan and makes 
purchases contemporaneously at a retail store), receives the first 
advance, or pays any fees or charges under the plan other than an 
application fee or refundable membership fee (see below). The 
prohibition on the payment of fees other than application or refundable 
membership fees before initial disclosures are provided does not apply 
to home equity plans subject to Sec. 226.5b. See the commentary to 
Sec. 226.5b(h) regarding the collection of fees for home equity plans 
covered by Sec. 226.5b.

     If the consumer pays a membership fee before 
receiving the Truth in Lending disclosures, or the consumer agrees to 
the imposition of a membership fee at the time of application and the 
Truth in Lending disclosure statement is not given at that time, 
disclosures are timely as long as the consumer, after receiving the 
disclosures, can reject the plan. The creditor must refund the 
membership fee if it has been paid, or clear the account if it has been 
debited to the consumer's account.
     If the consumer receives a cash advance check at 
the same time the Truth in Lending disclosures are provided, disclosures 
are still timely if the consumer can, after receiving

[[Page 485]]

the disclosures, return the cash advance check to the creditor without 
obligation (for example, without paying finance charges).
     Initial disclosures need not be given before the 
imposition of an application fee under Sec. 226.4(c)(1).
     If, after receiving the disclosures, the consumer 
uses the account, pays a fee, or negotiates a cash advance check, the 
creditor may consider the account not rejected for purposes of this 
section.

    2. Reactivation of suspended account. If an account is temporarily 
suspended (for example, because the consumer has exceeded a credit 
limit, or because a credit card is reported lost or stolen) and then is 
reactivated, no new initial disclosures are required.
    3. Reopening closed account. If an account has been closed (for 
example, due to inactivity, cancellation, or expiration) and then is 
reopened, new initial disclosures are required. No new initial 
disclosures are required, however, when the account is closed merely to 
assign it a new number (for example, when a credit card is reported lost 
or stolen) and the new account then continues on the same terms.
    4. Converting closed-end to open-end credit. If a closed-end credit 
transaction is converted to an open-end credit account under a written 
agreement with the consumer, the initial disclosures under Sec. 226.6 
must be given before the consumer becomes obligated on the open-end 
credit plan. (See the commentary to Sec. 226.17 on converting open-end 
credit to closed-end credit.)
    5. Balance transfers. A creditor that solicits the transfer by a 
consumer of outstanding balances from an existing account to a new open-
end plan must comply with Sec. 226.6 before the balance transfer 
occurs. Card issuers that are subject to the requirements of Sec. 
226.5a may establish procedures that comply with both sections in a 
single disclosure statement.
    5(b)(2) Periodic statements.
    Paragraph 5(b)(2)(i).
    1. Periodic statements not required. Periodic statements need not be 
sent in the following cases:

     If the creditor adjusts an account balance so 
that at the end of the cycle the balance is less than $1--so long as no 
finance charge has been imposed on the account for that cycle.
     If a statement was returned as undeliverable. If 
a new address is provided, however, within a reasonable time before the 
creditor must send a statement, the creditor must resume sending 
statements. Receiving the address at least 20 days before the end of a 
cycle would be a reasonable amount of time to prepare the statement for 
that cycle. For example, if an address is received 22 days before the 
end of the June cycle, the creditor must send the periodic statement for 
the June cycle. (See Sec. 226.13(a)(7).)

    2. Termination of credit privileges. When an open-end account is 
terminated without being converted to closed-end credit under a written 
agreement, the creditor must continue to provide periodic statements to 
those consumers entitled to receive them under Sec. 226.5(b)(2)((i) 
(for example, when an open-end credit plan ends and consumers are paying 
off outstanding balances) and must continue to follow all of the other 
open-end credit requirements and procedures in subpart B.
    Paragraph 5(b)(2)(ii).
    1. 14-day rule. The 14-day rule for mailing or delivering periodic 
statements does not apply if charges (for example, transaction or 
activity charges) are imposed regardless of the timing of a periodic 
statement. The 14-day rule does apply, for example:

     If current debits retroactively become subject to 
finance charges when the balance is not paid in full by a specified 
date.
     If charges other than finance charges will accrue 
when the consumer does not make timely payments (for example, late 
payment charges or charges for exceeding a credit limit).
    2. Computer malfunction. Footnote 10 does not extend to the failure 
to provide a periodic statement because of computer malfunction.
    3. Calling for periodic statements. When the consumer initiates a 
request, the creditor may permit, but may not require, consumers to pick 
up their periodic statements. If the consumer wishes to pick up the 
statement and the plan has a free-ride period, the statement must be 
made available in accordance with the 14-day rule.
    5(c) Basis of disclosures and use of estimates.
    1. Legal obligation. The disclosures should reflect the credit terms 
to which the parties are legally bound at the time of giving the 
disclosures.

     The legal obligation is determined by applicable 
state or other law.
     The fact that a term or contract may later be 
deemed unenforceable by a court on the basis of equity or other grounds 
does not, by itself, mean that disclosures based on that term or 
contract did not reflect the legal obligation.
     The legal obligation normally is presumed to be 
contained in the contract that evidences the agreement. But this may be 
rebutted if another agreement between the parties legally modifies that 
contract.

    2. Estimates--obtaining information. Disclosures may be estimated 
when the exact information is unknown at the time disclosures are made. 
Information is unknown if it is not reasonably available to the creditor 
at the time disclosures are made. The reasonably available standard 
requires that the

[[Page 486]]

creditor, acting in good faith, exercise due diligence in obtaining 
information. In using estimates, the creditor is not required to 
disclose the basis for the estimated figures, but may include such 
explanations as additional information. The creditor normally may rely 
on the representations of other parties in obtaining information. For 
example, the creditor might look to insurance companies for the cost of 
insurance.
    3. Estimates--redisclosure. If the creditor makes estimated 
disclosures, redisclosure is not required for that consumer, even though 
more accurate information becomes available before the first 
transaction. For example, in an open-end plan to be secured by real 
estate, the creditor may estimate the appraisal fees to be charged; such 
an estimate might reasonably be based on the prevailing market rates for 
similar appraisals. If the exact appraisal fee is determinable after the 
estimate is furnished but before the consumer receives the first advance 
under the plan, no new disclosure is necessary.
    4. Deferred payment transactions. See comment 7-3(iv).

    5(d) Multiple creditors; multiple consumers.
    1. Multiple creditors. Under Sec. 226.5(d):

     Creditors must choose which of them will make the 
disclosures.
     A single, complete set of disclosures must be 
provided, rather than partial disclosures from several creditors.
     All disclosures for the open-end credit plan must 
be given, even if the disclosing creditor would not otherwise have been 
obligated to make a particular disclosure.
     In some open-end credit programs involving 
multiple creditors, the consumer has the option (for example, at the end 
of a billing cycle) to pay creditor A directly or to transfer to 
creditor B all or part of the amount owing. If the consumer elects the 
latter option, the consumer no longer is obligated to creditor A for the 
specific amount(s) transferred. In such a case, creditor A and creditor 
B may send separate periodic statements that reflect the separate 
obligations owed to each.

    2. Multiple consumers. Disclosures may be made to either obligor on 
a joint account. Disclosure responsibilities are not satisfied by giving 
disclosures to only a surety or guarantor for a principal obligor or to 
an authorized user. In rescindable transactions, however, separate 
disclosures must be given to each consumer who has the right to rescind 
under Sec. 226.15.
    5(e) Effect of subsequent events.
    1. Events causing inaccuracies. Inaccuracies in disclosures are not 
violations if attributable to events occurring after disclosures are 
made. For example, when the consumer fails to fulfill a prior commitment 
to keep the collateral insured and the creditor then provides the 
coverage and charges the consumer for it, such a change does not make 
the original disclosures inaccurate. The creditor may, however, be 
required to provide a new disclosure(s) under Sec. 226.9(c).
    2. Use of inserts. When changes in a creditor's plan affect required 
disclosures, the creditor may use inserts with outdated disclosure 
forms. Any insert:

     Should clearly refer to the disclosure provision 
it replaces.
     Need not be physically attached or affixed to the 
basic disclosure statement.
     May be used only until the supply of outdated 
forms is exhausted.

                               References

    Statute: Sections 121 (a) through (c), 122 (a) and (b), 124, 127 (a) 
and (b), and 163(a).
    Other sections: Sections 226.6, 226.7, and 226.9.
    Previous regulation: Sections 226.6 (a) and (c) through (g), and 
226.7 (a) through (c).
    1981 changes: Section 226.5 implements amendments to the act and 
reflects several simplifying changes to the regulation. The use of 
required terminology, except for finance charge and annual percentage 
rate, is no longer required. Type size requirements have been deleted. 
Initial and periodic statement disclosures may be multi-page, so long as 
they constitute an integrated statement. New rules are provided for the 
basis of disclosures and for the use of estimates. The rules for credit 
plans involving multiple creditors or multiple consumers now provide 
that only one creditor need make the disclosures and that the 
disclosures need be made to only one primarily liable consumer.

  Section 226.5a Credit and Charge Card Applications and Solicitations

    1. General. Section 226.5a generally requires that credit 
disclosures be contained in application forms and preapproved 
solicitations initiated by a card issuer to open a credit or charge card 
account. (See the commentary to Sec. 226.5a(a)(3) and (e) for 
exceptions; see also Sec. 226.2(a)(15) and accompanying commentary for 
the definition of charge card.)
    2. Combining disclosures. The initial disclosures required by Sec. 
226.6 do not substitute for the disclosures required by Sec. 226.5a; 
however, a card issuer may establish procedures so that a single 
disclosure statement meets the requirements of both sections. For 
example, if a card issuer in complying with Sec. 226.5a(e)(2) provides 
all the applicable disclosures required under Sec. 226.6, in a form 
that the consumer may keep and in accordance with the other format and 
timing requirements for that section, the issuer satisfies the initial 
disclosure requirements under Sec. 226.6 as well as the disclosure 
requirements of Sec. 226.5a(e)(2). Or if, in complying with

[[Page 487]]

Sec. 226.5a(c) or Sec. 226.5a(d)(2), a card issuer provides an 
integrated document that the consumer may keep, and provides the Sec. 
226.5a disclosures (in a tabular format) along with the additional 
disclosures required under Sec. 226.6 (presented outside of the table), 
the card issuer satisfies the requirements of both Sec. Sec. 226.5a and 
226.6.

                           5a(a) General Rules

                      5a(a)(2) Form of Disclosures

    1. Clear and conspicuous standard. For purposes of Sec. 226.5a 
disclosures, clear and conspicuous means in a reasonably understandable 
form and readily noticeable to the consumer. As to type size, 
disclosures in 12-point type are deemed to be readily noticeable for 
purposes of Sec. 226.5a. Disclosures printed in less than 12-point type 
do not automatically violate the standard; however, disclosures in less 
than 8-point type would likely be too small to satisfy the standard. 
Disclosures that are transmitted by electronic communication are judged 
for purposes of the clear and conspicuous standard based on the form in 
which they are provided even though they may be viewed by the consumer 
in a different form.
    2. Prominent location. i. Generally. Certain of the required 
disclosures provided on or with an application or solicitation must be 
prominently located. Disclosures are deemed to be prominently located, 
for example, if the disclosures are on the same page as an application 
or solicitation reply form. If the disclosures appear elsewhere, they 
are deemed to be prominently located if the application or solicitation 
reply form contains a clear and conspicuous reference to the location of 
the disclosures and indicates that they contain rate, fee, and other 
cost information, as applicable. Disclosures required by Sec. 226.5a(b) 
that are placed outside the table must begin on the same page as the 
table but need not end on the same page.
    ii. Electronic disclosures. Electronic disclosures are deemed to be 
prominently located if:
    A. They are posted on a web site and the application or solicitation 
reply form is linked to the disclosures in a manner that prevents the 
consumer from by-passing the disclosures before submitting the 
application or reply form; or
    B. They are located on the same page as an application or 
solicitation reply form, that contains a clear and conspicuous reference 
to the location of the disclosures and indicates that they contain rate, 
fee, and other cost information, as applicable.
    3. Multiple accounts or varying terms. If a tabular format is 
required to be used, card issuers offering several types of accounts may 
disclose the various terms for the accounts in a single table or may 
provide a separate table for each account. Similarly, if rates or other 
terms vary from state to state, card issuers may list the states and the 
various disclosures in a single table or in separate tables.
    4. Additional information. The table containing the disclosures 
required by Sec. 226.5a should contain only the information required or 
permitted by this section. (See the commentary to Sec. 226.5a(b) for 
guidance on information permitted in the table.) Other credit 
information may be presented on or with an application or solicitation, 
provided such information appears outside the required table.
    5. Location of certain disclosures. A card issuer has the option of 
disclosing any of the fees in Sec. 226.5a(b) (8) through (10) in the 
required table or outside the table.
    6. Terminology. In general, Sec. 226.5a(a)(2)(iv) requires that the 
terminology used for the disclosures specified in Sec. 226.5a(b) be 
consistent with that used in the disclosures under Sec. Sec. 226.6 and 
226.7. This standard requires that the Sec. 226.5a(b) disclosures be 
close in meaning to those under Sec. Sec. 226.6 and 226.7; however, the 
terminology used need not be identical. In addition, Sec. 
226.5a(a)(2)(i) requires that the headings, content, and format of the 
tabular disclosures be substantially similar, but need not be identical, 
to the tables in appendix G. A special rule applies to the grace period 
disclosure, however: the term grace period must be used, either in the 
heading or in the text of the disclosure.
    7. Deletion of inapplicable disclosures. Generally, disclosures need 
only be given as applicable. Card issuers may, therefore, delete 
inapplicable headings and their corresponding boxes in the table. For 
example, if no transaction fee is imposed for purchases, the disclosure 
form may contain the heading Transaction fee for purchases and a box 
showing none, or the heading and box may be deleted from the table. 
There is an exception for the grace period disclosure, however: even if 
no grace period exists, that fact must be stated.
    8. Form of electronic disclosures provided on or with electronic 
applications or solicitations. Card issuers must provide the disclosures 
required by this section on or with a blank application or reply form 
that is made available to the consumer in electronic form, such as on a 
card issuer's Internet Web site. Card issuers have flexibility in 
satisfying this requirement. Methods card issuers could use to satisfy 
the requirement include, but are not limited to, the following examples:
    i. The disclosures could automatically appear on the screen when the 
application or reply form appears;
    ii. The disclosures could be located on the same Web page as the 
application or reply form (whether or not they appear on the initial 
screen), if the application or reply form contains a clear and 
conspicuous reference to the location of the disclosures and indicates

[[Page 488]]

that the disclosures contain rate, fee, and other cost information, as 
applicable;
    iii. Card issuers could provide a link to the electronic disclosures 
on or with the application (or reply form) as long as consumers cannot 
bypass the disclosures before submitting the application or reply form. 
The link would take the consumer to the disclosures, but the consumer 
need not be required to scroll completely through the disclosures; or
    iv. The disclosures could be located on the same web page as the 
application or reply form without necessarily appearing on the initial 
screen, immediately preceding the button that the consumer will click to 
submit the application or reply.
    Whatever method is used, a card issuer need not confirm that the 
consumer has read the disclosures. For disclosures required to be 
provided in tabular form, card issuers must satisfy the requirements 
with respect to electronic disclosures set forth in comment 5a(a)(2)-
2(ii).
    9. Form of disclosures. Whether disclosures must be in electronic 
form depends upon the following:
    i. If a consumer accesses a credit card application or solicitation 
electronically (other than as described under ii. below), such as online 
at a home computer, the card issuer must provide the disclosures in 
electronic form (such as with the application or solicitation on its Web 
site) in order to meet the requirement to provide disclosures in a 
timely manner on or with the application or solicitation. If the issuer 
instead mailed paper disclosures to the consumer, this requirement would 
not be met.
    ii. In contrast, if a consumer is physically present in the card 
issuer's office, and accesses a credit card application or solicitation 
electronically, such as via a terminal or kiosk (or if the consumer uses 
a terminal or kiosk located on the premises of an affiliate or third 
party that has arranged with the card issuer to provide applications or 
solicitations to consumers), the issuer may provide disclosures in 
either electronic or paper form, provided the issuer complies with the 
timing and delivery (``on or with'') requirements of the regulation.

                           5a(a)(3) Exceptions

    1. Coverage. Certain exceptions to the coverage of Sec. 226.5a are 
stated in Sec. 226.5a(a)(3); in addition, the requirements of Sec. 
226.5a do not apply to the following:
     Lines of credit accessed solely by account 
numbers
     Addition of a credit or charge card to an 
existing open-end plan
    2. Noncoverage of consumer initiated requests. Applications provided 
to a consumer upon request are not covered by Sec. 226.5a, even if the 
request is made in response to the card issuer's invitation to apply for 
a card account. To illustrate, if a card issuer invites consumers to 
call a toll-free number or to return a response card to obtain an 
application, the application sent in response to the consumer's request 
need not contain the disclosures required under Sec. 226.5a. Similarly, 
if the card issuer invites consumers to call and make an oral 
application on the telephone, Sec. 226.5a does not apply to the 
application made by the consumer. If, however, the card issuer calls a 
consumer or initiates a telephone discussion with a consumer about 
opening a card account and contemporaneously takes an oral application, 
such applications are subject to Sec. 226.5a, specifically Sec. 
226.5a(d).
    3. General purpose applications. The requirements of this section do 
not apply to general purpose applications unless the application, or 
material accompanying it, indicates that it can be used to open a credit 
or charge card account.

                5a(a)(5) Certain Fees that Vary by State

    1. Manner of disclosing range. If the card issuer discloses a range 
of fees instead of disclosing the amount of the fee imposed in each 
state, the range may be stated as the lowest authorized fee (zero, if 
there are one or more states where no fee applies) to the highest 
authorized fee.

                       5a(b) Required Disclosures

                     5a(b)(1) Annual Percentage Rate

    1. Periodic rate. The periodic rate, expressed as such, may be 
disclosed in the table in addition to the required disclosure of the 
corresponding annual percentage rate.
    2. Variable-rate accounts--definition. For purposes of Sec. 
226.5a(b)(1), a variable-rate account exists when rate changes are part 
of the plan and are tied to an index or formula. (See the commentary to 
Sec. 226.6(a)(2) for examples of variable-rate plans.)
    3. Variable-rate accounts--rates in effect. For variable-rate 
disclosures in direct mail applications and solicitations subject to 
Sec. 226.5a(c), and in applications and solicitations made available to 
the general public subject to Sec. 226.5a(e), the rules concerning 
accuracy of the annual percentage rate are stated in Sec. 
226.5a(b)(1)(ii). For variable-rate disclosures in telephone 
applications and solicitations subject to Sec. 226.5a(d), the card 
issuer must provide an annual percentage rate currently applicable when 
oral disclosures are provided under Sec. 226.5a(d)(1). For the 
alternate disclosures under Sec. 226.5a(d)(2), the card issuer must 
provide the annual percentage rate in effect at the time the disclosures 
are mailed or delivered. A rate in effect also includes the rate as of a 
specified date (which rate is then updated from time to time, for 
example, each calendar month) or an estimated rate provided in 
accordance with Sec. 226.5(c).

[[Page 489]]

    4. Variable-rate accounts--other disclosures. In describing how the 
applicable rate will be determined, the card issuer must identify the 
index or formula and disclose any margin or spread added to the index or 
formula in setting the rate. The card issuer may disclose the margin or 
spread as a range of the highest and lowest margins that may be 
applicable to the account. A disclosure of any applicable limitations on 
rate increases or decreases may also be included in the table.
    5. Introductory rates--discounted rates. If the initial rate is 
temporary and is lower than the rate that will apply after the temporary 
rate expires, the card issuer must disclose the annual percentage rate 
that would otherwise apply to the account. In a fixed-rate account, the 
card issuer must disclose the rate that will apply after the 
introductory rate expires. In a variable-rate account, the card issuer 
must disclose a rate based on the index or formula applicable to the 
account in accordance with the rules in Sec. 226.5a(b)(1)(ii) and 
comment 5a(b)(1)-3. An initial discounted rate may be provided in the 
table along with the rate required to be disclosed if the card issuer 
also discloses the time period during which the introductory rate will 
remain in effect.
    6. Introductory rates--premium rates. If the initial rate is 
temporary and is higher than the permanently applicable rate, the card 
issuer must disclose the initial rate in the table. The initial rate 
must be in at least 18-point type unless the issuer also discloses in 
the table the permanently applicable rate. The issuer may disclose in 
the table the permanently applicable rate that would otherwise apply if 
the issuer also discloses the time period during which the initial rate 
will remain in effect. In that case, the permanently applicable rate 
must be in at least 18-point type.
    7. Increased penalty rates. If the initial rate may increase upon 
the occurrence of one or more specific events, such as a late payment or 
an extension of credit that exceeds the credit limit, the card issuer 
must disclose in the table the initial rate and the increased penalty 
rate that may apply. If the penalty rate is based on an index and an 
increased margin, the issuer must also disclose in the table the index 
and the margin as well as the specific event or events that may result 
in the increased rate, such as ``applies to accounts 60 days late.'' If 
the penalty rate cannot be determined at the time disclosures are given, 
the issuer must provide an explanation of the specific event or events 
that may result in imposing an increased rate. In describing the 
specific event or events that may result in an increased rate, issuers 
need not be as detailed as for the disclosures required under Sec. 
226.6(a)(2). For issuers using a tabular format, the specific event or 
events must be placed outside the table and an asterisk or other means 
shall be used to direct the consumer to the additional information. At 
its option, the issuer may include in the explanation of the penalty 
rate the period for which the increased rate will remain in effect, such 
as ``until you make three timely payments.'' The issuer need not 
disclose an increased rate that is imposed when credit privileges are 
permanently terminated.

               5a(b)(2) Fees for Issuance or Availability

    1. Membership fees. Membership fees for opening an account must be 
disclosed under this paragraph. A membership fee to join an organization 
that provides a credit or charge card as a privilege of membership must 
be disclosed only if the card is issued automatically upon membership. 
Such a fee need not be disclosed if membership results merely in 
eligibility to apply for an account.
    2. Enhancements. Fees for optional services in addition to basic 
membership privileges in a credit or charge card account (for example, 
travel insurance or card-registration services) should not be disclosed 
in the table if the basic account may be opened without paying such 
fees.
    3. One-time fees. Disclosure of non-periodic fees is limited to fees 
related to opening the account, such as one-time membership fees. The 
following are examples of fees that should not be disclosed in the 
table:
     Fees for reissuing a lost or stolen card
     Statement reproduction fees
     Application fees described in Sec. 226.4(c)(1)
    4. Waived or reduced fees. If fees required to be disclosed are 
waived or reduced for a limited time, the introductory fees or the fact 
of fee waivers may be provided in the table in addition to the required 
fees if the card issuer also discloses how long the fees or waivers will 
remain in effect.
    5. Fees stated as annual amount. Fees imposed periodically must be 
stated as an annual total. For example, if a fee is imposed quarterly, 
the disclosures would state the total amount of the fees for one year. 
(See, however, the commentary to Sec. 226.9(e) with regard to 
disclosure of such fees in renewal notices.)

                      5a(b)(4) Transaction Charges

    1. Charges imposed by person other than card issuer. Charges imposed 
by a third party, such as a seller of goods, would not be disclosed 
under this section; the third party would be responsible for disclosing 
the charge under Sec. 226.9(d)(1).

                          5a(b)(5) Grace Period

    1. How disclosure is made. The card issuer may, but need not, refer 
to the beginning or ending point of any grace period and briefly state 
any conditions on the applicability of the grace period. For example, 
the grace period disclosure might read ``30 days'' or ``30 days from the 
date of the periodic statement

[[Page 490]]

(provided you have paid your previous balance in full by the due 
date).''

                   5a(b)(6) Balance Computation Method

    1. Form of disclosure. In cases where the card issuer uses a balance 
calculation method that is identified by name in the regulation, the 
card issuer may only disclose the name of the method in the table. In 
cases where the card issuer uses a balance computation method that is 
not identified by name in the regulation, the disclosure in the table 
should clearly explain the method in as much detail as set forth in the 
descriptions of balance methods in section 226.5a(g). The explanation 
need not be as detailed as that required for the disclosures under Sec. 
226.6(a)(3). (See the commentary to Sec. 226.5a(g) for guidance on 
particular methods.)
    2. Determining the method. In determining the appropriate balance 
computation method for purchases for disclosure purposes, the card 
issuer must assume that a purchase balance will exist at the end of any 
grace period. Thus, for example, if the average daily balance method 
will include new purchases or cover two billing cycles only if purchase 
balances are not paid within the grace period, the card issuer would 
disclose the name of the average daily balance method that includes new 
purchases or covers two billing cycles, respectively. The card issuer 
should not assume the existence of a purchase balance, however, in 
making other disclosures under Sec. 226.5a(b).

               5a(b)(7) Statement on Charge Card Payments

    1. Applicability and content. The disclosure that charges are 
payable upon receipt of the periodic statement is applicable only to 
charge card accounts. In making this disclosure, the card issuer may 
make such modifications as are necessary to more accurately reflect the 
circumstances of repayment under the account. For example, the 
disclosure might read, ``Charges are due and payable upon receipt of the 
periodic statement and must be paid no later than 15 days after receipt 
of such statement.''

                        5a(b)(8) Cash Advance Fee

    1. Applicability. The card issuer must disclose only those fees it 
imposes for a cash advance that are finance charges under Sec. 226.4. 
For example, a charge for a cash advance at an automated teller machine 
(ATM) would be disclosed under Sec. 226.5a(b)(8) if no similar charge 
is imposed for ATM transactions not involving an extension of credit. 
(See comment 4(a)-5 for a description of such a fee.)

                        5a(b)(9) Late Payment Fee

    1. Applicability. The disclosure of the fee for a late payment 
includes only those fees that will be imposed for actual, unanticipated 
late payments. (See the commentary to Sec. 226.4(c)(2) for additional 
guidance on late payment fees.)

                      5a(b)(10) Over-the-Limit Fee

    1. Applicability. The disclosure of fees for exceeding a credit 
limit does not include fees for other types of default or for services 
related to exceeding the limit. For example, no disclosure is required 
of fees for reinstating credit privileges or fees for the dishonor of 
checks on an account that, if paid, would cause the credit limit to be 
exceeded.

            5a(c) Direct Mail Applications and Solicitations

    1. Accuracy. In general, disclosures in direct mail applications and 
solicitations must be accurate as of the time of mailing. (An accurate 
variable annual percentage rate is one in effect within 60 days before 
mailing.)
    2. Mailed publications. Applications or solicitations contained in 
generally available publications mailed to consumers (such as 
subscription magazines) are subject to the requirements applicabIe to 
take-ones in Sec. 226.5a(e), rather than the direct mail requirements 
of Sec. 226.5a(c). However, if a primary purpose of a card issuer's 
mailing is to offer credit or charge card accounts--for example, where a 
card issuer ``prescreens'' a list of potential cardholders using credit 
criteria, and then mails to the targeted group its catalog containing an 
application or a solicitation for a card account--the direct mail rules 
apply. In addition, a card issuer may use a single application form as a 
take-one (in racks in public locations, for example) and for direct 
mailings, if the card issuer complies with the requirements of Sec. 
226.5a(c) even when the form is used as a take-one--that is, by 
presenting the required Sec. 226.5a disclosures in a tabular format. 
When used in a direct mailing, the credit term disclosures must be 
accurate as of the mailing date whether or not the Sec. 226.5a(e)(1) 
(ii) and (iii) disclosures are included; when used in a take-one, the 
disclosures must be accurate for as long as the take-one forms remain 
available to the public if the Sec. 226.5a(e)(1) (ii) and (iii) 
disclosures are omitted. (If those disclosures are included in the take-
one, the credit term disclosures need only be accurate as of the 
printing date.)

             5a(d) Telephone Applications and Solicitations

    1. Coverage. This paragraph applies if:
     A telephone conversation between a card issuer 
and consumer may result in the issuance of a card as a consequence of an 
issuer-initiated offer to open an account for which the issuer does not 
require any application (that is, a preapproved telephone solicitation).

[[Page 491]]

     The card issuer initiates the contact and at the 
same time takes application information over the telephone.
    This paragraph does not apply to:
     Telephone applications initiated by the consumer.
     Situations where no card will be issued--because, 
for example, the consumer indicates that he or she does not want the 
card, or the card issuer decides either during the telephone 
conversation or later not to issue the card.

  5a(e) Applications and Solicitations Made Available to General Public

    1. Coverage. Applications and solicitations made available to the 
general public include what are commonly referred to as take-one 
applications typically found at counters in banks and retail 
establishments, as well as applications contained in catalogs, magazines 
and other generally available publications. In the case of credit 
unions, this paragraph applies to applications and solicitations to open 
card accounts made available to those in the general field of 
membership.
    2. Cross-selling. If a card issuer invites a consumer to apply for a 
credit or charge card (for example, where the issuer engages in cross-
selling), an application provided to the consumer at the consumer's 
request is not considered an application made available to the general 
public and therefore is not subject to Sec. 226.5a(e). For example, the 
following are not covered:
     A consumer applies in person for a car loan at a 
financial institution and the loan officer invites the consumer to apply 
for a credit or charge card account; the consumer accepts the 
invitation.
     An employee of a retail establishment, in the 
course of processing a sales transaction using a bank credit card, asks 
a customer if he or she would like to apply for the retailer's credit or 
charge card; the customer responds affirmatively.
    3. Toll-free telephone number. If a card issuer, in complying with 
any of the disclosure options of Sec. 226.5a(e), provides a telephone 
number for consumers to call to obtain credit information, the number 
must be toll-free for nonlocal calls made from an area code other than 
the one used in the card issuer's dialing area. Alternatively, a card 
issuer may provide any telephone number that allows a consumer to call 
for information and reverse the telephone charges.

           5a(e)(1) Disclosure of Required Credit Information

    1. Date of printing. Disclosure of the month and year fulfills the 
requirement to disclose the date an application was printed.
    2. Form of disclosures. The disclosures specified in Sec. 
226.5a(e)(1) (ii) and (iii) may appear either in or outside the table 
containing the required credit disclosures.

            5a(e)(2) Inclusion of Certain Initial Disclosures

    1. Accuracy of disclosures. The disclosures required by Sec. 
226.5a(e)(2) generally must be current as of the time they are made 
available to the public. Disclosures are considered to be made available 
at the time they are placed in public locations (in the case of take-
ones) or mailed to consumers (in the case of publications).
    2. Accuracy--exception. If a card issuer discloses all the 
information required by Sec. 226.5a(e)(1)(ii) on the application or 
solicitation, the disclosures under Sec. 226.5a(e)(2) need only be 
current as of the date of printing. (A current variable annual 
percentage rate would be one in effect within 30 days before printing.)

              5a(e)(3) No Disclosure of Credit Information

    1. When disclosure option available. A card issuer may use this 
option only if the issuer does not include on or with the application or 
solicitation any statement that refers to the credit disclosures 
required by Sec. 226.5a(b). Statements such as no annual fee, low 
interest rate, favorable rates, and low costs are deemed to refer to the 
required credit disclosures and, therefore, may not be included on or 
with the solicitation or application, if the card issuer chooses to use 
this option.

          5a(e)(4) Prompt Response to Requests for Information

    1. Prompt disclosure. Information is promptly disclosed if it is 
given within 30 days of a consumer's request for information but in no 
event later than delivery of the credit or charge card.
    2. Information disclosed. When a consumer requests credit 
information, card issuers need not provide all the required credit 
disclosures in all instances. For example, if disclosures have been 
provided in accordance with Sec. 226.5a(e) (1) or (2) and a consumer 
calls or writes a card issuer to obtain information about changes in the 
disclosures, the issuer need only provide the items of information that 
have changed from those previously disclosed on or with the application 
or solicitation. If a consumer requests information about particular 
items, the card issuer need only provide the requested information. If, 
however, the card issuer has made disclosures in accordance with the 
option in Sec. 226.5a(e)(3) and a consumer calls or writes the card 
issuer requesting information about costs, all the required disclosure 
information must be given.
    3. Manner of response. A card issuer's response to a consumer's 
request for credit information may be provided orally or in writing, 
regardless of the manner in which the consumer's request is received by 
the issuer.

[[Page 492]]

Furthermore, the card issuer may provide the information listed in 
either Sec. 226.5a(e) (1) or (2). Information provided in writing need 
not be in a tabular format.

5a(f) Special Charge Card Rule--Card Issuer and Person Extending Credit 
                           Not the Same Person

    1. Duties of charge card issuer. Although the charge card issuer is 
not required to disclose information about the underlying open-end 
credit plan if the card issuer meets the conditions set forth in Sec. 
226.5a(f), the card issuer must disclose the information relating to the 
charge card plan itself.
    2. Duties of creditor maintaining open-end plan. Section 226.5a does 
not impose disclosure requirements on the creditor that maintains the 
underlying open-end credit plan. This is the case even though the 
creditor offering the open-end credit plan may be considered an agent of 
the charge card issuer. (See comment 2(a)(7)-1.)
    3. Form of disclosures. The disclosures required by Sec. 226.5a(f) 
may appear either in or outside the table containing the required credit 
disclosures in circumstances where a tabular format is required.

                5a(g) Balance Computation Methods Defined

    1. Daily balance method. Card issuers using the daily balance method 
may disclose it using the name average daily balance (including new 
purchases) or average daily balance (excluding new purchases), as 
appropriate. Alternatively, such card issuers may explain the method. 
(See comment 7(e)-5 for a discussion of the daily balance method.)
    2. Two-cycle average daily balance methods. The two-cycle average 
daily balance methods described in Sec. 226.5a(g)(2) (i) and (ii) 
include those methods in which the average daily balances for two 
billing cycles may be added together to compute the finance charge. Such 
methods also include those in which a periodic rate is applied 
separately to the balance in each cycle, and the resulting finance 
charges are added together. The method is a two-cycle average daily 
balance even if the finance charge is based on both the current and 
prior cycle balances only under certain circumstances, such as when 
purchases during a prior cycle were carried over into the current cycle 
and no finance charge was assessed during the prior cycle. Furthermore, 
the method is a two-cycle average daily balance method if the balances 
for both the current and prior cycles are average daily balances, even 
if those balances are figured differently. For example, the name two-
cycle average daily balance (excluding new purchases) should be used to 
describe a method in which the finance charge for the current cycle, 
figured on an average daily balance excluding new purchases, will be 
added to the finance charge for the prior cycle, figured on an average 
daily balance of only new purchases during that prior cycle.

            Section 226.5b Requirements for Home Equity Plans

    1. Coverage. This section applies to all open-end credit plans 
secured by the consumer's dwelling, as defined in Sec. 226.2(a)(19), 
and is not limited to plans secured by the consumer's principal 
dwelling. (See the commentary to Sec. 226.3(a), which discusses whether 
transactions are consumer or business-purpose credit, for guidance on 
whether a home equity plan is subject to Regulation Z.)
    2. Changes to home equity plans entered into on or after November 7, 
1989. Section 226.9(c) applies if, by written agreement under Sec. 
226.5b(f)(3)(iii), a creditor changes the terms of a home equity plan--
entered into on or after November 7, 1989--at or before its scheduled 
expiration, for example, by renewing a plan on different terms. A new 
plan results, however, if the plan is renewed (with or without changes 
to the terms) after the scheduled expiration. The new plan is subject to 
all open-end credit rules, including Sec. Sec. 226.5b, 226.6, and 
226.15.
    3. Transition rules and renewals of preexistinq plans. The 
requirements of this section do not apply to home equity plans entered 
into before November 7, 1989. The requirements of this section also do 
not apply if the original consumer, on or after November 7, 1989, renews 
a plan entered into prior to that date (with or without changes to the 
terms). If, on or after November 7, 1989, a security interest in the 
consumer's dwelling is added to a line of credit entered into before 
that date, the substantive restrictions of this section apply for the 
remainder of the plan, but no new disclosures are required under this 
section.
    4. Disclosure of repayment phase--applicability of requirements. 
Some plans provide in the initial agreement for a period during which no 
further draws may be taken and repayment of the amount borrowed is made. 
All of the applicable disclosures in this section must be given for the 
repayment phase. Thus, for example, a creditor must provide payment 
information about the repayment phase as well as about the draw period, 
as required by Sec. 226.5b(d)(5). If the rate that will apply during 
the repayment phase is fixed at a known amount, the creditor must 
provide an annual percentage rate under Sec. 226.5b(d)(6) for that 
phase. If, however, a creditor uses an index to determine the rate that 
will apply at the time of conversion to the repayment phase--even if the 
rate will thereafter be fixed--the creditor must provide the information 
in Sec. 226.5b(d)(12), as applicable.
    5. Payment terms--applicability of closed-end provisions and 
substantive rules. All payment terms that are provided for in the 
initial agreement are subject to the requirements of subpart B and not 
subpart C of the regulation. Payment terms that are subsequently

[[Page 493]]

added to the agreement may be subject to subpart B or to subpart C, 
depending on the circumstances. The following examples apply these 
general rules to different situations:
     If the initial agreement provides for a repayment 
phase or for other payment terms such as options permitting conversion 
of part or all of the balance to a fixed rate during the draw period, 
these terms must be disclosed pursuant to Sec. Sec. 226.5b and 226.6, 
and not under subpart C. Furthermore, the creditor must continue to 
provide periodic statements under Sec. 226.7 and comply with other 
provisions of subpart B (such as the substantive requirements of Sec. 
226.5b(f)) throughout the plan, including the repayment phase.
     If the consumer and the creditor enter into an 
agreement during the draw period to repay all or part of the principal 
balance on different terms (for example, with a fixed rate of interest) 
and the amount of available credit will be replenished as the principal 
balance is repaid, the creditor must continue to comply with subpart B. 
For example, the creditor must continue to provide periodic statements 
and comply with the substantive requirements of Sec. 226.5b(f) 
throughout the plan.
     If the consumer and creditor enter into an 
agreement during the draw period to repay all or part of the principal 
balance and the amount of available credit will not be replenished as 
the principal balance is repaid, the creditor must give closed-end 
credit disclosures pursuant to subpart C for that new agreement. In such 
cases, subpart B, including the substantive rules, does not apply to the 
closed-end credit transaction, although it will continue to apply to any 
remaining open-end credit available under the plan.
    6. Spreader clause. When a creditor holds a mortgage or deed of 
trust on the consumer's dwelling and that mortgage or deed of trust 
contains a spreader clause (also known as a dragnet or cross-
collateralization clause), subsequent occurrences such as the opening of 
an open-end plan are subject to the rules applicable to home equity 
plans to the same degree as if a security interest were taken directly 
to secure the plan, unless the creditor effectively waives its security 
interest under the spreader clause with respect to the subsequent open-
end credit extensions.

                        5b(a) Form of Disclosures

                            5b(a)(1) General

    1. Written disclosures. The disclosures required under this section 
must be clear and conspicuous and in writing, but need not be in a form 
the consumer can keep. (See the commentary to Sec. 226.6(e) for special 
rules when disclosures required under Sec. 226.5b(d) are given in a 
retainable form.)
    2. Disclosure of annual percentage rate--more conspicuous 
requirement. As provided in Sec. 226.5(a)(2), when the term annual 
percentage rate is required to be disclosed with a number, it must be 
more conspicuous than other required disclosures.
    3. Segregation of disclosures. While most of the disclosures must be 
grouped together and segregated from all unrelated information, the 
creditor is permitted to include information that explains or expands on 
the required disclosures, including, for example:
     Any prepayment penalty
     How a substitute index may be chosen
     Actions the creditor may take short of 
terminating and accelerating an outstanding balance
     Renewal terms
     Rebate of fees

An example of information that does not explain or expand on the 
required disclosures and thus cannot be included is the creditor's 
underwriting criteria, although the creditor could provide such 
information separately from the required disclosures.
    4. Method of providing disclosures. A creditor may provide a single 
disclosure form for all of its home equity plans, as long as the 
disclosure describes all aspects of the plans. For example, if the 
creditor offers several payment options, all such options must be 
disclosed. (See, however, the commentary to Sec. 226.5b(d)(5)(iii) and 
(d)(12) (x) and (xi) for disclosure requirements relating to these 
provisions.) If any aspects of a plan are linked together, the creditor 
must disclose clearly the relationship of the terms to each other. For 
example, if the consumer can only obtain a particular payment option in 
conjunction with a certain variable-rate feature, this fact must be 
disclosed. A creditor has the option of providing separate disclosure 
forms for multiple options or variations in features. For example, a 
creditor that offers different payment options for the draw period may 
prepare separate disclosure forms for the two payment options. A 
creditor using this alternative, however, must include a statement on 
each disclosure form that the consumer should ask about the creditor's 
other home equity programs. (This disclosure is required only for those 
programs available generally to the public. Thus, if the only other 
programs available are employee preferred-rate plans, for example, the 
creditor would not have to provide this statement.) A creditor that 
receives a request for information about other available programs must 
provide the additional disclosures as soon as reasonably possible.
    5. Form of electronic disclosures provided on or with electronic 
applications. Creditors must provide the disclosures required by this 
section (including the brochure) on or with a blank application that is 
made available to the consumer in electronic form, such as on a 
creditor's Internet Web site. Creditors have flexibility in satisfying 
this requirement.

[[Page 494]]

Methods creditors could use to satisfy the requirement include, but are 
not limited to, the following examples:
    i. The disclosures could automatically appear on the screen when the 
application appears;
    ii. The disclosures could be located on the same web page as the 
application (whether or not they appear on the initial screen), if the 
application contains a clear and conspicuous reference to the location 
of the disclosures and indicates that the disclosures contain rate, fee, 
and other cost information, as applicable;
    iii. Creditors could provide a link to the electronic disclosures on 
or with the application as long as consumers cannot bypass the 
disclosures before submitting the application. The link would take the 
consumer to the disclosures, but the consumer need not be required to 
scroll completely through the disclosures; or
    iv. The disclosures could be located on the same web page as the 
application without necessarily appearing on the initial screen, 
immediately preceding the button that the consumer will click to submit 
the application.
    Whatever method is used, a creditor need not confirm that the 
consumer has read the disclosures.

               5b(a)(2) Precedence of Certain Disclosures

    1. Precedence rule. The list of conditions provided at the 
creditor's option under Sec. 226.5b(d)(4)(iii) need not precede the 
other disclosures.

                           Paragraph 5b(a)(3)

    1. Form of disclosures. Whether disclosures must be in electronic 
form depends upon the following:
    i. If a consumer accesses a home equity credit line application 
electronically (other than as described under ii. below), such as online 
at a home computer, the creditor must provide the disclosures in 
electronic form (such as with the application form on its Web site) in 
order to meet the requirement to provide disclosures in a timely manner 
on or with the application. If the creditor instead mailed paper 
disclosures to the consumer, this requirement would not be met.
    ii. In contrast, if a consumer is physically present in the 
creditor's office, and accesses a home equity credit line application 
electronically, such as via a terminal or kiosk (or if the consumer uses 
a terminal or kiosk located on the premises of an affiliate or third 
party that has arranged with the creditor to provide applications to 
consumers), the creditor may provide disclosures in either electronic or 
paper form, provided the creditor complies with the timing, delivery, 
and retainability requirements of the regulation.

                        5b(b) Time of Disclosures

    1. Mail and telephone applications. If the creditor sends 
applications through the mail, the disclosures and a brochure must 
accompany the application. If an application is taken over the 
telephone, the disclosures and brochure may be delivered or mailed 
within three business days of taking the application. If an application 
is mailed to the consumer following a telephone request, however, the 
creditor also must send the disclosures and a brochure along with the 
application.
    2. General purpose applications. The disclosures and a brochure need 
not be provided when a general purpose application is given to a 
consumer unless (1) the application or materials accompanying it 
indicate that it can be used to apply for a home equity plan or (2) the 
application is provided in response to a consumer's specific inquiry 
about a home equity plan. On the other hand, if a general purpose 
application is provided in response to a consumer's specific inquiry 
only about credit other than a home equity plan, the disclosures and 
brochure need not be provided even if the application indicates it can 
be used for a home equity plan, unless it is accompanied by promotional 
information about home equity plans.
    3. Publicly-available applications. Some creditors make applications 
for home equity plans, such as take-ones, available without the need for 
a consumer to request them. These applications must be accompanied by 
the disclosures and a brochure, such as by attaching the disclosures and 
brochure to the application form.
    4. Response cards. A creditor may solicit consumers for its home 
equity plan by mailing a response card which the consumer returns to the 
creditor to indicate interest in the plan. If the only action taken by 
the creditor upon receipt of the response card is to send the consumer 
an application form or to telephone the consumer to discuss the plan, 
the creditor need not send the disclosures and brochure with the 
response card.
    5. Denial or withdrawal of application. In situations where footnote 
10a permits the creditor a three-day delay in providing disclosures and 
the brochure, if the creditor determines within that period that an 
application will not be approved, the creditor need not provide the 
consumer with the disclosures or brochure. Similarly, if the consumer 
withdraws the application within this three-day period, the creditor 
need not provide the disclosures or brochure.
    6. Intermediary agent or broker. In determining whether or not an 
application involves an intermediary agent or broker as discussed in 
footnote 10a, creditors should consult the provisions in comment 19(b)-
3.

[[Page 495]]

                      5b(c) Duties of Third Parties

    1. Disclosure requirements. Although third parties who give 
applications to consumers for home equity plans must provide the 
brochure required under Sec. 226.5b(e) in all cases, such persons need 
provide the disclosures required under Sec. 226.5b(d) only in certain 
instances. A third party has no duty to obtain disclosures about a 
creditor's home equity plan or to create a set of disclosures based on 
what it knows about a creditor's plan. If, however, a creditor provides 
the third party with disclosures along with its application form, the 
third party must give the disclosures to the consumer with the 
application form. The duties under this section are those of the third 
party; the creditor is not responsible for ensuring that a third party 
complies with those obligations. If an intermediary agent or broker 
takes an application over the telephone or receives an application 
contained in a magazine or other publication, footnote 10a permits that 
person to mail the disclosures and brochure within three business days 
of receipt of the application. (See the commentary to Sec. 226.5b(h) 
about imposition of nonrefundable fees.)

                      5b(d) Content of Disclosures

    1. Disclosures given as applicable. The disclosures required under 
this section need be made only as applicable. Thus, for example, if 
negative amortization cannot occur in a home equity plan, a reference to 
it need not be made.
    2. Duty to respond to requests for information. If the consumer, 
prior to the opening of a plan, requests information as suggested in the 
disclosures (such as the current index value or margin), the creditor 
must provide this information as soon as reasonably possible after the 
request.

                    5b(d)(1) Retention of Information

    1. When disclosure not required. The creditor need not disclose that 
the consumer should make or otherwise retain a copy of the disclosures 
if they are retainable--for example, if the disclosures are not part of 
an application that must be returned to the creditor to apply for the 
plan.

                 5b(d)(2) Conditions for Disclosed Terms

                          Paragraph 5b(d)(2)(i)

    1. Guaranteed terms. The requirement that the creditor disclose the 
time by which an application must be submitted to obtain the disclosed 
terms does not require the creditor to guarantee any terms. If a 
creditor chooses not to guarantee any terms, it must disclose that all 
of the terms are subject to change prior to opening the plan. The 
creditor also is permitted to guarantee some terms and not others, but 
must indicate which terms are subject to change.
    2. Date for obtaining disclosed terms. The creditor may disclose 
either a specific date or a time period for obtaining the disclosed 
terms. If the creditor discloses a time period, the consumer must be 
able to determine from the disclosure the specific date by which an 
application must be submitted to obtain any guaranteed terms. For 
example, the disclosure might read, ``To obtain the following terms, you 
must submit your application within 60 days after the date appearing on 
this disclosure,'' provided the disclosure form also shows the date.

                         Paragraph 5b(d)(2)(ii)

    1. Relation to other provisions. Creditors should consult the rules 
in Sec. 226.5b(g) regarding refund of fees.

                  5b(d)(4) Possible Actions by Creditor

                          Paragraph 5b(d)(4)(i)

    1. Fees imposed upon termination. This disclosure applies only to 
fees (such as penalty or prepayment fees) that the creditor imposes if 
it terminates the plan prior to normal expiration. The disclosure does 
not apply to fees that are imposed either when the plan expires in 
accordance with the agreement or if the consumer terminates the plan 
prior to its scheduled maturity. In addition, the disclosure does not 
apply to fees associated with collection of the debt, such as attorneys 
fees and court costs, or to increases in the annual percentage rate 
linked to the consumer's failure to make payments. The actual amount of 
the fee need not be disclosed.
    2. Changes specified in the initial agreement. If changes may occur 
pursuant to Sec. 226.5b(f)(3)(i), a creditor must state that certain 
changes will be implemented as specified in the initial agreement.

                         Paragraph 5b(d)(4)(iii)

    1. Disclosure of conditions. In making this disclosure, the creditor 
may provide a highlighted copy of the document that contains such 
information, such as the contract or security agreement. The relevant 
items must be distinguished from the other information contained in the 
document. For example, the creditor may provide a cover sheet that 
specifically points out which contract provisions contain the 
information, or may mark the relevant items on the document itself. As 
an alternative to disclosing the conditions in this manner, the creditor 
may simply describe the conditions using the language in Sec. Sec. 
226.5b(f)(2)(i)-(iii), 226.5b(f)(3)(i) (regarding freezing the line when 
the maximum annual percentage rate is reached), and 226.5b(f)(3)(vi) or 
language that is substantially similar. The condition contained

[[Page 496]]

in Sec. 226.5b(f)(2)(iv) need not be stated. In describing specified 
changes that may be implemented during the plan, the creditor may 
provide a disclosure such as ``Our agreement permits us to make certain 
changes to the terms of the line at specified times or upon the 
occurrence of specified events.''
    2. Form of disclosure. The list of conditions under Sec. 
226.5b(d)(4)(iii) may appear with the segregated disclosures or apart 
from them. If the creditor elects to provide the list of conditions with 
the segregated disclosures, the list need not comply with the precedence 
rule in Sec. 226.5b(a)(2).

                         5b(d)(5) Payment Terms

                          Paragraph 5b(d)(5)(i)

    1. Length of the plan. The combined length of the draw period and 
any repayment period need not be stated. If the length of the repayment 
phase cannot be determined because, for example, it depends on the 
balance outstanding at the beginning of the repayment period, the 
creditor must state that the length is determined by the size of the 
balance. If the length of the plan is indefinite (for example, because 
there is no time limit on the period during which the consumer can take 
advances), the creditor must state that fact.
    2. Renewal provisions. If, under the credit agreement, a creditor 
retains the right to review a line at the end of the specified draw 
period and determine whether to renew or extend the draw period of the 
plan, the possibility of renewal or extension--regardless of its 
likelihood--should be ignored for purposes of the disclosures. For 
example, if an agreement provides that the draw period is five years and 
that the creditor may renew the draw period for an additional five 
years, the possibility of renewal should be ignored and the draw period 
should be considered five years. (See the commentary accompanying Sec. 
226.9(c)(1) dealing with change in terms requirements.)

                         Paragraph 5b(d)(5)(ii)

    1. Determination of the minimum periodic payment. This disclosure 
must reflect how the minimum periodic payment is determined, but need 
only describe the principal and interest components of the payment. 
Other charges that may be part of the payment (as well as the balance 
computation method) may, but need not, be described under this 
provision.
    2. Fixed rate and term payment options during draw period. If the 
home equity plan permits the consumer to repay all or part of the 
balance during the draw period at a fixed rate (rather than a variable 
rate) and over a specified time period, this feature must be disclosed. 
To illustrate, a variable-rate plan may permit a consumer to elect 
during a ten-year draw period to repay all or a portion of the balance 
over a three-year period at a fixed rate. The creditor must disclose the 
rules relating to this feature including the period during which the 
option can be selected, the length of time over which repayment can 
occur, any fees imposed for such a feature, and the specific rate or a 
description of the index and margin that will apply upon exercise of 
this choice. For example, the index and margin disclosure might state: 
``If you choose to convert any portion of your balance to a fixed rate, 
the rate will be the highest prime rate published in the `Wall Street 
Journal' that is in effect at the date of conversion plus a margin.'' If 
the fixed rate is to be determined according to an index, it must be one 
that is outside the creditor's control and is publicly available in 
accordance with Sec. 226.5b(f)(1). The effect of exercising the option 
should not be reflected elsewhere in the disclosures, such as in the 
historical example required in Sec. 226.5b(d)(12)(xi).
    3. Balloon payments. In programs where the occurrence of a balloon 
payment is possible, the creditor must disclose the possibility of a 
balloon payment even if such a payment is uncertain or unlikely. In such 
cases, the disclosure might read, ``Your minimum payments may not be 
sufficient to fully repay the principal that is outstanding on your 
line. If they are not, you will be required to pay the entire 
outstanding balance in a single payment.'' In programs where a balloon 
payment will occur, such as programs with interest-only payments during 
the draw period and no repayment period, the disclosures must state that 
fact. For example, the disclosure might read, ``Your minimum payments 
will not repay the principal that is outstanding on your line. You will 
be required to pay the entire outstanding balance in a single payment.'' 
In making this disclosure, the creditor is not required to use the term 
``balloon payment.'' The creditor also is not required to disclose the 
amount of the balloon payment. (See, however, the requirement under 
Sec. 226.5b(d)(5)(iii).) The balloon payment disclosure does not apply 
in cases where repayment of the entire outstanding balance would occur 
only as a result of termination and acceleration. The creditor also need 
not make a disclosure about balloon payments if the final payment could 
not be more than twice the amount of other minimum payments under the 
plan.

                         Paragraph 5b(d)(5)(iii)

    1. Minimum periodic payment example. In disclosing the payment 
example, the creditor may assume that the credit limit as well as the 
outstanding balance is $10,000 if such an assumption is relevant to 
calculating payments. (If the creditor only offers lines of credit for 
less than $10,000, the creditor may

[[Page 497]]

assume an outstanding balance of $5,000 instead of $10,000 in making 
this disclosure.) The example should reflect the payment comprised only 
of principal and interest. Creditors may provide an additional example 
reflecting other charges that may be included in the payment, such as 
credit insurance premiums. Creditors may assume that all months have an 
equal number of days, that payments are collected in whole cents, and 
that payments will fall on a business day even though they may be due on 
a non-business day. For variable-rate plans, the example must be based 
on the last rate in the historical example required in Sec. 
226.5b(d)(12)(xi), or a more recent rate. In cases where the last rate 
shown in the historical example is different from the index value and 
margin (for example, due to a rate cap), creditors should calculate the 
rate by using the index value and margin. A discounted rate may not be 
considered a more recent rate in calculating this payment example for 
either variable- or fixed-rate plans.
    2. Representative examples. In plans with multiple payment options 
within the draw period or within any repayment period, the creditor may 
provide representative examples as an alternative to providing examples 
for each payment option. The creditor may elect to provide 
representative payment examples based on three categories of payment 
options. The first category consists of plans that permit minimum 
payment of only accrued finance charges (interest only plans). The 
second category includes plans in which a fixed percentage or a fixed 
fraction of the outstanding balance or credit limit (for example, 2% of 
the balance or \1/180\th of the balance) is used to determine the 
minimum payment. The third category includes all other types of minimum 
payment options, such as a specified dollar amount plus any accrued 
finance charges. Creditors may classify their minimum payment 
arrangements within one of these three categories even if other features 
exist, such as varying lengths of a draw or repayment period, required 
payment of past due amounts, late charges, and minimum dollar amounts. 
The creditor may use a single example within each category to represent 
the payment options in that category. For example, if a creditor permits 
minimum payments of 1%, 2%, 3% or 4% of the outstanding balance, it may 
pick one of these four options and provide the example required under 
Sec. 226.5b(d)(5)(iii) for that option alone.
    The example used to represent a category must be an option commonly 
chosen by consumers, or a typical or representative example. (See the 
commentary to Sec. 226.5b(d)(12) (x) and (xi) for a discussion of the 
use of representative examples for making those disclosures. Creditors 
using a representative example within each category must use the same 
example for purposes of the disclosures under Sec. 226.5b (d)(5)(iii) 
and (d)(12) (x) and (xi).) Creditors may use representative examples 
under Sec. 226.5b(d)(5) only with respect to the payment example 
required under paragraph (d)(5)(iii). Creditors must provide a full 
narrative description of all payment options under Sec. 226.5b(d)(5) 
(i) and (ii).
    3. Examples for draw and repayment periods. Separate examples must 
be given for the draw and repayment periods unless the payments are 
determined the same way during both periods. In setting forth payment 
examples for any repayment period under this section (and the historical 
example under Sec. 226.5b(d)(12)(xi)), creditors should assume a 
$10,000 advance is taken at the beginning of the draw period and is 
reduced according to the terms of the plan. Creditors should not assume 
an additional advance is taken at any time, including at the beginning 
of any repayment period.
    4. Reverse mortgages. Reverse mortgages, also known as reverse 
annuity or home equity conversion mortgages, in addition to permitting 
the consumer to obtain advances, may involve the disbursement of monthly 
advances to the consumer for a fixed period or until the occurrence of 
an event such as the consumer's death. Repayment of the reverse mortgage 
(generally a single payment of principal and accrued interest) may be 
required to be made at the end of the disbursements or, for example, 
upon the death of the consumer. In disclosing these plans, creditors 
must apply the following rules, as applicable:
     If the reverse mortgage has a specified period 
for advances and disbursements but repayment is due only upon occurrence 
of a future event such as the death of the consumer, the creditor must 
assume that disbursements will be made until they are scheduled to end. 
The creditor must assume repayment will occur when disbursements end (or 
within a period following the final disbursement which is not longer 
than the regular interval between disbursements). This assumption should 
be used even though repayment may occur before or after the 
disbursements are scheduled to end. In such cases, the creditor may 
include a statement such as ``The disclosures assume that you will repay 
the line at the time the draw period and our payments to you end. As 
provided in your agreement, your repayment may be rquired at a different 
time.'' The single payment should be considered the ``minimum periodic 
payment'' and consequently would not be treated as a balloon payment. 
The example of the minimum payment under Sec. 226.5b(d)(5)(iii) should 
assume a single $10,000 draw.
     If the reverse mortgage has neither a specified 
period for advances or disbursements nor a specified repayment date and

[[Page 498]]

these terms will be determined solely by reference to future events, 
including the consumer's death, the creditor may assume that the draws 
and disbursements will end upon the consumer's death (estimated by using 
actuarial tables, for example) and that repayment will be required at 
the same time (or within a period following the date of the final 
disbursement which is not longer than the regular interval for 
disbursements). Alternatively, the creditor may base the disclosures 
upon another future event it estimates will be most likely to occur 
first. (If terms will be determined by reference to future events which 
do not include the consumer's death, the creditor must base the 
disclosures upon the occurrence of the event estimated to be most likely 
to occur first.)
     In making the disclosures, the creditor must 
assume that all draws and disbursements and accrued interest will be 
paid by the consumer. For example, if the note has a non-recourse 
provision providing that the consumer is not obligated for an amount 
greater than the value of the house, the creditor must nonetheless 
assume that the full amount to be drawn or disbursed will be repaid. In 
this case, however, the creditor may include a statement such as ``The 
disclosures assume full repayment of the amount advanced plus accrued 
interest, although the amount you may be required to pay is limited by 
your agreement.''
     Some reverse mortgages provide that some or all 
of the appreciation in the value of the property will be shared between 
the consumer and the creditor. The creditor must disclose the 
appreciation feature, including describing how the creditor's share will 
be determined, any limitations, and when the feature may be exercised.

                     5b(d)(6) Annual Percentage Rate

    1. Preferred-rate plans. If a creditor offers a preferential fixed-
rate plan in which the rate will increase a specified amount upon the 
occurrence of a specified event, the creditor must disclose the specific 
amount the rate will increase.

                    5b(d)(7) Fees Imposed by Creditor

    1. Applicability. The fees referred to in Sec. 226.5b(d)(7) include 
items such as application fees, points, annual fees, transaction fees, 
fees to obtain checks to access the plan, and fees imposed for 
converting to a repayment phase that is provided for in the original 
agreement. This disclosure includes any fees that are imposed by the 
creditor to use or maintain the plan, whether the fees are kept by the 
creditor or a third party. For example, if a creditor requires an annual 
credit report on the consumer and requires the consumer to pay this fee 
to the creditor or directly to the third party, the fee must be 
specifically stated. Third party fees to open the plan that are 
initially paid by the consumer to the creditor may be included in this 
disclosure or in the disclosure under Sec. 226.5b(d)(8).
    2. Manner of describing fees. Charges may be stated as an estimated 
dollar amount for each fee, or as a percentage of a typical or 
representative amount of credit. The creditor may provide a stepped fee 
schedule in which a fee will increase a specified amount at a specified 
date. (See the discussion contained in the commentary to Sec. 
226.5b(f)(3)(i).)
    3. Fees not required to be disclosed. Fees that are not imposed to 
open, use, or maintain a plan, such as fees for researching an account, 
photocopying, paying late, stopping payment, having a check returned, 
exceeding the credit limit, or closing out an account do not have to be 
disclosed under this section. Credit report and appraisal fees imposed 
to investigate whether a condition permitting a freeze continues to 
exist--as discussed in the commentary to Sec. 226.5b(f)(3)(vi)--are not 
required to be disclosed under this section or Sec. 226.5b(d)(8).
    4. Rebates of closing costs. If closing costs are imposed they must 
be disclosed, regardless of whether such costs may be rebated later (for 
example, rebated to the extent of any interest paid during the first 
year of the plan).
    5. Terms used in disclosure. Creditors need not use the terms 
finance charge or other charge in describing the fees imposed by the 
creditor under this section or those imposed by third parties under 
Sec. 226.5b(d)(8).

          5b(d)(8) Fees Imposed by Third Parties to Open a Plan

    1. Applicability. Section 226.5b(d)(8) applies only to fees imposed 
by third parties to open the plan. Thus, for example, this section does 
not require disclosure of a fee imposed by a government agency at the 
end of a plan to release a security interest. Fees to be disclosed 
include appraisal, credit report, government agency, and attorneys fees. 
In cases where property insurance is required by the creditor, the 
creditor either may disclose the amount of the premium or may state that 
property insurance is required. For example, the disclosure might state, 
``You must carry insurance on the property that secures this plan.''
    2. Itemization of third-party fees. In all cases creditors must 
state the total of third-party fees as a single dollar amount or a range 
except that the total need not include costs for property insurance if 
the creditor discloses that such insurance is required. A creditor has 
two options with regard to providing the more detailed information about 
third party fees. Creditors may provide a statement that the consumer 
may request more specific cost information about third party fees from 
the creditor. As an alternative to including this statement, creditors 
may provide an

[[Page 499]]

itemization of such fees (by type and amount) with the early 
disclosures. Any itemization provided upon the consumer's request need 
not include a disclosure about property insurance.
    3. Manner of describing fees. A good faith estimate of the amount of 
fees must be provided. Creditors may provide, based on a typical or 
representative amount of credit, a range for such fees or state the 
dollar amount of such fees. Fees may be expressed on a unit cost basis, 
for example, $5 per $1,000 of credit.
    4. Rebates of third party fees. Even if fees imposed by third 
parties may be rebated, they must be disclosed. (See the commentary to 
Sec. 226.5b(d)(7).)

                     5b(d)(9) Negative Amortization

    1. Disclosure required. In transactions where the minimum payment 
will not or may not be sufficient to cover the interest that accrues on 
the outstanding balance, the creditor must disclose that negative 
amortization will or may occur. This disclosure is required whether or 
not the unpaid interest is added to the outstanding balance upon which 
interest is computed. A disclosure is not required merely because a loan 
calls for non-amortizing or partially amortizing payments.

                   5b(d)(10) Transaction Requirements

    1. Applicability. A limitation on automated teller machine usage 
need not be disclosed under this paragraph unless that is the only means 
by which the consumer can obtain funds.

              5b(d)(12) Disclosures for Variable-Rate Plans

    1. Variable-rate provisions. Sample forms in appendix G-14 provide 
illustrative guidance on the variable-rate rules.

                         Paragraph 5b(d)(12)(iv)

    1. Determination of annual percentage rate. If the creditor adjusts 
its index through the addition of a margin, the disclosure might read, 
``Your annual percentage rate is based on the index plus a margin.'' The 
creditor is not required to disclose a specific value for the margin.

                        Paragraph 5b(d)(12)(viii)

    1. Preferred-rate provisions. This paragraph requires disclosure of 
preferred-rate provisions, where the rate will increase upon the 
occurrence of some event, such as the borrower-employee leaving the 
creditor's employ or the consumer closing an existing deposit account 
with the creditor.
    2. Provisions on conversion to fixed rates. The commentary to Sec. 
226.5b(d)(5)(ii) discusses the disclosure requirements for options 
permitting the consumer to convert from a variable rate to a fixed rate.

                         Paragraph 5b(d)(12)(ix)

    1. Periodic limitations on increases in rates. The creditor must 
disclose any annual limitations on increases in the annual percentage 
rate. If the creditor bases its rate limitation on 12 monthly billing 
cycles, such a limitation should be treated as an annual cap. Rate 
limitations imposed on less than an annual basis must be stated in terms 
of a specific amount of time. For example, if the creditor imposes rate 
limitations on only a semiannual basis, this must be expressed as a rate 
limitation for a six-month time period. If the creditor does not impose 
periodic limitations (annual or shorter) on rate increases, the fact 
that there are no annual rate limitations must be stated.
    2. Maximum limitations on increases in rates. The maximum annual 
percentage rate that may be imposed under each payment option over the 
term of the plan (including the draw period and any repayment period 
provided for in the initial agreement) must be provided. The creditor 
may disclose this rate as a specific number (for example, 18%) or as a 
specific amount above the initial rate. For example, this disclosure 
might read, ``The maximum annual percentage rate that can apply to your 
line will be 5 percentage points above your initial rate.'' If the 
creditor states the maximum rate as a specific amount above the initial 
rate, the creditor must include a statement that the consumer should 
inquire about the rate limitations that are currently available. If an 
initial discount is not taken into account in applying maximum rate 
limitations, that fact must be disclosed. If separate overall 
limitations apply to rate increases resulting from events such as the 
exercise of a fixed-rate conversion option or leaving the creditor's 
employ, those limitations also must be stated. Limitations do not 
include legal limits in the nature of usury or rate ceilings under state 
or federal statutes or regulations.
    3. Form of disclosures. The creditor need not disclose each periodic 
or maximum rate limitation that is currently available. Instead, the 
creditor may disclose the range of the lowest and highest periodic and 
maximum rate limitations that may be applicable to the creditor's home 
equity plans. Creditors using this alternative must include a statement 
that the consumer should inquire about the rate limitations that are 
currently available.

                         Paragraph 5b(d)(12)(x)

    1. Maximum rate payment example. In calculating the payment 
creditors should assume the maximum rate is in effect. Any discounted or 
premium initial rates or periodic rate limitations should be ignored for 
purposes of this disclosure. If a range is used to disclose the maximum 
cap under Sec. 226.5b(d)(12)(ix), the highest rate in the

[[Page 500]]

range must be used for the disclosure under this paragraph. As an 
alternative to making disclosures based on each payment option, the 
creditor may choose a representative example within the three categories 
of payment options upon which to base this disclosure. (See the 
commentary to Sec. 226.5b(d)(5).) However, separate examples must be 
provided for the draw period and for any repayment period unless the 
payment is determined the same way in both periods. Creditors should 
calculate the example for the repayment period based on an assumed 
$10,000 balance. (See the commentary to Sec. 226.5b(d)(5) for a 
discussion of the circumstances in which a creditor may use a lower 
outstanding balance.)
    2. Time the maximum rate could be reached. In stating the date or 
time when the maximum rate could be reached, creditors should assume the 
rate increases as rapidly as possible under the plan. In calculating the 
date or time, creditors should factor in any discounted or premium 
initial rates and periodic rate limitations. This disclosure must be 
provided for the draw phase and any repayment phase. Creditors should 
assume the index and margin shown in the last year of the historical 
example (or a more recent rate) is in effect at the beginning of each 
phase.

                         Paragraph 5b(d)(12)(xi)

    1. Index movement. Index values and annual percentage rates must be 
shown for the entire 15 years of the historical example and must be 
based on the most recent 15 years. The example must be updated annually 
to reflect the most recent 15 years of index values as soon as 
reasonably possible after the new index value becomes available. If the 
values for an index have not been available for 15 years, a creditor 
need only go back as far as the values have been available and may start 
the historical example at the year for which values are first available.
    2. Selection of index values. The historical example must reflect 
the method of choosing index values for the plan. For example, if an 
average of index values is used in the plan, averages must be used in 
the example, but if an index value as of a particular date is used, a 
single index value must be shown. The creditor is required to assume one 
date (or one period, if an average is used) within a year on which to 
base the history of index values. The creditor may choose to use index 
values as of any date or period as long as the index value as of this 
date or period is used for each year in the example. Only one index 
value per year need be shown, even if the plan provides for adjustments 
to the annual percentage rate or payment more than once in a year. In 
such cases, the creditor can assume that the index rate remained 
constant for the full year for the purpose of calculating the annual 
percentage rate and payment.
    3. Selection of margin. A value for the margin must be assumed in 
order to prepare the example. A creditor may select a representative 
margin that it has used with the index during the six months preceding 
preparation of the disclosures and state that the margin is one that it 
has used recently. The margin selected may be used until the creditor 
annually updates the disclosure form to reflect the most recent 15 years 
of index values.
    4. Amount of discount or premium. In reflecting any discounted or 
premium initial rate, the creditor may select a discount or premium that 
it has used during the six months preceding preparation of the 
disclosures, and should disclose that the discount or premium is one 
that the creditor has used recently. The discount or premium should be 
reflected in the example for as long as it is in effect. The creditor 
may assume that a discount or premium that would have been in effect for 
any part of a year was in effect for the full year for purposes of 
reflecting it in the historical example.
    5. Rate limitations. Limitations on both periodic and maximum rates 
must be reflected in the historical example. If ranges of rate 
limitations are provided under Sec. 226.5b(d)(12)(ix), the highest 
rates provided in those ranges must be used in the example. Rate 
limitations that may apply more often than annually should be treated as 
if they were annual limitations. For example, if a creditor imposes a 1% 
cap every six months, this should be reflected in the example as if it 
were a 2% annual cap.
    6. Assumed advances. The creditor should assume that the $10,000 
balance is an advance taken at the beginning of the first billing cycle 
and is reduced according to the terms of the plan, and that the consumer 
takes no subsequent draws. As discussed in the commentary to Sec. 
226.5b(d)(5), creditors should not assume an additional advance is taken 
at the beginning of any repayment period. If applicable, the creditor 
may assume the $10,000 is both the advance and the credit limit. (See 
the commentary to Sec. 226.5b(d)(5) for a discussion of the 
circumstances in which a creditor may use a lower outstanding balance.)
    7. Representative payment options. The creditor need not provide an 
historical example for all of its various payment options, but may 
select a representative payment option within each of the three 
categories of payments upon which to base its disclosure. (See the 
commentary to Sec. 226.5b(d)(5).)
    8. Payment information. The payment figures in the historical 
example must reflect all significant program terms. For example, 
features such as rate and payment caps, a discounted initial rate, 
negative amortization, and rate carryover must be taken into account in 
calculating the payment figures if these would have applied to the plan. 
The

[[Page 501]]

historical example should include payments for as much of the length of 
the plan as would occur during a 15-year period. For example:
     If the draw period is 10 years and the repayment 
period is 15 years, the example should illustrate the entire 10-year 
draw period and the first 5 years of the repayment period.
     If the length of the draw period is 15 years and 
there is a 15-year repayment phase, the historical example must reflect 
the payments for the 15-year draw period and would not show any of the 
repayment period. No additional historical example would be required to 
reflect payments for the repayment period.
     If the length of the plan is less than 15 years, 
payments in the historical example need only be shown for the number of 
years in the term. In such cases, however, the creditor must show the 
index values, margin and annual percentage rates and continue to reflect 
all significant plan terms such as rate limitations for the entire 15 
years.

A creditor need show only a single payment per year in the example, even 
though payments may vary during a year. The calculations should be based 
on the actual payment computation formula, although the creditor may 
assume that all months have an equal number of days. The creditor may 
assume that payments are made on the last day of the billing cycle, the 
billing date or the payment due date, but must be consistent in the 
manner in which the period used to illustrate payment information is 
selected. Information about balloon payments and remaining balance may, 
but need not, be reflected in the example.
    9. Disclosures for repayment period. The historical example must 
reflect all features of the repayment period, including the appropriate 
index values, margin, rate limitations, length of the repayment period, 
and payments. For example, if different indices are used during the draw 
and repayment periods, the index values for that portion of the 15 years 
that reflect the repayment period must be the values for the appropriate 
index.
    10. Reverse mortgages. The historical example for reverse mortgages 
should reflect 15 years of index values and annual percentage rates, but 
the payment column should be blank until the year that the single 
payment will be made, assuming that payment is estimated to occur within 
15 years. (See the commentary to Sec. 226.5b(d)(5) for a discussion of 
reverse mortgages.)

                             5b(e) Brochure

    1. Substitutes. A brochure is a suitable substitute for the Board's 
home equity brochure if it is, at a minimum, comparable to the Board's 
brochure in substance and comprehensiveness. Creditors are permitted to 
provide more detailed information than is contained in the Board's 
brochure.
    2. Effect of third party delivery of brochure. If a creditor 
determines that a third party has provided a consumer with the required 
brochure pursuant to Sec. 226.5b(c), the creditor need not give the 
consumer a second brochure.

                 5b(f) Limitations on Home Equity Plans

    1. Coverage. Section 226.5b(f) limits both actions that may be taken 
and language that may be included in contracts, and applies to any 
assignee or holder as well as to the original creditor. The limitations 
apply to the draw period and any repayment period, and to any renewal or 
modification of the original agreement.

                           Paragraph 5b(f)(1)

    1. External index. A creditor may change the annual percentage rate 
for a plan only if the change is based on an index outside the 
creditor's control. Thus, a creditor may not make rate changes based on 
its own prime rate or cost of funds and may not reserve a contractual 
right to change rates at its discretion. A creditor is permitted, 
however, to use a published prime rate, such as that in the Wall Street 
Journal, even if the bank's own prime rate is one of several rates used 
to establish the published rate.
    2. Publicly available. The index must be available to the public. A 
publicly available index need not be published in a newspaper, but it 
must be one the consumer can independently obtain (by telephone, for 
example) and use to verify rates imposed under the plan.
    3. Provisions not prohibited. This paragraph does not prohibit rate 
changes that are specifically set forth in the agreement. For example, 
stepped-rate plans, in which specified rates are imposed for specified 
periods, are permissible. In addition, preferred-rate provisions, in 
which the rate increases by a specified amount upon the occurrence of a 
specified event, also are permissible.

                           Paragraph 5b(f)(2)

    1. Limitations on termination and acceleration. In general, 
creditors are prohibited from terminating and accelerating payment of 
the outstanding balance before the scheduled expiration of a plan. 
However, creditors may take these actions in the four circumstances 
specified in Sec. 226.5b(f)(2). Creditors are not permitted to specify 
in their contracts any other events that allow termination and 
acceleration beyond those permitted by the regulation. Thus, for 
example, an agreement may not provide that the balance is payable on 
demand nor may it provide that the account will be terminated and the 
balance accelerated if the rate cap is reached.

[[Page 502]]

    2. Other actions permitted. If an event permitting termination and 
acceleration occurs, a creditor may instead take actions short of 
terminating and accelerating. For example, a creditor could temporarily 
or permanently suspend further advances, reduce the credit limit, change 
the payment terms, or require the consumer to pay a fee. A creditor also 
may provide in its agreement that a higher rate or higher fees will 
apply in circumstances under which it would otherwise be permitted to 
terminate the plan and accelerate the balance. A creditor that does not 
immediately terminate an account and accelerate payment or take another 
permitted action may take such action at a later time, provided one of 
the conditions permitting termination and acceleration exists at that 
time.

                          Paragraph 5b(f)(2)(i)

    1. Fraud or material misrepresentation. A creditor may terminate a 
plan and accelerate the balance if there has been fraud or material 
misrepresentation by the consumer in connection with the plan. This 
exception includes fraud or misrepresentation at any time, either during 
the application process or during the draw period and any repayment 
period. What constitutes fraud or misrepresentation is determined by 
applicable state law and may include acts of omission as well as overt 
acts, as long as any necessary intent on the part of the consumer 
exists.

                         Paragraph 5b(f)(2)(ii)

    1. Failure to meet repayment terms. A creditor may terminate a plan 
and accelerate the balance when the consumer fails to meet the repayment 
terms provided for in the agreement. However, a creditor may terminate 
and accelerate under this provision only if the consumer actually fails 
to make payments. For example, a creditor may not terminate and 
accelerate if the consumer, in error, sends a payment to the wrong 
location, such as a branch rather than the main office of the creditor. 
If a consumer files for or is placed in bankruptcy, the creditor may 
terminate and accelerate under this provision if the consumer fails to 
meet the repayment terms of the agreement. This section does not 
override any state or other law that requires a right-to-cure notice, or 
otherwise places a duty on the creditor before it can terminate a plan 
and accelerate the balance.

                         Paragraph 5b(f)(2)(iii)

    1. Impairment of security. A creditor may terminate a plan and 
accelerate the balance if the consumer's action or inaction adversely 
affects the creditor's security for the plan, or any right of the 
creditor in that security. Action or inaction by third parties does not, 
in itself, permit the creditor to terminate and accelerate.
    2. Examples. A creditor may terminate and accelerate, for example, 
if:
     The consumer transfers title to the property or 
sells the property without the permission of the creditor
     The consumer fails to maintain required insurance 
on the dwelling
     The consumer fails to pay taxes on the property
     The consumer permits the filing of a lien senior 
to that held by the creditor
     The sole consumer obligated on the plan dies
     The property is taken through eminent domain
     A prior lienholder forecloses

By contrast, the filing of a judgment against the consumer would permit 
termination and acceleration only if the amount of the judgment and 
collateral subject to the judgment is such that the creditor's security 
is adversely affected. If the consumer commits waste or otherwise 
destructively uses or fails to maintain the property such that the 
action adversely affects the security, the plan may be terminated and 
the balance accelerated. Illegal use of the property by the consumer 
would permit termination and acceleration if it subjects the property to 
seizure. If one of two consumers obligated on a plan dies the creditor 
may terminate the plan and accelerate the balance if the security is 
adversely affected. If the consumer moves out of the dwelling that 
secures the plan and that action adversely affects the security, the 
creditor may terminate a plan and accelerate the balance.

                           Paragraph 5b(f)(3)

    1. Scope of provision. In general, a creditor may not change the 
terms of a plan after it is opened. For example, a creditor may not 
increase any fee or impose a new fee once the plan has been opened, even 
if the fee is charged by a third party, such as a credit reporting 
agency, for a service. The change of terms prohibition applies to all 
features of a plan, not only those required to be disclosed under this 
section. For example, this provision applies to charges imposed for late 
payment, although this fee is not required to be disclosed under Sec. 
226.5b(d)(7).
    2. Charges not covered. There are three charges not covered by this 
provision. A creditor may pass on increases in taxes since such charges 
are imposed by a governmental body and are beyond the control of the 
creditor. In addition, a creditor may pass on increases in premiums for 
property insurance that are excluded from the finance charge under Sec. 
226.4(d)(2), since such insurance provides a benefit to the consumer 
independent of the use of the line and is often maintained 
notwithstanding the line. A creditor also

[[Page 503]]

may pass on increases in premiums for credit insurance that are excluded 
from the finance charge under Sec. 226.4(d)(1), since the insurance is 
voluntary and provides a benefit to the consumer.

                          Paragraph 5b(f)(3)(i)

    1. Changes provided for in agreement. A creditor may provide in the 
initial agreement that further advances will be prohibited or the credit 
line reduced during any period in which the maximum annual percentage 
rate is reached. A creditor also may provide for other specific changes 
to take place upon the occurrence of specific events. Both the 
triggering event and the resulting modification must be stated with 
specificity. For example, in home equity plans for employees, the 
agreement could provide that a specified higher rate or margin will 
apply if the borrower's employment with the creditor ends. A contract 
could contain a stepped-rate or stepped-fee schedule providing for 
specified changes in the rate or the fees on certain dates or after a 
specified period of time. A creditor also may provide in the initial 
agreement that it will be entitled to a share of the appreciation in the 
value of the property as long as the specific appreciation share and the 
specific circumstances which require the payment of it are set forth. A 
contract may permit a consumer to switch among minimum payment options 
during the plan.
    2. Prohibited provisions. A creditor may not include a general 
provision in its agreement permitting changes to any or all of the terms 
of the plan. For example, creditors may not include ``boilerplate'' 
language in the agreement stating that they reserve the right to change 
the fees imposed under the plan. In addition, a creditor may not include 
any ``triggering events'' or responses that the regulation expressly 
addresses in a manner different from that provided in the regulation. 
For example, an agreement may not provide that the margin in a variable-
rate plan will increase if there is a material change in the consumer's 
financial circumstances, because the regulation specifies that 
temporarily freezing the line or lowering the credit limit is the 
permissible response to a material change in the consumer's financial 
circumstances. Similarly a contract cannot contain a provision allowing 
the creditor to freeze a line due to an insignificant decline in 
property value since the regulation allows that response only for a 
significant decline.

                         Paragraph 5b(f)(3)(ii)

    1. Substitution of index. A creditor may change the index and margin 
used under the plan if the original index becomes unavailable, as long 
as historical fluctuations in the original and replacement indices were 
substantially similar, and as long as the replacement index and margin 
will produce a rate similar to the rate that was in effect at the time 
the original index became unavailable. If the replacement index is newly 
established and therefore does not have any rate history, it may be used 
if it produces a rate substantially similar to the rate in effect when 
the original index became unavailable.

                         Paragraph 5b(f)(3)(iii)

    1. Changes by written agreement. A creditor may change the terms of 
a plan if the consumer expressly agrees in writing to the change at the 
time it is made. For example, a consumer and a creditor could agree in 
writing to change the repayment terms from interest-only payments to 
payments that reduce the principal balance. The provisions of any such 
agreement are governed by the limitations in Sec. 226.5b(f). For 
example, a mutual agreement could not provide for future annual 
percentage rate changes based on the movement of an index controlled by 
the creditor or for termination and acceleration under circumstances 
other than those specified in the regulation. By contrast, a consumer 
could agree to a new credit limit for the plan, although the agreement 
could not permit the creditor to later change the credit limit except by 
a subsequent written agreement or in the circumstances described in 
Sec. 226.5b(f)(3)(vi).
    2. Written agreement. The change must be agreed to in writing by the 
consumer. Creditors are not permitted to assume consent because the 
consumer uses an account, even if use of an account would otherwise 
constitute acceptance of a proposed change under state law.

                         Paragraph 5b(f)(3)(iv)

    1. Beneficial changes. After a plan is opened, a creditor may make 
changes that unequivocally benefit the consumer. Under this provision, a 
creditor may offer more options to consumers, as long as existing 
options remain. For example, a creditor may offer the consumer the 
option of making lower monthly payments or could increase the credit 
limit. Similarly, a creditor wishing to extend the length of the plan on 
the same terms may do so. Creditors are permitted to temporarily reduce 
the rate or fees charged during the plan (though a change in terms 
notice may be required under Sec. 226.9(c) when the rate or fees are 
returned to their original level). Creditors also may offer an 
additional means of access to the line, even if fees are associated with 
using the device, provided the consumer retains the ability to use prior 
access devices on the original terms.

[[Page 504]]

                          Paragraph 5b(f)(3)(v)

    1. Insignificant changes. A creditor is permitted to make 
insignificant changes after a plan is opened. This rule accommodates 
operational and similar problems, such as changing the address of the 
creditor for purposes of sending payments. It does not permit a creditor 
to change a term such as a fee charged for late payments.
    2. Examples of insignificant changes. Creditors may make minor 
changes to features such as the billing cycle date, the payment due date 
(as long as the consumer does not have a diminished grace period if one 
is provided), and the day of the month on which index values are 
measured to determine changes to the rate for variable-rate plans. A 
creditor also may change its rounding practice in accordance with the 
tolerance rules set forth in Sec. 226.14 (for example, stating an exact 
APR of 14.3333 percent as 14.3 percent, even if it had previously been 
stated as 14.33 percent). A creditor may change the balance computation 
method it uses only if the change produces an insignificant difference 
in the finance charge paid by the consumer. For example, a creditor may 
switch from using the average daily balance method (including new 
transactions) to the daily balance method (including new transactions).

                         Paragraph 5b(f)(3)(vi)

    1. Suspension of credit privileges or reduction of credit limit. A 
creditor may prohibit additional extensions of credit or reduce the 
credit limit in the circumstances specified in this section of the 
regulation. In addition, as discussed under Sec. 226.5b(f)(3)(i), a 
creditor may contractually reserve the right to take such actions when 
the maximum annual percentage rate is reached. A creditor may not take 
these actions under other circumstances, unless the creditor would be 
permitted to terminate the line and accelerate the balance as described 
in Sec. 226.5b(f)(2). The creditor's right to reduce the credit limit 
does not permit reducing the limit below the amount of the outstanding 
balance if this would require the consumer to make a higher payment.
    2. Temporary nature of suspension or reduction. Creditors are 
permitted to prohibit additional extensions of credit or reduce the 
credit limit only while one of the designated circumstances exists. When 
the circumstance justifying the creditor's action ceases to exist, 
credit privileges must be reinstated, assuming that no other 
circumstance permitting such action exists at that time.
    3. Imposition of fees. If not prohibited by state law, a creditor 
may collect only bona fide and reasonable appraisal and credit report 
fees if such fees are actually incurred in investigating whether the 
condition permitting the freeze continues to exist. A creditor may not, 
in any circumstances, impose a fee to reinstate a credit line once the 
condition has been determined not to exist.
    4. Reinstatement of credit privileges. Creditors are responsible for 
ensuring that credit privileges are restored as soon as reasonably 
possible after the condition that permitted the creditor's action ceases 
to exist. One way a creditor can meet this responsibility is to monitor 
the line on an ongoing basis to determine when the condition ceases to 
exist. The creditor must investigate the condition frequently enough to 
assure itself that the condition permitting the freeze continues to 
exist. The frequency with which the creditor must investigate to 
determine whether a condition continues to exist depends upon the 
specific condition permitting the freeze. As an alternative to such 
monitoring, the creditor may shift the duty to the consumer to request 
reinstatement of credit privileges by providing a notice in accordance 
with Sec. 226.9(c)(3). A creditor may require a reinstatement request 
to be in writing if it notifies the consumer of this requirement on the 
notice provided under Sec. 226.9(c)(3). Once the consumer requests 
reinstatement, the creditor must promptly investigate to determine 
whether the condition allowing the freeze continues to exist. Under this 
alternative, the creditor has a duty to investigate only upon the 
consumer's request.
    5. Suspension of credit privileges following request by consumer. A 
creditor may honor a specific request by a consumer to suspend credit 
privileges. If the consumer later requests that the creditor reinstate 
credit privileges, the creditor must do so provided no other 
circumstance justifying a suspension exists at that time. If two or more 
consumers are obligated under a plan and each has the ability to take 
advances, the agreement may permit any of the consumers to direct the 
creditor not to make further advances. A creditor may require that all 
persons obligated under a plan request reinstatement.
    6. Significant decline defined. What constitutes a significant 
decline for purposes of Sec. 226.5b(f)(3)(vi)(A) will vary according to 
individual circumstances. In any event, if the value of the dwelling 
declines such that the initial difference between the credit limit and 
the available equity (based on the property's appraised value for 
purposes of the plan) is reduced by fifty percent, this constitutes a 
significant decline in the value of the dwelling for purposes of Sec. 
226.5b(f)(3)(vi)(A). For example, assume that a house with a first 
mortgage of $50,000 is appraised at $100,000 and the credit limit is 
$30,000. The difference between the credit limit and the available 
equity is $20,000, half of which is $10,000. The creditor could prohibit 
further advances or reduce the credit limit if the value of the property 
declines from $100,000 to $90,000. This provision does

[[Page 505]]

not require a creditor to obtain an appraisal before suspending credit 
privileges although a significant decline must occur before suspension 
can occur.
    7. Material change in financial circumstances. Two conditions must 
be met for Sec. 226.5b(f)(3)(vi)(B) to apply. First, there must be a 
``material change'' in the consumer's financial circumstances, such as a 
significant decrease in the consumer's income. Second, as a result of 
this change, the creditor must have a reasonable belief that the 
consumer will be unable to fulfill the payment obligations of the plan. 
A creditor may, but does not have to, rely on specific evidence (such as 
the failure to pay other debts) in concluding that the second part of 
the test has been met. A creditor may prohibit further advances or 
reduce the credit limit under this section if a consumer files for or is 
placed in bankruptcy.
    8. Default of a material obligation. Creditors may specify events 
that would qualify as a default of a material obligation under Sec. 
226.5b(f)(3)(vi)(C). For example, a creditor may provide that default of 
a material obligation will exist if the consumer moves out of the 
dwelling or permits an intervening lien to be filed that would take 
priority over future advances made by the creditor.
    9. Government limits on the annual percentage rate. Under Sec. 
226.5b(f)(3)(vi)(D), a creditor may prohibit further advances or reduce 
the credit limit if, for example, a state usury law is enacted which 
prohibits a creditor from imposing the agreed-upon annual percentage 
rate.

                          5b(g) Refund of Fees

    1. Refund of fees required. If any disclosed term, including any 
term provided upon request pursuant to Sec. 226.5b(d), changes between 
the time the early disclosures are provided to the consumer and the time 
the plan is opened, and the consumer as a result decides to not enter 
into the plan, a creditor must refund all fees paid by the consumer in 
connection with the application. All fees, including credit report fees 
and appraisal fees, must be refunded whether such fees are paid to the 
creditor or directly to third parties. A consumer is entitled to a 
refund of fees under these circumstances whether or not terms are 
guaranteed by the creditor under Sec. 226.5b(d)(2)(i).
    2. Variable-rate plans. The right to a refund of fees does not apply 
to changes in the annual percentage rate resulting from fluctuations in 
the index value in a variable-rate plan. Also, if the maximum annual 
percentage rate is expressed as an amount over the initial rate, the 
right to refund of fees would not apply to changes in the cap resulting 
from fluctuations in the index value.
    3. Changes in terms. If a term, such as the maximum rate, is stated 
as a range in the early disclosures, and the term ultimately applicable 
to the plan falls within that range, a change does not occur for 
purposes of this section. If, however, no range is used and the term is 
changed (for example, a rate cap of 6 rather than 5 percentage points 
over the initial rate), the change would permit the consumer to obtain a 
refund of fees. If a fee imposed by the creditor is stated in the early 
disclosures as an estimate and the fee changes, the consumer could elect 
to not enter into the agreement and would be entitled to a refund of 
fees. On the other hand, if fees imposed by third parties are disclosed 
as estimates and those fees change, the consumer is not entitled to a 
refund of fees paid in connection with the application. Creditors must, 
however, use the best information reasonably available in providing 
disclosures about such fees.
    4. Timing of refunds and relation to other provisions. The refund of 
fees must be made as soon as reasonably possible after the creditor is 
notified that the consumer is not entering into the plan because of the 
changed term, or that the consumer wants a refund of fees. The fact that 
an application fee may be refunded to some applicants under this 
provision does not render such fees finance charges under Sec. 
226.4(c)(1) of the regulation.

                 5b(h) Imposition of Nonrefundable Fees

    1. Collection of fees after consumer receives disclosures. A fee may 
be collected after the consumer receives the disclosures and brochure 
and before the expiration of three days, although the fee must be 
refunded if, within three days of receiving the required information, 
the consumer decides to not enter into the agreement. In such a case, 
the consumer must be notified that the fee is refundable for three days. 
The notice must be clear and conspicuous and in writing, and may be 
included with the disclosures required under Sec. 226.5b(d) or as an 
attachment to them. If disclosures and brochure are mailed to the 
consumer, footnote 10d of the regulation provides that a nonrefundable 
fee may not be imposed until six business days after the mailing.
    2. Collection of fees before consumer receives disclosures. An 
application fee may be collected before the consumer receives the 
disclosures and brochure (for example, when an application contained in 
a magazine is mailed in with an application fee) provided that it 
remains refundable until three business days after the consumer receives 
the Sec. 226.5b disclosures. No other fees except a refundable 
membership fee may be collected until after the consumer receives the 
disclosures required under Sec. 226.5b.
    3. Relation to other provisions. A fee collected before disclosures 
are provided may become nonrefundable except that, under Sec. 
226.5b(g), it must be refunded if the consumer elects to not enter into 
the plan because of a change in terms. (Of course, all

[[Page 506]]

fees must be refunded if the consumer later rescinds under Sec. 
226.15.)

               Section 226.6 Initial Disclosure Statement

    1. Consistent terminology. Language on the initial and periodic 
disclosure statements must be close enough in meaning to enable the 
consumer to relate the 2 sets of disclosures; however, the language need 
not be identical. For example, in making the disclosure under Sec. 
226.6(a)(3), the creditor may refer to the ``outstanding balance at the 
end of the billing cycle,'' while the disclosure for Sec. 226.7(i) 
refers to the ``ending balance'' or ``new balance.''
    2. Separate initial disclosures permitted. In a certain open-end 
credit program involving more than one creditor--a card issuer of 
travel-and-entertainment cards and a financial institution--the consumer 
has the option to pay the card issuer directly or to transfer to the 
financial institution all or part of the amount owing. In this case, the 
creditors may send separate initial disclosure statements.
    6(a) Finance charge.
    Paragraph 6(a)(1)
    1. When finance charges accrue. Creditors may provide a general 
explanation about finance charges beginning to run and need not disclose 
a specific date. For example, a disclosure that the consumer has 30 days 
from the closing date to pay the new balance before finance charges will 
accrue on the account would describe when finance charges begin to run.
    2. Free-ride periods. In disclosing whether or not a free-ride 
period exists, the creditor need not use ``free period,'' ``free-ride 
period,'' or any other particular descriptive phrase or term. For 
example, a statement that ``the finance charge begins on the date the 
transaction is posted to your account'' adequately discloses that no 
free-ride period exists. In the same fashion, a statement that ``finance 
charges will be imposed on any new purchases only if they are not paid 
in full within 25 days after the close of the billing cycle'' indicates 
that a free-ride period exists in the interim.
    Paragraph 6(a)(2).
    1. Range of balances. The range of balances disclosure is 
inapplicable:
     If only one periodic rate may be applied to the 
entire account balance.
     If only one periodic rate may be applied to the 
entire balance for a feature (for example, cash advances), even though 
the balance for another feature (purchases) may be subject to 2 rates (a 
1.5% periodic rate on purchase balances of $0-$500, while balances above 
$500 are subject to a 1% periodic rate). Of course, the creditor must 
give a range of balances disclosure for the purchase feature.
    2. Variable-rate disclosures--coverage. This section covers open-end 
credit plans under which rate changes are part of the plan and are tied 
to an index or formula. A creditor would use variable-rate disclosures 
(and thus be excused from the requirement of giving a change-in-terms 
notice when rate increases occur as disclosed) for plans involving rate 
changes such as the following:

     Rate changes that are tied to the rate the 
creditor pays on its 6-month money market certificates.
     Rate changes that are tied to Treasury bill 
rates.
     Rate changes that are tied to changes in the 
creditor's commercial lending rate.

In contrast, the creditor's contract reservation to increase the rate 
without reference to such an index or formula (for example, a plan that 
simply provides that the creditor reserves the right to raise its rates) 
would not be considered a variable-rate plan for Truth in Lending 
disclosure purposes. (See the rule in Sec. 226.5b(f)(1) applicable to 
home equity plans, however, which prohibits ``rate reservation'' 
clauses.) Moreover, an open-end credit plan in which the employee 
receives a lower rate contingent upon employment (that is, with the rate 
to be increased upon termination of employment) is not a variable-rate 
plan. (With regard to such employee preferential-rate plans, however, 
see comment 9(c)-1, which provides that if the specific change that 
would occur is disclosed on the initial disclosure statement, no notice 
of a change in terms need be given when the term later changes as 
disclosed.)
    3. Variable rate plan--rate(s) in effect. In disclosing the rate(s) 
in effect at the time of the initial disclosures (as is required by 
Sec. 226.6(a)(2)), the creditor may use an insert showing the current 
rate; may give the rate as of a specified date and then update the 
disclosure from time to time, for example, each calendar month; or may 
disclose an estimated rate under Sec. 226.5(c).
    4. Variable rate plan--additional disclosures required. In addition 
to disclosing the rates in effect at the time of the initial 
disclosures, the disclosures under footnote 12 also must be made.
    5. Variable rate plan--index. The index to be used must be clearly 
identified; the creditor need not give, however, an explanation of how 
the index is determined or provide instructions for obtaining it.
    6. Variable rate plan--circumstances for increase. Circumstances 
under which the rate(s) may increase include, for example:
     An increase in the Treasury bill rate.
     An increase in the Federal Reserve discount rate.
    The creditor must disclose when the increase will take effect; for 
example,
     ``An increase will take effect on the day that 
the Treasury bill rate increases,'' or
     ``An increase in the Federal Reserve discount 
rate will take effect on the first day of the creditor's billing 
cycle.''

[[Page 507]]

    7. Variable-rate plan--limitations on increase. In disclosing any 
limitations on rate increases, limitations such as the maximum increase 
per year or the maximum increase over the duration of the plan must be 
disclosed. When there are no limitations, the creditor may, but need 
not, disclose that fact. (A maximum interest rate must be included in 
dwelling-secured open-end credit plans under which the interest rate may 
be changed. See Sec. 226.30 and the commentary to that section.) Legal 
limits such as usury or rate ceilings under State or Federal statutes or 
regulations need not be disclosed. Examples of limitations that must be 
disclosed include:
     ``The rate on the plan will not exceed 25% annual 
percentage rate.''
     ``Not more than \1/2\% increase in the annual 
percentage rate per year will occur.''
    8. Variable rate plan--effects of increase. Examples of effects that 
must be disclosed include:
     Any requirement for additional collateral if the 
annual percentage rate increases beyond a specified rate.
     Any increase in the scheduled minimum periodic 
payment amount.

    9. Variable rate plan--change-in-terms notice not required. No 
notice of a change in terms is required for a rate increase under a 
variable rate plan as defined in Comment 6(a)(2)-2.
    10. Discounted variable-rate plans. In some variable-rate plans, 
creditors may set an initial interest rate that is not determined by the 
index or formula used to make later interest rate adjustments. 
Typically, this initial rate is lower than the rate would be if it were 
calculated using the index or formula.
     For example, a creditor may calculate interest 
rates according to a formula using the six-month Treasury bill rate plus 
a 2 percent margin. If the current Treasury bill rate is 10 percent, the 
creditor may forego the 2 percent spread and charge only 10 percent for 
a limited time, instead of setting an initial rate of 12 percent, or the 
creditor may disregard the index or formula and set the initial rate at 
9 percent.
     When creditors use an initial rate that is not 
calculated using the index or formula for later rate adjustments, the 
initial disclosure statement should reflect: (1) The initial rate 
(expressed as a periodic rate and a corresponding annual percentage 
rate), together with a statement of how long it will remain in effect; 
(2) the current rate that would have been applied using the index or 
formula (also expressed as a periodic rate and a corresponding annual 
percentage rate); and (3) the other variable-rate information required 
by footnote 12 to Sec. 226.6(a)(2).
     In disclosing the current periodic and annual 
percentage rates that would be applied using the index or formula, the 
creditor may use any of the disclosure options described in comment 
6(a)(2)-3.
    11. Increased penalty rates. If the initial rate may increase upon 
the occurrence of one or more specific events, such as a late payment or 
an extension of credit that exceeds the credit limit, the creditor must 
disclose the initial rate and the increased penalty rate that may apply. 
If the penalty rate is based on an index and an increased margin, the 
issuer must disclose the index and the margin. The creditor must also 
disclose the specific event or events that may result in the increased 
rate, such as ``22% APR, if 60 days late.'' If the penalty rate cannot 
be determined at the time disclosures are given, the creditor must 
provide an explanation of the specific event or events that may result 
in the increased rate. At the creditor's option, the creditor may 
disclose the period for which the increased rate will remain in effect, 
such as ``until you make three timely payments.'' The creditor need not 
disclose an increased rate that is imposed when credit privileges are 
permanently terminated.
    Paragraph 6(a)(3).
    1. Explanation of balance computation method. A shorthand phrase 
such as ``previous balance method'' does not suffice in explaining the 
balance computation method. (See appendix G-1 for model clauses.)
    2. Allocation of payments. Disclosure about the allocation of 
payments and other credits is not required. For example, the creditor 
need not disclose that payments are applied to late charges, overdue 
balances, and finance charges before being applied to the principal 
balance; or in a multifeatured plan, that payments are applied first to 
finance charges, then to purchases, and then to cash advances. (See 
Comment 7-1 for definition of multifeatured plan.)
    Paragraph 6(a)(4).
    1. Finance charges. In addition to disclosing the periodic rate(s) 
under Sec. 226.6(a)(2), disclosure is required of any other type of 
finance charge that may be imposed, such as minimum, fixed, transaction, 
and activity charges; required insurance; or appraisal or credit report 
fees (unless excluded from the finance charge under Sec. 226.4(c)(7)).
    6(b) Other charges.
    1. General; examples of other charges. Under Sec. 226.6(b), 
significant charges related to the plan (that are not finance charges) 
must also be disclosed. For example:
    i. Late payment and over-the-credit-limit charges.
    ii. Fees for providing documentary evidence of transactions 
requested under Sec. 226.13 (billing error resolution).
    iii. Charges imposed in connection with real estate transactions 
such as title, appraisal, and credit report fees (see Sec. 
226.4(c)(7)).
    iv. A tax imposed on the credit transaction by a state or other 
governmental body, such

[[Page 508]]

as a documentary stamp tax on cash advances (see the commentary to Sec. 
226.4(a)).
    v. A membership or participation fee for a package of services that 
includes an open-end credit feature, unless the fee is required whether 
or not the open-end credit feature is included. For example, a 
membership fee to join a credit union is not an ``other charge,'' even 
if membership is required to apply for credit. For the fee to be 
excluded from disclosure as an ``other charge,'' however, the package of 
services must have some substantive purpose other than access to the 
credit feature. For example, if the primary benefit of membership in an 
organization is the opportunity to apply for a credit card, and the 
other benefits offered (such as a newsletter or a member information 
hotline) are merely incidental to the credit feature, the membership fee 
would have to be disclosed as an ``other charge.''
    vi. Automated teller machine (ATM) charges described in comment 
4(a)-4 that are not finance charges.
    vii. Charges imposed for the termination of an open-end credit plan.

    2. Exclusions. The following are examples of charges that are not 
``other charges'':
    i. Fees charged for documentary evidence of transactions for income 
tax purposes.
    ii. Amounts payable by a consumer for collection activity after 
default; attorney's fees, whether or not automatically imposed; 
foreclosure costs; post-judgment interest rates imposed by law; and 
reinstatement or reissuance fees.
    iii. Premiums for voluntary credit life or disability insurance, or 
for property insurance, that are not part of the finance charge.
    iv. Application fees under Sec. 226.4(c)(1).
    v. A monthly service charge for a checking account with overdraft 
protection that is applied to all checking accounts, whether or not a 
credit feature is attached.
    vi. Charges for submitting as payment a check that is later returned 
unpaid (see commentary to Sec. 226.4(c)(2)).
    vii. Charges imposed on a cardholder by an institution other than 
the card issuer for the use of the other institution's ATM in a shared 
or interchange system. (See also comment 7(b)-2.)
    viii. Taxes and filing or notary fees excluded from the finance 
charge under Sec. 226.4(e).
    ix. A fee to expedite delivery of a credit card, either at account 
opening or during the life of the account, provided delivery of the card 
is also available by standard mail service (or other means at least as 
fast) without paying a fee for delivery.
    x. A fee charged for arranging a single payment on the credit 
account, upon the consumer's request (regardless of how frequently the 
consumer requests the service), if the credit plan provides that the 
consumer may make payments on the account by another reasonable means, 
such as by standard mail service, without paying a fee to the creditor.
    6(c) Security interests.
    1. General. Disclosure is not required about the type of security 
interest, or about the creditor's rights with respect to that 
collateral. In other words, the creditor need not expand on the term 
security interest. Also, since no specified terminology is required, the 
creditor may designate its interest by using, for example, pledge, lien, 
or mortgage (instead of security interest).
    2. Identification of property. Identification of the collateral by 
type is satisfied by stating, for example, motor vehicle or household 
appliances. (Creditors should be aware, however, that the federal credit 
practices rules, as well as some state laws, prohibit certain security 
interests in household goods.) The creditor may, at its option, provide 
a more specific identification (for example, a model and serial number).
    3. Spreader clause. The fact that collateral for pre-existing credit 
extensions with the institution is being used to secure the present 
obligation constitutes a security interest and must be disclosed. (Such 
security interests may be known as spreader or dragnet clauses, or as 
cross-collateralization clauses.) A specific identification of that 
collateral is unnecessary, but a reminder of the interest arising from 
the prior indebtedness is required. This may be accomplished by using 
language such as ``collateral securing other loans with us may also 
secure this loan.'' At the creditor's option, a more specific 
description of the property involved may be given.
    4. Additional collateral. If collateral is required when advances 
reach a certain amount, the creditor should disclose the information 
available at the time of the initial disclosures. For example, if the 
creditor knows that a security interest will be taken in household goods 
if the consumer's balance exceeds $1,000, the creditor should disclose 
accordingly. If the creditor knows that security will be required if the 
consumer's balance exceeds $1,000, but the creditor does not know what 
security will be required, the creditor must disclose on the initial 
disclosure statement that security will be required if the balance 
exceeds $1,000, and the creditor must provide a change-in-terms notice 
under Sec. 226.9(c) at the time the security is taken. (See comment 
6(c)-2.)
    5. Collateral from third party. In certain situations, the 
consumer's obligation may be secured by collateral belonging to a third 
party. For example, an open-end credit plan may be secured by an 
interest in property owned by the consumer's parents. In such cases, the 
security interest is taken in connection with the plan and must be 
disclosed, even though the property encumbered is owned by someone other 
than the consumer.

[[Page 509]]

    6(d) Statement of billing rights.
    See the commentary to appendix G-3.

                    6(e) Home Equity Plan Information

    1. Additional disclosures required. For home equity plans, creditors 
must provide several of the disclosures set forth in Sec. 226.5b(d) 
along with the disclosures required under Sec. 226.6. Creditors also 
must disclose a list of the conditions that permit the creditor to 
terminate the plan, freeze or reduce the credit limit, and implement 
specified modifications to the original terms. (See comment 
5b(d)(4)(iii)-1.)
    2. Form of disclosures. The home equity disclosures provided under 
this section must be in a form the consumer can keep, and are governed 
by Sec. 226.5(a)(1). The segregation standard set forth in Sec. 
226.5b(a) does not apply to home equity disclosures provided under Sec. 
226.6.
    3. Disclosure of payment and variable-rate examples. The payment 
example disclosure in Sec. 226.5b(d)(5)(iii) and the variable-rate 
information in Sec. 226.5b(d)(12) (viii), (x), (xi), and (xii) need not 
be provided with the disclosures under Sec. 226.6 if:
     The disclosures under Sec. 226.5b(d) were 
provided in a form the consumer could keep; and
     The disclosures of the payment example under 
Sec. 226.5b(d)(5)(iii), the maximum payment example under Sec. 
226.5b(d)(12)(x) and the historical table under Sec. 226.5b(d)(12)(xi) 
included a representative payment example for the category of payment 
options the consumer has chosen.

For example, if a creditor offers three payment options (one for each of 
the categories described in the commentary to Sec. 226.5b(d)(5)), 
describes all three options in its early disclosures, and provides all 
of the disclosures in a retainable form, that creditor need not provide 
the Sec. 226.5b(d)(5)(iii) or (d)(12) disclosures again when the 
account is opened. If the creditor showed only one of the three options 
in the early disclosures (which would be the case with a separate 
disclosure form rather than a combined form, as discussed under Sec. 
226.5b(a)), the disclosures under Sec. 226.5b(d)(5)(iii) and (d)(12) 
(viii), (x), (xi) and (xii) must be given to any consumer who chooses 
one of the other two options. If the Sec. 226.5b(d)(5)(iii) and (d)(12) 
disclosures are provided with the second set of disclosures, they need 
not be transaction-specific, but may be based on a representative 
example of the category of payment option chosen.
    4. Disclosures for the repayment period. The creditor must provide 
disclosures about both the draw and repayment phases when giving the 
disclosures under Sec. 226.6. Specifically, the creditor must make the 
disclosures in Sec. 226.6(e), state the corresponding annual percentage 
rate (as required in Sec. 226.6(a)(2)) and provide the variable-rate 
information required in footnote 12 for the repayment phase. To the 
extent the corresponding annual percentage rate, the information in 
footnote 12, and any other required disclosures are the same for the 
draw and repayment phase, the creditor need not repeat such information, 
as long as it is clear that the information applies to both phases.

                               References

    Statute: Section 127(a).
    Other sections: Sections 226.4, 226.5, 226.7, 226.9, 226.14, and 
appendix G.
    Previous regulation: Section 226.7(a) and Interpretation Sec. 
226.706.
    1981 changes: Section 226.6 implements the amended statute which 
requires disclosure of the fact that no free period exists. Disclosures 
about the minimum periodic payment and the Comparative Index of Credit 
Cost have been eliminated. The security interest disclosures have been 
simplified. Other charges no longer include voluntary credit life or 
disability insurance, required property insurance premiums, default 
charges, or fees for collection activity. Disclosures for variable rate 
plans are now required by the regulation, replacing Interpretation Sec. 
226.707. The regulation no longer specifies the exact language to be 
used for the billing rights notice; creditors may use any version 
substantially similar to the one in appendix G.

                    Section 226.7--Periodic Statement

    1. Multifeatured plans. Some plans involve a number of different 
features, such as purchases, cash advances, or overdraft checking. 
Groups of transactions subject to different finance charge terms because 
of the dates on which the transactions took place are treated like 
different features for purposes of disclosures on the periodic 
statements. The commentary includes some special rules for multifeatured 
plans.
    2. Separate periodic statements permitted. In a certain open-end 
credit program involving more than one creditor--a card issuer of 
travel-and-entertainment cards and a financial institution--the consumer 
has the option to pay the card issuer directly or to transfer to the 
financial institution all or part of the amount owing. In this case, the 
creditors may send separate periodic statements that reflect the 
separate obligations owed to each.
    3. Deferred payment transactions. Creditors offer a variety of 
payment plans for purchases that permit consumers to avoid finance 
charges if the purchase balance is paid in full by a certain date. The 
following provides guidance for one type of deferred payment plan where, 
for example, no finance charge is imposed on a $500 purchase made in 
January if the $500 balance is paid by March 31.

[[Page 510]]

    i. Periodic rates. Under Sec. 226.7(d), creditors must disclose 
each periodic rate that may be used to compute the finance charge. Under 
some plans with a deferred payment feature, if the deferred payment 
balance is not paid by the payment due date, finance charges 
attributable to periodic rates applicable to the billing cycles between 
the date of purchase and the payment due date (January through March in 
this example) may be imposed. Periodic rates that may apply to the 
deferred payment balance ($500 in this example) if the balance is not 
paid in full by the payment due date must appear on periodic statements 
for the billing cycles between the date of purchase and the payment due 
date. However, if the consumer does not pay the deferred payment balance 
by the due date, the creditor is not required to identify, on the 
periodic statement disclosing the finance charge for the deferred 
payment balance, periodic rates that have been disclosed in previous 
billing cycles between the date of purchase and the payment due date.
    ii. Balances subject to periodic rates. Under Sec. 226.7(e), 
creditors must disclose the balances subject to periodic rates during a 
billing cycle. The deferred payment balance ($500 in this example) is 
not subject to a periodic rate for billing cycles between the date of 
purchase and the payment due date. Periodic statements sent for those 
billing cycles should not include the deferred payment balance in the 
balance disclosed under Sec. 226.7(e). At the creditor's option, this 
amount may be disclosed on periodic statements provided it is identified 
by a term other than the term used to identify the balance disclosed 
under Sec. 226.7(e) (such as ``deferred payment balance''). During any 
billing cycle in which a periodic rate finance charge on the deferred 
payment balance is debited to the account, the balance disclosed under 
Sec. 226.7(e) should include the deferred payment balance for that 
billing cycle.
    iii. Amount of finance charge. Under Sec. 226.7(f), creditors must 
disclose finance charges imposed during a billing cycle. For some 
deferred payment purchases, the creditor may impose a finance charge 
from the date of purchase if the deferred payment balance ($500 in this 
example) is not paid in full by the due date, but otherwise will not 
impose finance charges for billing cycles between the date of purchase 
and the payment due date. Periodic statements for billing cycles 
preceding the payment due date should not include in the finance charge 
disclosed under Sec. 226.7(f) the amounts a consumer may owe if the 
deferred payment balance is not paid in full by the payment due date. In 
this example, the February periodic statement should not identify as 
finance charges interest attributable to the $500 January purchase. At 
the creditor's option, this amount may be disclosed on periodic 
statements provided it is identified by a term other than ``finance 
charge'' (such as ``contingent finance charge'' or ``deferred finance 
charge''). The finance charge on a deferred payment balance should be 
reflected on the periodic statement under Sec. 226.7(f) for the billing 
cycle in which the finance charge is debited to the account.
    iv. Free-ride period. Assuming monthly billing cycles ending at 
month-end and a free-ride period ending on the 25th of the following 
month, here are four examples illustrating how a creditor may comply 
with the requirement to disclose the free-ride period applicable to a 
deferred payment balance ($500 in this example) and with the 14-day rule 
for mailing or delivering periodic statements before imposing finance 
charges (see Sec. 226.5):
    A. The creditor could include the $500 purchase on the periodic 
statement reflecting account activity for February and sent on March 1 
and identify March 31 as the payment due date for the $500 purchase. 
(The creditor could also identify March 31 as the payment due date for 
any other amounts that would normally be due on March 25.)
    B. The creditor could include the $500 purchase on the periodic 
statement reflecting activity for March and sent on April 1 and identify 
April 25 as the payment due date for the $500 purchase, permitting the 
consumer to avoid finance charges if the $500 is paid in full by April 
25.
    C. The creditor could include the $500 purchase and its due date on 
each periodic statement sent during the deferred payment period 
(January, February, and March in this example).
    D. If the due date for the deferred payment balance is March 7 
(instead of March 31), the creditor could include the $500 purchase and 
its due date on the periodic statement reflecting activity for January 
and sent on February 1, the most recent statement sent at least 14 days 
prior to the due date.
    7(a) Previous balance.
    1. Credit balances. If the previous balance is a credit balance, it 
must be disclosed in such a way so as to inform the consumer that it is 
a credit balance, rather than a debit balance.
    2. Multifeatured plans. In a multifeatured plan, the previous 
balance may be disclosed either as an aggregate balance for the account 
or as separate balances for each feature (for example, a previous 
balance for purchases and a previous balance for cash advances). If 
separate balances are disclosed, a total previous balance is optional.
    3. Accrued finance charges allocated from payments. Some open-end 
credit plans provide that the amount of the finance charge that has 
accrued since the consumer's last payment is directly deducted from each 
new payment, rather than being separately added to each statement and 
reflected as an increase in the obligation. In such a plan, the

[[Page 511]]

previous balance need not reflect finance charges accrued since the last 
payment.
    7(b) Identification of transactions.
    1. Multifeatured plans. In identifying transactions under Sec. 
226.7(b) for multifeatured plans, creditors may, for example, choose to 
arrange transactions by feature (such as disclosing sale transactions 
separately from cash advance transactions) or in some other clear 
manner, such as by arranging the transactions in general chronological 
order.
    2. Automated teller machine (ATM) charges imposed by other 
institutions in shared or interchange systems. A charge imposed on the 
cardholder by an institution other than the card issuer for the use of 
the other institution's ATM in a shared or interchange system and 
included by the terminal-operating institution in the amount of the 
transaction need not be separately disclosed on the periodic statement.
    7(c) Credits.
    1. Identification--sufficiency. The creditor need not describe each 
credit by type (returned merchandise, rebate of finance charge, etc.)--
credit would suffice--except if the creditor is using the periodic 
statement to satisfy the billing error correction notice requirement. 
(See the commentary to Sec. 226.13 (e) and (f).)
    2. Format. A creditor may list credits relating to credit extensions 
(payments, rebates, etc.) together with other types of credits (such as 
deposits to a checking account), as long as the entries are identified 
so as to inform the consumer which type of credit each entry represents.
    3. Date. If only one date is disclosed (that is, the crediting date 
as required by the regulation), no further identification of that date 
is necessary. More than one date may be disclosed for a single entry, as 
long as it is clear which date represents the date on which credit was 
given.
    4. Totals. Where the creditor lists the credits made to the account 
during the billing cycle, the creditor need not disclose total figures 
for the amounts credited.
    7(d) Periodic rates.
    1. Disclosure of periodic rates--whether or not actually applied. 
Any periodic rate that may be used to compute finance charges (and its 
corresponding annual percentage rate) must be disclosed whether or not 
it is applied during the billing cycle. For example:

     If the consumer's account has both a purchase 
feature and a cash advance feature, the creditor must disclose the rate 
for each, even if the consumer only makes purchases on the account 
during the billing cycle.
     If the rate varies (such as when it is tied to a 
particular index), the creditor must disclose each rate in effect during 
the cycle for which the statement was issued.

    2. Disclosure of periodic rates required only if imposition 
possible. With regard to the periodic rate disclosure (and its 
corresponding annual percentage rate), only rates that could have been 
imposed during the billing cycle reflected on the periodic statement 
need to be disclosed. For example:

     If the creditor is changing rates effective 
during the next billing cycle (either because it is changing terms or 
because of a variable rate plan), the rates required to be disclosed 
under Sec. 226.7(d) are only those in effect during the billing cycle 
reflected on the periodic statement. For example, if the monthly rate 
applied during May was 1.5 percent, but the creditor will increase the 
rate to 1.8 percent effective June 1, 1.5 percent (and its corresponding 
annual percentage rate) is the only required disclosure under Sec. 
226.7(d) for the periodic statement reflecting the May account activity.
     If the consumer has an overdraft line that might 
later be expanded upon the consumer's request to include secured 
advances, the rates for the secured advance feature need not be given 
until such time as the consumer has requested and received access to the 
additional feature.
     If rates applicable to a particular type of 
transaction changed after a certain date, and the old rate is only being 
applied to transactions that took place prior to that date, the creditor 
need not continue to disclose the old rate for those consumers that have 
no outstanding balances to which that rate could be applied.
    3. Multiple rates--same transaction. If two or more periodic rates 
are applied to the same balance for the same type of transaction (for 
example, if the finance charge consists of a monthly periodic rate of 
1.5% applied to the outstanding balance and a required credit life 
insurance component calculated at .1% per month on the same outstanding 
balance), the creditor may do either of the following:

     Disclose each periodic rate, the range of 
balances to which it is applicable, and the corresponding annual 
percentage rate for each. (For example, 1.5% monthly, 18% annual 
percentage rate; .1% monthly, 1.2% annual percentage rate.)
     Disclose one composite periodic rate (that is, 
1.6% per month) along with the applicable range of balances and 
corresponding annual percentage rate.

    4. Corresponding annual percentage rate. In disclosing the annual 
percentage rate that corresponds to each periodic rate, the creditor may 
use ``corresponding annual percentage rate,'' ``nominal annual 
percentage rate,'' ``corresponding nominal annual percentage rate,'' or 
similar phrases.
    5. Rate same as actual annual percentage rate. When the 
corresponding rate is the same as the actual annual percentage rate 
(historical rate) required to be disclosed (Sec. 226.7(g)), the 
creditor need disclose only

[[Page 512]]

one annual percentage rate, but must use the phrase ``annual percentage 
rate.''
    6. Ranges of balances. See Comment 6(a)(2)-1.
    7. Deferred payment transactions. See comment 7-3(i).
    7(e) Balance on which finance charge computed.
    1. Limitation to periodic rates. Section 226.7(e) only requires 
disclosure of the balance(s) to which a periodic rate was applied and 
does not apply to balances on which other kinds of finance charges (such 
as transaction charges) were imposed. For example, if a consumer obtains 
a $1,500 cash advance subject to both a 1% transaction fee and a 1% 
monthly periodic rate, the creditor need only disclose the balance 
subject to the monthly rate (which might include portions of earlier 
cash advances not paid off in previous cycles).
    2. Split rates applied to balance ranges. If split rates were 
applied to a balance because different portions of the balance fall 
within two or more balance ranges, the creditor need not separately 
disclose the portions of the balance subject to such different rates 
since the range of balances to which the rates apply has been separately 
disclosed. For example, a creditor could disclose a balance of $700 for 
purchases even though a monthly periodic rate of 1.5 percent applied to 
the first $500, and a monthly periodic rate of 1 percent to the 
remainder. This option to disclose a combined balance does not apply 
when the finance charge is computed by applying the split rates to each 
day's balance (in contrast, for example, to applying the rates to the 
average daily balance). In that case, the balances must be disclosed 
using any of the options that are available if two or more daily rates 
are imposed. (See comment 7(e)-5.)
    3. Monthly rate on average daily balance. If a creditor computes a 
finance charge on the average daily balance by application of a monthly 
periodic rate or rates, the balance is adequately disclosed if the 
statement gives the amount of the average daily balance on which the 
finance charge was computed, and also states how the balance is 
determined.
    4. Multifeatured plans. In a multifeatured plan, the creditor must 
disclose a separate balance (or balances, as applicable) to which a 
periodic rate was applied for each feature or group of features subject 
to different periodic rates or different balance computation methods. 
Separate balances are not required, however, merely because a ``free-
ride'' period is available for some features but not others. A total 
balance for the entire plan is optional. This does not affect how many 
balances the creditor must disclose--or may disclose--within each 
feature. (See, for example, comment 7(e)-5.)
    5. Daily rate on daily balance. If the finance charge is computed on 
the balance each day by application of one or more daily periodic rates, 
the balance on which the finance charge was computed may be disclosed in 
any of the following ways for each feature:

     If a single daily periodic rate is imposed, the 
balance to which it is applicable may be stated as:

    --A balance for each day in the billing cycle
    --A balance for each day in the billing cycle on which the balance 
in the account changes
    --The sum of the daily balances during the billing cycle
    --The average daily balance during the billing cycle, in which case 
the creditor shall explain that the average daily balance is or can be 
multiplied by the number of days in the billing cycle and the periodic 
rate applied to the product to determine the amount of the finance 
charge.

     If two or more daily periodic rates may be 
imposed, the balances to which the rates are applicable may be stated 
as:

    --A balance for each day in the billing cycle
    --A balance for each day in the billing cycle on which the balance 
in the account changes
    --Two or more average daily balances, each applicable to the daily 
periodic rates imposed for the time that those rates were in effect, as 
long as the creditor explains that the finance charge is or may be 
determined by (1) multiplying each of the average balances by the number 
of days in the billing cycle (or if the daily rate varied during the 
cycle, by multiplying by the number of days the applicable rate was in 
effect), (2) multiplying each of the results by the applicable daily 
periodic rate, and (3) adding these products together.

    6. Explanation of balance computation method. See the commentary to 
Sec. 226.6(a)(3).
    7. Information to compute balance. In connection with disclosing the 
finance charge balance, the creditor need not give the consumer all of 
the information necessary to compute the balance if that information is 
not otherwise required to be disclosed. For example, if current 
purchases are included from the date they are posted to the account, the 
posting date need not be disclosed.
    8. Non-deduction of credits. The creditor need not specifically 
identify the total dollar amount of credits not deducted in computing 
the finance charge balance. Disclosure of the amount of credits not 
deducted is accomplished by listing the credits (Sec. 226.7(c)) and 
indicating which credits will not be deducted in determining the balance 
(for example, ``credits after the 15th of the month are not deducted in 
computing the finance charge.'')

[[Page 513]]

    9. Use of one balance computation method explanation when multiple 
balances disclosed. Sometimes the creditor will disclose more than one 
balance to which a periodic rate was applied even though each balance 
was computed using the same balance computation method. For example, if 
a plan involves purchases and cash advances that are subject to 
different rates, more than one balance must be disclosed even though the 
same computation method is used for determining the balance for each 
feature. In these cases, one explanation of the balance computation 
method is sufficient. Sometimes the creditor separately discloses the 
portions of the balance that are subject to different rates because 
different portions of the balance fall within two or more balance 
ranges, even when a combined balance disclosure would be permitted under 
comment 7(e)-2. In these cases, one explanation of the balance 
computation method is also sufficient (assuming, of course, that all 
portions of the balance were computed using the same method).
    10. Deferred payment transactions. See comment 7-3(ii).
    7(f) Amount of finance charge.
    1. Total. A total finance charge amount for the plan is not 
required.
    2. Itemization--types of finance charges. Each type of finance 
charge (such as periodic rates, transaction charges, and minimum 
charges) imposed during the cycle must be separately itemized; for 
example, disclosure of only a combined finance charge attributable to 
both a minimum charge and transaction charges would not be permissible. 
Finance charges of the same type may be disclosed, however, individually 
or as a total. For example, 5 transaction charges of $1 may be listed 
separately or as $5.
    3. Itemization--different periodic rates. Whether different periodic 
rates are applicable to different types of transactions or to different 
balance ranges, the creditor may give the finance charge attributable to 
each rate or may give a total finance charge amount. For example, if a 
creditor charges 1.5% per month on the first $500 of a balance and 1% 
per month on amounts over $500, the creditor may itemize the two 
components ($7.50 and $1.00) of the $8.50 charge, or may disclose $8.50.
    4. Multifeatured plans. In a multifeatured plan, in disclosing the 
amount of the finance charge attributable to the application of periodic 
rates no total periodic rate disclosure for the entire plan need be 
given.
    5. Finance charges not added to account. A finance charge that is 
not included in the new balance because it is payable to a third party 
(such as required life insurance) must still be shown on the periodic 
statement as a finance charge.
    6. Finance charges other than periodic rates. See Comment 6(a)(4)-1 
for examples.
    7. Accrued finance charges allocated from payments. Some plans 
provide that the amount of the finance charge that has accrued since the 
consumer's last payment is directly deducted from each new payment, 
rather than being separately added to each statement and therefore 
reflected as an increase in the obligation. In such a plan, no 
disclosure is required of finance charges that have accrued since the 
last payment.
    8. Start-up fees. Points, loan fees, and similar finance charges 
relating to the opening of the account that are paid prior to the 
issuance of the first periodic statement need not be disclosed on the 
periodic statement. If, however, these charges are financed as part of 
the plan, including charges that are paid out of the first advance, the 
charges must be disclosed as part of the finance charge on the first 
periodic statement. However, they need not be factored into the annual 
percentage rate. (See footnote 33 in the regulation.)
    9. Deferred payment transactions. See comment 7-3(iii).
    7(g) Annual percentage rate.
    1. Rate same as corresponding annual percentage rate. See Comment 
7(d)-5.
    2. Multifeatured plans. In a multifeatured plan, the actual annual 
percentage rate that reflects the finance charge imposed during the 
cycle may be separately stated for each feature, or may be described as 
a composite for the whole plan. If separate rates are given, a composite 
annual percentage rate for the entire plan is optional.
    7(h) Other charges.
    1. Identification. In identifying any ``other charges'' actually 
imposed during the billing cycle, the type is adequately described as 
late charge or membership fee, for example. Similarly, closing costs or 
settlement costs, for example, may be used to describe charges imposed 
in connection with real estate transactions that are excluded from the 
finance charge under Sec. 226.4(c)(7), if the same term (such as 
closing costs) was used in the initial disclosures and if the creditor 
chose to itemize and individually disclose the costs included in that 
term. Even though the taxes and filing or notary fees excluded from the 
finance charge under Sec. 226.4(e) are not required to be disclosed as 
other charges under Sec. 226.6(b), these charges may be included in the 
amount shown as closing costs or settlement costs on the periodic 
statement, if the charges were itemized and disclosed as part of the 
closing costs or settlement costs on the initial disclosure statement. 
(See comment 6(b)-1 for examples of other charges.)
    2. Date. The date of imposing or debiting other charges need not be 
disclosed.
    3. Total. Disclosure of the total amount of other charges is 
optional.
    4. Itemization--types of other charges. Each type of other charge 
(such as late payment charges, over-the-credit-limit charges, ATM

[[Page 514]]

fees that are not finance charges, and membership fees) imposed during 
the cycle must be separately itemized; for example, disclosure of only a 
total of other charges attributable to both an over-the-credit-limit 
charge and a late payment charge would not be permissible. Other charges 
of the same type may be disclosed, however, individually or as a total. 
For example, three ATM fees of $1 may be listed separately or as $3.
    7(i) Closing date of billing cycle; new balance.
    1. Credit balances. See Comment 7(a)-1.
    2. Multifeatured plans. In a multifeatured plan, the new balance may 
be disclosed for each feature or for the plan as a whole. If separate 
new balances are disclosed, a total new balance is optional.
    3. Accrued finance charges allocated from payments. Some plans 
provide that the amount of the finance charge that has accrued since the 
consumer's last payment is directly deducted from each new payment, 
rather than being separately added to each statement and therefore 
reflected as an increase in the obligation. In such a plan, the new 
balance need not reflect finance charges accrued since the last payment.
    7(j) Free-ride period.
    1. Wording. Although the creditor is required to indicate any time 
period the consumer may have to pay the balance outstanding without 
incurring additional finance charges, no specific wording is required, 
so long as the language used is consistent with that used on the initial 
disclosure statement. For example, ``To avoid additional finance 
charges, pay the new balance before ------'' would suffice.
    2. Deferred payment transactions. See comment 7-3(iv).

    7(k) Address for notice of billing errors.
    1. Wording. The periodic statement must contain the address for 
consumers to use in asserting billing errors under Sec. 226.13. Since 
all disclosures must be ``clear,'' the statement should indicate the 
general purpose for the address, although no elaborate explanation or 
particular wording is required.
    2. Telephone number. A telephone number may be included, but the 
address for billing error inquiries, which is the required disclosure, 
must be clear and conspicuous. One way to ensure that the address is 
clear and conspicuous is to include a precautionary instruction that 
telephoning will not preserve the consumer's billing error rights. Both 
of the billing rights statements in appendix G contain such a 
precautionary instruction, so that a creditor could, by including either 
of these statements with each periodic statement, ensure that the 
required address is provided in a clear and conspicuous manner.

                               References

    Statute: Section 127(b).
    Previous regulation: Section 226.7(b)(1) and Interpretation 
Sec. Sec. 226.701, 226.703, 226.706, and 226.707.
    Other sections: Sections 226.4 through 226.6, 226.8, 226.14, and 
appendix G.
    1981 changes: Under Sec. 226.7, required terminology is no longer 
mandated except for the terms finance charge and annual percentage rate. 
The requirement in the previous regulation about the location of 
disclosures has been deleted.
    Under the revised Sec. 226.7, disclosure of credits to the account 
no longer have to indicate the type of credit. A short disclosure for 
variable rate plans must be included on the periodic statement. 
Disclosures relating to multifeatured accounts have been clarified.
    Section 226.7 now specifically requires a periodic statement 
disclosure of other charges (non-finance charges related to the plan) 
that are actually imposed during the billing cycle.
    Disclosures about minimum charges that might be imposed on the 
account and about the Comparative Index of Credit Cost have been 
deleted.

              Section 226.8--Identification of Transactions

    1. Application of identification rules. Section 226.8 deals with the 
requirement (imposed by Sec. 226.7(b)) for identification of each 
credit transaction made during the billing cycle. The rules for 
identifying transactions on periodic statements vary, depending on 
whether:

     The transaction involves sale credit (purchases) 
or nonsale credit (cash advances, for example).
     An actual copy of the credit document reflecting 
the transaction accompanies the statement (this is the distinction 
between so-called country club and descriptive billing).
     The creditor and seller are the same or related 
persons.

    2. Sale credit. The term sale credit refers to a purchase in which 
the consumer uses a credit card or otherwise directly accesses an open-
end line of credit (see Comment 8-3 if access is by means of a check) to 
obtain goods or services from a merchant, whether or not the merchant is 
the card issuer. Sale credit even includes:

     Premiums for voluntary credit life insurance 
whether sold by the card issuer or another person.
     The purchase of funds-transfer services (such as 
telegrams) from an intermediary.

    3. Nonsale credit. The term nonsale credit refers to any form of 
loan credit including, for example:

     Cash advances.
     Overdraft checking.
     The use of a supplemental credit device in the 
form of a check or draft or the use of the overdraft feature of a debit 
card, even if such

[[Page 515]]

use is in connection with a purchase of goods or services.
     Miscellaneous debits to remedy mispostings, 
returned checks, and similar entries.

    4. Actual copy. An actual copy does not include a recreated 
document. It includes, for example, a duplicate, carbon, or photographic 
copy, but does not include a so-called ``facsimile draft'' in which the 
required information is typed, printed, or otherwise recreated. If a 
facsimile draft is used, the creditor must follow the rules that apply 
when a copy of the credit document is not furnished.
    5. Same or related persons. For purposes of identifying 
transactions, the term same or related persons refers to, for example:

     Franchised or licensed sellers of a creditor's 
product or service.
     Sellers who assign or sell open-end sales 
accounts to a creditor or arrange for such credit under a plan that 
allows the consumer to use the credit only in transactions with that 
seller.

    A seller is not related to the creditor merely because the seller 
and the creditor have an agreement authorizing the seller to honor the 
creditor's credit card.

    6. Transactions resulting from promotional material. In describing 
transactions with third-party sellers resulting from promotional 
material mailed by the creditor, creditors may use the rules either for 
related or for non-related sellers and creditors.
    7. Credit insurance offered through the creditor. When credit 
insurance that is not part of the finance charge (for example, voluntary 
credit life insurance) is offered to the consumer through the creditor, 
but is actually provided by another company, the creditor has the option 
of identifying the premiums in one of two ways on the periodic 
statement. The creditor may describe the premiums using either the rule 
in Sec. 226.8(a)(2) for related sellers and creditors, or the rule in 
Sec. 226.8(a)(3) for non-related sellers and creditors. This means, 
therefore, that the creditor may identify the insurance either by 
providing, under Sec. 226.8(a)(2), a brief identification of the 
services provided (for example, credit life insurance), or by 
disclosing, under Sec. 226.8(a)(3), the name and address of the company 
providing the insurance (for example, ABC Insurance Company, New York, 
New York). In either event, the creditor would, of course, also provide 
the amount and the date of the transaction.
    8. Transactions involving creditors and sellers with corporate 
connections. In a credit card plan established for use primarily with 
sellers that have no corporate connection with the creditor, the 
creditor may describe all transactions under the plan by using the rules 
in Sec. 226.8(a)(3)--creditor and seller not same or related persons--
including transactions involving a seller that has a corporate 
connection with the creditor. In other credit card plans, the creditor 
may describe transactions involving a seller that has a corporate 
connection with the creditor, such as subsidiary-parent, using the rules 
in Sec. 226.8(a)(3) where it is unlikely that the consumer would know 
of the corporate connection between the creditor and the seller--for 
example, where the names of the creditor and the seller are not similar, 
and the periodic statement is issued in the name of the creditor only.
    8(a) Sale credit.
    1. Date--disclosure of only one date. If only the required date is 
disclosed for a transaction, the creditor need not identify it as the 
``transaction date.'' If the creditor discloses more than one date (for 
example, the transaction date and the posting date), the creditor must 
identify each.
    2. Date--disclosure of month and day only. The month and day are 
sufficient disclosure of the date on which the transaction took place, 
unless the posting of the transaction is delayed so long that the year 
is needed for a clear disclosure to the consumer.
    3. When transaction takes place. If the consumer conducts the 
transaction in person, the date of the transaction is the calendar date 
on which the consumer made the purchase or order, or secured the 
advance. For transactions billed to the account on an ongoing basis 
(other than installments to pay a precomputed amount), the date of the 
transaction is the date on which the amount is debited to the account. 
This might include, for example, monthly insurance premiums. For mail or 
telephone orders, a creditor may disclose as the transaction date either 
the invoice date, the debiting date, or the date the order was placed by 
telephone.
    4. Transactions not billed in full. If sale transactions are not 
billed in full on any single statement, but are billed periodically in 
precomputed installments, the first periodic statement reflecting the 
transaction must show either the full amount of the transaction together 
with the date the transaction actually took place; or the amount of the 
first installment that was debited to the account together with the date 
of the transaction or the date on which the first installment was 
debited to the account. In any event, subsequent periodic statements 
should reflect each installment due, together with either any other 
identifying information required by Sec. 226.8(a) (such as the seller's 
name and address in a three-party situation) or other appropriate 
identifying information relating the transaction to the first billing. 
The debiting date for the particular installment, or the date the 
transaction took place, may be used as the date of the transaction on 
these subsequent statements.
    8(a)(1) Copy of credit document provided.

[[Page 516]]

    1. Format. The information required by Sec. 226.8(a)(1) may appear 
either on the copy of the credit document reflecting the transaction or 
on the periodic statement.
    8(a)(2) Copy of credit document not provided--creditor and seller 
same or related person(s).
    1. Property identification--sufficiency of description. The ``brief 
identification'' provision in Sec. 226.8(a)(2) requires a designation 
that will enable the consumer to reconcile the periodic statement with 
the consumer's own records. In determining the sufficiency of the 
description, the following rules apply:

     While item-by-item descriptions are not 
necessary, reasonable precision is required. For example, merchandise, 
miscellaneous, second-hand goods, or promotional items would not 
suffice.
     A reference to a department in a sales 
establishment that accurately conveys the identification of the types of 
property or services available in the department is sufficient--for 
example, jewelry, sporting goods.

    2. Property identification--number or symbol. The ``brief 
identification'' may be made by disclosing on the periodic statement a 
number or symbol that is related to an identification list printed 
elsewhere on the statement.
    3. Property identification--additional document. In making the 
``brief identification'' required by Sec. 226.8(a)(2), the creditor may 
identify the property by describing the transaction on a document 
accompanying the periodic statement (for example, on a facsimile draft). 
(See also footnote 17.)
    4. Small creditors. Under footnote 18, which provides a further 
identification alternative to a creditor with fewer than 15,000 
accounts, the creditor need count only its own accounts and not others 
serviced by the same data processor or other shared-service provider.
    5. Date of transaction--foreign transactions. In a foreign 
transaction, the debiting date may be considered the transaction date.
    8(a)(3) Copy of credit document not provided--creditor and seller 
not same or related person(s).
    1. Seller's name. The requirement contemplates that the seller's 
name will appear on the periodic statement in essentially the same form 
as it appears on transaction documents provided to the consumer at the 
time of the sale. The seller's name may also be disclosed as, for 
example:

     A more complete spelling of the name that was 
alphabetically abbreviated on the receipt or other credit document.
     An alphabetical abbreviation of the name on the 
periodic statement even if the name appears in a more complete spelling 
on the receipt or other credit document. Terms that merely indicate the 
form of a business entity, such as Inc., Co., or Ltd., may always be 
omitted.

    2. Location of transaction. The disclosure of the location where the 
transaction took place generally requires an indication of both the 
city, and the state or foreign country. If the seller has multiple 
stores or branches within that city, the creditor need not identify the 
specific branch at which the sale occurred.
    3. No fixed location. When no meaningful address is available 
because the consumer did not make the purchase at any fixed location of 
the seller, the creditor:
     May omit the address.
     May provide some other identifying designation, 
such as aboard plane, ABC Airways Flight, customer's home, telephone 
order, or mail order.

    4. Date of transaction--foreign transactions. See Comment 8(a)(2)-5.
    8(b) Nonsale credit.
    1. Date of transaction. If only one of the required dates is 
disclosed for a transaction, the creditor need not identify it. If the 
creditor discloses more than one date (for example, transaction date and 
debiting date), the creditor must identify each.
    2. Amount of transaction. If credit is extended under an overdraft 
checking account plan or by means of a debit card with an overdraft 
feature, the amount to be disclosed is that of the credit extension, not 
the face amount of the check or the total amount of the debit/credit 
transaction.
    3. Amount--disclosure on cumulative basis. If credit is extended 
under an overdraft checking account plan or by means of a debit card 
with an overdraft feature, the creditor may disclose the amount of the 
credit extensions on a cumulative daily basis, rather than the amount 
attributable to each check or each use of the debit/credit card.
    4. Identification of transaction type. The creditor may identify a 
transaction by describing the type of advance it represents, such as 
cash advance, loan, overdraft loan, or any readily understandable trade 
name for the credit program.

                               References

    Statute: Section 127(b)(2).
    Previous regulation: Section 226.7(k).
    Other sections: Section 226.7.
    1981 changes: Section 226.8 has been streamlined and reorganized to 
facilitate its use. Technical detail has been deleted from the 
Regulation for inclusion in the commentary. The Regulation implements 
the amended section 127(b)(2) of the Act by providing for protection 
from civil liability under certain circumstances when required 
information is not provided and by reducing disclosure responsibilities 
for certain small creditors. For descriptive billing of nonsale 
transactions,

[[Page 517]]

the regulation now permits the use of the debiting date in all cases.

            Section 226.9--Subsequent Disclosure Requirements

              9(a) Furnishing Statement of Billing Rights.

                        9(a)(1) Annual Statement

    1. General. The creditor may provide the annual billing rights 
statement:

     By sending it in one billing period per year to 
each consumer that gets a periodic statement for that period; or
     By sending a copy to all of its account holders 
sometime during the calendar year but not necessarily all in one billing 
period (for example, sending the annual notice in connection with 
renewal cards or when imposing annual membership fees).

    2. Substantially similar. See the commentary to appendix G-3.

                  9(a)(2) Alternative Summary Statement

    1. Changing from long-form to short-form statement and vice versa. 
If the creditor has been sending the long-form annual statement, and 
subsequently decides to use the alternative summary statement, the first 
summary statement must be sent no later than 12 months after the last 
long-form statement was sent. Conversely, if the creditor wants to 
switch to the long-form, the first long-form statement must be sent no 
later than 12 months after the last summary statement.
    2. Substantially similar. See the commentary to appendix G-4.

9(b) Disclosures for Supplemental Credit Devices and Additional Features

    1. Credit device--examples. Credit device includes, for example, a 
blank check, payee-designated check, blank draft or order, or 
authorization form for issuance of a check; it does not include a check 
issued payable to a consumer representing loan proceeds or the 
disbursement of a cash advance.
    2. Credit feature--examples. A new credit feature would include, for 
example:

     The addition of overdraft checking to an existing 
account (although the regular checks that could trigger the overdraft 
feature are not themselves devices).
     The option to use an existing credit card to 
secure cash advances, when previously the card could only be used for 
purchases.

                            Paragraph 9(b)(1)

    1. Same finance charge terms. If the new means of accessing the 
account is subject to the same finance charge terms as those previously 
disclosed, the creditor:
     Need only provide a reminder that the new device 
or feature is covered by the earlier disclosures. (For example, in 
mailing special checks that directly access the credit line, the 
creditor might give a disclosure such as ``Use this as you would your 
XYZ card to obtain a cash advance from our bank''); or
     May remake the Sec. 226.6(a) finance charge 
disclosures.

                            Paragraph 9(b)(2)

    1. Different finance charge terms. If the finance charge terms are 
different from those previously disclosed, the creditor may satisfy the 
requirement to give the finance charge terms either by giving a complete 
set of new initial disclosures reflecting the terms of the added device 
or feature or by giving only the finance charge disclosures for the 
added device or feature.

                          9(c) Change in Terms

    1. Changes initially disclosed. No notice of a change in terms need 
be given if the specific change is set forth initially, such as: Rate 
increases under a properly disclosed variable-rate plan, a rate increase 
that occurs when an employee has been under a preferential rate 
agreement and terminates employment, or an increase that occurs when the 
consumer has been under an agreement to maintain a certain balance in a 
savings account in order to keep a particular rate and the account 
balance falls below the specified minimum. In contrast, notice must be 
given if the contract allows the creditor to increase the rate at its 
discretion but does not include specific terms for an increase (for 
example, when an increase may occur under the creditor's contract 
reservation right to increase the periodic rate). The rules in Sec. 
226.5b(f) relating to home equity plans, however, limit the ability of a 
creditor to change the terms of such plans.
    2. State law issues. Examples of issues not addressed by Sec. 
226.9(c) because they are controlled by State or other applicable law 
include:

     The types of changes a creditor may make.
     How changed terms affect existing balances, such 
as when a periodic rate is changed and the consumer does not pay off the 
entire existing balance before the new rate takes effect.

    3. Change in billing cycle. Whenever the creditor changes the 
consumer's billing cycle, it must give a change-in-terms notice if the 
change either affects any of the terms required to be disclosed under 
Sec. 226.6 or increases the minimum payment, unless an exception under 
Sec. 226.9(c)(2) applies; for example, the creditor must give advance 
notice if the creditor initially disclosed a 25-day free-ride period on 
purchases and the consumer will have fewer days during the billing cycle 
change.

[[Page 518]]

                     9(c)(1) Written Notice Required

    1. Affected consumers. Change-in-terms notices need only go to those 
consumers who may be affected by the change. For example, a change in 
the periodic rate for check overdraft credit need not be disclosed to 
consumers who do not have that feature on their accounts.
    2. Timing--effective date of change. The rule that the notice of the 
change in terms be provided at least 15 days before the change takes 
effect permits mid-cycle changes when there is clearly no retroactive 
effect, such as the imposition of a transaction fee. Any change in the 
balance computation method, in contrast, would need to be disclosed at 
least 15 days prior to the billing cycle in which the change is to be 
implemented.
    3. Timing--advance notice not required. Advance notice of 15 days is 
not necessary--that is, a notice of change in terms is required, but it 
may be mailed or delivered as late as the effective date of the change--
in two circumstances:

 If there is an increased periodic rate or any other 
finance charge attributable to the consumer's delinquency or default.
 If the consumer agrees to the particular change. This 
provision is intended for use in the unusual instance when a consumer 
substitutes collateral or when the creditor can advance additional 
credit only if a change relatively unique to that consumer is made, such 
as the consumer's providing additional security or paying an increased 
minimum payment amount. Therefore, the following are not ``agreements'' 
between the consumer and the creditor for purposes of Sec. 226.9(c)(1): 
The consumer's general acceptance of the creditor's contract reservation 
of the right to change terms; the consumer's use of the account (which 
might imply acceptance of its terms under State law); and the consumer's 
acceptance of a unilateral term change that is not particular to that 
consumer, but rather is of general applicability to consumers with that 
type of account.

    4. Form of change-in-terms notice. A complete new set of the initial 
disclosures containing the changed term complies with Sec. 226.9(c) if 
the change is highlighted in some way on the disclosure statement, or if 
the disclosure statement is accompanied by a letter or some other insert 
that indicates or draws attention to the term change.
    5. Security interest change--form of notice. A copy of the security 
agreement that describes the collateral securing the consumer's account 
may be used as the notice, when the term change is the addition of a 
security interest or the addition or substitution of collateral.
    6. Changes to home equity plans entered into on or after November 7, 
1989. Section 226.9(c) applies when, by written agreement under Sec. 
226.5b(f)(3)(iii), a creditor changes the terms of a home equity plan--
entered into on or after November 7, 1989--at or before its scheduled 
expiration, for example, by renewing a plan on terms different from 
those of the original plan. In disclosing the change:
     If the index is changed, the maximum annual 
percentage rate is increased (to the limited extent permitted by Sec. 
226.30), or a variable-rate feature is added to a fixed-rate plan, the 
creditor must include the disclosures required by Sec. 226.5b 
(d)(12)(x) and (d)(12)(xi), unless these disclosures are unchanged from 
those given earlier.
     If the minimum payment requirement is changed, 
the creditor must include the disclosures required by Sec. 
226.5(d)(5)(iii) (and, in variable-rate plans, the disclosures required 
by Sec. 226.5b (d)(12)(x) and (d)(12)(xi)) unless the disclosures given 
earlier contained representative examples covering the new minimim 
payment requirement. (See the commentary to Sec. 226.5b (d)(5)(iii), 
(d)(12)(x) and (d)(12)(xi) for a discussion of representative examples.)

When the terms are changed pursuant to a written agreement as described 
in Sec. 226.5b(f)(3)(iii), the advance-notice requirement does not 
apply.

                       9(c)(2) Notice Not Required

    1. Changes not requiring notice. The following are examples of 
changes that do not require a change-in-terms notice:

     A change in the consumer's credit limit.
     A change in the name of the credit card or credit 
card plan.
     The substitution of one insurer for another.
     A termination or suspension of credit privileges.
     Changes arising merely by operation of law; for 
example, if the creditor's security interest in a consumer's car 
automatically extends to the proceeds when the consumer sells the car.

    2. Skip features. If a credit program allows consumers to skip or 
reduce one or more payments during the year, or involves temporary 
reductions in finance charges, no notice of the change in terms is 
required either prior to the reduction or upon resumption of the higher 
rates or payments if these features are explained on the initial 
disclosure statement (including an explanation of the terms upon 
resumption). For example, a merchant may allow consumers to skip the 
December payment to encourage holiday shopping, or a teachers' credit 
union may not require payments during summer vacation. Otherwise, the 
creditor must give notice prior to resuming the original schedule or 
rate, even though no notice is required prior to the reduction. The 
change-in-terms

[[Page 519]]

notice may be combined with the notice offering the reduction. For 
example, the periodic statement reflecting the reduction or skip feature 
may also be used to notify the consumer of the resumption of the 
original schedule or rate, either by stating explicitly when the higher 
payment or charges resume, or by indicating the duration of the skip 
option. Language such as ``You may skip your October payment,'' or ``We 
will waive your finance charges for January,'' may serve as the change-
in-terms notice.

                  9(c)(3) Notice for Home Equity Plans

    1. Written request for reinstatement. If a creditor requires the 
request for reinstatement of credit privileges to be in writing, the 
notice under Sec. 226.9(c)(3) must state that fact.
    2. Notice not required. A creditor need not provide a notice under 
this paragraph if, pursuant to the commentary to Sec. 226.5b(f)(2), a 
creditor freezes a line or reduces a credit line rather than terminating 
a plan and accelerating the balance.

           9(d) Finance Charge Imposed at Time of Transaction

    1. Disclosure prior to imposition. A person imposing a finance 
charge at the time of honoring a consumer's credit card must disclose 
the amount of the charge, or an explanation of how the charge will be 
determined, prior to its imposition. This must be disclosed before the 
consumer becomes obligated for property or services that may be paid for 
by use of a credit card. For example, disclosure must be given before 
the consumer has dinner at a restaurant, stays overnight at a hotel, or 
makes a deposit guaranteeing the purchase of property or services.

         9(e) Disclosures Upon Renewal of Credit or Charge Card

    1. Coverage. This paragraph applies to credit and charge card 
accounts of the type subject to 226.5a. (See Sec. 226.5a(a)(3) and the 
accompanying commentary for discussion of the types of accounts subject 
to Sec. 226.5a.) The disclosure requirements are triggered when a card 
issuer imposes any annual or other periodic fee on such an account, 
whether or not the card issuer originally was required to provide the 
application and solicitation disclosures described in Sec. 226.5a.
    2. Form. The disclosures under this paragraph must be clear and 
conspicuous, but need not appear in a tabular format or in a prominent 
location. The disclosures need not be in a form the cardholder can 
retain.
    3. Terms at renewal. Renewal notices must reflect the terms actually 
in effect at the time of renewal. For example, a card issuer that offers 
a preferential annual percentage rate to employees during their 
employment must send a renewal notice to employees disclosing the lower 
rate actually charged to employees (although the card issuer also may 
show the rate charged to the general public).
    4. Variable rate. If the card issuer cannot determine the rate that 
will be in effect if the cardholder chooses to renew a variable-rate 
account, the card issuer may disclose the rate in effect at the time of 
mailing or delivery of the renewal notice. Alternatively, the card 
issuer may use the rate as of a specified date (and then update the rate 
from time to time, for example, each calendar month) or use an estimated 
rate under Sec. 226.5(c).
    5. Renewals more frequent than annual. If a renewal fee is billed 
more often than annually, the renewal notice should be provided each 
time the fee is billed. In this instance, the fee need not be disclosed 
as an annualized amount. Alternatively, the card issuer may provide the 
notice no less than once every twelve months if the notice explains the 
amount and frequency of the fee that will be billed during the time 
period covered by the disclosure, and also discloses the fee as an 
annualized amount. The notice under this alternative also must state the 
consequences of a cardholder's decision to terminate the account after 
the renewal notice period has expired. For example, if a $2 fee is 
billed monthly but the notice is given annually, the notice must inform 
the cardholder that the monthly charge is $2, the annualized fee is $24, 
and $2 will be billed to the account each month for the coming year 
unless the cardholder notifies the card issuer. If the cardholder is 
obligated to pay an amount equal to the remaining unpaid monthly charges 
if the cardholder terminates the account during the coming year but 
after the first month, the notice must disclose that fact.
    6. Terminating credit availability. Card issuers have some 
flexibility in determining the procedures for how and when an account 
may be terminated. However, the card issuer must clearly disclose the 
time by which the cardholder must act to terminate the account to avoid 
paying a renewal fee. State and other applicable law govern whether the 
card issuer may impose requirements such as specifying that the 
cardholder's response be in writing or that the outstanding balance be 
repaid in full upon termination.
    7. Timing of termination by cardholder. When a card issuer provides 
notice under Sec. 226.9(e)(1), a cardholder must be given at least 30 
days or one billing cycle, whichever is less, from the date the notice 
is mailed or delivered to make a decision whether to terminate an 
account. When notice is given under Sec. 226.9(e)(2), a cardholder has 
30 days from mailing or delivery to decide to terminate an account.

[[Page 520]]

    8. Timing of notices. A renewal notice is deemed to be provided when 
mailed or delivered. Similarly, notice of termination is deemed to be 
given when mailed or delivered.
    9. Prompt reversal of renewal fee upon termination. In a situation 
where a cardholder has provided timely notice of termination and a 
renewal fee has been billed to a cardholder's account, the card issuer 
must reverse or otherwise withdraw the fee promptly. Once a cardholder 
has terminated an account, no additional action by the cardholder may be 
required.

               9(e)(3) Notification on Periodic Statements

    1. Combined disclosures. If a single disclosure is used to comply 
with both Sec. Sec. 226.9(e) and 226.7, the periodic statement must 
comply with the rules in Sec. Sec. 226.5a and 226.7. For example, the 
words grace period must be used and the name of the balance calculation 
method must be identified (if listed in Sec. 226.5a(g)) to comply with 
the requirements of Sec. 226.5a, even though the use of those terms 
would not otherwise be required for periodic statements under Sec. 
226.7. A card issuer may include some of the renewal disclosures on a 
periodic statement and others on a separate document so long as there is 
some reference indicating that they relate to one another. All renewal 
disclosures must be provided to a cardholder at the same time.
    2. Preprinted notices on periodic statements. A card issuer may 
preprint the required information on its periodic statements. A card 
issuer that does so, however, using the advance notice option under 
Sec. 226.9(e)(1), must make clear on the periodic statement when the 
preprinted renewal disclosures are applicable. For example, the card 
issuer could include a special notice (not preprinted) at the 
appropriate time that the renewal fee will be billed in the following 
billing cycle, or could show the renewal date as a regular (preprinted) 
entry on all periodic statements.

          9(f) Change in Credit Card Account Insurance Provider

    1. Coverage. This paragraph applies to credit card accounts of the 
type subject to Sec. 226.5a if credit insurance (typically life, 
disability, and unemployment insurance) is offered on the outstanding 
balance of such an account. (Credit card accounts subject to Sec. 
226.9(f) are the same as those subject to Sec. 226.9(e); see comment 
9(e)-1.) Charge card accounts are not covered by this paragraph. In 
addition, the disclosure requirements of this paragraph apply only where 
the card issuer initiates the change in insurance providers. For 
example, if the card issuer's current insurance provider is merged into 
or acquired by another company, these disclosures would not be required. 
Disclosures also need not be given in cases where card issuers pay for 
credit insurance themselves and do not separately charge the cardholder.
    2. No increase in rate or decrease in coverage. The requirement to 
provide the disclosure arises when the card issuer changes the provider 
of insurance, even if there will be no increase in the premium rate 
charged the consumer and no decrease in coverage under the insurance 
policy.
    3. Form of notice. If a substantial decrease in coverage will result 
from the change in providers, the card issuer either must explain the 
decrease or refer to an accompanying copy of the policy or group 
certificate for details of the new terms of coverage. (See the 
commentary to appendix G-13.)
    4. Discontinuation of insurance. In addition to stating that the 
cardholder may cancel the insurance, the card issuer may explain the 
effect the cancellation would have on the consumer's credit card plan.
    5. Mailing by third party. Although the card issuer is responsible 
for the disclosures, the insurance provider or another third party may 
furnish the disclosures on the card issuer's behalf.

                9(f)(3) Substantial Decrease in Coverage

    1. Determination. Whether a substantial decrease in coverage will 
result from the change in providers is determined by the two-part test 
in Sec. 226.9(f)(3): First, whether the decrease is in a significant 
term of coverage; and second, whether the decrease might reasonably be 
expected to affect a cardholder's decision to continue the insurance. If 
both conditions are met, the decrease must be disclosed in the notice.

                               References

    Statute: Section 127(a)(7).
    Other sections: Sections 226.4 through 226.7 and appendix G.
    Previous regulation: Section 226.7 (d) through (f) and (j) and 
Interpretation Sec. Sec. 226.705 and 226.708.
    1981 changes: Section 226.9(a) implements the statutory change that 
the long-form statement of billing rights be provided only once a year. 
The provision now permits two rather than one means of providing the 
long-form statement to consumers. The verbatim text of the annual 
statement is no longer required; creditors may use any version 
``substantially similar'' to the one in appendix G. If the creditor 
elects to use the alternative summary statement, the new regulation no 
longer requires that the long-form statement be sent upon receiving a 
billing error notice and at the consumer's request. The rules in Sec. 
226.708 on switching the type of billing rights statement used have been 
modified.
    Under Sec. 226.9(b) disclosure requirements have been streamlined 
when supplemental credit devices or new credit features are added to an 
existing open-end plan.

[[Page 521]]

    Section 226.9(c) substantially changes the change-in-terms rules. 
Change-in-terms disclosures must now be made 15 days before the 
effective date of the change, rather than 15 days before the billing 
cycle in which the change will take effect. The kinds of changes that 
will trigger disclosures have been reduced: change-in-terms notices are 
no longer required for the types of changes described in Sec. 
226.9(c)(2). But the provision reverses Interpretation Sec. 226.705, 
which indicated that certain changes in the balance computation method 
did not require disclosure because they could result in lowered finance 
charges; now, any change in the balance computation method requires 
disclosure.
    When a finance charge is imposed at the time of a transaction, Sec. 
226.9(d) only requires disclosure of the finance charge at point of 
sale; the amount financed and annual percentage rate figured in 
accordance with the closed-end credit provisions need no longer be 
disclosed. Furthermore, the finance charge disclosure now may be made 
orally by the person honoring the card.

              Section 226.10--Prompt Crediting of Payments

    10(a) General rule.
    1. Crediting date. Section 226.10(a) does not require the creditor 
to post the payment to the consumer's account on a particular date; the 
creditor is only required to credit the payment as of the date of 
receipt.
    2. Date of receipt. The ``date of receipt'' is the date that the 
payment instrument or other means of completing the payment reaches the 
creditor. For example:

     Payment by check is received when the creditor 
gets it, not when the funds are collected.
     In a payroll deduction plan in which funds are 
deposited to an asset account held by the creditor, and from which 
payments are made periodically to an open-end credit account, payment is 
received on the date when it is debited to the asset account (rather 
than on the date of the deposit), provided the payroll deduction method 
is voluntary and the consumer retains use of the funds until the 
contractual payment date.
     If the consumer elects to have payment made by a 
third-party payor such as a financial institution, through a 
preauthorized payment or telephone bill-payment arrangement, payment is 
received when the creditor gets the third-party payor's check or other 
transfer medium, such as an electronic fund transfer, as long as the 
payment meets the creditor's requirements as specified under Sec. 
226.10(b).

    10(b) Specific requirements for payments.
    1. Payment requirements. The creditor may specify requirements for 
making payments, such as:

     Requiring that payments be accompanied by the 
account number or the payment stub.
     Setting a cut-off hour for payment to be 
received, or set different hours for payment by mail and payments made 
in person.
     Specifying that only checks or money orders 
should be sent by mail.
     Specifying that payment is to be made in U.S. 
dollars.
     Specifying one particular address for receiving 
payments, such as a post office box.

The creditor may be prohibited, however, from specifying payment by 
preauthorized electronic fund transfer. (See section 913 of the 
Electronic Fund Transfer Act.)
    2. Payment requirements--limitations. Requirements for making 
payments must be reasonable; it should not be difficult for most 
consumers to make conforming payments. For example, it would not be 
reasonable to require that all payments be made in person between 10 
a.m. and 11 a.m., since this would require consumers to take time off 
from their jobs to deliver payments.
    3. Acceptance of non-conforming payments. If the creditor accepts a 
non-conforming payment (for example, payment at a branch office, when it 
had specified that payment be sent to headquarters), finance charges may 
accrue for the period between receipt and crediting of payments.
    4. Implied guidelines for payments. In the absence of specified 
requirements for making payments (see Sec. 226.10(b)):

     Payments may be made at any location where the 
creditor conducts business.
     Payments may be made any time during the 
creditor's normal business hours.
     Payments may be made by cash, money order, draft, 
or other similar instrument in properly negotiable form, or by 
electronic fund transfer if the creditor and consumer have so agreed.

                               References

    Statute: Section 164.
    Other sections: Section 226.7.
    Previous regulation: Section 226.7(g).
    1981 changes: Much of the explanatory detail of the previous 
regulation is now in the commentary. The revised regulation gives the 
creditor 5 days in which to credit non-conforming payments, whereas the 
previous regulation required the crediting of such payments promptly, 
with an outside limit of 5 days. The 5 days in which to credit are 
available whenever the creditor accepts payment that does not conform to 
the creditor's disclosed specifications, in contrast to the previous 
regulation, which only allowed deferred crediting for payments made at 
the wrong location.

              Section 226.11--Treatment of Credit Balances

    1. Timing of refund. The creditor may also fulfill its obligations 
under Sec. 226.11 by:

     Refunding any credit balance to the consumer 
immediately.

[[Page 522]]

     Refunding any credit balance prior to receiving a 
written request (under Sec. 226.11(b)) from the consumer.
     Making a good faith effort to refund any credit 
balance before 6 months have passed. If that attempt is unsuccessful, 
the creditor need not try again to refund the credit balance at the end 
of the 6-month period.

    2. Amount of refund. The phrase any part of the credit balance 
remaining in the account in Sec. 226.11(b) and (c) means the amount of 
the credit balance at the time the creditor is required to make the 
refund. The creditor may take into consideration intervening purchases 
or other debits to the consumer's account (including those that have not 
yet been reflected on a periodic statement) that decrease or eliminate 
the credit balance.
    Paragraph 11(b).
    1. Written requests--standing orders. The creditor is not required 
to honor standing orders requesting refunds of any credit balance that 
may be created on the consumer's account.
    Paragraph 11(c).
    1. Good faith effort to refund. The creditor must take positive 
steps to return any credit balance that has remained in the account for 
over 6 months. This includes, if necessary, attempts to trace the 
consumer through the consumer's last known address or telephone number, 
or both.
    2. Good faith effort unsuccessful. Section 226.11 imposes no further 
duties on the creditor if a good faith effort to return the balance is 
unsuccessful. The ultimate disposition of the credit balance (or any 
credit balance of $1 or less) is to be determined under other applicable 
law.

                               References

    Statute: Section 165.
    Previous regulation: Section 226.7(h).
    1981 changes: Under the previous regulation, the creditor's duty to 
refund credit balances applied only to ``excess payments''; Sec. 226.11 
of the revised regulation implements the amendments to section 165 of 
the statute which impose refunding duties on the creditor whatever the 
source of the credit balance. The revised regulation permits the 
creditor, in computing the refund, to take account of intervening 
debits, not just the difference between the previous balance and the 
overpayment as is provided in the previous regulation. The revised 
regulation gives the creditor 7 business days in which to make the 
refund after receiving the consumer's written request, whereas the 
previous regulation required the creditor to make the refund promptly, 
with an outside limit of 5 business days. This provision also implements 
the amended statute by requiring a good faith effort to refund the 
credit balance after 6 months.

             Section 226.12--Special Credit Card Provisions

    1. Scope. Sections 226.12(a) and (b) deal with the issuance and 
liability rules for credit cards, whether the card is intended for 
consumer, business, or any other purposes. Sections 226.12(a) and (b) 
are exceptions to the general rule that the regulation applies only to 
consumer credit. (See Sec. Sec. 226.1 and 226.3.)
    12(a) Issuance of credit cards.

                           Paragraph 12(a)(1)

    1. Explicit request. A request or application for a card must be 
explicit. For example, a request for overdraft privileges on a checking 
account does not constitute an application for a credit card with 
overdraft checking features.
    2. Addition of credit features. If the consumer has a non-credit 
card, the addition of credit features to the card (for example, the 
granting of overdraft privileges on a checking account when the consumer 
already has a check guarantee card) constitutes issuance of a credit 
card.
    3. Variance of card from request. The request or application need 
not correspond exactly to the card that is issued. For example:

     The name of the card requested may be different 
when issued.
     The card may have features in addition to those 
reflected in the request or application.

    4. Permissible form of request. The request or application may be 
oral (in response to a telephone solicitation by a card issuer, for 
example) or written.
    5. Time of issuance. A credit card may be issued in response to a 
request made before any cards are ready for issuance (for example, if a 
new program is established), even if there is some delay in issuance.
    6. Persons to whom cards may be issued. A card issuer may issue a 
credit card to the person who requests it, and to anyone else for whom 
that person requests a card and who will be an authorized user on the 
requester's account. In other words, cards may be sent to consumer A on 
A's request, and also (on A's request) to consumers B and C, who will be 
authorized users on A's account. In these circumstances, the following 
rules apply:

     The additional cards may be imprinted in either 
A's name or in the names of B and C.
     No liability for unauthorized use (by persons 
other than B and C), not even the $50, may be imposed on B or C since 
they are merely users and not cardholders as that term is defined in 
Sec. 226.2 and used in Sec. 226.12(b); of course, liability of up to 
$50 for unauthorized use of B's and C's cards may be imposed on A.
     Whether B and C may be held liable for their own 
use, or on the account generally, is a matter of state or other 
applicable law.


[[Page 523]]


    7. Issuance of non-credit cards. i. General. Under Sec. 
226.12(a)(1), a credit card cannot be issued except in response to a 
request or an application. (See comment 2(a)(15)-2 for examples of cards 
or devices that are and are not credit cards.) A non-credit card may be 
sent on an unsolicited basis by an issuer that does not propose to 
connect the card to any credit plan; a credit feature may be added to a 
previously issued non-credit card only upon the consumer's specific 
request.
    ii. Examples. A purchase-price discount card may be sent on an 
unsolicited basis by an issuer that does not propose to connect the card 
to any credit plan. An issuer demonstrates that it proposes to connect 
the card to a credit plan by, for example, including promotional 
materials about credit features or account agreements and disclosures 
required by Sec. 226.6. The issuer will violate the rule against 
unsolicited issuance if, for example, at the time the card is sent a 
credit plan can be accessed by the card or the recipient of the 
unsolicited card has been preapproved for credit that the recipient can 
access by contacting the issuer and activating the card.
    8. Unsolicited issuance of PINs. A card issuer may issue personal 
identification numbers (PINs) to existing credit cardholders without a 
specific request from the cardholders, provided the PINs cannot be used 
alone to obtain credit. For example, the PINs may be necessary if 
consumers wish to use their existing credit cards at automated teller 
machines or at merchant locations with point-of-sale terminals that 
require PINs.

                           Paragraph 12(a)(2)

    1. Renewal. Renewal generally contemplates the regular replacement 
of existing cards because of, for example, security reasons or new 
technology or systems. It also includes the re-issuance of cards that 
have been suspended temporarily, but does not include the opening of a 
new account after a previous account was closed.
    2. Substitution--examples. Substitution encompasses the replacement 
of one card with another because the underlying account relationship has 
changed in some way--such as when the card issuer has:

     Changed its name.
     Changed the name of the card.
     Changed the credit or other features available on 
the account. For example, the original card could be used to make 
purchases and obtain cash advances at teller windows. The substitute 
card might be usable, in addition, for obtaining cash advances through 
automated teller machines. (If the substitute card constitutes an access 
device, as defined in Regulation E, then the Regulation E issuance rules 
would have to be followed.) The substitution of one card with another on 
an unsolicited basis is not permissible, however, where in conjunction 
with the substitution an additional credit card account is opened and 
the consumer is able to make new purchases or advances under both the 
original and the new account with the new card. For example, if a retail 
card issuer replaces its credit card with a combined retailer/bank card, 
each of the creditors maintains a separate account, and both accounts 
can be accessed for new transactions by use of the new credit card, the 
card cannot be provided to a consumer without solicitation.
     Substituted a card user's name on the substitute 
card for the cardholder's name appearing on the original card.
     Changed the merchant base. However, the new card 
must be honored by at least one of the persons that honored the original 
card.
    3. Substitution--successor card issuer. Substitution also occurs 
when a successor card issuer replaces the original card issuer (for 
example, when a new card issuer purchases the accounts of the original 
issuer and issues its own card to replace the original one). A 
permissible substitution exists even if the original issuer retains the 
existing receivables and the new card issuer acquires the right only to 
future receivables, provided use of the original card is cut off when 
use of the new card becomes possible.
    4. Substitution--non-credit-card plan. A credit card that replaces a 
retailer's open-end credit plan not involving a credit card is not 
considered a substitute for the retailer's plan--even if the consumer 
used the retailer's plan. A credit card cannot be issued in these 
circumstances without a request or application.
    5. One-for-one rule. An accepted card may be replaced by no more 
than one renewal or substitute card. For example, the card issuer may 
not replace a credit card permitting purchases and cash advances with 
two cards, one for the purchases and another for the cash advances.
    6. One-for-one rule--exceptions. The regulation does not prohibit 
the card issuer from:
    i. Replacing a debit/credit card with a credit card and another card 
with only debit functions (or debit functions plus an associated 
overdraft capability), since the latter card could be issued on an 
unsolicited basis under Regulation E.
    ii. Replacing an accepted card with more than one renewal or 
substitute card, provided that:
    A. No replacement card accesses any account not accessed by the 
accepted card;
    B. For terms and conditions required to be disclosed under Sec. 
226.6, all replacement cards are issued subject to the same terms and 
conditions, except that a creditor may vary terms for which no change in 
terms notice is required under Sec. 226.9(c); and
    C. Under the account's terms the consumer's total liability for 
unauthorized use

[[Page 524]]

with respect to the account does not increase.
    7. Methods of terminating replaced card. The card issuer need not 
physically retrieve the original card, provided the old card is voided 
in some way; for example:

     The issuer includes with the new card a 
notification that the existing card is no longer valid and should be 
destroyed immediately.
     The original card contained an expiration date.
     The card issuer, in order to preclude use of the 
card, reprograms computers or issues instructions to authorization 
centers.

    8. Incomplete replacement. If a consumer has duplicate credit cards 
on the same account (Card A--one type of bank credit card, for example), 
the card issuer may not replace the duplicate cards with one Card A and 
one Card B (Card B--another type of bank credit card) unless the 
consumer requests Card B.
    9. Multiple entities. Where multiple entities share responsibilities 
with respect to a credit card issued by one of them, the entity that 
issued the card may replace it on an unsolicited basis, if that entity 
terminates the original card by voiding it in some way, as described in 
comment 12(a)(2)-7. The other entity or entities may not issue a card on 
an unsolicited basis in these circumstances.
    12(b) Liability of cardholder for unauthorized use.
    1. Meaning of cardholder. For purposes of this provision, cardholder 
includes any person (including organizations) to whom a credit card is 
issued for any purpose, including business. When a corporation is the 
cardholder, required disclosures should be provided to the corporation 
(as opposed to an employee user).
    2. Imposing liability. A card issuer is not required to impose 
liability on a cardholder for the unauthorized use of a credit card; if 
the card issuer does not seek to impose liability, the issuer need not 
conduct any investigation of the cardholder's claim.
    3. Reasonable investigation. If a card issuer seeks to impose 
liability when a claim of unauthorized use is made by a cardholder, the 
card issuer must conduct a reasonable investigation of the claim. In 
conducting its investigation, the card issuer may reasonably request the 
cardholder's cooperation. The card issuer may not automatically deny a 
claim based solely on the cardholder's failure or refusal to comply with 
a particular request; however, if the card issuer otherwise has no 
knowledge of facts confirming the unauthorized use, the lack of 
information resulting from the cardholder's failure or refusal to comply 
with a particular request may lead the card issuer reasonably to 
terminate the investigation. The procedures involved in investigating 
claims may differ, but actions such as the following represent steps 
that a card issuer may take, as appropriate, in conducting a reasonable 
investigation:
    i. Reviewing the types or amounts of purchases made in relation to 
the cardholder's previous purchasing pattern.
    ii. Reviewing where the purchases were delivered in relation to the 
cardholder's residence or place of business.
    iii. Reviewing where the purchases were made in relation to where 
the cardholder resides or has normally shopped.
    iv. Comparing any signature on credit slips for the purchases to the 
signature of the cardholder or an authorized user in the card issuer's 
records, including other credit slips.
    v. Requesting documentation to assist in the verification of the 
claim.
    vi. Requesting a written, signed statement from the cardholder or 
authorized user.
    vii. Requesting a copy of a police report, if one was filed.
    viii. Requesting information regarding the cardholder's knowledge of 
the person who allegedly used the card or of that person's authority to 
do so.
    12(b)(1) Limitation on amount.
    1. Meaning of authority. Footnote 22 defines unauthorized use in 
terms of whether the user has actual, implied, or apparent authority. 
Whether such authority exists must be determined under state or other 
applicable law.
    2. Liability limits--dollar amounts. As a general rule, the 
cardholder's liability for a series of unauthorized uses cannot exceed 
either $50 or the value obtained through the unauthorized use before the 
care issuer is notified, whichever is less.
    12(b)(2) Conditions of liability.
    1. Issuer's option not to comply. A card issuer that chooses not to 
impose any liability on cardholders for unauthorized use need not comply 
with the disclosure and identification requirements discussed below.
    Paragraph 12(b)(2)(ii).
    1. Disclosure of liability and means of notifying issuer. The 
disclosures referred to in Sec. 226.12(b)(2)(ii) may be given, for 
example, with the initial disclosures under Sec. 226.6, on the credit 
card itself, or on periodic statements. They may be given at any time 
preceding the unauthorized use of the card.
    Paragraph 12(b)(2)(iii).
    1. Means of identifying cardholder or user. To fulfill the condition 
set forth in Sec. 226.12(b)(2)(iii), the issuer must provide some 
method whereby the cardholder or the authorized user can be identified. 
This could include, for example, signature, photograph, or fingerprint 
on the card, or electronic or mechanical confirmation.
    2. Identification by magnetic strip. Unless a magnetic strip (or 
similar device not readable without physical aids) must be used in 
conjunction with a secret code or the like, it would not constitute 
sufficient means of identification. Sufficient identification also

[[Page 525]]

does not exist if a pool or group card, issued to a corporation and 
signed by a corporate agent who will not be a user of the card, is 
intended to be used by another employee for whom no means of 
identification is provided.
    3. Transactions not involving card. The cardholder may not be held 
liable under Sec. 226.12(b) when the card itself (or some other 
sufficient means of identification of the cardholder) is not presented. 
Since the issuer has not provided a means to identify the user under 
these circumstances, the issuer has not fulfilled one of the conditions 
for imposing liability. For example, when merchandise is ordered by 
telephone by a person without authority to do so, using a credit card 
account number or other number only (which may be widely available), no 
liability may be imposed on the cardholder.
    12(b)(3) Notification to card issuer.
    1. How notice must be provided. Notice given in a normal business 
manner--for example, by mail, telephone, or personal visit--is effective 
even though it is not given to, or does not reach, some particular 
person within the issuer's organization. Notice also may be effective 
even though it is not given at the address or phone number disclosed by 
the card issuer under Sec. 226.12(b)(2)(ii).
    2. Who must provide notice. Notice of loss, theft, or possible 
unauthorized use need not be initiated by the cardholder. Notice is 
sufficient so long as it gives the pertinent information which would 
include the name or card number of the cardholder and an indication that 
unauthorized use has or may have occurred.
    3. Relationship to Sec. 226.13. The liability protections afforded 
to cardholders in Sec. 226.12 do not depend upon the cardholder's 
following the error resolution procedures in Sec. 226.13. For example, 
the written notification and time limit requirements of Sec. 226.13 do 
not affect the section 226.12 protections.
    12(b)(5) Business use of credit cards.
    1. Agreement for higher liability for business use cards. The card 
issuer may not rely on Sec. 226.12(b)(5) if the business is clearly not 
in a position to provide 10 or more cards to employees (for example, if 
the business has only 3 employees). On the other hand, the issuer need 
not monitor the personnel practices of the business to make sure that it 
has at least 10 employees at all times.
    2. Unauthorized use by employee. The protection afforded to an 
employee against liability for unauthorized use in excess of the limits 
set in Sec. 226.12(b) applies only to unauthorized use by someone other 
then the employee. If the employee uses the card in an unauthorized 
manner, the regulation sets no restriction on the employee's potential 
liability for such use.
    12(c) Right of cardholder to assert claims or defenses against card 
issuer.
    1. Relationship to Sec. 226.13. The Sec. 226.12(c) credit card 
``holder in due course'' provision deals with the consumer's right to 
assert against the card issuer a claim or defense concerning property or 
services purchased with a credit card, if the merchant has been 
unwilling to resolve the dispute. Even though certain merchandise 
disputes, such as non-delivery of goods, may also constitute ``billing 
errors'' under Sec. 226.13, that section operates independently of 
Sec. 226.12(c). The cardholder whose asserted billing error involves 
undelivered goods may institute the error resolution procedures of Sec. 
226.13; but whether or not the cardholder has done so, the cardholder 
may assert claims or defenses under Sec. 226.12(c). Conversely, the 
consumer may pay a disputed balance and thus have no further right to 
assert claims and defenses, but still may assert a billing error if 
notice of that billing error is given in the proper time and manner. An 
assertion that a particular transaction resulted from unauthorized use 
of the card could also be both a ``defense'' and a billing error.
    2. Claims and defenses assertible. Section 226.12(c) merely 
preserves the consumer's right to assert against the card issuer any 
claims or defenses that can be asserted against the merchant. It does 
not determine what claims or defenses are valid as to the merchant; this 
determination must be made under state or other applicable law.
    12(c)(1) General rule.
    1. Situations excluded and included. The consumer may assert claims 
or defenses only when the goods or services are ``purchased with the 
credit card.'' This could include:

     Mail or telephone orders, if the purchase is 
charged to the credit card account.

    But it would exclude:

     Use of a credit card to obtain a cash advance, 
even if the consumer then uses the money to purchase goods or services. 
Such a transaction would not involve ``property or services purchased 
with the credit card.''
     The purchase of goods or services by use of a 
check accessing an overdraft account and a credit card used solely for 
identification of the consumer. (On the other hand, if the credit card 
is used to make partial payment for the purchase and not merely for 
identification, the right to assert claims or defenses would apply to 
credit extended via the credit card, although not to the credit extended 
on the overdraft line.)
     Purchases made by use of a check guarantee card 
in conjunction with a cash advance check (or by cash advance checks 
alone). See footnote 24. A cash advance check is a check that, when 
written, does not draw on an asset account; instead, it is charged 
entirely to an open-end credit account.
     Purchases effected by use of either a check 
guarantee card or a debit card when used to draw on overdraft credit 
lines (see

[[Page 526]]

footnote 24). The debit card exemption applies whether the card accesses 
an asset account via point-of-sale terminals, automated teller machines, 
or in any other way, and whether the card qualifies as an ``access 
device'' under Regulation E or is only a paper-based debit card. If a 
card serves both as an ordinary credit card and also as check guarantee 
or debit card, a transaction will be subject to this rule on asserting 
claims and defenses when used as an ordinary credit card, but not when 
used as a check guarantee or debit card.

    12(c)(2) Adverse credit reports prohibited.
    1. Scope of prohibition. Although an amount in dispute may not be 
reported as delinquent until the matter is resolved:
    i. That amount may be reported as disputed.
    ii. Nothing in this provision prohibits the card issuer from 
undertaking its normal collection activities for the delinquent and 
undisputed portion of the account.
    2. Settlement of dispute. A card issuer may not consider a dispute 
settled and report an amount disputed as delinquent or begin collection 
of the disputed amount until it has completed a reasonable investigation 
of the cardholder's claim. A reasonable investigation requires an 
independent assessment of the cardholder's claim based on information 
obtained from both the cardholder and the merchant, if possible. In 
conducting an investigation, the card issuer may request the 
cardholder's reasonable cooperation. The card issuer may not 
automatically consider a dispute settled if the cardholder fails or 
refuses to comply with a particular request. However, if the card issuer 
otherwise has no means of obtaining information necessary to resolve the 
dispute, the lack of information resulting from the cardholder's failure 
or refusal to comply with a particular request may lead the card issuer 
reasonably to terminate the investigation.

    12(c)(3) Limitations.
    Paragraph 12(c)(3)(i).
    1. Resolution with merchant. The consumer must have tried to resolve 
the dispute with the merchant. This does not require any special 
procedures or correspondence between them, and is a matter for factual 
determination in each case. The consumer is not required to seek 
satisfaction from the manufacturer of the goods involved. When the 
merchant is in bankruptcy proceedings, the consumer is not required to 
file a claim in those proceedings.
    Paragraph 12(c)(3)(ii).
    1. Geographic limitation. The question of where as transaction 
occurs (as in the case of mail or telephone orders, for example) is to 
be determined under state or other applicable law.
    2. Merchant honoring card. The exceptions (stated in footnote 26) to 
the amount and geographic limitations do not apply if the merchant 
merely honors, or indicates through signs or advertising that it honors, 
a particular credit card.
    12(d) Offsets by card issuer prohibited.
    Paragraph 12(d)(1).
    1. Holds on accounts. ``Freezing'' or placing a hold on funds in the 
cardholder's deposit account is the functional equivalent of an offset 
and would contravene the prohibition in Sec. 226.12(d)(1), unless done 
in the context of one of the exceptions specified in Sec. 226.12(d)(2). 
For example, if the terms of a security agreement permitted the card 
issuer to place a hold on the funds, the hold would not violate the 
offset prohibition. Similarly, if an order of a bankruptcy court 
required the card issuer to turn over deposit account funds to the 
trustee in bankruptcy, the issuer would not violate the regulation by 
placing a hold on the funds in order to comply with the court order.
    2. Funds intended as deposits. If the consumer tenders funds as a 
deposit (to a checking account, for example), the card issuer may not 
apply the funds to repay indebtedness on the consumer's credit card 
account.
    3. Types of indebtedness; overdraft accounts. The offset prohibition 
applies to any indebtedness arising from transactions under a credit 
card plan, including accrued finance charges and other charges on the 
account. The prohibition also applies to balances arising from 
transactions not using the credit card itself but taking place under 
plans that involve credit cards. For example, if the consumer writes a 
check that accesses an overdraft line of credit, the resulting 
indebtedness is subject to the offset prohibition since it is incurred 
through a credit card plan, even though the consumer did not use an 
associated check guarantee or debit card.
    4. When prohibition applies in case of termination of account. The 
offset prohibition applies even after the card issuer terminates the 
cardholder's credit card privileges, if the indebtedness was incurred 
prior to termination. If the indebtedness was incurred after 
termination, the prohibition does not apply.
    Paragraph 12(d)(2).
    1. Security interest--limitations. In order to qualify for the 
exception stated in Sec. 226.12(d)(2), a security interest must be 
affirmatively agreed to by the consumer and must be disclosed in the 
issuer's initial disclosures under Sec. 226.6. The security interest 
must not be the functional equivalent of a right of offset; as a result, 
routinely including in agreements contract language indicating that 
consumers are giving a security interest in any deposit accounts 
maintained with the issuer does not result in a security interest that 
falls within the exception in Sec. 226.12(d)(2). For a security 
interest to qualify for the exception under Sec. 226.12(d)(2) the 
following conditions must be met:

[[Page 527]]

     The consumer must be aware that granting a 
security interest is a condition for the credit card account (or for 
more favorable account terms) and must specifically intend to grant a 
security interest in a deposit account. Indicia of the consumer's 
awareness and intent could include, for example:

--Separate signature or initials on the agreement indicating that a 
security interest is being given
--Placement of the security agreement on a separate page, or otherwise 
separating the security interest provisions from other contract and 
disclosure provisions
--Reference to a specific amount of deposited funds or to a specific 
deposit account number

     The security interest must be obtainable and 
enforceable by creditors generally. If other creditors could not obtain 
a security interest in the consumer's deposit accounts to the same 
extent as the card issuer, the security interest is prohibited by Sec. 
226.12(d)(2).
    2. Security interest--after-acquired property. As used in Sec. 
226.12(d), the term security interest does not exclude (as it does for 
other Regulation Z purposes) interests in after-acquired property. Thus, 
a consensual security interest in deposit-account funds, including funds 
deposited after the granting of the security interest, would constitute 
a permissible exception to the prohibition on offsets.
    3. Court order. If the card issuer obtains a judgment against the 
cardholder, and if State and other applicable law and the terms of the 
judgment do not so prohibit, the card issuer may offset the indebtedness 
against the cardholder's deposit account.
    Paragraph 12(d)(3).
    1. Automatic payment plans--scope of exception. With regard to 
automatic debit plans under Sec. 226.12(d)(3), the following rules 
apply:

     The cardholder's authorization must be in writing 
and signed or initialed by the cardholder.
     The authorizing language need not appear directly 
above or next to the cardholder's signature or initials, provided it 
appears on the same document and that it clearly spells out the terms of 
the automatic debit plan.
     If the cardholder has the option to accept or 
reject the automatic debit feature (such option may be required under 
section 913 of the Electronic Fund Transfer Act), the fact that the 
option exists should be clearly indicated.

    2. Automatic payment plans--additional exceptions. The following 
practices are not prohibited by Sec. 226.12(d)(1):

     Automatically deducting charges for participation 
in a program of banking services (one aspect of which may be a credit 
card plan).
     Debiting the cardholder's deposit account on the 
cardholder's specific request rather than on an automatic periodic basis 
(for example, a cardholder might check a box on the credit card bill 
stub, requesting the issuer to debit the cardholder's account to pay 
that bill).

    12(e) Prompt notification of returns and crediting of refunds.
    Paragraph 12(e)(1).
    1. Normal channels. The term normal channels refers to any network 
or interchange system used for the processing of the original charge 
slips (or equivalent information concerning the transaction).
    Paragraph 12(e)(2).
    1. Crediting account. The card issuer need not actually post the 
refund to the consumer's account within 3 business days after receiving 
the credit statement, provided that it credits the account as of a date 
within that time period.

                               References

    Statute: Sections 103(1), 132, 133, 135, 162, 166, 167, 169, and 
170.
    Other sections: Section 226.13.
    Other regulations: Regulation E (12 CFR 205).
    Previous regulation: Section 226.13.
    1981 changes: The issuance rules in Sec. 226.12(a) make clear that 
cards may be sent to the person making the request and also to any other 
person for whom a card is requested, except that no liability for 
unauthorized use may be imposed on persons who are only authorized 
users.
    The principal differences in Sec. 226.12(b) about conditions of 
liability are as follows: the requirement that the cardholder be given a 
postage-paid, preaddressed card or envelope for notification of loss or 
theft has been deleted (corresponding to an amendment to the act); the 
required disclosures of maximum liability and of means of notification 
have been simplified; and the required provision of a means of 
identification has been changed in that the issuer now may provide a 
means to identify either the cardholder or the authorized user. Finally, 
anyone may provide the notification to the card issuer, not just the 
cardholder.
    Section 226.12(d) on offsets clarifies that the offset prohibition 
does not apply to consensual security interests. The separate promptness 
standard which used to apply in addition to the 7-business-day and 3-
business-day standards has been deleted from Sec. 226.12(e) on prompt 
notification of returns. Section 226.12(f) now clarifies rules on 
clearing accounts.
    Section 226.12(g), dealing with the relationship of the regulation 
to Regulation E (Electronic Fund Transfers), has been added.

[[Page 528]]

                Section 226.13--Billing Error Resolution

    1. General prohibitions. Footnote 27 prohibits a creditor from 
responding to a consumer's billing error allegation by accelerating the 
debt or closing the account, and reflects protections authorized by 
section 161(d) of the Truth in Lending Act and section 701 of the Equal 
Credit Opportunity Act. The footnote also alerts creditors that failure 
to comply with the error resolution procedures may result in the 
forfeiture of disputed amounts as prescribed in section 161(e) of the 
Act. (Any failure to comply may also be a violation subject to the 
liability provisions of section 130 of the Act.)
    2. Charges for error resolution. If a billing error occurred, 
whether as alleged or in a different amount or manner, the creditor may 
not impose a charge related to any aspect of the error resolution 
process (including charges for documentation or investigation) and must 
credit the consumer's account if such a charge was assessed pending 
resolution. Since the Act grants the consumer error resolution rights, 
the creditor 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.
    13(a) Definition of billing error.
    1. Actual, implied, or apparent authority. Whether use of a credit 
card or open-end credit plan is authorized is determined by state or 
other applicable law.
    Paragraph 13(a)(3).
    1. Coverage. Section 226.13(a)(3) covers disputes about goods or 
services that are ``not accepted'' or ``not delivered . . . as agreed''; 
for example:

     The appearance on a periodic statement of a 
purchase, when the consumer refused to take delivery of goods because 
they did not comply with the contract.
     Delivery of property or services different from 
that agreed upon.
     Delivery of the wrong quantity.
     Late delivery.
     Delivery to the wrong location.

    Section 226.13(a)(3) does not apply to a dispute relating to the 
quality of property or services that the consumer accepts. Whether 
acceptance occurred is determined by state or other applicable law.
    Paragraph 13(a)(5).
    1. Computational errors. In periodic statements that are combined 
with other information, the error resolution procedures are triggered 
only if the consumer asserts a computational billing error in the 
credit-related portion of the periodic statement. For example:

     If a bank combines a periodic statement 
reflecting the consumer's credit card transactions with the consumer's 
monthly checking statement, a computational error in the checking 
account portion of the combined statement is not a billing error.

    Paragraph 13(a)(6).
    1. Documentation requests. A request for documentation such as 
receipts or sales slips, unaccompanied by an allegation of an error 
under Sec. 226.13(a) or a request for additional clarification under 
Sec. 226.13(a)(6), does not trigger the error resolution procedures. 
For example, a request for documentation merely for purposes such as tax 
preparation or recordkeeping does not trigger the error resolution 
procedures.
    13(b) Billing error notice.
    1. Withdrawal. The consumer's withdrawal of a billing error notice 
may be oral or written.
    Paragraph 13(b)(1).
    1. Failure to send periodic statement--timing. If the creditor has 
failed to send a periodic statement, the 60-day period runs from the 
time the statement should have been sent. Once the statement is 
provided, the consumer has another 60 days to assert any billing errors 
reflected on it.
    2. Failure to reflect credit--timing. If the periodic statement 
fails to reflect a credit to the account, the 60-day period runs from 
transmittal of the statement on which the credit should have appeared.
    3. Transmittal. If a consumer has arranged for periodic statements 
to be held at the financial institution until called for, the statement 
is ``transmitted'' when it is first made available to the consumer.
    Paragraph 13(b)(2).
    1. Identity of the consumer. The billing error notice need not 
specify both the name and the account number if the information supplied 
enables the creditor to identify the consumer's name and account.
    13(c) Time for resolution; general procedures.
    1. Temporary or provisional corrections. A creditor may temporarily 
correct the consumer's account in response to a billing error notice, 
but is not excused from complying with the remaining error resolution 
procedures within the time limits for resolution.
    2. Correction without investigation. A creditor may correct a 
billing error in the manner and amount asserted by the consumer without 
the investigation or the determination normally required. The creditor 
must comply, however, with all other applicable provisions. If a 
creditor follows this procedure, no presumption is created that a 
billing error occurred.
    Paragraph 13(c)(2).
    1. Time for resolution. The phrase two complete billing cycles means 
2 actual billing cycles occurring after receipt of the billing error 
notice, not a measure of time equal to 2 billing cycles. For example, if 
a creditor on a monthly billing cycle receives a billing error notice 
mid-cycle, it has the remainder

[[Page 529]]

of that cycle plus the next 2 full billing cycles to resolve the error.
    13(d) Rules pending resolution.
    1. Disputed amount. Disputed amount is the dollar amount alleged by 
the consumer to be in error. When the allegation concerns the 
description or identification of the transaction (such as the date or 
the seller's name) rather than a dollar amount, the disputed amount is 
the amount of the transaction or charge that corresponds to the disputed 
transaction identification. If the consumer alleges a failure to send a 
periodic statement under Sec. 226.13(a)(7),the disputed amount is the 
entire balance owing.
    13(d)(1) Consumer's right to withhold disputed amount; collection 
action prohibited.
    1. Prohibited collection actions. During the error resolution 
period, the creditor is prohibited from trying to collect the disputed 
amount from the consumer. Prohibited collection actions include, for 
example, instituting court action, taking a lien, or instituting 
attachment proceedings.
    2. Right to withhold payment. If the creditor reflects any disputed 
amount or related finance or other charges on the periodic statement, 
and is therefore required to make the disclosure under footnote 30, the 
creditor may comply with that disclosure requirement by indicating that 
payment of any disputed amount is not required pending resolution. 
Making a disclosure that only refers to the disputed amount would, of 
course, in no way affect the consumer's right under Sec. 226.13(d)(1) 
to withhold related finance and other charges. The disclosure under 
footnote 30 need not appear in any specific place on the periodic 
statement, need not state the specific amount that the consumer may 
withhold, and may be preprinted on the periodic statement.
    3. Imposition of additional charges on undisputed amounts. The 
consumer's withholding of a disputed amount from the total bill cannot 
subject undisputed balances (including new purchases or cash advances 
made during the present or subsequent cycles) to the imposition of 
finance or other charges. For example, if on an account with a free-ride 
period (that is, an account in which paying the new balance in full 
allows the consumer to avoid the imposition of additional finance 
charges), a consumer disputes a $2 item out of a total bill of $300 and 
pays $298 within the free-ride period, the consumer would not lose the 
free-ride as to any undisputed amounts, even if the creditor determines 
later that no billing error occurred. Furthermore, finance or other 
charges may not be imposed on any new purchases or advances that, absent 
the unpaid disputed balance, would not have finance or other charges 
imposed on them. Finance or other charges that would have been incurred 
even if the consumer had paid the disputed amount would not be affected.
    4. Automatic payment plans--coverage. The coverage of this provision 
is limited to the card issuer's intra-institutional payment plans. It 
does not apply to:

     Inter-institutional payment plans that permit a 
cardholder to pay automatically any credit card indebtedness from an 
asset account not held by the card issuer receiving payment.
     Intra-institutional automatic payment plans 
offered by financial institutions that are not credit card issuers.

    5. Automatic payment plans--time of notice. While the card issuer 
does not have to restore or prevent the debiting of a disputed amount if 
the billing error notice arrives after the 3-business-day cut-off, the 
card issuer must, however, prevent the automatic debit of any part of 
the disputed amount that is still outstanding and unresolved at the time 
of the next scheduled debit date.
    13(d)(2) Adverse credit reports prohibited.
    1. Report of dispute. Although the creditor must not issue an 
adverse credit report because the consumer fails to pay the disputed 
amount or any related charges, the creditor may report that the amount 
or the account is in dispute. Also, the creditor may report the account 
as delinquent if undisputed amounts remain unpaid.
    2. Person. During the error resolution period, the creditor is 
prohibited from making an adverse credit report about the disputed 
amount to any person--including employers, insurance companies, other 
creditors, and credit bureaus.
    3. Creditor's agent. Whether an agency relationship exists between a 
creditor and an issuer of an adverse credit report is determined by 
State or other applicable law.
    13(e) Procedures if billing error occurred as asserted.
    1. Correction of error. The phrase as applicable means that the 
necessary corrections vary with the type of billing error that occurred. 
For example, a misidentified transaction (or a transaction that is 
identified by one of the alternative methods in Sec. 226.8) is cured by 
properly identifying the transaction and crediting related finance and 
any other charges imposed. The creditor is not required to cancel the 
amount of the underlying obligation incurred by the consumer.
    2. Form of correction notice. The written correction notice may take 
a variety of forms. It may be sent separately, or it may be included on 
or with a periodic statement that is mailed within the time for 
resolution. If the periodic statement is used, the amount of the billing 
error must be specifically identified.
    If a separate billing error correction notice is provided, the 
accompanying or subsequent periodic statement reflecting the corrected 
amount may simply identify it as credit.

[[Page 530]]

    13(f) Procedures if different billing error or no billing error 
occurred.
    1. Different billing error. Examples of a different billing error 
include:

     Differences in the amount of an error (for 
example, the customer asserts a $55.00 error but the error was only 
$53.00).
     Differences in other particulars asserted by the 
consumer (such as when a consumer asserts that a particular transaction 
never occurred, but the creditor determines that only the seller's name 
was disclosed incorrectly).

    2. Form of creditor's explanation. The written explanation (which 
also may notify the consumer of corrections to the account) may take a 
variety of forms. It may be sent separately, or it may be included on or 
with a periodic statement that is mailed within the time for resolution. 
If the creditor uses the periodic statement for the explanation and 
correction(s), the corrections must be specifically identified. If a 
separate explanation, including the correction notice, is provided, the 
enclosed or subsequent periodic statement reflecting the corrected 
amount may simply identify it as a credit. The explanation may be 
combined with the creditor's notice to the consumer of amounts still 
owing, which is required under Sec. 226.13(g)(1), provided it is sent 
within the time limit for resolution. (See Commentary to Sec. 
226.13(e).)
    13(g) Creditor's rights and duties after resolution.
    Paragraph 13(g)(1).
    1. Amounts owed by consumer. Amounts the consumer still owes may 
include both minimum periodic payments and related finance and other 
charges that accrued during the resolution period. As explained in the 
commentary to Sec. 226.13(d)(1), even if the creditor later determines 
that no billing error occurred, the creditor may not include finance or 
other charges that are imposed on undisputed balances solely as a result 
of a consumer's withholding payment of a disputed amount.
    2. Time of notice. The creditor need not send the notice of amount 
owed within the time period for resolution, although it is under a duty 
to send the notice promptly after resolution of the alleged error. If 
the creditor combines the notice of the amount owed with the explanation 
required under Sec. 226.13(f)(1), the combined notice must be provided 
within the time limit for resolution.
    Paragraph 13(g)(2).
    1. The creditor need not allow any free-ride period disclosed under 
Sec. Sec. 226.6(a)(1) and 226.7(j) to pay the amount due under Sec. 
226.13(g)(1) if no error occurred and the consumer was not entitled to a 
free-ride period at the time the consumer asserted the error.
    Paragraph 13(g)(3).
    1. Time for payment. The consumer has a minimum of 10 days to pay 
(measured from the time the consumer could reasonably be expected to 
have received notice of the amount owed) before the creditor may issue 
an adverse credit report; if an initially disclosed free-ride period 
allows the consumer a longer time in which to pay, the consumer has the 
benefit of that longer period.
    Paragraph 13(g)(4).
    1. Credit reporting. Under Sec. 226.13(g)(4)(i) and (iii) the 
creditor's additional credit reporting responsibilities must be 
accomplished promptly. The creditor need not establish costly procedures 
to fulfill this requirement. For example, a creditor that reports to a 
credit bureau on scheduled updates need not transmit corrective 
information by an unscheduled computer or magnetic tape; it may provide 
the credit bureau with the correct information by letter or other 
commercially reasonable means when using the scheduled update would not 
be ``prompt.'' The creditor is not responsible for ensuring that the 
credit bureau corrects its information immediately.
    2. Adverse report to credit bureau. If a creditor made an adverse 
report to a credit bureau that disseminated the information to other 
creditors, the creditor fulfills its Sec. 226.13(g)(4)(ii) obligations 
by providing the consumer with the name and address of the credit 
bureau.
    13(i) Relation to Electronic Fund Transfer Act and Regulation E.
    1. Coverage. Credit extended directly from a non-overdraft credit 
line is governed solely by Regulation Z, even though a combined credit 
card/access device is used to obtain the extension.
    2. Incidental credit under agreement. Credit extended incident to an 
electronic fund transfer under an agreement between the consumer and the 
financial institution is governed by Sec. 226.13(i), which provides 
that certain error resolution procedures in both this regulation and 
Regulation E apply. Incidental credit that is not extended under an 
agreement between the consumer and the financial institution is governed 
solely by the error resolution procedures in Regulation E. For example:

     Credit inadvertently extended incident to an 
electronic fund transfer is governed solely by the Regulation E error 
resolution procedures, if the bank and the consumer do not have an 
agreement to extend credit when the consumer's account is overdrawn.

    3. Application to debit/credit transactions-examples. If a consumer 
withdraws money at an automated teller machine and activates an 
overdraft credit feature on the checking account:
    i. An error asserted with respect to the transaction is subject, for 
error resolution

[[Page 531]]

purposes, to the applicable Regulation E provisions (such as timing and 
notice) for the entire transaction.
    ii. The creditor need not provisionally credit the consumer's 
account, under Sec. 205.11(c)(2)(i) of Regulation E, for any portion of 
the unpaid extension of credit.
    iii. The creditor must credit the consumer's account under Sec. 
205.11(c) with any finance or other charges incurred as a result of the 
alleged error.
    iv. The provisions of Sec. 226.13(d) and (g) apply only to the 
credit portion of the transaction.

                               References

    Statute: Sections 161 and 162.
    Other sections: Sections 226.6 through 226.8.
    Other regulations: Regulation E (12 CFR 205).
    Previous regulation: Sections 226.2(j) and (cc), and 226.14.
    1981 changes: Section 226.13 reflects several substantive changes 
from the previous regulation and a complete restructuring of the error 
resolution provisions. The new organization, for example, arranges the 
creditor's responsibilities in chronological sequence.
    Section 226.13(a)(7) implements amended Sec. 161(b) of the act, and 
provides that the creditor's failure to send a periodic statement to the 
consumer's current address is a billing error, unless the creditor 
received written notice of the address change fewer than 20 days 
(instead of 10 days) before the end of the billing cycle.
    Several provisions regarding the creditor's duties after a billing 
error is alleged have been revised. The previous regulation immunized a 
creditor from liability for inadvertently taking collection action or 
making an adverse credit report within 2 days after receiving a billing 
error notice; these provisions are deleted from the revised regulation. 
The revised regulation no longer requires placement ``on the face'' of 
the periodic statment of the disclosure about payment of disputed 
amounts.
    The revised regulation changes the rule in the previous regulation 
that a card issuer must prevent or restore an automatic debit of a 
disputed amount if it receives a billing error notice within 16 days 
after transmitting the periodic statement that reflects the alleged 
error. Under the revised regulation, the card issuer must prevent an 
automatic debit if it receives a billing error notice up to 3 days 
before the scheduled payment date (provided that the notice is received 
within the 60 days for the consumer to assert the error).

         Section 226.14--Determination of Annual Percentage Rate

    14(a) General rule.
    1. Tolerance. The tolerance of \1/8\ of 1 percentage point above or 
below the annual percentage rate applies to any required disclosure of 
the annual percentage rate. The disclosure of the annual percentage rate 
is required in Sec. Sec. 226.6, 226.7, 226.9, 226.15, 226.16, and 
226.26.
    2. Rounding. The regulation does not require that the annual 
percentage rate be calculated to any particular number of decimal 
places; rounding is permissible within the \1/8\ of 1 percent tolerance. 
For example, an exact annual percentage rate of 14.33333% may be stated 
as 14.33% or as 14.3%, or even as 14\1/4\%; but it could not be stated 
as 14.2% or 14%, since each varies by more than the permitted tolerance.
    3. Periodic rates. No explicit tolerance exists for any periodic 
rate as such; a disclosed periodic rate may vary from precise accuracy 
(for example, due to rounding) only to the extent that its annualized 
equivalent is within the tolerance permitted by Sec. 226.14(a). 
Further, a periodic rate need not be calculated to any particular number 
of decimal places.
    4. Finance charges. The regulation does not prohibit creditors from 
assessing finance charges on balances that include prior, unpaid finance 
charges; state or other applicable law may do so, however.
    5. Good faith reliance on faulty calculation tools. Footnote 31a 
absolves a creditor of liability for an error in the annual percentage 
rate or finance charge that resulted from a corresponding error in a 
calculation tool used in good faith by the creditor. Whether or not the 
creditor's use of the tool was in good faith must be determined on a 
case-by-case basis, but the creditor must in any case have taken 
reasonable steps to verify the accuracy of the tool, including any 
instructions, before using it. Generally, the footnote is available only 
for errors directly attributable to the calculation tool itself, 
including software programs; it is not intended to absolve a creditor of 
liability for its own errors, or for errors arising from improper use of 
the tool, from incorrect data entry, or from misapplication of the law.

     14(b) Annual Percentage Rate for Sec. Sec. 226.5a and 226.5b 
    Disclosures, for Initial Disclosures and for Advertising Purposes

    1. Corresponding annual percentage rate computation. For purposes of 
Sec. Sec. 226.5a, 226.5b, 226.6 and 226.16, the annual percentage rate 
is determined by multiplying the periodic rate by the number of periods 
in the year. This computation reflects the fact that, in such 
disclosures, the rate (known as the corresponding annual percentage 
rate) is prospective and does not involve any particular finance charge 
or periodic balance. This computation also is used to determine any 
annual percentage rate for oral disclosures under Sec. 226.26(a).

[[Page 532]]

    14(c) Annual percentage rate for periodic statements.
    1. General rule. Section 226.14(c) requires disclosure of the 
corresponding annual percentage rate for each periodic rate (under Sec. 
226.7(d)). It is figured by multiplying each periodic rate by the number 
of periods per year. This disclosure is like that provided on the 
initial disclosure statement. The periodic statement also must reflect 
(under Sec. 226.7(g)) the annualized equivalent of the rate actually 
applied during a particular cycle (the historical rate); this rate may 
differ from the corresponding annual percentage rate because of the 
inclusion of fixed, minimum, or transaction charges. Sections 226.14 
(c)(1) through (c)(4) state the computation rules for the historical 
rate.
    2. Periodic rates. Section 226.14(c)(1) applies if the only finance 
charge imposed is due to the application of a periodic rate to a 
balance. The creditor may compute the annual percentage rate either:

     By multiplying each periodic rate by the number 
of periods in the year; or
     By the ``quotient'' method. This method refers to 
a composite annual percentage rate when different periodic rates apply 
to different balances. For example, a particular plan may involve a 
periodic rate of 1\1/2\% on balances up to $500, and 1% on balances over 
$500. If, in a given cycle, the consumer has a balance of $800, the 
finance charge would consist of $7.50 (500x.015) plus $3.00 (300x.01), 
for a total finance charge of $10.50. The annual percentage rate for 
this period may be disclosed either as 18% on $500 and 12% on $300, or 
as 15.75% on a balance of $800 (the quotient of $10.50 divided by $800, 
multiplied by 12).

    3. Charges not based on periodic rates. Section 226.14(c)(2) applies 
if the finance charge imposed includes a charge not due to the 
application of a periodic rate (other than a charge relating to a 
specific transaction). For example, if the creditor imposes a minimum $1 
finance charge on all balances below $50, and the consumer's balance was 
$40 in a particular cycle, the creditor would disclose an annual 
percentage rate of 30% (1/40x12).
    4. No balance. Footnote 32 to Sec. 226.14(c)(2) would apply not 
only when minimum charges are imposed on an account with no balance, but 
also to a plan in which a periodic rate is applied to advances from the 
date of the transaction. For example, if on May 19 the consumer pays the 
new balance in full from a statement dated May 1, and has no further 
transactions reflected on the June 1 statement, that statement would 
reflect a finance charge with no account balance.
    5. Transaction charges. i. Section 226.14(c)(3) transaction charges 
include, for example:
    A. A loan fee of $10 imposed on a particular advance.
    B. A charge of 3% of the amount of each transaction.
    ii. The reference to avoiding duplication in the computation 
requires that the amounts of transactions on which transaction charges 
were imposed not be included both in the amount of total balances and in 
the ``other amounts on which a finance charge was imposed'' figure. In a 
multifeatured plan, creditors may consider each bona fide feature 
separately in the calculation of the denominator. A creditor has 
considerable flexibility in defining features for open-end plans, as 
long as the creditor has a reasonable basis for the distinctions. For 
further explanation and examples of how to determine the components of 
this formula, see appendix F.
    6. Daily rate with specific transaction charge. Section 226.14(c)(3) 
sets forth an acceptable method for calculating the annual percentage 
rate if the finance charge results from a charge relating to a specific 
transaction and the application of a daily periodic rate. This section 
includes the requirement that the creditor follow the rules in appendix 
F in calculating the annual percentage rate, especially footnote 1 to 
appendix F which addresses the daily rate/transaction charge situation 
by providing that the ``average of daily balances'' shall be used 
instead of the ``sum of the balances.''
    7. Charges related to opening, renewing, or continuing an account. 
Footnote 33 is applicable to Sec. 226.14 (c)(2) and (c)(3). The charges 
involved here do not relate to a specific transaction or to specific 
activity on the account, but relate solely to the opening, renewing, or 
continuing of the account. For example, an annual fee to renew an open-
end credit account that is a percentage of the credit limit on the 
account, or that is charged only to consumers that have not used their 
credit card for a certain dollar amount in transactions during the 
preceding year, would not be included in the calculation of the annual 
percentage rate, even though the fee may not be excluded from the 
finance charge under Sec. 226.4(c)(4). (See comment 4(c)(4)-2.) 
Inclusion of these charges in the annual percentage rate calculation 
results in significant distortions of the annual percentage rate and 
delivery of a possibly misleading disclosure to consumers. The rule in 
footnote 33 applies even if the loan fee, points, or similar charges are 
billed on a subsequent periodic statement or withheld from the proceeds 
of the first advance on the account.
    8. Classification of charges. If the finance charge includes a 
charge not due to the application of a periodic rate, the creditor must 
determine the proper annual percentage rate computation method according 
to the type of charge imposed. If the charge is tied to a specific 
transaction (for example, 3% of the amount of each transaction), then

[[Page 533]]

the method in Sec. 226.14(c)(3) must be used. If a fixed or minimum 
charge is applied, that is, one not tied to any specific transaction, 
then the formula in Sec. 226.14(c)(2) is appropriate.
    9. Small finance charges. Section 226.14(c)(4) gives the creditor an 
alternative to Sec. 226.14(c)(2) and (c)(3) if small finance charges 
(50 cents or less) are involved; that is, if the finance charge includes 
minimum or fixed fees not due to the application of a periodic rate and 
the total finance charge for the cycle does not exceed 50 cents. For 
example, while a monthly activity fee of 50 cents on a balance of $20 
would produce an annual percentage rate of 30 percent under the rule in 
Sec. 226.14(c)(2), the creditor may disclose an annual percentage rate 
of 18 percent if the periodic rate generally applicable to all balances 
is 1\1/2\ percent per month. This option is consistent with the 
provision in footnote 11 to Sec. Sec. 226.6 and 226.7 permitting the 
creditor to disregard the effect of minimum charges in disclosing the 
ranges of balances to which periodic rates apply.
    10. Prior-cycle adjustments. i. The annual percentage rate reflects 
the finance charges imposed during the billing cycle. However, finance 
charges imposed during the billing cycle may relate to activity in a 
prior cycle. Examples of circumstances when this may occur are:
    A. A cash advance occurs on the last day of a billing cycle on an 
account that uses the transaction date to figure finance charges, and it 
is impracticable to post the transaction until the following cycle.
    B. An adjustment to the finance charge is made following the 
resolution of a billing error dispute.
    C. A consumer fails to pay the purchase balance under a deferred 
payment feature by the payment due date, and finance charges are imposed 
from the date of purchase.
    ii. Finance charges relating to activity in prior cycles should be 
reflected on the periodic statement as follows:
    A. If a finance charge imposed in the current billing cycle is 
attributable to periodic rates applicable to prior billing cycles (such 
as when a deferred payment balance was not paid in full by the payment 
due date and finance charges from the date of purchase are now being 
debited to the account, or when a cash advance occurs on the last day of 
a billing cycle on an account that uses the transaction date to figure 
finance charges and it is impracticable to post the transaction until 
the following cycle), and the creditor uses the quotient method to 
calculate the annual percentage rate, the numerator would include the 
amount of any transaction charges plus any other finance charges posted 
during the billing cycle. At the creditor's option, balances relating to 
the finance charge adjustment may be included in the denominator if 
permitted by the legal obligation, if it was impracticable to post the 
transaction in the previous cycle because of timing, or if the 
adjustment is covered by comment 14(c)10.ii.B.
    B. If a finance charge that is posted to the account relates to 
activity for which a finance charge was debited or credited to the 
account in a previous billing cycle (for example, if the finance charge 
relates to an adjustment such as the resolution of a billing error 
dispute, or an unintentional posting error, or a payment by check that 
was later returned unpaid for insufficient funds or other reasons), the 
creditor shall at its option:
    1. Calculate the annual percentage rate in accord with ii.A. of this 
paragraph, or
    2. Disclose the finance charge adjustment on the periodic statement 
and calculate the annual percentage rate for the current billing cycle 
without including the finance charge adjustment in the numerator and 
balances associated with the finance charge adjustment in the 
denominator.

    14(d) Calculations where daily periodic rate applied.
    1. Quotient Method. Section 226.14(d) addresses use of a daily 
periodic rate(s) to determine some or all of the finance charge and use 
of the quotient method to determine the annual percentage rate. Since 
the quotient formula in Sec. 226.14(c)(1)(ii) does not work when a 
daily rate is being applied to a series of daily balances, Sec. 
226.14(d) gives the creditor 2 alternative ways to figure the annual 
percentage rate--either of which satisfies the requirement in Sec. 
226.7(g).
    2. Daily rate with specific transaction charge. If the finance 
charge results from a charge relating to a specific transaction and the 
application of a daily periodic rate, see comment 14(c)-6 for guidance 
on an appropriate calculation method.

                               References

    Statute: Section 107.
    Other sections: Sections 226.6, 226.7, 226.9, 226.15, 226.16, and 
226.26.
    Previous regulation: Section 226.5(a) and Interpretation Sec. Sec. 
226.501 and 226.506.
    1981 changes: Section 226.14 reflects the statutory amendment 
permitting a \1/8\ of 1 percent tolerance for annual percentage rates. 
The revised regulation no longer reflects the provision dealing with 
finance charges imposed on specified ranges or brackets of balances. The 
revised regulation includes a footnote providing that loan fees, points, 
or similar charges unrelated to any specific transaction are not figured 
into the annual percentage rate computation.

                   Section 226.15--Right of Rescission

    1. Transactions not covered. Credit extensions that are not subject 
to the regulation are not covered by Sec. 226.15 even if the customer's 
principal dwelling is the collateral

[[Page 534]]

securing the credit. For this purpose, credit extensions also would 
include the occurrences listed in Comment 15(a)(1)-1. For example, the 
right of rescission does not apply to the opening of a business-purpose 
credit line, even though the loan is secured by the customer's principal 
dwelling.
    15(a) Consumer's right to rescind.
    Paragraph 15(a)(1).
    1. Occurrences subject to right. Under an open-end credit plan 
secured by the consumer's principal dwelling, the right of rescission 
generally arises with each of the following occurrences:

     Opening the account.
     Each credit extension.
     Increasing the credit limit.
     Adding to an existing account a security interest 
in the consumer's principal dwelling.
     Increasing the dollar amount of the security 
interest taken in the dwelling to secure the plan. For example, a 
consumer may open an account with a $10,000 credit limit, $5,000 of 
which is initially secured by the consumer's principal dwelling. The 
consumer has the right to rescind at that time and (except as noted in 
Sec. 226.15(a)(1)(ii)) with each extension on the account. Later, if 
the creditor decides that it wants the credit line fully secured, and 
increases the amount of its interest in the consumer's dwelling, the 
consumer has the right to rescind the increase.

    2. Exceptions. Although the consumer generally has the right to 
rescind with each transaction on the account, section 125(e) of the Act 
provides an exception: the creditor need not provide the right to 
rescind at the time of each credit extension made under an open-end 
credit plan secured by the consumer's principal dwelling to the extent 
that the credit extended is in accordance with a previously established 
credit limit for the plan. This limited rescission option is available 
whether or not the plan existed prior to the effective date of the Act.
    3. Security interest arising from transaction. In order for the 
right of rescission to apply, the security interest must be retained as 
part of the credit transaction. For example:

     A security interest that is acquired by a 
contractor who is also extending the credit in the transaction.
     A mechanic's or materialman's lien that is 
retained by a subcontractor or supplier of a contractor-creditor, even 
when the latter has waived its own security interest in the consumer's 
home.

    The security interest is not part of the credit transaction, and 
therefore the transaction is not subject to the right of rescission 
when, for example:

     A mechanic's or materialman's lien is obtained by 
a contractor who is not a party to the credit transaction but merely is 
paid with the proceeds of the consumer's cash advance.
     All security interests that may arise in 
connection with the credit transaction are validly waived.
     The creditor obtains a lien and completion bond 
that in effect satisfies all liens against the consumer's principal 
dwelling as a result of the credit transaction.

    Although liens arising by operation of law are not considered 
security interests for purposes of disclosure under Sec. 226.2, that 
section specifically includes them in the definition for purposes of the 
right of rescission. Thus, even though an interest in the consumer's 
principal dwelling is not a required disclosure under Sec. 226.6(c), it 
may still give rise to the right of rescission.
    4. Consumer. To be a consumer within the meaning of Sec. 226.2, 
that person must at least have an ownership interest in the dwelling 
that is encumbered by the creditor's security interest, although that 
person need not be a signatory to the credit agreement. For example, if 
only one spouse enters into a secured plan, the other spouse is a 
consumer if the ownership interest of that spouse is subject to the 
security interest.
    5. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 15(a)(1)-6.) A vacation or other 
second home would not be a principal dwelling. A transaction secured by 
a second home (such as a vacation home) that is not currently being used 
as the consumer's principal dwelling is not rescindable, even if the 
consumer intends to reside there in the future. When a consumer buys or 
builds a new dwelling that will become the consumer's principal dwelling 
within one year or upon completion of construction, the new dwelling is 
considered the principal dwelling if it secures the open-end credit 
line. In that case, the transaction secured by the new dwelling is a 
residential mortgage transaction and is not rescindable. For example, if 
a consumer whose principal dwelling is currently A builds B, to be 
occupied by the consumer upon completion of construction, an advance on 
an open-end line to finance B and secured by B is a residential mortgage 
transaction. Dwelling, as defined in Sec. 226.2, includes structures 
that are classified as personalty under state law. For example, a 
transaction secured by a mobile home, trailer, or houseboat used as the 
consumer's principal dwelling may be rescindable.
    6. Special rule for principal dwelling. Notwithstanding the general 
rule that consumers may have only one principal dwelling, when the 
consumer is acquiring or constructing a new principal dwelling, a credit 
plan or extension that is subject to Regulation Z and is secured by the 
equity in the consumer's current principal dwelling is subject to the 
right of rescission regardless of

[[Page 535]]

the purpose of that loan (for example, an advance to be used as a bridge 
loan). For example, if a consumer whose principal dwelling is currently 
A builds B, to be occupied by the consumer upon completion of 
construction, a loan to finance B and secured by A is subject to the 
right of rescission. Moreover, a loan secured by both A and B is, 
likewise, rescindable.
    Paragraph 15(a)(2).
    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec. 226.15(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--the 
time period for the creditor's performance under Sec. 226.15(d)(2) does 
not begin to run until the notification has been received. The creditor 
may designate an agent to receive the notification so long as the 
agent's name and address appear on the notice provided to the consumer 
under Sec. 226.15(b). Where the creditor fails to provide the consumer 
with a designated address for sending the notification of rescission, 
delivery of the notification to the person or address to which the 
consumer has been directed to send payments constitutes delivery to the 
creditor or assignee. State law determines whether delivery of the 
notification to a third party other than the person to whom payments are 
made is delivery to the creditor or assignee, in the case where the 
creditor fails to designate an address for sending the notification of 
rescission.
    Paragraph 15 (a)(3).
    1. Rescission period. the period within which the consumer may 
exercise the right to rescind runs for 3 business days from the last of 
3 events:

     The occurrence that gives rise to the right of 
rescission.
     Delivery of all material disclosures that are 
relevant to the plan.
     Delivery to the consumer of the required 
rescission notice.

    For example, an account is opened on Friday, June 1, and the 
disclosures and notice of the right to rescind were given on Thursday, 
May 31; the rescission period will expire at midnight of the third 
business day after June 1--that is, Tuesday June 5. In another example, 
if the disclosures are given and the account is opened on Friday, June 
1, and the rescission notice is given on Monday, June 4, the rescission 
period expires at midnight of the third business day after June 4--that 
is Thursday, June 7. The consumer must place the rescission notice in 
the mail, file it for telegraphic transmission, or deliver it to the 
creditor's place of business within that period in order to exercise the 
right.
    2. Material disclosures. Footnote 36 sets forth the material 
disclosures that must be provided before the rescission period can begin 
to run. The creditor must provide sufficient information to satisfy the 
requirements of Sec. 226.6 for these disclosures. A creditor may 
satisfy this requirement by giving an initial disclosure statement that 
complies with the regulation. Failure to give the other required initial 
disclosures (such as the billing rights statement) or the information 
required under section 226.5b. does not prevent the running of the 
rescission period, although that failure may result in civil liability 
or administrative sanctions. The payment terms set forth in footnote 36 
apply to any repayment phase set forth in the agreement. Thus, the 
payment terms described in Sec. 226.6(e)(2) for any repayment phase as 
well as for the draw period are ``material disclosures.''
    3. Material disclosures--variable rate program. For a variable rate 
program, the material disclosures also include the disclosures listed in 
footnote 12 to Sec. 226.6(a)(2): the circumstances under which the rate 
may increase; the limitations on the increase; and the effect of an 
increase. The disclosures listed in footnote 12 to section 226.6(a)(2) 
for any repayment phase also are material disclosures for variable-rate 
programs.
    4. Unexpired right of rescission. When the creditor has failed to 
take the action necessary to start the three-day rescission period 
running the right to rescind automatically lapses on the occurrence of 
the earliest of the following three events:

     The expiration of three years after the 
occurrence giving rise to the right of rescission.
     Transfer of all the consumer's interest in the 
property.
     Sale of the consumer's interest in the property, 
including a transaction in which the consumer sells the dwelling and 
takes back a purchase money note and mortgage or retains legal title 
through a device such as an installment sale contract.

    Transfer of all the consumer's interest includes such transfers as 
bequests and gifts. A sale or transfer of the property need not be 
voluntary to terminate the right to rescind. For example, a foreclosure 
sale would terminate an unexpired right to rescind. As provided in 
section 125 of the act, the three-year limit may be extended by an 
administrative proceeding to enforce the provisions of Sec. 226.15. A 
partial transfer of the consumer's interest, such as a transfer 
bestowing co-ownership on a spouse, does not terminate the right of 
rescission.
    Paragraph 15(a)(4).
    1. Joint owners. When more than one consumer has the right to 
rescind a transaction, any one of them may exercise that right and 
cancel the transaction on behalf of all. For example, if both a husband 
and wife have the right to rescind a transaction, either spouse

[[Page 536]]

acting alone may exercise the right and both are bound by the 
rescission.
    15(b) Notice of right to rescind.
    1. Who receives notice. Each consumer entitled to rescind must be 
given:
     Two copies of the rescission notice.
     The material disclosures.
    In a transaction involving joint owners, both of whom are entitled 
to rescind, both must receive the notice of the right to rescind and 
disclosures. For example, if both spouses are entitled to rescind a 
transaction, each must receive two copies of the rescission notice (one 
copy to each if the notice is provided in electronic form in accordance 
with the consumer consent and other applicable provisions of the E-Sign 
Act) and one copy of the disclosures.
    2. Format. The rescission notice may be physically separated from 
the material disclosures or combined with the material disclosures, so 
long as the information required to be included on the notice is set 
forth in a clear and conspicuous manner. See the model notices in 
appendix G.
    3. Content. The notice must include all of the information outlined 
in Sec. 226.15(b)(1) through (5). The requirement in Sec. 226.15(b) 
that the transaction or occurrence be identified may be met by providing 
the date of the transaction or occurrence. The notice may include 
additional information related to the required information, such as:
     A description of the property subject to the 
security interest.
     A statement that joint owners may have the right 
to rescind and that a rescission by one is effective for all.
     The name and address of an agent of the creditor 
to receive notice of rescission.

    4. Time of providing notice. The notice required by Sec. 226.15(b) 
need not be given before the occurrence giving rise to the right of 
rescission. The creditor may deliver the notice after the occurrence, 
but the rescission period will not begin to run until the notice is 
given. For example, if the creditor provides the notice on May 15, but 
disclosures were given and the credit limit was raised on May 10, the 3-
business-day rescission period will run from May 15.
    15(c) Delay of creditor's performance.
    1. General rule. Until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not rescinded, 
the creditor must not, either directly or through a third party:
     Disburse advances to the consumer.
     Begin performing services for the consumer.
     Deliver materials to the consumer.
    A creditor may, however, continue to allow transactions under an 
existing open-end credit plan during a rescission period that results 
solely from the addition of a security interest in the consumer's 
principal dwelling. (See comment 15(c)-3 for other actions that may be 
taken during the delay period.)

    2. Escrow. The creditor may disburse advances during the rescission 
period in a valid escrow arrangement. The creditor may not, however, 
appoint the consumer as ``trustee'' or ``escrow agent'' and distribute 
funds to the consumer in that capacity during the delay period.
    3. Actions during the delay period. Section 226.15(c) does not 
prevent the creditor from taking other steps during the delay, short of 
beginning actual performance. Unless otherwise prohibited, such as by 
state law, the creditor may, for example:
     Prepare the cash advance check.
     Perfect the security interest.
     Accrue finance charges during the delay period.

    4. Performance by third party. The creditor is relieved from 
liability for failure to delay performance if a third party with no 
knowledge that the rescission right has been activated provides 
materials or services, as long as any debt incurred for materials or 
services obtained by the consumer during the rescission period is not 
secured by the security interest in the consumer's dwelling. For 
example, if a consumer uses a bank credit card to purchase materials 
from a merchant in an amount below the floor limit, the merchant might 
not contact the card issuer for authorization and therefore would not 
know that materials should not be provided.
    5. Delay beyond rescission period. The creditor must wait until it 
is reasonably satisfied that the consumer has not rescinded. For 
example, the creditor may satisfy itself by doing one of the following:

     Waiting a reasonable time after expiration of the 
rescission period to allow for delivery of a mailed notice.
     Obtaining a written statement from the consumer 
that the right has not been exercised.

    When more than one consumer has the right to rescind, the creditor 
cannot reasonably rely on the assurance of only one consumer, because 
other consumers may exercise the right.
    15(d) Effects of rescission.
    Paragraph 15(d)(1).
    1. Termination of security interest. Any security interest giving 
rise to the right of rescission becomes void when the consumer exercises 
the right of rescission. The security interest is automatically negated, 
regardless of its status and whether or not it was recorded or 
perfected. Under Sec. 226.15(d)(2), however, the creditor must take any 
action necessary to reflect the fact that the security interest no 
longer exists.
    2. Extent of termination. The creditor's security interest is void 
to the extent that it is related to the occurrence giving rise to the

[[Page 537]]

right of rescission. For example, upon rescission:

     If the consumer's right to rescind is activated 
by the opening of a plan, any security interest in the principal 
dwelling is void.
     If the right arises due to an increase in the 
credit limit, the security interest is void as to the amount of credit 
extensions over the prior limit, but the security interest in amounts up 
to the original credit limit is unaffected.
     If the right arises with each individual credit 
extension, then the interest is void as to that extension, and other 
extensions are unaffected.

    Paragraph 15(d)(2).
    1. Refunds to consumer. The consumer cannot be required to pay any 
amount in the form of money or property either to the creditor or to a 
third party as part of the occurrence subject to the right of 
rescission. Any amounts of this nature already paid by the consumer must 
be refunded. ``Any amount'' includes finance charges already accrued, as 
well as other charges such as broker fees, application and commitment 
fees, or fees for a title search or appraisal, whether paid to the 
creditor, paid by the consumer directly to a third party, or passed on 
from the creditor to the third party. It is irrelevant that these 
amounts may not represent profit to the creditor. For example:
     If the occurrence is the opening of the plan, the 
creditor must return any membership or application fee paid.
     If the occurrence is the increase in a credit 
limit or the addition of a security interest, the creditor must return 
any fee imposed for a new credit report or filing fees.
     If the occurrence is a credit extension, the 
creditors must return fees such as application, title, and appraisal or 
survey fees, as well as any finance charges related to the credit 
extension.

    2. Amounts not refundable to consumer. Creditors need not return any 
money given by the consumer to a third party outside of the occurrence, 
such as costs incurred for a building permit or for a zoning variance. 
Similarly, the term any amount does not apply to money or property given 
by the creditor to the consumer; those amounts must be tendered by the 
consumer to the creditor under Sec. 226.15(d)(3).
    3. Reflection of security interest termination. The creditor must 
take whatever steps are necessary to indicate that the security interest 
is terminated. Those steps include the cancellation of documents 
creating the security interest, and the filing of release or termination 
statements in the public record. In a transaction involving 
subcontractors or suppliers that also hold security interests related to 
the occurrence rescinded by the consumer, the creditor must insure that 
the termination of their security interests is also reflected. The 20-
day period for the creditor's action refers to the time within which the 
creditor must begin the process. It does not require all necessary steps 
to have been completed within that time, but the creditor is responsible 
for seeing the process through to completion.
    Paragraph 15(d)(3).
    1. Property exchange. Once the creditor has fulfilled its obligation 
under Sec. 226.15(d)(2), the consumer must tender to the creditor any 
property or money the creditor has already delivered to the consumer. At 
the consumer's option, property may be tendered at the location of the 
property. For example, if fixtures or furniture have been delivered to 
the consumer's home, the consumer may tender them to the creditor by 
making them available for pick-up at the home, rather than physically 
returning them to the creditor's premises. Money already given to the 
consumer must be tendered at the creditor's place of business. For 
purpose of property exchange, the following additional rules apply:

     A cash advance is considered money for purposes 
of this section even if the creditor knows what the consumer intends to 
purchase with the money.
     In a 3-party open-end credit plan (that is, if 
the creditor and seller are not the same or related persons), extensions 
by the creditor that are used by the consumer for purchases from third-
party sellers are considered to be the same as cash advances for 
purposes of tendering value to the creditor, even though the transaction 
is a purchase for other purposes under the regulation. For example, if a 
consumer exercises the unexpired right to rescind after using a 3-party 
credit card for one year, the consumer would tender the amount of the 
purchase price for the items charged to the account, rather than 
tendering the items themselves to the creditor.

    2. Reasonable value. If returning the property would be extremely 
burdensome to the consumer, the consumer may offer the creditor its 
reasonable value rather than returning the property itself. For example, 
if building materials have already been incorporated into the consumer's 
dwelling, the consumer may pay their reasonable value.
    Paragraph 15(d)(4).
    1. Modifications. The procedures outlined in Sec. 226.15(d)(2) and 
(3) may be modified by a court. For example, when a consumer is in 
bankruptcy proceedings and prohibited from returning anything to the 
creditor, or when the equities dictate, a modification might be made. 
The sequence of procedures under Sec. 226.15(d)(2) and (3), or a 
court's modification of those procedures under Sec. 226.15(d)(4), does 
not affect a consumer's substantive right to rescind and to have the 
loan amount adjusted accordingly. Where the consumer's right to rescind 
is contested by the creditor, a court would normally determine whether

[[Page 538]]

the consumer has a right to rescind and determine the amounts owed 
before establishing the procedures for the parties to tender any money 
or property.
    15(e) Consumer's waiver of right to rescind.
    1. Need for waiver. To waive the right to rescind, the consumer must 
have a bona fide personal financial emergency that must be met before 
the end of the rescission period. The existence of the consumer's waiver 
will not, of itself, automatically insulate the creditor from liability 
for failing to provide the right of rescission.
    2. Procedure. To waive or modify the right to rescind, the consumer 
must give a written statement that specifically waives or modifies the 
right, and also includes a brief description of the emergency. Each 
consumer entitled to rescind must sign the waiver statement. In a 
transaction involving multiple consumers, such as a husband and wife 
using their home as collateral, the waiver must bear the signatures of 
both spouses.
    15(f) Exempt transactions.
    1. Residential mortgage transaction. Although residential mortgage 
transactions would seldom be made on bona fide open-end credit plans 
(under which repeated transactions must be reasonably contemplated), an 
advance on an open-end plan could be for a downpayment for the purchase 
of a dwelling that would then secure the remainder of the line. In such 
a case, only the particular advance for the downpayment would be exempt 
from the rescission right.
    2. State creditors. Cities and other political subdivisions of 
states acting as creditors are not exempt from Sec. 226.15.
    3. Spreader clause. When the creditor holds a mortgage or deed of 
trust on the consumer's principal dwelling and that mortgage or deed of 
trust contains a ``spreader clause'' (also known as a ``dragnet'' or 
cross-collateralization clause), subsequent occurrences such as the 
opening of a plan or individual credit extensions are subject to the 
right of rescission to the same degree as if the security interest were 
taken directly to secure the open-end plan, unless the creditor 
effectively waives its security interest under the spreader clause with 
respect to the subsequent open-end credit extensions.

                               References

    Statute: Sections 113, 125, 130, and the Housing and Community 
Development Technical Amendments Act of 1984, Sec. 205 (Pub. L. 98-479).
    Other sections: Section 226.2 and appendix G.
    Previous regulation: Section 226.9.
    1981 Changes: Section 226.15 reflects the statutory amendments of 
1980, providing for a limited right of rescission when individual credit 
extensions are made in accordance with a previously established credit 
limit for an open-end credit plan. The 1980 amendments provided that 
this limited rescission right be available for a three-year trial 
period. However, Pub. L. 98-479 now permanently exempts such individual 
credit extensions from the right of rescission.
    The right to rescind applies not only to real property used as the 
consumer's principal dwelling, but to personal property as well. The 
regulation provides no specific text or format for the rescission 
notice.
    When a consumer exercises the right to rescind, the creditor now has 
20 days to return a consumer's money or property and take the necessary 
action to terminate the security interest. The creditor has 20 days to 
take possession of the money or property after the consumer's tender 
before the consumer may keep it without further obligation.
    Under the revised regulation, the waiver provision has been relaxed. 
The lien status of the mortgage is irrelevant for purposes of the 
residential mortgage transaction exemption. The exemption for 
agricultural loans from the right to rescind has been deleted.

                       Section 226.16--Advertising

    1. Clear and conspicuous standard. Section 226.16 is subject to the 
general ``clear and conspicuous'' standard for subpart B (see Sec. 
226.5(a)(1)) but prescribes no specific rules for the format of the 
necessary disclosures. The credit terms need not be printed in a certain 
type size nor need they appear in any particular place in the 
advertisement.
    2. Expressing the annual percentage rate in abbreviated form. 
Whenever the annual percentage rate is used in an advertisement for 
open-end credit, it may be expressed using a readily understandable 
abbreviation such as ``APR''.
    16(a) Actually available terms.
    1. General rule. To the extent that an advertisement mentions 
specific credit terms, it may state only those terms that the creditor 
is actually prepared to offer. For example, a creditor may not advertise 
a very low annual percentage rate that will not in fact be available at 
any time. Section 226.16(a) is not intended to inhibit the promotion of 
new credit programs, but to bar the advertising of terms that are not 
and will not be available. For example, a creditor may advertise terms 
that will be offered for only a limited period, or terms that will 
become available at a future date.
    2. Specific credit terms. Specific credit terms is not limited to 
the disclosures required by the regulation but would include any 
specific components of a credit plan, such as the minimum periodic 
payment amount or seller's points in a plan secured by real estate.
    16(b) Advertisement of terms that require additional disclosures.
    1. Terms requiring additional disclosures. In Sec. 226.16(b) the 
phrase the terms required to be

[[Page 539]]

disclosed under Sec. 226.6 refers to the terms in Sec. 226.6(a) and 
Sec. 226.6(b).
    2. Use of positive terms. An advertisement must state a credit term 
as a positive number in order to trigger additional disclosures. For 
example, no annual membership fee would not trigger the additional 
disclosures required by Sec. 226.16(b). (See, however, the rules in 
Sec. 226.16(d) relating to advertisements for home equity plans.)
    3. Implicit terms. Section 226.16(b) applies even if the triggering 
term is not stated explicitly, but may be readily determined from the 
advertisement.
    4. Membership fees. A membership fee is not a triggering term nor 
need it be disclosed under Sec. 226.16(b)(3) if it is required for 
participation in the plan whether or not an open-end credit feature is 
attached. (See Comment 6(b)-1.)
    5. Variable-rate plans. In disclosing the annual percentage rate in 
an advertisement for a variable-rate plan, as required by Sec. 
226.16(b)(2), the creditor may use an insert showing the current rate; 
may give the rate as of a specified recent date; or may disclose an 
estimated rate under Sec. 226.5(c). The additional requirement in Sec. 
226.16(b)(2) to disclose the variable-rate feature may be satisfied by 
disclosing that the annual percentage rate may vary or a similar 
statement, but the advertisement need not include the information 
required by footnote 12 to Sec. 226.6(a)(2).
    6. Discounted variable-rate plans--disclosure of the annual 
percentage rates. The advertised annual percentage rates for discounted 
variable-rate plans must, in accordance with comment 6(a)(2)-10, include 
both the initial rate (with the statement of how long it will remain in 
effect) and the current indexed rate (with the statement that this 
second rate may vary). The options listed in comment I6(b)-5 may be used 
in disclosing the current indexed rate.
    7. Triggering terms. The following are examples of terms that 
trigger additional disclosures:
     Small monthly service charge on the remaining 
balance, which describes how the amount of a finance charge will be 
determined.
     12 percent Annual Percentage Rate or A $15 annual 
membership fee buys you $2,000 in credit, which describe required 
disclosures using positive numbers.

    8. Minimum, fixed, transaction, activity, or similar charge. The 
charges to be disclosed under Sec. 226.16(b)(1) are those that are 
considered finance charges under Sec. 226.4.
    9. Deferred billing and deferred payment programs. Statements such 
as ``Charge it--you won't be billed until May'' or ``You may skip your 
January payment'' are not in themselves triggering terms, since the 
timing for initial billing or for monthly payments are not terms 
required to be disclosed under Sec. 226.6. However, a statement such as 
``No finance charge until May'' or any other statement regarding when 
finance charges begin to accrue is a triggering term, whether appearing 
alone or in conjunction with a description of a deferred billing or 
deferred payment program such as the examples above.
    16(c) Catalogs or Other Multiple-page Advertisements; Electronic 
Advertisements
    1. Definition. The multiple-page advertisements to which Sec. 
226.16(c) refers are advertisements consisting of a series of 
sequentially numbered pages--for example, a supplement to a newspaper. A 
mailing consisting of several separate flyers or pieces of promotional 
material in a single envelope does not constitute a single multiple-page 
advertisement for purposes of Sec. 226.16(c).
    Paragraph 16(c)(1).
    1. General. Section 226.16(c)(1) permits creditors to put credit 
information together in one place in a catalog or other multiple-page 
advertisement or an electronic advertisement (such as an advertisement 
appearing on an Internet Web site). The rule applies only if the 
advertisement contains one or more of the triggering terms from Sec. 
226.16(b).
    2. Electronic advertisement. If an electronic advertisement (such as 
an advertisement appearing on an Internet Web site) contains the table 
or schedule permitted under Sec. 226.16(c)(1), any statement of terms 
set forth in Sec. 226.6 appearing anywhere else in the advertisement 
must clearly direct the consumer to the location where the table or 
schedule begins. For example, a term triggering additional disclosures 
may be accompanied by a link that directly takes the consumer to the 
additional information.
    Paragraph 16(c)(2).
    1. Table or schedule if credit terms depend on outstanding balance. 
If the credit terms of a plan vary depending on the amount of the 
balance outstanding, rather than the amount of any property purchased, a 
table or schedule complies with Sec. 226.16(c)(2) if it includes the 
required disclosures for representative balances. For example, a 
creditor would disclose that a periodic rate of 1.5% is applied to 
balances of $500 or less, and a 1% rate is applied to balances greater 
than $500.

           16(d) Additional Requirements for Home Equity Plans

    1. Trigger terms. Negative as well as affirmative references trigger 
the requirement for additional information. For example, if a creditor 
states no annual fee, no points, or we waive closing costs in an 
advertisement, additional information must be provided. (See comment 
16(d)-4 regarding the use of a phrase such as no closing costs.) 
Inclusion of a statement such as low fees, however, would not trigger 
the need to state additional information. References to payment terms 
include references to the draw period or any repayment period, to the 
length of the plan,

[[Page 540]]

to how the minimum payments are determined and to the timing of such 
payments.
    2. Fees to open the plan. Section 226.16(d)(1)(i) requires a 
disclosure of any fees imposed by the creditor or a third party to open 
the plan. In providing the fee information required under this 
paragraph, the corresponding rules for disclosure of this information 
apply. For example, fees to open the plan may be stated as a range. 
Similarly, if property insurance is required to open the plan, a 
creditor either may estimate the cost of the insurance or provide a 
statement that such insurance is required. (See the commentary to Sec. 
226.5b(d)(7) and (8).)
    3. Statements of tax deductibility. An advertisement referring to 
deductibility for tax purposes is not misleading if it includes a 
statement such as ``consult a tax advisor regarding the deductibility of 
interest.''
    4. Misleading terms prohibited. Under Sec. 226.16(d)(5), 
advertisements may not refer to home equity plans as free money or use 
other misleading terms. For example, an advertisement could not state 
``no closing costs'' or ``we waive closing costs'' if consumers may be 
required to pay any closing costs, such as recordation fees. In the case 
of property insurance, however, a creditor may state, for example, ``no 
closing costs'' even if property insurance may be required, as long as 
the creditor also provides a statement that such insurance may be 
required. (See the commentary to this section regarding fees to open a 
plan.)
    5. Relation to other sections. Advertisements for home equity plans 
must comply with all provisions in Sec. 226.16, not solely the rules in 
Sec. 226.16(d). If an advertisement contains information (such as the 
payment terms) that triggers the duty under Sec. 226.16(d) to state the 
annual percentage rate, the additional disclosures in Sec. 226.16(b) 
must be provided in the advertisement. While Sec. 226.16(d) does not 
require a statement of fees to use or maintain the plan (such as 
membership fees and transaction charges), such fees must be disclosed 
under Sec. 226.16(b) (1) and (3).
    6. Inapplicability of closed-end rules. Advertisements for home 
equity plans are governed solely by the requirements in Sec. 226.16, 
and not by the closed-end advertising rules in Sec. 226.24. Thus, if a 
creditor states payment information about the repayment phase, this will 
trigger the duty to provide additional information under Sec. 226.16, 
but not under Sec. 226.24.
    7. Balloon payment. In some programs, a balloon payment will occur 
if only the minimum payments under the plan are made. If an 
advertisement for such a program contains any statement about a minimum 
periodic payment, the advertisement must also state that a balloon 
payment will result (not merely that a balloon payment ``may'' result). 
(See comment 5b(d)(5)(ii)-3 for guidance on items not required to be 
stated in the advertisement, and on situations in which the balloon 
payment requirement does not apply.)

                               References

    Statute: Sections 141 and 143.
    Previous regulation: Section 226.10 (a) through (c) and 
Interpretation Sec. 226.1002.
    Other sections: Sections 226.2 and 226.6.
    1981 changes: Section 226.16 reflects the statutory changes to 
section 143 of the act which reduce both the number of triggering terms 
and the additional disclosures required by the use of those terms. 
Membership or participation fees are included among the additional 
disclosures required when a triggering term is used. The substance of 
Interpretation Sec. 226.1002, requiring disclosure of representative 
amounts of credit in catalogs and multiple-page advertisements, has been 
incorporated in simplified form in paragraph (c).

                      Subpart C--Closed-End Credit

             Section 226.17--General Disclosure Requirements

    17(a) Form of disclosures.
    Paragraph 17(a)(1).
    1. Clear and conspicuous. This standard requires that disclosures be 
in a reasonably understandable form. For example, while the regulation 
requires no mathematical progression or format, the disclosures must be 
presented in a way that does not obscure the relationship of the terms 
to each other. In addition, although no minimum type size is mandated, 
the disclosures must be legible, whether typewritten, handwritten, or 
printed by computer.
    2. Segregation of disclosures. The disclosures may be grouped 
together and segregated from other information in a variety of ways. For 
example, the disclosures may appear on a separate sheet of paper or may 
be set off from other information on the contract or other documents:
     By outlining them in a box
     By bold print dividing lines
     By a different color background
     By a different type style

(The general segregation requirement described in this subparagraph does 
not apply to the disclosures required under Sec. Sec. 226.19(b) and 
226.20(c) although the disclosures must be clear and conspicuous.)

    3. Location. The regulation imposes no specific location 
requirements on the segregated disclosures. For example:

     They may appear on a disclosure statement 
separate from all other material.
     They may be placed on the same document with the 
credit contract or other information, so long as they are segregated 
from that information.
     They may be shown on the front or back of a 
document.

[[Page 541]]

     They need not begin at the top of a page.
     They may be continued from one page to another.

    4. Content of segregated disclosures. Footnotes 37 and 38 contain 
exceptions to the requirement that the disclosures under Sec. 226.18 be 
segregated from material that is not directly related to those 
disclosures. Footnote 37 lists the items that may be added to the 
segregated disclosures, even though not directly related to those 
disclosures. Footnote 38 lists the items required under Sec. 226.18 
that may be deleted from the segregated disclosures and appear 
elsewhere. Any one or more of these additions or deletions may be 
combined and appear either together with or separate from the segregated 
disclosures. The itemization of the amount financed under Sec. 
226.18(c), however, must be separate from the other segregated 
disclosures under Sec. 226.18. If a creditor chooses to include the 
security interest charges required to be itemized under Sec. 226.4(e) 
and Sec. 226.18(o) in the amount financed itemization, it need not list 
these charges elsewhere.
    5. Directly related. The segregated disclosures may, at the 
creditor's option, include any information that is directly related to 
those disclosures. The following is directly related information:
    i. A description of a grace period after which a late payment charge 
will be imposed. For example, the disclosure given under Sec. 226.18(l) 
may state that a late charge will apply to ``any payment received more 
than 15 days after the due date.''
    ii. A statement that the transaction is not secured. For example, 
the creditor may add a category labelled ``unsecured'' or ``not 
secured'' to the security interest disclosures given under Sec. 
226.18(m).
    iii. The basis for any estimates used in making disclosures. For 
example, if the maturity date of a loan depends solely on the occurrence 
of a future event, the creditor may indicate that the disclosures assume 
that event will occur at a certain time.
    iv. The conditions under which a demand feature may be exercised. 
For example, in a loan subject to demand after five years, the 
disclosures may state that the loan will become payable on demand in 
five years.
    v. An explanation of the use of pronouns or other references to the 
parties to the transaction. For example, the disclosures may state, 
```You' refers to the customer and `we' refers to the creditor.''
    vi. Instructions to the creditor or its employees on the use of a 
multiple-purpose form. For example, the disclosures may state, ``Check 
box if applicable.''
    vii. A statement that the borrower may pay a minimum finance charge 
upon prepayment in a simple-interest transaction. For example, when 
state law prohibits penalties, but would allow a minimum finance charge 
in the event of prepayment, the creditor may make the Sec. 226.18(k)(1) 
disclosure by stating, ``You may be charged a minimum finance charge.''
    viii. A brief reference to negative amortization in variable-rate 
transactions. For example, in the variable-rate disclosure, the creditor 
may include a short statement such as ``Unpaid interest will be added to 
principal.'' (See the commentary to Sec. 226.18(f)(1)(iii).)
    ix. A brief caption identifying the disclosures. For example, the 
disclosures may bear a general title such as ``Federal Truth in Lending 
Disclosures'' or a descriptive title such as ``Real Estate Loan 
Disclosures.''
    x. A statement that a due-on-sale clause or other conditions on 
assumption are contained in the loan document. For example, the 
disclosure given under Sec. 226.18(q) may state, ``Someone buying your 
home may, subject to conditions in the due-on-sale clause contained in 
the loan document, assume the remainder of the mortgage on the original 
terms.''
    xi. If a state or Federal law prohibits prepayment penalties and 
excludes the charging of interest after prepayment from coverage as a 
penalty, a statement that the borrower may have to pay interest for some 
period after prepayment in full. The disclosure given under Sec. 
226.18(k) may state, for example, ``If you prepay your loan on other 
than the regular installment date, you may be assessed interest charges 
until the end of the month.''
    xii. More than one hypothetical example under Sec. 226.18(f)(1)(iv) 
in transactions with more than one variable-rate feature. For example, 
in a variable-rate transaction with an option permitting consumers to 
convert to a fixed-rate transaction, the disclosures may include an 
example illustrating the effects on the payment terms of an increase 
resulting from conversion in addition to the example illustrating an 
increase resulting from changes in the index.
    xiii. The disclosures set forth under Sec. 226.18(f)(1) for 
variable-rate transactions subject to Sec. 226.18(f)(2).
    xiv. A statement whether or not a subsequent purchaser of the 
property securing an obligation may be permitted to assume the remaining 
obligation on its original terms.
    xv. A late-payment fee disclosure under Sec. 226.18(l) on a single 
payment loan.

    6. Multiple-purpose forms. The creditor may design a disclosure 
statement that can be used for more than one type of transaction, so 
long as the required disclosures for individual transactions are clear 
and conspicuous. (See the Commentary to appendices G and H for a 
discussion of the treatment of disclosures that do not apply to specific 
transactions.) Any disclosure listed in Sec. 226.18 (except the 
itemization of the amount financed under Sec. 226.18(c)) may be 
included on a standard disclosure statement even though

[[Page 542]]

not all of the creditor's transactions include those features. For 
example, the statement may include:

     The variable rate disclosure under Sec. 
226.18(f).
     The demand feature disclosure under Sec. 
226.18(i).
     A reference to the possibility of a security 
interest arising from a spreader clause, under Sec. 226.18(m).
     The assumption policy disclosure under Sec. 
226.18(q).
     The required deposit disclosure under Sec. 
226.18(r).
    7. Balloon payment financing with leasing characteristics. In 
certain credit sale or loan transactions, a consumer may reduce the 
dollar amount of the payments to be made during the course of the 
transaction by agreeing to make, at the end of the loan term, a large 
final payment based on the expected residual value of the property. The 
consumer may have a number of options with respect to the final payment, 
including, among other things, retaining the property and making the 
final payment, refinancing the final payment, or transferring the 
property to the creditor in lieu of the final payment. Such transactions 
may have some of the characteristics of lease transactions subject to 
Regulation M, but are considered credit transactions where the consumer 
assumes the indicia of ownership, including the risks, burdens and 
benefits of ownership upon consummation. These transactions are governed 
by the disclosure requirements of this regulation instead of Regulation 
M. Creditors should not include in the segregated Truth in Lending 
disclosures additional information. Thus, disclosures should show the 
large final payment in the payment schedule and should not, for example, 
reflect the other options available to the consumer at maturity.

    Paragraph 17(a)(2).
    1. When disclosures must be more conspicuous. The following rules 
apply to the requirement that the terms annual percentage rate and 
finance charge be shown more conspicuously:

     The terms must be more conspicuous only in 
relation to the other required disclosures under Sec. 226.18. For 
example, when the disclosures are included on the contract document, 
those 2 terms need not be more conspicuous as compared to the heading on 
the contract document or information required by state law.
     The terms need not be more conspicuous except as 
part of the finance charge and annual percentage rate disclosures under 
Sec. 226.18 (d) and (e), although they may, at the creditor's option, 
be highlighted wherever used in the required disclosures. For example, 
the terms may, but need not, be highlighted when used in disclosing a 
prepayment penalty under Sec. 226.18(k) or a required deposit under 
Sec. 226.18(r).
     The creditor's identity under Sec. 226.18(a) 
may, but need not, be more prominently displayed than the finance charge 
and annual percentage rate.
     The terms need not be more conspicuous than 
figures (including, for example, numbers, percentages, and dollar signs)

    2. Making disclosures more conspicuous. The terms finance charge and 
annual percentage rate may be made more conspicuous in any way that 
highlights them in relation to the other required disclosures. For 
example, they may be:

     Capitalized when other disclosures are printed in 
capital and lower case.
     Printed in larger type, bold print or different 
type face.
     Printed in a contrasting color.
     Underlined.
     Set off with asterisks.

                       17(b) Time of disclosures.

    1. Consummation. As a general rule, disclosures must be made before 
``consummation'' of the transaction. The disclosures need not be given 
by any particular time before consummation, except in certain mortgage 
transactions and variable-rate transactions secured by the consumer's 
principal dwelling with a term greater than one year under Sec. 226.19. 
(See the commentary to Sec. 226.2(a)(13) regarding the definition of 
consummation.)
    2. Converting open-end to closed-end credit. Except for home equity 
plans subject to Sec. 226.5b in which the agreement provides for a 
repayment phase, if an open-end credit account is converted to a closed-
end transaction under a written agreement with the consumer, the 
creditor must provide a set of closed-end credit disclosures before 
consummation of the closed-end transaction. (See the commentary to Sec. 
226.19(b) for the timing rules for additional disclosures required upon 
the conversion to a variable-rate transaction secured by a consumer's 
principal dwelling with a term greater than one year.) If consummation 
of the closed-end transaction occurs at the same time as the consumer 
enters into the open-end agreement, the closed-end credit disclosures 
may be given at the time of conversion. If disclosures are delayed until 
conversion and the closed-end transaction has a variable-rate feature, 
disclosures should be based on the rate in effect at the time of 
conversion. (See the commentary to Sec. 226.5 regarding conversion of 
closed-end to open-end credit.)
    3. Disclosures provided on credit contracts. Creditors must give the 
required disclosures to the consumer in writing, in a form that the 
consumer may keep, before consummation of the transaction. See Sec. 
226.17(a)(1) and (b). Sometimes the disclosures are placed on the same 
document with the credit contract.

[[Page 543]]

Creditors are not required to give the consumer two separate copies of 
the document before consummation, one for the consumer to keep and a 
second copy for the consumer to execute. The disclosure requirement is 
satisfied if the creditor gives a copy of the document containing the 
unexecuted credit contract and disclosures to the consumer to read and 
sign; and the consumer receives a copy to keep at the time the consumer 
becomes obligated. It is not sufficient for the creditor merely to show 
the consumer the document containing the disclosures before the consumer 
signs and becomes obligated. The consumer must be free to take 
possession of and review the document in its entirety before signing.
    i. Example. To illustrate:
    A. A creditor gives a consumer a multiple-copy form containing a 
credit agreement and TILA disclosures. The consumer reviews and signs 
the form and returns it to the creditor, who separates the copies and 
gives one copy to the consumer to keep. The creditor has satisfied the 
disclosure requirement.
    17(c) Basis of disclosures and use of estimates.
    Paragraph 17(c)(1).
    1. Legal obligation. The disclosures shall reflect the credit terms 
to which the parties are legally bound as of the outset of the 
transaction. In the case of disclosures required under Sec. 226.20(c), 
the disclosures shall reflect the credit terms to which the parties are 
legally bound when the disclosures are provided. The legal obligation is 
determined by applicable state law or other law. (Certain transactions 
are specifically addressed in this commentary. See, for example, the 
discussion of buydown transactions elsewhere in the commentary to Sec. 
226.17(c).)

     The fact that a term or contract may later be 
deemed unenforceable by a court on the basis of equity or other grounds 
does not, by itself, mean that disclosures based on that term or 
contract did not reflect the legal obligation.

    2. Modification of obligation. The legal obligation normally is 
presumed to be contained in the note or contract that evidences the 
agreement. But this presumption is rebutted if another agreement between 
the parties legally modifies that note or contract. If the parties 
informally agree to a modification of the legal obligation, the 
modification should not be reflected in the disclosures unless it rises 
to the level of a change in the terms of the legal obligation. For 
example:

     If the creditor offers a preferential rate, such 
as an employee preferred rate, the disclosures should reflect the terms 
of the legal obligation. (See the commentary to Sec. 226.19(b) for an 
example of a preferred-rate transaction that is a variable-rate 
transaction.)
     If the contract provides for a certain monthly 
payment schedule but payments are made on a voluntary payroll deduction 
plan or an informal principal-reduction agreement, the disclosures 
should reflect the schedule in the contract.
     If the contract provides for regular monthly 
payments but the creditor informally permits the consumer to defer 
payments from time to time, for instance, to take account of holiday 
seasons or seasonal employment, the disclosures should reflect the 
regular monthly payments.

    3. Third-party buydowns. In certain transactions, a seller or other 
third party may pay an amount, either to the creditor or to the 
consumer, in order to reduce the consumer's payments or buy down the 
interest rate for all or a portion of the credit term. For example, a 
consumer and a bank agree to a mortgage with an interest rate of 15% and 
level payments over 25 years. By a separate agreement, the seller of the 
property agrees to subsidize the consumer's payments for the first 2 
years of the mortgage, giving the consumer an effective rate of 12% for 
that period.

     If the lower rate is reflected in the credit 
contract between the consumer and the bank, the disclosures must take 
the buydown into account. For example, the annual percentage rate must 
be a composite rate that takes account of both the lower initial rate 
and the higher subsequent rate, and the payment schedule disclosures 
must reflect the 2 payment levels. However, the amount paid by the 
seller would not be specifically reflected in the disclosures given by 
the bank, since that amount constitutes seller's points and thus is not 
part of the finance charge.
     If the lower rate is not reflected in the credit 
contract between the consumer and the bank and the consumer is legally 
bound to the 15% rate from the outset, the disclosures given by the bank 
must not reflect the seller buydown in any way. For example, the annual 
percentage rate and payment schedule would not take into account the 
reduction in the interest rate and payment level for the first 2 years 
resulting from the buydown.

    4. Consumer buydowns. In certain transactions, the consumer may pay 
an amount to the creditor to reduce the payments or obtain a lower 
interest rate on the transaction. Consumer buydowns must be reflected in 
the disclosures given for that transaction. To illustrate, in a mortgage 
transaction, the creditor and consumer agree to a note specifying a 14 
percent interest rate. However, in a separate document, the consumer 
agrees to pay an amount to the creditor at consummation in return for a 
reduction in the interest rate to 12 percent for a portion of the 
mortgage term. The amount paid by the consumer may be deposited in an 
escrow account or may be retained by the creditor.

[[Page 544]]

Depending upon the buydown plan, the consumer's prepayment of the 
obligation may or may not result in a portion of the amount being 
credited or refunded to the consumer. In the disclosures given for the 
mortgage, the creditor must reflect the terms of the buydown agreement. 
For example:

     The amount paid by the consumer is a prepaid 
finance charge (even if deposited in an escrow account).
     A composite annual percentage rate must be 
calculated, taking into account both interest rates, as well as the 
effect of the prepaid finance charge.
     The payment schedule must reflect the multiple 
payment levels resulting from the buydown.

    The rules regarding consumer buydowns do not apply to transactions 
known as ``lender buydowns,'' In lender buydowns. a creditor pays an 
amount (either into an account or to the party to whom the obligation is 
sold) to reduce the consumer's payments or interest rate for all or a 
portion of the credit term. Typically, these transactions are structured 
as a buydown of the interest rate during an initial period of the 
transaction with a higher than usual rate for the remainder of the term. 
The disclosures for lender buydowns should be based on the terms of the 
legal obligation between the consumer and the creditor. (See comment 
17(c)(1)-3 for the analogous rules concerning third-party buydowns.)
    5. Split buydowns. In certain transactions, a third party (such as a 
seller) and a consumer both pay an amount to the creditor to reduce the 
interest rate. The creditor must include the portion paid by the 
consumer in the finance charge and disclose the corresponding multiple 
payment levels and composite annual percentage rate. The portion paid by 
the third party and the corresponding reduction in interest rate, 
however, should not be reflected in the disclosures unless the lower 
rate is reflected in the credit contract. (See the discussion on third-
party and consumer buydown transactions elsewhere in the commentary to 
Sec. 226.17(c).)
    6. Wrap-around financing. Wrap-around transactions, usually loans, 
involve the creditor's wrapping the outstanding balance on an existing 
loan and advancing additional funds to the consumer. The pre-existing 
loan, which is wrapped, may be to the same consumer or to a different 
consumer. In either case, the consumer makes a single payment to the new 
creditor, who makes the payments on the pre-existing loan to the 
original creditor. Wrap-around loans or sales are considered new single-
advance transactions, with an amount financed equalling the sum of the 
new funds advanced by the wrap creditor and the remaining principal owed 
to the original creditor on the pre-existing loan. In disclosing the 
itemization of the amount financed, the creditor may use a label such as 
``the amount that will be paid to creditor X'' to describe the remaining 
principal balance on the pre-existing loan. This approach to Truth in 
Lending calculations has no effect on calculations required by other 
statutes, such as state usury laws.
    7. Wrap-around financing with balloon payments. For wrap-around 
transactions involving a large final payment of the new funds before the 
maturity of the pre-existing loan, the amount financed is the sum of the 
new funds and the remaining principal on the pre-existing loan. The 
disclosures should be based on the shorter term of the wrap loan, with a 
large final payment of both the new funds and the total remaining 
principal on the pre-existing loan (although only the wrap loan will 
actually be paid off at that time).
    8. Basis of disclosures in variable-rate transactions. The 
disclosures for a variable-rate transaction must be given for the full 
term of the transaction and must be based on the terms in effect at the 
time of consummation. Creditors should base the disclosures only on the 
initial rate and should not assume that this rate will increase. For 
example, in a loan with an initial rate of 10 percent and a 5 percentage 
points rate cap, creditors should base the disclosures on the initial 
rate and should not assume that this rate will increase 5 percentage 
points. However, in a variable-rate transaction with a seller buydown 
that is reflected in the credit contract, a consumer buydown, or a 
discounted or premium rate, disclosures should not be based solely on 
the initial terms. In those transactions, the disclosed annual 
percentage rate should be a composite rate based on the rate in effect 
during the initial period and the rate that is the basis of the 
variable-rate feature for the remainder of the term. (See the commentary 
to Sec. 226.17(c) for a discussion of buydown, discounted, and premium 
transactions and the commentary to section 226.19(a)(2) for a discussion 
of the redisclosure in certain residential mortgage transactions with a 
variable-rate feature).
    9. Use of estimates in variable-rate transactions. The variable-rate 
feature does not, by itself, make the disclosures estimates.
    10. Discounted and premium variable-rate transactions. In some 
variable-rate transactions, creditors may set an initial interest rate 
that is not determined by the index or formula used to make later 
interest rate adjustments. Typically, this initial rate charged to 
consumers is lower than the rate would be if it were calculated using 
the index or formula. However, in some cases the initial rate may be 
higher. In a discounted transaction, for example, a creditor may 
calculate interest rates according to a formula using the six-month 
Treasury bill rate plus a 2 percent margin. If the Treasury bill rate at 
consummation is 10 percent, the creditor

[[Page 545]]

may forgo the 2 percent spread and charge only 10 percent for a limited 
time, instead of setting an initial rate of 12 percent.
    i. When creditors use an initial interest rate that is not 
calculated using the index or formula for later rate adjustments, the 
disclosures should reflect a composite annual percentage rate based on 
the initial rate for as long as it is charged and, for the remainder of 
the term, the rate that would have been applied using the index or 
formula at the time of consummation. The rate at consummation need not 
be used if a contract provides for a delay in the implementation of 
changes in an index value. For example, if the contract specifies that 
rate changes are based on the index value in effect 45 days before the 
change date, creditors may use any index value in effect during the 45 
day period before consummation in calculating a composite annual 
percentage rate.
    ii. The effect of the multiple rates must also be reflected in the 
calculation and disclosure of the finance charge, total of payments, and 
payment schedule.
    iii. If a loan contains a rate or payment cap that would prevent the 
initial rate or payment, at the time of the first adjustment, from 
changing to the rate determined by the index or formula at consummation, 
the effect of that rate or payment cap should be reflected in the 
disclosures.
    iv. Because these transactions involve irregular payment amounts, an 
annual percentage rate tolerance of \1/4\ of 1 percent applies, in 
accordance with Sec. 226.22(a)(3).
    v. Examples of discounted variable-rate transactions include:
    A. A 30-year loan for $100,000 with no prepaid finance charges and 
rates determined by the Treasury bill rate plus 2 percent. Rate and 
payment adjustments are made annually. Although the Treasury bill rate 
at the time of consummation is 10 percent, the creditor sets the 
interest rate for one year at 9 percent, instead of 12 percent according 
to the formula. The disclosures should reflect a composite annual 
percentage rate of 11.63 percent based on 9 percent for one year and 12 
percent for 29 years. Reflecting those two rate levels, the payment 
schedule should show 12 payments of $804.62 and 348 payments of 
$1,025.31. The finance charge should be $266,463.32 and the total of 
payments $366,463.32.
    B. Same loan as above, except with a 2 percent rate cap on periodic 
adjustments. The disclosures should reflect a composite annual 
percentage rate of 11.53 percent based on 9 percent for the first year, 
11 percent for the second year, and 12 percent for the remaining 28 
years. Reflecting those three rate levels, the payment schedule should 
show 12 payments of $804.62, 12 payments of $950.09, and 336 payments of 
$1,024.34. The finance charge should be $265,234.76 and the total of 
payments $365,234.76.
    C. Same loan as above, except with a 7\1/2\ percent cap on payment 
adjustments. The disclosures should reflect a composite annual 
percentage rate of 11.64 percent, based on 9 percent for one year and 12 
percent for 29 years. Because of the payment cap, five levels of 
payments should be reflected. The payment schedule should show 12 
payments of $804.62, 12 payments of $864.97, 12 payments of $929.84, 12 
payments of $999.58, and 312 payments of $1,070.04. The finance charge 
should be $277,040.60, and the total of payments $377,040.60.
    vi. A loan in which the initial interest rate is set according to 
the index or formula used for later adjustments but is not set at the 
value of the index or formula at consummation is not a discounted 
variable-rate loan. For example, if a creditor commits to an initial 
rate based on the formula on a date prior to consummation, but the index 
has moved during the period between that time and consummation, a 
creditor should base its disclosures on the initial rate.
    11. Examples of variable-rate transactions. Variable-rate 
transactions include:
     Renewable balloon-payment instruments where the 
creditor is both unconditionally obligated to renew the balloon-payment 
loan at the consumer's option (or is obligated to renew subject to 
conditions within the consumer's control) and has the option of 
increasing the interest rate at the time of renewal. Disclosures must be 
based on the payment amortization (unless the specified term of the 
obligation with renewals is shorter) and on the rate in effect at the 
time of consummation of the transaction. (Examples of conditions within 
a consumer's control include requirements that a consumer be current in 
payments or continue to reside in the mortgaged property. In contrast, 
setting a limit on the rate at which the creditor would be obligated to 
renew or reserving the right to change the credit standards at the time 
of renewal are examples of conditions outside a consumer's control.) If, 
however, a creditor is not obligated to renew as described above, 
disclosures must be based on the term of the balloon-payment loan. 
Disclosures also must be based on the term of the balloon-payment loan 
in balloon-payment instruments in which the legal obligation provides 
that the loan will be renewed by a ``refinancing'' of the obligation, as 
that term is defined by Sec. 226.20(a). If it cannot be determined from 
the legal obligation that the loan will be renewed by a ``refinancing,'' 
disclosures must be based either on the term of the balloon-payment loan 
or on the payment amortization, depending on whether the creditor is 
unconditionally obligated to renew the loan as described above. (This 
discussion does not apply to construction loans subject to Sec. 
226.17(c)(6).)

[[Page 546]]

     ``Shared-equity'' or ``shared-appreciation'' 
mortgages that have a fixed rate of interest and an appreciation share 
based on the consumer's equity in the mortgaged property. The 
appreciation share is payable in a lump sum at a specified time. 
Disclosures must be based on the fixed interest rate. (As discussed in 
the commentary to Sec. 226.2, other types of shared-equity arrangements 
are not considered ``credit'' and are not subject to Regulation Z.)
     Preferred-rate loans where the terms of the legal 
obligation provide that the initial underlying rate is fixed but will 
increase upon the occurrence of some event, such as an employee leaving 
the employ of the creditor, and the note reflects the preferred rate. 
The disclosures are to be based on the preferred rate.
     Graduated-payment mortgages and step-rate 
transactions without a variable-rate feature are not considered 
variable-rate transactions.
     ``Price level adjusted mortgages'' or other 
indexed mortgages that have a fixed rate of interest but provide for 
periodic adjustments to payments and the loan balance to reflect changes 
in an index measuring prices or inflation. Disclosures are to be based 
on the fixed interest rate.
    12. Graduated payment adjustable rate mortgages. These mortgages 
involve both a variable interest rate and scheduled variations in 
payment amounts during the loan term. For example, under these plans, a 
series of graduated payments may be scheduled before rate adjustments 
affect payment amounts, or the initial scheduled payment may remain 
constant for a set period before rate adjustments affect the payment 
amount. In any case, the initial payment amount may be insufficient to 
cover the scheduled interest, causing negative amortization from the 
outset of the transaction. In these transactions, the disclosures should 
treat these features as follows:

     The finance charge includes the amount of 
negative amortization based on the assumption that the rate in effect at 
consummation remains unchanged.
     The amount financed does not include the amount 
of negative amortization.
     As in any variable-rate transaction, the annual 
percentage rate is based on the terms in effect at consummation.
     The schedule of payments discloses the amount of 
any scheduled initial payments followed by an adjusted level of payments 
based on the initial interest rate. Since some mortgage plans contain 
limits on the amount of the payment adjustment, the payment schedule may 
require several different levels of payments, even with the assumption 
that the original interest rate does not increase.

    13. Growth-equity mortgages. Also referred to as payment-escalated 
mortgages, these mortgage plans involve scheduled payment increases to 
prematurely amortize the loan. The initial payment amount is determined 
as for a long-term loan with a fixed interest rate. Payment increases 
are scheduled periodically, based on changes in an index. The larger 
payments result in accelerated amortization of the loan. In disclosing 
these mortgage plans, creditors may either:
     Estimate the amount of payment increases, based 
on the best information reasonably available; or
     Disclose by analogy to the variable-rate 
disclosures in 226.18(f)(1).

(This discussion does not apply to growth-equity mortgages in which the 
amount of payment increases can be accurately determined at the time of 
disclosure. For these mortgages, as for graduated-payment mortgages, 
disclosures should reflect the scheduled increases in payments.)
    14. Reverse mortgages. Reverse mortgages, also known as reverse 
annuity or home equity conversion mortgages, typically involve the 
disbursement of monthly advances to the consumer for a fixed period or 
until the occurrence of an event such as the consumer's death. Repayment 
of the loan (generally a single payment of principal and accrued 
interest) may be required to be made at the end of the disbursements or, 
for example, upon the death of the consumer. In disclosing these 
transactions, creditors must apply the following rules, as applicable:
     If the reverse mortgage has a specified period 
for disbursements but repayment is due only upon the occurrence of a 
future event such as the death of the consumer, the creditor must assume 
that disbursements will be made until they are scheduled to end. The 
creditor must assume repayment will occur when disbursements end (or 
within a period following the final disbursement which is not longer 
than the regular interval between disbursements). This assumption should 
be used even though repayment may occur before or after the 
disbursements are scheduled to end. In such cases, the creditor may 
include a statement such as ``The disclosures assume that you will repay 
the loan at the time our payments to you end. As provided in your 
agreement, your repayment may be required at a different time.''
     If the reverse mortgage has neither a specified 
period for disbursements nor a specified repayment date and these terms 
will be determined solely by reference to future events including the 
consumer's death, the creditor may assume that the disbursements will 
end upon the consumer's death (estimated by using actuarial tables, for 
example) and that repayment will be required at the same time (or within 
a period following the date of the final disbursement which is not 
longer than the regular interval

[[Page 547]]

for disbursements). Alternatively, the creditor may base the disclosures 
upon another future event it estimates will be most likely to occur 
first. (If terms will be determined by reference to future events which 
do not include the consumer's death, the creditor must base the 
disclosures upon the occurence of the event estimated to be most likely 
to occur first.)
     In making the disclosures, the creditor must 
assume that all disbursements and accrued interest will be paid by the 
consumer. For example, if the note has a nonrecourse provision providing 
that the consumer is not obligated for an amount greater than the value 
of the house, the creditor must nonetheless assume that the full amount 
to be disbursed will be repaid. In this case, however, the creditor may 
include a statement such as ``The disclosures assume full repayment of 
the amount advanced plus accrued interest, although the amount you may 
be required to pay is limited by your agreement.''
     Some reverse mortgages provide that some or all 
of the appreciation in the value of the property will be shared between 
the consumer and the creditor. Such loans are considered variable-rate 
mortgages, as described in comment 17(c)(1)-11, and the appreciation 
feature must be disclosed in accordance with Sec. 226.18(f)(1). If the 
reverse mortgage has a variable interest rate, is written for a term 
greater than one year, and is secured by the consumer's principal 
dwelling, the shared appreciation feature must be described under Sec. 
226.19(b)(2)(vii).
    15. Morris Plan transactions. When a deposit account is created for 
the sole purpose of accumulating payments and then is applied to satisfy 
entirely the consumer's obligation in the transaction, each deposit made 
into the account is considered the same as a payment on a loan for 
purposes of making disclosures.
    16. Number of transactions. Creditors have flexibility in handling 
credit extensions that may be viewed as multiple transactions. For 
example:

     When a creditor finances the credit sale of a 
radio and a television on the same day, the creditor may disclose the 
sales as either 1 or 2 credit sale transactions.
     When a creditor finances a loan along with a 
credit sale of health insurance, the creditor may disclose in one of 
several ways: a single credit sale transaction, a single loan 
transaction, or a loan and a credit sale transaction.
     The separate financing of a downpayment in a 
credit sale transaction may, but need not, be disclosed as 2 
transactions (a credit sale and a separate transaction for the financing 
of the downpayment).

    17. Special rules for tax refund anticipation loans. Tax refund 
loans, also known as refund anticipation loans (RALs), are transactions 
in which a creditor will lend up to the amount of a consumer's expected 
tax refund. RAL agreements typically require repayment upon demand, but 
also may provide that repayment is required when the refund is made. The 
agreements also typically provide that if the amount of the refund is 
less than the payment due, the consumer must pay the difference. 
Repayment often is made by a preauthorized offset to a consumer's 
account held with the creditor when the refund has been deposited by 
electronic transfer. Creditors may charge fees for RALs in addition to 
fees for filing the consumer's tax return electronically. In RAL 
transactions subject to the regulation the following special rules 
apply:
     If, under the terms of the legal obligation, 
repayment of the loan is required when the refund is received by the 
consumer (such as by deposit into the consumer's account), the 
disclosures should be based on the creditor's estimate of the time the 
refund will be delivered even if the loan also contains a demand clause. 
The practice of a creditor to demand repayment upon delivery of refunds 
does not determine whether the legal obligation requires that repayment 
be made at that time; this determination must be made according to 
applicable state or other law. (See comment 17(c)(5)-1 for the rules 
regarding disclosures if the loan is payable solely on demand or is 
payable either on demand or on an alternate maturity date.)
     If the consumer is required to repay more than 
the amount borrowed, the difference is a finance charge unless excluded 
under Sec. 226.4. In addition, to the extent that any fees charged in 
connection with the loan (such as for filing the tax return 
electronically) exceed those fees for a comparable cash transaction 
(that is, filing the tax return electronically without a loan), the 
difference must be included in the finance charge.
    18. Pawn Transactions. When, in connection with an extension of 
credit, a consumer pledges or sells an item to a pawnbroker creditor in 
return for a sum of money and retains the right to redeem the item for a 
greater sum (the redemption price) within a specified period of time, 
disclosures are required. In addition to other disclosure requirements 
that may be applicable under Sec. 226.18, for purposes of pawn 
transactions:
    i. The amount financed is the initial sum paid to the consumer. The 
pawnbroker creditor need not provide a separate itemization of the 
amount financed if that entire amount is paid directly to the consumer 
and the disclosed description of the amount financed is ``the amount of 
cash given directly to you'' or a similar phrase.
    ii. The finance charge is the difference between the initial sum 
paid to the consumer

[[Page 548]]

and the redemption price plus any other finance charges paid in 
connection with the transaction. (See Sec. 226.4.)
    iii. The term of the transaction, for calculating the annual 
percentage rate, is the period of time agreed to by the pawnbroker 
creditor and the consumer. The term of the transaction does not include 
a grace period (including any statutory grace period) after the agreed 
redemption date.
    Paragraph 17(c)(2)(i).
    1. Basis for estimates. Disclosures may be estimated when the exact 
information is unknown at the time disclosures are made. Information is 
unknown if it is not reasonably available to the creditor at the time 
the disclosures are made. The ``reasonably available'' standard requires 
that the creditor, acting in good faith, exercise due diligence in 
obtaining information. For example, the creditor must at a minimum 
utilize generally accepted calculation tools, but need not invest in the 
most sophisticated computer program to make a particular type of 
calculation. The creditor normally may rely on the representations of 
other parties in obtaining information. For example, the creditor might 
look to the consumer for the time of consummation, to insurance 
companies for the cost of insurance, or to realtors for taxes and escrow 
fees. The creditor may utilize estimates in making disclosures even 
though the creditor knows that more precise information will be 
available by the point of consummation. However, new disclosures may be 
required under Sec. 226.17(f) or Sec. 226.19.
    2. Labelling estimates. Estimates must be designated as such in the 
segregated disclosures. Even though other disclosures are based on the 
same assumption on which a specific estimated disclosure was based, the 
creditor has some flexibility in labelling the estimates. Generally, 
only the particular disclosure for which the exact information is 
unknown is labelled as an estimate. However, when several disclosures 
are affected because of the unknown information, the creditor has the 
option of labelling either every affected disclosure or only the 
disclosure primarily affected. For example, when the finance charge is 
unknown because the date of consummation is unknown, the creditor must 
label the finance charge as an estimate and may also label as estimates 
the total of payments and the payment schedule. When many disclosures 
are estimates, the creditor may use a general statement, such as ``all 
numerical disclosures except the late payment disclosure are 
estimates,'' as a method to label those disclosures as estimates.
    3. Simple-interest transactions. If consumers do not make timely 
payments in a simple-interest transaction, some of the amounts 
calculated for Truth in Lending disclosures will differ from amounts 
that consumers will actually pay over the term of the transaction. 
Creditors may label disclosures as estimates in these transactions. For 
example, because the finance charge and total of payments may be larger 
than disclosed if consumers make late payments, creditors may label the 
finance charge and total of payments as estimates. On the other hand, 
creditors may choose not to label disclosures as estimates and may base 
all disclosures on the assumption that payments will be made on time, 
disregarding any possible inaccuracies resulting from consumers' payment 
patterns.
    Paragraph 17(c)(2)(ii).
    1. Per-diem interest. This paragraph applies to any numerical amount 
(such as the finance charge, annual percentage rate, or payment amount) 
that is affected by the amount of the per-diem interest charge that will 
be collected at consummation. If the amount of per-diem interest used in 
preparing the disclosures for consummation is based on the information 
known to the creditor at the time the disclosure document is prepared, 
the disclosures are considered accurate under this rule, and affected 
disclosures are also considered accurate, even if the disclosures are 
not labeled as estimates. For example, if the amount of per-diem 
interest used to prepare disclosures is less than the amount of per-diem 
interest charged at consummation, and as a result the finance charge is 
understated by $200, the disclosed finance charge is considered accurate 
even though the understatement is not within the $100 tolerance of Sec. 
226.18(d)(1), and the finance charge was not labeled as an estimate. In 
this example, if in addition to the understatement related to the per-
diem interest, a $90 fee is incorrectly omitted from the finance charge, 
causing it to be understated by a total of $290, the finance charge is 
considered accurate because the $90 fee is within the tolerance in Sec. 
226.18(d)(1).
    Paragraph 17(c)(3)
    1. Minor variations. Section 226.17(c)(3) allows creditors to 
disregard certain factors in calculating and making disclosures. For 
example:

     Creditors may ignore the effects of collecting 
payments in whole cents. Because payments cannot be collected in 
fractional cents, it is often difficult to amortize exactly an 
obligation with equal payments; the amount of the last payment may 
require adjustment to account for the rounding of the other payments to 
whole cents.
     Creditors may base their disclosures on 
calculation tools that assume that all months have an equal number of 
days, even if their practice is to take account of the variations in 
months for purposes of collecting interest. For example, a creditor may 
use a calculation tool based on a 360-day year, when it in fact collects 
interest by applying a factor of 1/365 of the annual rate to 365 days. 
This rule does not, however, authorize creditors to ignore, for 
disclosure

[[Page 549]]

purposes, the effects of applying 1/360 of an annual rate to 365 days.
    2. Use of special rules. A creditor may utilize the special rules in 
Sec. 226.17(c)(3) for purposes of calculating and making all 
disclosures for a transaction or may, at its option, use the special 
rules for some disclosures and not others.
    Paragraph 17(c)(4).
    1. Payment schedule irregularities. When one or more payments in a 
transaction differ from the others because of a long or short first 
period, the variations may be ignored in disclosing the payment 
schedule, finance charge, annual percentage rate, and other terms. For 
example:

     A 36-month auto loan might be consummated on June 
8 with payments due on July 1 and the first of each succeeding month. 
The creditor may base its calculations on a payment schedule that 
assumes 36 equal intervals and 36 equal installment payments, even 
though a precise computation would produce slightly different amounts 
because of the shorter first period.
     By contrast, in the same example, if the first 
payment were not scheduled until August 1, the irregular first period 
would exceed the limits in Sec. 226.17(c)(4); the creditor could not 
use the special rule and could not ignore the extra days in the first 
period in calculating its disclosures.

    2. Measuring odd periods. In determining whether a transaction may 
take advantage of the rule in Sec. 226.17(c)(4), the creditor must 
measure the variation against a regular period. For purposes of that 
rule:

     The first period is the period from the date on 
which the finance charge begins to be earned to the date of the first 
payment.
     The term is the period from the date on which the 
finance charge begins to be earned to the date of the final payment.
     The regular period is the most common interval 
between payments in the transaction.

    In transactions involving regular periods that are monthly, 
semimonthly or multiples of a month, the length of the irregular and 
regular periods may be calculated on the basis of either the actual 
number of days or an assumed 30-day month. In other transactions, the 
length of the periods is based on the actual number of days.
    3. Use of special rules. A creditor may utilize the special rules in 
Sec. 226.17(c)(4) for purposes of calculating and making some 
disclosures but may elect not to do so for all of the disclosures. For 
example, the variations may be ignored in calculating and disclosing the 
annual percentage rate but taken into account in calculating and 
disclosing the finance charge and payment schedule.
    4. Relation to prepaid finance charges. Prepaid finance charges, 
including ``odd-days'' or ``per-diem'' interest, paid prior to or at 
closing may not be treated as the first payment on a loan. Thus, 
creditors may not disregard an irregularity in disclosing such finance 
charges.
    Paragraph 17(c)(5).
    1. Demand disclosures. Disclosures for demand obligations are based 
on an assumed 1-year term, unless an alternate maturity date is stated 
in the legal obligation. Whether an alternate maturity date is stated in 
the legal obligation is determined by applicable law. An alternate 
maturity date is not inferred from an informal principal reduction 
agreement or a similar understanding between the parties. However, when 
the note itself specifies a principal reduction schedule (for example, 
``payable on demand or $2,000 plus interest quarterly''), an alternate 
maturity is stated and the disclosures must reflect that date.
    2. Future event as maturity date. An obligation whose maturity date 
is determined solely by a future event, as for example, a loan payable 
only on the sale of property, is not a demand obligation. Because no 
demand feature is contained in the obligation, demand disclosures under 
Sec. 226.18(i) are inapplicable. The disclosures should be based on the 
creditor's estimate of the time at which the specified event will occur, 
and may indicate the basis for the creditor's estimate, as noted in the 
commentary to Sec. 226.17(a).
    3. Demand after stated period. Most demand transactions contain a 
demand feature that may be exercised at any point during the term, but 
certain transactions convert to demand status only after a fixed period. 
For example, in States prohibiting due-on-sale clauses, the Federal 
National Mortgage Association (FNMA) requires mortgages that it 
purchases to include a call option rider that may be exercised after 7 
years. These mortgages are generally written as long-term obligations, 
but contain a demand feature that may be exercised only within a 30-day 
period at 7 years. The disclosures for these transactions should be 
based upon the legally agreed-upon maturity date. Thus, if a mortgage 
containing the 7-year FNMA call option is written as a 20-year 
obligation, the disclosures should be based on the 20-year term, with 
the demand feature disclosed under Sec. 226.18(i).
    4. Balloon mortgages. Balloon payment mortgages, with payments based 
on a long-term amortization schedule and a large final payment due after 
a shorter term, are not demand obligations unless a demand feature is 
specifically contained in the contract. For example, a mortgage with a 
term of 5 years and a payment schedule based on 20 years would not be 
treated as a mortgage with a demand feature, in the absence of any 
contractual demand provisions. In this type of mortgage, disclosures 
should be based on the 5-year term.
    Paragraph 17(c)(6).

[[Page 550]]

    1. Series of advances. Section 226.17(c)(6)(i) deals with a series 
of advances under an agreement to extend credit up to a certain amount. 
A creditor may treat all of the advances as a single transaction or 
disclose each advance as a separate transaction. If these advances are 
treated as 1 transaction and the timing and amounts of advances are 
unknown, creditors must make disclosures based on estimates, as provided 
in Sec. 226.17(c)(2). If the advances are disclosed separately, 
disclosures must be provided before each advance occurs, with the 
disclosures for the first advance provided by consummation.
    2. Construction loans. Section 226.17(c)(6)(ii) provides a flexible 
rule for disclosure of construction loans that may be permanently 
financed. These transactions have 2 distinct phases, similar to 2 
separate transactions. The construction loan may be for initial 
construction or subsequent construction, such as rehabilitation or 
remodelling. The construction period usually involves several 
disbursements of funds at times and in amounts that are unknown at the 
beginning of that period, with the consumer paying only accrued interest 
until construction is completed. Unless the obligation is paid at that 
time, the loan then converts to permanent financing in which the loan 
amount is amortized just as in a standard mortgage transaction. Section 
226.17(c)(6)(ii) permits the creditor to give either one combined 
disclosure for both the construction financing and the permanent 
financing, or a separate set of disclosures for the 2 phases. This rule 
is available whether the consumer is initially obligated to accept 
construction financing only or is obligated to accept both construction 
and permanent financing from the outset. If the consumer is obligated on 
both phases and the creditor chooses to give 2 sets of disclosures, both 
sets must be given to the consumer initially, because both transactions 
would be consummated at that time. (appendix D provides a method of 
calculating the annual percentage rate and other disclosures for 
construction loans, which may be used, at the creditor's option, in 
disclosing construction financing.)
    3. Multiple-advance construction loans. Section 226.17(c)(6)(i) and 
(ii) are not mutually exclusive. For example, in a transaction that 
finances the construction of a dwelling that may be permanently financed 
by the same creditor, the construction phase may consist of a series of 
advances under an agreement to extend credit up to a certain amount. In 
these cases, the creditor may disclose the construction phase as either 
1 or more than 1 transaction and also disclose the permanent financing 
as a separate transaction.
    4. Residential mortgage transaction. See the commentary to Sec. 
226.2(a)(24) for a discussion of the effect of Sec. 226.17(c)(6) on the 
definition of a residential mortgage transaction.
    5. Allocation of points. When a creditor utilizes the special rule 
in Sec. 226.17(c)(6) to disclose credit extensions as multiple 
transactions, buyers points or similar amounts imposed on the consumer 
must be allocated for purposes of calculating disclosures. While such 
amounts should not be taken into account more than once in making 
calculations, they may be allocated between the transactions in any 
manner the creditor chooses. For example, if a construction-permanent 
loan is subject to 5 points imposed on the consumer and the creditor 
chooses to disclose the 2 phases separately, the 5 points may be 
allocated entirely to the construction loan, entirely to the permanent 
loan, or divided in any manner between the two. However, the entire 5 
points may not be applied twice, that is, to both the construction and 
the permanent phases.
    17(d) Multiple creditors; multiple consumers.
    1. Multiple creditors. If a credit transaction involves more than 
one creditor:

 The creditors must choose which of them will make the 
disclosures.
 A single, complete set of disclosures must be 
provided, rather than partial disclosures from several creditors.
 All disclosures for the transaction must be given, 
even if the disclosing creditor would not otherwise have been obligated 
to make a particular disclosure. For example, if one of the creditors is 
the seller, the total sale price disclosure under Sec. 226.18(j) must 
be made, even though the disclosing creditor is not the seller.

    2. Multiple consumers. When two consumers are joint obligors with 
primary liability on an obligation, the disclosures may be given to 
either one of them. If one consumer is merely a surety or guarantor, the 
disclosures must be given to the principal debtor. In rescindable 
transactions, however, separate disclosures must be given to each 
consumer who has the right to rescind under Sec. 226.23, although the 
disclosures required under Sec. 226.19(b) need only be provided to the 
consumer who expresses an interest in a variable-rate loan program.
    17(e) Effect of subsequent events.
    1. Events causing inaccuracies. Inaccuracies in disclosures are not 
violations if attributable to events occurring after the disclosures are 
made. For example, when the consumer fails to fulfill a prior commitment 
to keep the collateral insured and the creditor then provides the 
coverage and charges the consumer for it, such a change does not make 
the original disclosures inaccurate. The creditor may, however, be 
required to make new disclosures under Sec. 226.17(f) or Sec. 226.19 
if the events occurred between disclosure and consummation or under 
Sec. 226.20 if the events occurred after consummation.
    17(f) Early disclosures.

[[Page 551]]

    1. Change in rate or other terms. Redisclosure is required for 
changes that occur between the time disclosures are made and 
consummation if the annual percentage rate in the consummated 
transaction exceeds the limits prescribed in this section, even if the 
initial disclosures would be considered accurate under the tolerances in 
Sec. 226.18(d) or 226.22(a). To illustrate:
    i. General. A. If disclosures are made in a regular transaction on 
July 1, the transaction is consummated on July 15, and the actual annual 
percentage rate varies by more than \1/8\ of 1 percentage point from the 
disclosed annual percentage rate, the creditor must either redisclose 
the changed terms or furnish a complete set of new disclosures before 
consummation. Redisclosure is required even if the disclosures made on 
July 1 are based on estimates and marked as such.
    B. In a regular transaction, if early disclosures are marked as 
estimates and the disclosed annual percentage rate is within \1/8\ of 1 
percentage point of the rate at consummation, the creditor need not 
redisclose the changed terms (including the annual percentage rate).
    ii. Nonmortgage loan. If disclosures are made on July 1, the 
transaction is consummated on July 15, and the finance charge increased 
by $35 but the disclosed annual percentage rate is within the permitted 
tolerance, the creditor must at least redisclose the changed terms that 
were not marked as estimates. (See Sec. 226.18(d)(2) of this part.)
    iii. Mortgage loan. At the time TILA disclosures are prepared in 
July, the loan closing is scheduled for July 31 and the creditor does 
not plan to collect per-diem interest at consummation. Consummation 
actually occurs on August 5, and per-diem interest for the remainder of 
August is collected as a prepaid finance charge. Assuming there were no 
other changes requiring redisclosure, the creditor may rely on the 
disclosures prepared in July that were accurate when they were prepared. 
However, if the creditor prepares new disclosures in August that will be 
provided at consummation, the new disclosures must take into account the 
amount of the per-diem interest known to the creditor at that time.

    2. Variable rate. The addition of a variable rate feature to the 
credit terms, after early disclosures are given, requires new 
disclosures.
    3. Content of new disclosures. If redisclosure is required, the 
creditor has the option of either providing a complete set of new 
disclosures, or providing disclosures of only the terms that vary from 
those originally disclosed. (See the commentary to Sec. 226.19(a)(2).)
    4. Special rules. In residential mortgage transactions subject to 
Sec. 226.19, the creditor must redisclose if, between the delivery of 
the required early disclosures and consummation, the annual percentage 
rate changes by more than a stated tolerance. When subsequent events 
occur after consummation, new disclosures are required only if there is 
a refinancing or an assumption within the meaning of Sec. 226.20.
    Paragraph 17(f)(2).
    1. Irregular transactions. For purposes of this paragraph, a 
transaction is deemed to be ``irregular'' according to the definition in 
footnote 46 of Sec. 226.22(a)(3).
    17(g) Mail or telephone orders--delay in disclosures.
    1. Conditions for use. When the creditor receives a mail or 
telephone request for credit, the creditor may delay making the 
disclosures until the first payment is due if the following conditions 
are met:

     The credit request is initiated without face-to-
face or direct telephone solicitation. (Creditors may, however, use the 
special rule when credit requests are solicited by mail.)
     The creditor has supplied the specified credit 
information about its credit terms either to the individual consumer or 
to the public generally. That information may be distributed through 
advertisements, catalogs, brochures, special mailers, or similar means.

    2. Insurance. The location requirements for the insurance 
disclosures under Sec. 226.18(n) permit them to appear apart from the 
other disclosures. Therefore, a creditor may mail an insurance 
authorization to the consumer and then prepare the other disclosures to 
reflect whether or not the authorization is completed by the consumer. 
Creditors may also disclose the insurance cost on a unit-cost basis, if 
the transaction meets the requirements of Sec. 226.17(g).
    17(h) Series of sales--delay in disclosures.
    1. Applicability. The creditor may delay the disclosures for 
individual credit sales in a series of such sales until the first 
payment is due on the current sale, assuming the 2 conditions in this 
paragraph are met. If those conditions are not met, the general timing 
rules in Sec. 266.17(b) apply.
    2. Basis of disclosures. Creditors structuring disclosures for a 
series of sales under Sec. 226.17(h) may compute the total sale price 
as either:

 The cash price for the sale plus that portion of the 
finance charge and other charges applicable to that sale; or
 The cash price for the sale, other charges applicable 
to the sale, and the total finance charge and outstanding principal.

    17(i) Interim student credit extensions.
    1. Definition. Student credit plans involve extensions of credit for 
education purposes where the repayment amount and schedule are not known 
at the time credit is advanced. These plans include loans made

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under any student credit plan, whether government or private, where the 
repayment period does not begin immediately. (Certain student credit 
plans that meet this definition are exempt from Regulation Z. See Sec. 
226.3(f).) Creditors in interim student credit extensions need not 
disclose the terms set forth in this paragraph at the time the credit is 
actually extended but must make complete disclosures at the time the 
creditor and consumer agree upon the repayment schedule for the total 
obligation. At that time, a new set of disclosures must be made of all 
applicable items under Sec. 226.18.
    2. Basis of disclosures. The disclosures given at the time of 
execution of the interim note should reflect two annual percentage 
rates, one for the interim period and one for the repayment period. The 
use of Sec. 226.17(i) in making disclosures does not, by itself, make 
those disclosures estimates. Any portion of the finance charge, such as 
statutory interest, that is attributable to the interim period and is 
paid by the student (either as a prepaid finance charge, periodically 
during the interim period, in one payment at the end of the interim 
period, or capitalized at the beginning of the repayment period) must be 
reflected in the interim annual percentage rate. Interest subsidies, 
such as payments made by either a state or the Federal government on an 
interim loan, must be excluded in computing the annual percentage rate 
on the interim obligation, when the consumer has no contingent liability 
for payment of those amounts. Any finance charges that are paid 
separately by the student at the outset or withheld from the proceeds of 
the loan are prepaid finance charges. An example of this type of charge 
is the loan guarantee fee. The sum of the prepaid finance charges is 
deducted from the loan proceeds to determine the amount financed and 
included in the calculation of the finance charge.
    3. Consolidation. Consolidation of the interim student credit 
extensions through a renewal note with a set repayment schedule is 
treated as a new transaction with disclosures made as they would be for 
a refinancing. Any unearned portion of the finance charge must be 
reflected in the new finance charge and annual percentage rate, and is 
not added to the new amount financed. In itemizing the amount financed 
under Sec. 226.18(c), the creditor may combine the principal balances 
remaining on the interim extensions at the time of consolidation and 
categorize them as the amount paid on the consumer's account.
    4. Approved student credit forms. See the commentary to appendix H 
regarding disclosure forms approved for use in certain student credit 
programs.

                               References

    Statute: Sections 121, 122, 124, and 128, and the Higher Education 
Act of 1965 (20 U.S.C. 1071) as amended by Pub. L. 97-35, August 13, 
1981.
    Other sections: Section 226.2 and appendix H.
    Previous regulation: Sections 226.6 and 226.8.
    1981 changes: With few exceptions, the disclosures must now appear 
apart from all other information, and may not be interspersed with that 
information. The disclosures must be based on the legal obligation 
between the parties, rather than any side agreement.
    The assumed maturity period for demand loans has been increased from 
6 months to 1 year. Any alternate maturity date must be stated in the 
legal obligation rather than inferred from the documents, in order to 
form a basis for disclosures.
    In multiple-advance transactions, a series of advances up to a 
certain amount and construction loans that may be permanently financed 
may be disclosed, at the creditor's option, as either a single 
transaction or several transactions. Appendix D is applicable only to 
multiple advances for the construction of a dwelling, whereas its 
predecessor, Interpretation Sec. 226.813, could be used for all 
multiple-advance transactions.
    If disclosures are made before the date of consummation, the 
creditor need not provide updated disclosures at consummation unless the 
annual percentage rate has changed beyond certain limits or a variable 
rate feature has been added.

                 Section 226.18--Content of Disclosures

    1. As applicable. The disclosures required by this section need be 
made only as applicable. Any disclosure not relevant to a particular 
transaction may be eliminated entirely. For example:

     In a loan transaction, the creditor may delete 
disclosure of the total sale price.
     In a credit sale requiring disclosure of the 
total sale price under Sec. 226.18(j), the creditor may delete any 
reference to a downpayment where no downpayment is involved.

    Where the amounts of several numerical disclosures are the same, the 
``as applicable'' language also permits creditors to combine the terms, 
so long as it is done in a clear and conspicuous manner. For example:

     In a transaction in which the amount financed 
equals the total of payments, the creditor may disclose ``amount 
financed/total of payments,'' together with descriptive language, 
followed by a single amount.
     However, if the terms are separated on the 
disclosure statement and separate space is provided for each amount, 
both disclosures must be completed, even though the same amount is 
entered in each space.

    2. Format. See the commentary to Sec. 226.17 and appendix H for a 
discussion of the format to be used in making these disclosures, as well 
as acceptable modifications.

[[Page 553]]

    18(a) Creditor.
    1. Identification of creditor. The creditor making the disclosures 
must be identified. This disclosure may, at the creditor's option, 
appear apart from the other disclosures. Use of the creditor's name is 
sufficient, but the creditor may also include an address and/or 
telephone number. In transactions with multiple creditors, any one of 
them may make the disclosures; the one doing so must be identified.
    18(b) Amount financed.
    1. Disclosure required. The net amount of credit extended must be 
disclosed using the term amount financed and a descriptive explanation 
similar to the phrase in the regulation.
    2. Rebates and loan premiums. In a loan transaction, the creditor 
may offer a premium in the form of cash or merchandise to prospective 
borrowers. Similarly, in a credit sale transaction, a seller's or 
manufacturer's rebate may be offered to prospective purchasers of the 
creditor's goods or services. At the creditor's option, these amounts 
may be either reflected in the Truth in Lending disclosures or 
disregarded in the disclosures. If the creditor chooses to reflect them 
in the Sec. 226.18 disclosures, rather than disregard them, they may be 
taken into account in any manner as part of those disclosures.
    Paragraph 18(b)(1).
    1. Downpayments. A downpayment is defined in Sec. 226.2(a)(18) to 
include, at the creditor's option, certain deferred downpayments or 
pick-up payments. A deferred downpayment that meets the criteria set 
forth in the definition may be treated as part of the downpayment, at 
the creditor's option.

     Deferred downpayments that are not treated as 
part of the downpayment (either because they do not meet the definition 
or because the creditor simply chooses not to treat them as 
downpayments) are included in the amount financed.
     Deferred downpayments that are treated as part of 
the downpayment are not part of the amount financed under Sec. 
226.18(b)(1).

    Paragraph 18(b)(2).
    1. Adding other amounts. Fees or other charges that are not part of 
the finance charge and that are financed rather than paid separately at 
consummation of the transaction are included in the amount financed. 
Typical examples are real estate settlement charges and premiums for 
voluntary credit life and disability insurance excluded from the finance 
charge under Sec. 226.4. This paragraph does not include any amounts 
already accounted for under Sec. 226.18(b)(1), such as taxes, tag and 
title fees, or the costs of accessories or service policies that the 
creditor includes in the cash price.
    Paragraph 18(b)(3).
    1. Prepaid finance charges. Prepaid finance charges that are paid 
separately in cash or by check should be deducted under Sec. 
226.18(b)(3) in calculating the amount financed. To illustrate:
     A consumer applies for a loan of $2,500 with a 
$40 loan fee. The face amount of the note is $2,500 and the consumer 
pays the loan fee separately by cash or check at closing. The principal 
loan amount for purposes of Sec. 226.18(b)(1) is $2,500 and $40 should 
be deducted under Sec. 226.18(b(3), thereby yielding an amount financed 
of $2,460.
    In some instances, as when loan fees are financed by the creditor, 
finance charges are incorporated in the face amount of the note. 
Creditors have the option, when the charges are not add-on or discount 
charges, of determining a principal loan amount under Sec. 226.18(b)(1) 
that either includes or does not include the amount of the finance 
charges. (Thus the principal loan amount may, but need not, be 
determined to equal the face amount of the note.) When the finance 
charges are included in the principal loan amount, they should be 
deducted as prepaid finance charges under Sec. 226.18(b)(3). When the 
finance charges are not included in the principal loan amount, they 
should not be deducted under Sec. 226.18(b)(3). The following examples 
illustrate the application of Sec. 226.18(b) to this type of 
transaction. Each example assumes a loan request of $2,500 with a loan 
fee of $40; the creditor assesses the loan fee by increasing the face 
amount of the note to $2,540.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,540, it has included the loan 
fee in the principal loan amount and should deduct $40 as a prepaid 
finance charge under Sec. 226.18(b)(3), thereby obtaining an amount 
financed of $2,500.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,500, it has not included the 
loan fee in the principal loan amount and should not deduct any amount 
under Sec. 226.18(b)(3), thereby obtaining an amount financed of 
$2,500.
The same rules apply when the creditor does not increase the face amount 
of the note by the amount of the charge but collects the charge by 
withholding it from the amount advanced to the consumer. To illustrate, 
the following examples assume a loan request of $2,500 with a loan fee 
of $40; the creditor prepares a note for $2,500 and advances $2,460 to 
the consumer.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,500, it has included the loan 
fee in the principal loan amount and should deduct $40 as a prepaid 
finance charge under Sec. 226.18(b)(3), thereby obtaining an amount 
financed of $2,460.
     If the creditor determines the principal loan 
amount under Sec. 226.18(b)(1) to be $2,460, it has not included the 
loan fee in the principal loan amount and should not deduct any amount 
under Sec. 226.18(b)(3), thereby obtaining an amount financed of 
$2,460.

[[Page 554]]

Thus in the examples where the creditor derives the net amount of credit 
by determining a principal loan amount that does not include the amount 
of the finance charge, no subtraction is appropriate. Creditors should 
note, however, that although the charges are not subtracted as prepaid 
finance charges in those examples, they are nonetheless finance charges 
and must be treated as such.
    2. Add-on or discount charges. All finance charges must be deducted 
from the amount of credit in calculating the amount financed. If the 
principal loan amount reflects finance charges that meet the definition 
of a prepaid finance charge in Sec. 226.2, those charges are included 
in the Sec. 226.18(b)(1) amount and deducted under Sec. 226.18(b)(3). 
However, if the principal loan amount includes finance charges that do 
not meet the definition of a prepaid finance charge, the Sec. 
226.18(b)(1) amount must exclude those finance charges. The following 
examples illustrate the application of Sec. 226.18(b) to these types of 
transactions. Each example assumes a loan request of $1000 for 1 year, 
subject to a 6 percent precomputed interest rate, with a $10 loan fee 
paid separately at consummation.

     The creditor assesses add-on interest of $60 
which is added to the $1000 in loan proceeds for an obligation with a 
face amount of $1060. The principal for purposes of Sec. 226.18(b)(1) 
is $1000, no amounts are added under Sec. 226.18(b)(2), and the $10 
loan fee is a prepaid finance charge to be deducted under Sec. 
226.18(b)(3). The amount financed is $990.
     The creditor assesses discount interest of $60 
and distributes $940 to the consumer, who is liable for an obligation 
with a face amount of $1000. The principal under Sec. 226.18(b)(1) is 
$940, which results in an amount financed of $930, after deduction of 
the $10 prepaid finance charge under Sec. 226.18(b)(3).
     The creditor assesses $60 in discount interest by 
increasing the face amount of the obligation to $1060, with the consumer 
receiving $1000. The principal under Sec. 226.18(b)(1) is thus $1000 
and the amount financed $990, after deducting the $10 prepaid finance 
charge under Sec. 226.18(b)(3).

    18(c) Itemization of amount financed.
    1. Disclosure required. The creditor has 2 alternatives in complying 
with Sec. 226.18(c):

     The creditor may inform the consumer, on the 
segregated disclosures, that a written itemization of the amount 
financed will be provided on request, furnishing the itemization only if 
the customer in fact requests it.
     The creditor may provide an itemization as a 
matter of course, without notifying the consumer of the right to receive 
it or waiting for a request.

    Whether given as a matter of course or only on request, the 
itemization must be provided at the same time as the other disclosures 
required by Sec. 226.18, although separate from those disclosures.
    2. Additional information. Section 226.18(c) establishes only a 
minimum standard for the material to be included in the itemization of 
the amount financed. Creditors have considerable flexibility in revising 
or supplementing the information listed in Sec. 226.18(c) and shown in 
model form H-3, although no changes are required. The creditor may, for 
example, do one or more of the following:
    i. Include amounts that reflect payments not part of the amount 
financed. For example, escrow items and certain insurance premiums may 
be included, as discussed in the commentary to Sec. 226.18(g).
    ii. Organize the categories in any order. For example, the creditor 
may rearrange the terms in a mathematical progression that depicts the 
arithmetic relationship of the terms.
    iii. Add categories. For example, in a credit sale, the creditor may 
include the cash price and the downpayment. If the credit sale involves 
a trade-in of the consumer's car and an existing lien on that car 
exceeds the value of the trade-in amount, the creditor may disclose the 
consumer's trade-in value, the creditor's payoff of the existing lien, 
and the resulting additional amount financed.
    iv. Further itemize each category. For example, the amount paid 
directly to the consumer may be subdivided into the amount given by 
check and the amount credited to the consumer's savings account.
    v. Label categories with different language from that shown in Sec. 
226.18(c). For example, an amount paid on the consumer's account may be 
revised to specifically identify the account as ``your auto loan with 
us.''
    vi. Delete, leave blank, mark ``N/A'' or otherwise not inapplicable 
categories in the itemization. For example, in a credit sale with no 
prepaid finance charges or amounts paid to others, the amount financed 
may consist of only the cash price less downpayment. In this case, the 
itemization may be composed of only a single category and all other 
categories may be eliminated.

    3. Amounts appropriate to more than one category. When an amount may 
appropriately be placed in any of several categories and the creditor 
does not wish to revise the categories shown in Sec. 226.18(c), the 
creditor has considerable flexibility in determining where to show the 
amount. For example:

     In a credit sale, the portion of the purchase 
price being financed by the creditor may be viewed as either an amount 
paid to the consumer or an amount paid on the consumer's account.

    4. RESPA transactions. The Real Estate Settlement Procedures Act 
(RESPA) requires creditors to provide a good faith estimate of closing 
costs and a settlement statement

[[Page 555]]

listing the amounts paid by the consumer. Transactions subject to RESPA 
are exempt from the requirements of Sec. 226.18(c) if the creditor 
complies with RESPA's requirements for a good faith estimate and 
settlement statement. The itemization of the amount financed need not be 
given, even though the content and timing of the good faith estimate and 
settlement statement under RESPA differ from the requirements of 
Sec. Sec. 226.18(c) and 226.19(a)(2). If a creditor chooses to 
substitute RESPA's settlement statement for the itemization when 
redisclosure is required under Sec. 226.19(a)(2), the statement must be 
delivered to the consumer at or prior to consummation. The disclosures 
required by Sec. Sec. 226.18(c) and 226.19(a)(2) may appear on the same 
page or on the same document as the good faith estimate or the 
settlement statement, so long as the requirements of Sec. 226.17(a) are 
met.
    Paragraph 18(c)(1)(i).
    1. Amounts paid to consumer. This encompasses funds given to the 
consumer in the form of cash or a check, including joint proceeds 
checks, as well as funds placed in an asset account. It may include 
money in an interest-bearing account even if that amount is considered a 
required deposit under Sec. 226.18(r). For example, in a transaction 
with total loan proceeds of $500, the consumer receives a check for $300 
and $200 is required by the creditor to be put into an interest-bearing 
account. Whether or not the $200 is a required deposit, it is part of 
the amount financed. At the creditor's option, it may be broken out and 
labeled in the itemization of the amount financed.
    Paragraph 18(c)(1)(ii).
    1. Amounts credited to consumer's account. The term consumer's 
account refers to an account in the nature of a debt with that creditor. 
It may include, for example, an unpaid balance on a prior loan, a credit 
sale balance or other amounts owing to that creditor. It does not 
include asset accounts of the consumer such as savings or checking 
accounts.
    Paragraph 18(c)(1)(iii).
    1. Amounts paid to others. This includes, for example, tag and title 
fees; amounts paid to insurance companies for insurance premiums; 
security interest fees, and amounts paid to credit bureaus, appraisers 
or public officials. When several types of insurance premiums are 
financed, they may, at the creditor's option, be combined and listed in 
one sum, labeled ``insurance'' or similar term. This includes, but is 
not limited to, different types of insurance premiums paid to one 
company and different types of insurance premiums paid to different 
companies. Except for insurance companies and other categories noted in 
footnote 41, third parties must be identified by name.
    2. Charges added to amounts paid to others. A sum is sometimes added 
to the amount of a fee charged to a consumer for a service provided by a 
third party (such as for an extended warranty or a service contract) 
that is payable in the same amount in comparable cash and credit 
transactions. In the credit transaction, the amount is retained by the 
creditor. Given the flexibility permitted in meeting the requirements of 
the amount financed itemization (see the commentary to Sec. 226.18(c)), 
the creditor in such cases may reflect that the creditor has retained a 
portion of the amount paid to others. For example, the creditor could 
add to the category ``amount paid to others'' language such as ``(we may 
be retaining a portion of this amount).''
    Paragraph 18(c)(1)(iv).
    1. Prepaid finance charge. Prepaid finance charges that are deducted 
under Sec. 226.18(b)(3) must be disclosed under this section. The 
prepaid finance charges must be shown as a total amount but may, at the 
creditor's option, also be further itemized and described. All amounts 
must be reflected in this total, even if portions of the prepaid finance 
charge are also reflected elsewhere. For example, if at consummation the 
creditor collects interim interest of $30 and a credit report fee of 
$10, a total prepaid finance charge of $40 must be shown. At the 
creditor's option, the credit report fee paid to a third party may also 
be shown elsewhere as an amount included in Sec. 226.18(c)(1)(iii). The 
creditor may also further describe the 2 components of the prepaid 
finance charge, although no itemization of this element is required by 
Sec. 226.18(c)(1)(iv).
    2. Prepaid mortgage insurance premiums. RESPA requires creditors to 
give consumers a settlement statement disclosing the costs associated 
with mortgage loan transactions. Included on the settlement statement 
are mortgage insurance premiums collected at settlement, which are 
prepaid finance charges. In calculating the total amount of prepaid 
finance charges, creditors should use the amount for mortgage insurance 
listed on the line for mortgage insurance on the settlement statement 
(line 1002 on HUD-1 or HUD 1-A), without adjustment, even if the actual 
amount collected at settlement may vary because of RESPA's escrow 
accounting rules. Figures for mortgage insurance disclosed in 
conformance with RESPA shall be deemed to be accurate for purposes of 
Regulation Z.
    18(d) Finance charge.
    1. Disclosure required. The creditor must disclose the finance 
charge as a dollar amount, using the term finance charge, and must 
include a brief description similar to that in Sec. 226.18(d). The 
creditor may, but need not, further modify the descriptor for variable 
rate transactions with a phrase such as which is subject to change. The 
finance charge must be shown on the disclosures only as a total amount; 
the elements of the finance

[[Page 556]]

charge must not be itemized in the segregated disclosures, although the 
regulation does not prohibit their itemization elsewhere.
    2. [Reserved]
    18(d)(2) Other credit.
    1. Tolerance. When a finance charge error results in a misstatement 
of the amount financed, or some other dollar amount for which the 
regulation provides no specific tolerance, the misstated disclosure does 
not violate the act or the regulation if the finance charge error is 
within the permissible tolerance under this paragraph.
    18(e) Annual percentage rate.
    1. Disclosure required. The creditor must disclose the cost of the 
credit as an annual rate, using the term annual percentage rate, plus a 
brief descriptive phrase comparable to that used in Sec. 226.18(e). For 
variable rate transactions, the descriptor may be further modified with 
a phrase such as which is subject to change. Under Sec. 226.17(a), the 
terms annual percentage rate and finance charge must be more conspicuous 
than the other required disclosures.
    2. Exception. Footnote 42 provides an exception for certain 
transactions in which no annual percentage rate disclosure is required.
    18(f) Variable rate.
    1. Coverage. The requirements of Sec. 226.18(f) apply to all 
transactions in which the terms of the legal obligation allow the 
creditor to increase the rate originally disclosed to the consumer. It 
includes not only increases in the interest rate but also increases in 
other components, such as the rate of required credit life insurance. 
The provisions, however, do not apply to increases resulting from 
delinquency (including late payment), default, assumption, acceleration 
or transfer of the collateral. Section 226.18(f)(1) applies to variable-
rate transactions that are not secured by the consumer's principal 
dwelling and to those that are secured by the principal dwelling but 
have a term of one year or less. Section 226.18(f)(2) applies to 
variable-rate transactions that are secured by the consumer's principal 
dwelling and have a term greater than one year. Moreover, transactions 
subject to Sec. 226.18(f)(2) are subject to the special early 
disclosure requirements of Sec. 226.19(b). (However, ``shared-equity'' 
or ``shared-appreciation'' mortgages are subject to the disclosure 
requirements of Sec. 226.18(f)(1) and not to the requirements of 
Sec. Sec. 226.18(f)(2) and 226.19(b) regardless of the general coverage 
of those sections.) Creditors are permitted under footnote 43 to 
substitute in any variable-rate transaction the disclosures required 
under Sec. 226.19(b) for those disclosures ordinarily required under 
226.18(f)(1). Creditors who provide variable-rate disclosures under 
Sec. 226.19(b) must comply with all of the requirements of that 
section, including the timing of disclosures, and must also provide the 
disclosures required under Sec. 226.18(f)(2). Creditors utilizing 
footnote 43 may, but need not, also provide disclosures pursuant to 
Sec. 226.20(c). (Substitution of disclosures under Sec. 226.18(f)(1) 
in transactions subject to Sec. 226.19(b) is not permitted under the 
footnote.)
    Paragraph 18(f)(1).
    1. Terms used in disclosure. In describing the variable rate 
feature, the creditor need not use any prescribed terminology. For 
example, limitations and hypothetical examples may be described in terms 
of interest rates rather than annual percentage rates. The model forms 
in appendix H provide examples of ways in which the variable rate 
disclosures may be made.
    2. Conversion feature. In variable-rate transactions with an option 
permitting consumers to convert to a fixed-rate transaction, the 
conversion option is a variable-rate feature that must be disclosed. In 
making disclosures under Sec. 226.18(f)(1), creditors should disclose 
the fact that the rate may increase upon conversion; identify the index 
or formula used to set the fixed rate; and state any limitations on and 
effects of an increase resulting from conversion that differ from other 
variable-rate features. Because Sec. 226.18(f)(1)(iv) requires only one 
hypothetical example (such as an example of the effect on payments 
resulting from changes in the index), a second hypothetical example need 
not be given.
    Paragraph 18(f)(1)(i).
    1. Circumstances. The circumstances under which the rate may 
increase include identification of any index to which the rate is tied, 
as well as any conditions or events on which the increase is contingent.

     When no specific index is used, any identifiable 
factors used to determine whether to increase the rate must be 
disclosed.
     When the increase in the rate is purely 
discretionary, the fact that any increase is within the creditor's 
discretion must be disclosed.
     When the index is internally defined (for 
example, by that creditor's prime rate), the creditor may comply with 
this requirement by either a brief description of that index or a 
statement that any increase is in the discretion of the creditor. An 
externally defined index, however, must be identified.

    Paragraph 18(f)(1)(ii).
    1. Limitations. This includes any maximum imposed on the amount of 
an increase in the rate at any time, as well as any maximum on the total 
increase over the life of the transaction. When there are no 
limitations, the creditor may, but need not, disclose that fact. 
Limitations do not include legal limits in the nature of usury or rate 
ceilings under state or federal statutes or regulations. (See Sec. 
226.30 for the rule requiring that a maximum interest rate be included 
in certain variable-rate transactions.)

[[Page 557]]

    Paragraph 18(f)(1)(iii).
    1. Effects. Disclosure of the effect of an increase refers to an 
increase in the number or amount of payments or an increase in the final 
payment. In addition, the creditor may make a brief reference to 
negative amortization that may result from a rate increase. (See the 
commentary to Sec. 226.17(a)(1) regarding directly related 
information.) If the effect cannot be determined, the creditor must 
provide a statement of the possible effects. For example, if the 
exercise of the variable-rate feature may result in either more or 
larger payments, both possibilities must be noted.
    Paragraph 18(f)(1)(iv).
    1. Hypothetical example. The example may, at the creditor's option 
appear apart from the other disclosures. The creditor may provide either 
a standard example that illustrates the terms and conditions of that 
type of credit offered by that creditor or an example that directly 
reflects the terms and conditions of the particular transaction. In 
transactions with more than one variable-rate feature, only one 
hypothetical example need be provided. (See the commentary to section 
226.17(a)(1) regarding disclosure of more than one hypothetical example 
as directly related information.)
    2. Hypothetical example not required. The creditor need not provide 
a hypothetical example in the following transactions with a variable-
rate feature:

 Demand obligations with no alternate maturity date.
 Interim student credit extensions.
 Multiple-advance construction loans disclosed 
pursuant to appendix D, Part I.
    Paragraph 18(f)(2).
    1. Disclosure required. In variable-rate transactions that have a 
term greater than one year and are secured by the consumer's principal 
dwelling, the creditor must give special early disclosures under Sec. 
226.19(b) in addition to the later disclosures required under Sec. 
226.18(f)(2). The disclosures under Sec. 226.18(f)(2) must state that 
the transaction has a variable-rate feature and that variable-rate 
disclosures have been provided earlier. (See the commentary to Sec. 
226.17(a)(1) regarding the disclosure of certain directly related 
information in addition to the variable-rate disclosures required under 
Sec. 226.18(f)(2).)

    18(g) Payment schedule.
    1. Amounts included in repayment schedule. The repayment schedule 
should reflect all components of the finance charge, not merely the 
portion attributable to interest. A prepaid finance charge, however, 
should not be shown in the repayment schedule as a separate payment. The 
payments may include amounts beyond the amount financed and finance 
charge. For example, the disclosed payments may, at the creditor's 
option, reflect certain insurance premiums where the premiums are not 
part of either the amount financed or the finance charge, as well as 
real estate escrow amounts such as taxes added to the payment in mortage 
transactions.
    2. Deferred downpayments. As discussed in the commentary to Sec. 
226.2(a)(18), deferred downpayments or pick-up payments that meet the 
conditions set forth in the definition of downpayment may be treated as 
part of the downpayment. Even if treated as a downpayment, that amount 
may nevertheless be disclosed as part of the payment schedule, at the 
creditor's option.
    3. Total number of payments. In disclosing the number of payments 
for transactions with more than one payment level, creditors may but 
need not disclose as a single figure the total number of payments for 
all levels. For example, in a transaction calling for 108 payments of 
$350, 240 payments of $335, and 12 payments of $330, the creditor need 
not state that there will be a total of 360 payments.
    4. Timing of payments. i. General rule. Section 226.18(g) requires 
creditors to disclose the timing of payments. To meet this requirement, 
creditors may list all of the payment due dates. They also have the 
option of specifying the ``period of payments'' scheduled to repay the 
obligation. As a general rule, creditors that choose this option must 
disclose the payment intervals or frequency, such as ``monthly''or ``bi-
weekly,'' and the calendar date that the beginning payment is due. For 
example, a creditor may disclose that payments are due ``monthly 
beginning on July 1, 1998.'' This information, when combined with the 
number of payments, is necessary to define the repayment period and 
enable a consumer to determine all of the payment due dates.
    ii. Exception. In a limited number of circumstances, the beginning-
payment date is unknown and difficult to determine at the time 
disclosures are made. For example, a consumer may become obligated on a 
credit contract that contemplates the delayed disbursement of funds 
based on a contingent event, such as the completion of home repairs. 
Disclosures may also accompany loan checks that are sent by mail, in 
which case the initial disbursement and repayment dates are solely 
within the consumer's control. In such cases, if the beginning-payment 
date is unknown the creditor may use an estimated date and label the 
disclosure as an estimate pursuant to Sec. 226.17(c). Alternatively, 
the disclosure may refer to the occurrence of a particular event, for 
example, by disclosing that the beginning payment is due ``30 days after 
the first loan disbursement.'' This information also may be included 
with an estimated date to explain the basis for the creditor's estimate. 
See Comment 17(a)(1)-5(iii).
    5. Mortgage insurance. The payment schedule should reflect the 
consumer's mortgage

[[Page 558]]

insurance payments until the date on which the creditor must 
automatically terminate coverage under applicable law, even though the 
consumer may have a right to request that the insurance be cancelled 
earlier. The payment schedule must reflect the legal obligation, as 
determined by applicable state or other law. For example, assume that 
under applicable law, mortgage insurance must terminate after the 130th 
scheduled monthly payment, and the creditor collects at closing and 
places in escrow two months of premiums. If, under the legal obligation, 
the creditor will include mortgage insurance premiums in 130 payments 
and refund the escrowed payments when the insurance is terminated, the 
payment schedule should reflect 130 premium payments. If, under the 
legal obligation, the creditor will apply the amount escrowed to the two 
final insurance payments, the payment schedule should reflect 128 
monthly premium payments. (For assumptions in calculating a payment 
schedule that includes mortgage insurance that must be automatically 
terminated, see comments 17(c)(1)-8 and 17(c)(1)-10.)
    Paragraph 18(g)(1).
    1. Demand obligations. In demand obligations with no alternate 
maturity date, the creditor has the option of disclosing only the due 
dates or periods of scheduled interest payments in the first year (for 
example, ``interest payable quarterly'' or ``interest due the first of 
each month''). The amounts of the interest payments need not be shown.
    Paragraph 18(g)(2).
    1. Abbreviated disclosure. The creditor may disclose an abbreviated 
payment schedule when the amount of each regularly scheduled payment 
(other than the first or last payment) includes an equal amount to be 
applied on principal and a finance charge computed by application of a 
rate to the decreasing unpaid balance. This option is also available 
when mortgage-guarantee insurance premiums, paid either monthly or 
annually, cause variations in the amount of the scheduled payments, 
reflecting the continual decrease or increase in the premium due. In 
addition, in transactions where payments vary because interest and 
principal are paid at different intervals, the two series of payments 
may be disclosed separately and the abbreviated payment schedule may be 
used for the interest payments. For example, in transactions with fixed 
quarterly principal payments and monthly interest payments based on the 
outstanding principal balance, the amount of the interest payments will 
change quarterly as principal declines. In such cases the creditor may 
treat the interest and principal payments as two separate series of 
payments, separately disclosing the number, amount, and due dates of 
principal payments, and, using the abbreviated payment schedule, the 
number, amount, and due dates of interest payments. This option may be 
used when interest and principal are scheduled to be paid on the same 
date of the month as well as on different dates of the month. The 
creditor using this alternative must disclose the dollar amount of the 
highest and lowest payments and make reference to the variation in 
payments.
    2. Combined payment schedule disclosures. Creditors may combine the 
option in this paragraph with the general payment schedule requirements 
in transactions where only a portion of the payment schedule meets the 
conditions of Sec. 226.18(g)(2). For example, in a graduated payment 
mortgage where payments rise sharply for 5 years and then decline over 
the next 25 years because of decreasing mortgage insurance premiums, the 
first 5 years would be disclosed under the general rule in Sec. 
226.18(g) and the next 25 years according to the abbreviated schedule in 
Sec. 226.18(g)(2).
    3. Effect on other disclosures. Section 226.18(g)(2) applies only to 
the payment schedule disclosure. The actual amounts of payments must be 
taken into account in calculating and disclosing the finance charge and 
the annual percentage rate.
    Paragraph 18(h) Total of payments.
    1. Disclosure required. The total of payments must be disclosed 
using that term, along with a descriptive phrase similar to the one in 
the regulation. The descriptive explanation may be revised to reflect a 
variable rate feature with a brief phrase such as ``based on the current 
annual percentage rate which may change.''
    2. Calculation of total of payments. The total of payments is the 
sum of the payments disclosed under Sec. 226.18(g). For example, if the 
creditor disclosed a deferred portion of the downpayment as part of the 
payment schedule, that payment must be reflected in the total disclosed 
under this paragraph.
    3. Exception. Footnote 44 permits creditors to omit disclosure of 
the total of payments in single-payment transactions. This exception 
does not apply to a transaction calling for a single payment of 
principal combined with periodic payments of interest.
    4. Demand obligations. In demand obligations with no alternate 
maturity date, the creditor may omit disclosure of payment amounts under 
Sec. 226.18(g)(1). In those transactions, the creditor need not 
disclose the total of payments.
    Paragraph 18(i) Demand feature.
    1. Disclosure requirements. The disclosure requirements of this 
provision apply not only to transactions payable on demand from the 
outset, but also to transactions that are not payable on demand at the 
time of consummation but convert to a demand status after a stated 
period. In demand obligations in which the disclosures are based on an 
assumed maturity of 1 year under Sec. 226.17(c)(5), that fact must also 
be stated. Appendix H

[[Page 559]]

contains model clauses that may be used in making this disclosure.
    2. Covered demand features. The type of demand feature triggering 
the disclosures required by Sec. 226.18(i) includes only those demand 
features contemplated by the parties as part of the legal obligation. 
For example, this provision does not apply to transactions that covert 
to a demand status as a result of the consumer's default. A due-on-sale 
clause is not considered a demand feature. A creditor may, but need not, 
treat its contractual right to demand payment of a loan made to its 
executive officers as a demand feature to the extent that the 
contractual right is required by Regulation O (12 CFR 215.5) or other 
federal law.
    3. Relationship to payment schedule disclosures. As provided in 
Sec. 226.18(g)(1), in demand obligations with no alternate maturity 
date, the creditor need only disclose the due dates or payment periods 
of any scheduled interest payments for the first year. If the demand 
obligation states an alternate maturity, however, the disclosed payment 
schedule must reflect that stated term; the special rule in Sec. 
226.18(g)(1) is not available.
    Paragraph 18(j) Total sale price.
    1. Disclosure required. In a credit sale transaction, the total sale 
price must be disclosed using that term, along with a descriptive 
explanation similar to the one in the regulation. For variable rate 
transactions, the descriptive phrase may, at the creditor's option, be 
modified to reflect the variable rate feature. For example, the 
descriptor may read: ``The total cost of your purchase on credit, which 
is subject to change, including your downpayment of * * *.'' The 
reference to a downpayment may be eliminated in transactions calling for 
no downpayment.
    2. Calculation of total sale price. The figure to be disclosed is 
the sum of the cash price, other charges added under Sec. 226.18(b)(2), 
and the finance charge disclosed under Sec. 226.18(d).
    3. Effect of existing liens. When a credit sale transaction involves 
property that is being used as a trade-in (an automobile, for example) 
and that has a lien exceeding the value of the trade-in, the total sale 
price is affected by the amount of any cash provided. (See comment 
2(a)(18)-3.) To illustrate, assume a consumer finances the purchase of 
an automobile with a cash price of $20,000. Another vehicle used as a 
trade-in has a value of $8,000 but has an existing lien of $10,000, 
leaving a $2,000 deficit that the consumer must finance.
    i. If the consumer pays $1,500 in cash, the creditor may apply the 
cash first to the lien, leaving a $500 deficit, and reflect a 
downpayment of $0. The total sale price would include the $20,000 cash 
price, an additional $500 financed under Sec. 226.18(b)(2), and the 
amount of the finance charge. Alternatively, the creditor may reflect a 
downpayment of $1,500 and finance the $2,000 deficit. In that case, the 
total sale price would include the sum of the $20,000 cash price, the 
$2,000 lien payoff amount as an additional amount financed, and the 
amount of the finance charge.
    ii. If the consumer pays $3,000 in cash, the creditor may apply the 
cash first to extinguish the lien and reflect the remainder as a 
downpayment of $1,000. The total sale price would reflect the $20,000 
cash price and the amount of the finance charge. (The cash payment 
extinguishes the trade-in deficit and no charges are added under Sec. 
226.18(b)(2).) Alternatively, the creditor may elect to reflect a 
downpayment of $3,000 and finance the $2,000 deficit. In that case, the 
total sale price would include the sum of the $20,000 cash price, the 
$2,000 lien payoff amount as an additional amount financed, and the 
amount of the finance charge.
    Paragraph 18(k) Prepayment.
    1. Disclosure required. The creditor must give a definitive 
statement of whether or not a penalty will be imposed or a rebate will 
be given.

     The fact that no penalty will be imposed may not 
simply be inferred from the absence of a penalty disclosure; the 
creditor must indicate that prepayment will not result in a penalty.
     If a penalty or refund is possible for one type 
of prepayment, even though not for all, a positive disclosure is 
required. This applies to any type of prepayment, whether voluntary or 
involuntary as in the case of prepayments resulting from acceleration.
     Any difference in rebate or penalty policy, 
depending on whether prepayment is voluntary or not, must not be 
disclosed with the segregated disclosures.

    2. Rebate-penalty disclosure. A single transaction may involve both 
a precomputed finance charge and a finance charge computed by 
application of a rate to the unpaid balance (for example, mortgages with 
mortgage-guarantee insurance). In these cases, disclosures about both 
prepayment rebates and penalties are required. Sample form H-15 in 
appendix H illustrates a mortgage transaction in which both rebate and 
penalty disclosures are necessary.
    3. Prepaid finance charge. The existence of a prepaid finance charge 
in a transaction does not, by itself, require a disclosure under Sec. 
226.18(k). A prepaid finance charge is not considered a penalty under 
Sec. 226.18(k)(1), nor does it require a disclosure under Sec. 
226.18(k)(2). At its option, however, a creditor may consider a prepaid 
finance charge to be under Sec. 226.18(k)(2). If a disclosure is made 
under Sec. 226.18(k)(2) with respect to a prepaid finance charge or 
other finance charge, the creditor may further identify that finance 
charge. For example, the disclosure may state that the borrower ``will 
not be entitled to a refund of the prepaid finance

[[Page 560]]

charge'' or some other term that describes the finance charge.
    Paragraph 18(k)(1).
    1. Penalty. This applies only to those transactions in which the 
interest calculation takes account of all scheduled reductions in 
principal, as well as transactions in which interest calculations are 
made daily. The term penalty as used here encompasses only those charges 
that are assessed strictly because of the prepayment in full of a 
simple-interest obligation, as an addition to all other amounts. Items 
which are penalties include, for example:
     Interest charges for any period after prepayment 
in full is made. (See the commentary to Sec. 226.17(a)(1) regarding 
disclosure of interest charges assessed for periods after prepayment in 
full as directly related information.)
     A minimum finance charge in a simple-interest 
transaction. (See the commentary to Sec. 226.17(a)(1) regarding the 
disclosure of a minimum finance charge as directly related information.) 
Items which are not penalties include, for example:
     Loan guarantee fees
     Interim interest on a student loan
    Paragraph 18(k)(2).
    1. Rebate of finance charge. This applies to any finance charges 
that do not take account of each reduction in the principal balance of 
an obligation. This category includes, for example:

 Precomputed finance charges such as add-on charges.
 Charges that take account of some but not all 
reductions in principal, such as mortgage guarantee insurance assessed 
on the basis of an annual declining balance, when the principal is 
reduced on a monthly basis.

No description of the method of computing earned or unearned finance 
charges is required or permitted as part of the segregated disclosures 
under this section.
    Paragraph 18(l) Late payment.
    1. Definition. This paragraph requires a disclosure only if charges 
are added to individual delinquent installments by a creditor who 
otherwise considers the transaction ongoing on its original terms. Late 
payment charges do not include:

     The right of acceleration.
     Fees imposed for actual collection costs, such as 
repossession charges or attorney's fees.
     Deferral and extension charges.
     The continued accrual of simple interest at the 
contract rate after the payment due date. However, an increase in the 
interest rate is a late payment charge to the extent of the increase.

    2. Content of disclosure. Many state laws authorize the calculation 
of late charges on the basis of either a percentage or a specified 
dollar amount, and permit imposition of the lesser or greater of the 2 
charges. The disclosure made under Sec. 226.18(l) may reflect this 
alternative. For example, stating that the charge in the event of a late 
payment is 5% of the late amount, not to exceed $5.00, is sufficient. 
Many creditors also permit a grace period during which no late charge 
will be assessed; this fact may be disclosed as directly related 
information. (See the commentary to Sec. 226.17(a).)
    Paragraph 18(m) Security interest.
    1. Purchase money transactions. When the collateral is the item 
purchased as part of, or with the proceeds of, the credit transaction, 
section 226.18(m) requires only a general identification such as ``the 
property purchased in this transaction.'' However, the creditor may 
identify the property by item or type instead of identifying it more 
generally with a phrase such as ``the property purchased in this 
transaction.'' For example, a creditor may identify collateral as ``a 
motor vehicle,'' or as ``the property purchased in this transaction.'' 
Any transaction in which the credit is being used to purchase the 
collateral is considered a purchase money transaction and the 
abbreviated identification may be used, whether the obligation is 
treated as a loan or a credit sale.
    2. Nonpurchase money transactions. In nonpurchase money 
transactions, the property subject to the security interest must be 
identified by item or type. This disclosure is satisfied by a general 
disclosure of the category of property subject to the security interest, 
such as ``motor vehicles,'' ``securities,'' ``certain household items,'' 
or ``household goods.'' (Creditors should be aware, however, that the 
Federal credit practices rules, as well as some state laws, prohibit 
certain security interests in household goods.) At the creditor's 
option, however, a more precise identification of the property or goods 
may be provided.
    3. Mixed collateral. In some transactions in which the credit is 
used to purchase the collateral, the creditor may also take other 
property of the consumer as security. In those cases, a combined 
disclosure must be provided, consisting of an identification of the 
purchase money collateral consistent with comment 18(m)-1 and a specific 
identification of the other collateral consistent with comment 18(m)-2.
    4. After-acquired property. An after-acquired property clause is not 
a security interest to be disclosed under Sec. 226.18(m).
    5. Spreader clause. The fact that collateral for pre-existing credit 
with the institution is being used to secure the present obligation 
constitutes a security interest and must be disclosed. (Such security 
interests may be known as ``spreader'' or ``dragnet'' clauses, or as 
``cross-collateralization'' clauses.) A specific identification of that 
collateral is unnecessary but a reminder of the interest

[[Page 561]]

arising from the prior indebtedness is required. The disclosure may be 
made by using language such as ``collateral securing other loans with us 
may also secure this loan.'' At the creditor's option, a more specific 
description of the property involved may be given.
    6. Terms used in disclosure. No specified terminology is required in 
disclosing a security interest. Although the disclosure may, at the 
creditor's option, use the term security interest, the creditor may 
designate its interest by using, for example, pledge, lien, or mortgage.
    7. Collateral from third party. In certain transactions, the 
consumer's obligation may be secured by collateral belonging to a third 
party. For example, a loan to a student may be secured by an interest in 
the property of the student's parents. In such cases, the security 
interest is taken in connection with the transaction and must be 
disclosed, even though the property encumbered is owned by someone other 
than the consumer.
    18(n) Insurance and debt cancellation.
    1. Location. This disclosure may, at the creditor's option, appear 
apart from the other disclosures. It may appear with any other 
information, including the amount financed itemization, any information 
prescribed by state law, or other supplementary material. When this 
information is disclosed with the other segregated disclosures, however, 
no additional explanatory material may be included.
    2. Debt cancellation. Creditors may use the model credit insurance 
disclosures only if the debt cancellation coverage constitutes insurance 
under state law. Otherwise, they may provide a parallel disclosure that 
refers to debt cancellation coverage.
    Paragraph 18(o) Certain security interest charges.
    1. Format. No special format is required for these disclosures; 
under Sec. 226.4(e), taxes and fees paid to government officials with 
respect to a security interest may be aggregated, or may be broken down 
by individual charge. For example, the disclosure could be labelled 
``filing fees and taxes'' and all funds disbursed for such purposes may 
be aggregated in a single disclosure. This disclosure may appear, at the 
creditor's option, apart from the other required disclosures. The 
inclusion of this information on a statement required under the Real 
Estate Settlement Procedures Act is sufficient disclosure for purposes 
of Truth in Lending.
    Paragraph 18(p) Contract reference.
    1. Content. Creditors may substitute, for the phrase ``appropriate 
contract document,'' a reference to specific transaction documents in 
which the additional information is found, such as ``promissory note'' 
or ``retail installment sale contract.'' A creditor may, at its option, 
delete inapplicable items in the contract reference, as for example when 
the contract documents contain no information regarding the right of 
acceleration.
    Paragraph 18(q) Assumption policy.
    1. Policy statement. In many mortgages, the creditor cannot 
determine, at the time disclosure must be made, whether a loan may be 
assumable at a future date on its original terms. For example, the 
assumption clause commonly used in mortgages sold to the Federal 
National Mortgage Association and the Federal Home Loan Mortgage 
Corporation conditions an assumption on a variety of factors such as the 
creditworthiness of the subsequent borrower, the potential for 
impairment of the lender's security, and execution of an assumption 
agreement by the subsequent borrower. In cases where uncertainty exists 
as to the future assumability of a mortgage, the disclosure under Sec. 
226.18(q) should reflect that fact. In making disclosures in such cases, 
the creditor may use phrases such as ``subject to conditions,'' ``under 
certain circumstances,'' or ``depending on future conditions.'' The 
creditor may provide a brief reference to more specific criteria such as 
a due-on-sale clause, although a complete explanation of all conditions 
is not appropriate. For example, the disclosure may state, ``Someone 
buying your home may be allowed to assume the mortgage on its original 
terms, subject to certain conditions, such as payment of an assumption 
fee.'' See comment 17(a)(1)-5 for an example for a reference to a due-
on-sale clause.
    2. Original terms. The phrase original terms for purposes of Sec. 
226.18(q) does not preclude the imposition of an assumption fee, but a 
modification of the basic credit agreement, such as a change in the 
contract interest rate, represents different terms.
    Paragraph 18(r) Required deposit.
    1. Disclosure required. The creditor must inform the consumer of the 
existence of a required deposit. (appendix H provides a model clause 
that may be used in making that disclosure.) Footnote 45 describes 3 
types of deposits that need not be considered required deposits. Use of 
the phrase ``need not'' permits creditors to include the disclosure even 
in cases where there is doubt as to whether the deposit constitutes a 
required deposit.
    2. Pledged account mortgages. In these transactions, a consumer 
pledges as collateral funds that the consumer deposits in an account 
held by the creditor. The creditor withdraws sums from that account to 
supplement the consumer's periodic payments. Creditors may treat these 
pledged accounts as required deposits or they may treat them as consumer 
buydowns in accordance with the commentary to Sec. 226.17(c)(1).
    3. Escrow accounts. The escrow exception in footnote 45 applies, for 
example, to accounts for such items as maintenance fees, repairs, or 
improvements, whether in a realty or a nonrealty transaction. (See the 
commentary to Sec. 226.17(c)(1) regarding the use of escrow

[[Page 562]]

accounts in consumer buydown transactions.)
    4. Interest-bearing accounts. When a deposit earns at least 5 
percent interest per year, no disclosure is required under Sec. 
226.18(r). This exception applies whether the deposit is held by the 
creditor or by a third party.
    5. Morris Plan transactions. A deposit under a Morris Plan, in which 
a deposit account is created for the sole purpose of accumulating 
payments and this is applied to satisfy entirely the consumer's 
obligation in the transaction, is not a required deposit.
    6. Examples of amounts excluded. The following are among the types 
of deposits that need not be treated as required deposits:

     Requirement that a borrower be a customer or a 
member even if that involves a fee or a minimum balance.
     Required property insurance escrow on a mobile 
home transaction.
     Refund of interest when the obligation is paid in 
full.
     Deposits that are immediately available to the 
consumer.
     Funds deposited with the creditor to be disbursed 
(for example, for construction) before the loan proceeds are advanced.
     Escrow of condominium fees.
     Escrow of loan proceeds to be released when the 
repairs are completed.

                               References

    Statute: Section 128, the Garn-St Germain Depository Institutions 
Act of 1982 (Pub. L. 97-320) and the Real Estate Settlement Procedures 
Act (12 U.S.C. 2602).
    Other sections: Sections 226.2, 226.17, and appendix H.
    Other regulations: 12 CFR 545.6-2(a) and 12 CFR Part 29.
    Previous regulation: Sections 226.4 and 226.8.
    1981 changes: Five of the required disclosures must be explained to 
the consumer in a manner similar to the descriptive phrases shown in the 
regulation. A written itemization of the amount financed need not be 
provided unless the consumer requests it. The finance charge must be 
provided in all transactions, including real estate transactions, but 
must be shown only as a total amount. The disclosed finance charge is 
considered accurate if it is within a specified range.
    The variable rate hypothetical is required in all variable rate 
transactions and may be either general or transaction-specific. The 
penalty and rebate disclosures in the event of prepayment have been 
modified and combined. The requirement of an explanation of how the 
rebates or penalties are computed has been eliminated. The late payment 
disclosure has also been narrowed to include only charges imposed before 
maturity for late payments.
    The information required in the security interest disclosure has 
been decreased by the deletion of the type of security interest and a 
reduction in the property description requirement. The disclosure of the 
required deposit is limited to a statement that the annual percentage 
rate does not reflect the required deposit; the presence of a required 
deposit has no effect on the annual percentage rate.
    Two disclosure requirements have been added: A reference to the 
contract documents for additional information and, in a residential 
mortgage transaction, a statement of the creditor's assumption policy.

     Section 226.19--Certain Residential Mortgage and Variable-Rate 
                              Transactions

    Paragraph 19(a)(1) Time of disclosure.
    1. Coverage. This section requires early disclosure of credit terms 
in residential mortgage transactions that are also subject to the Real 
Estate Settlement Procedures Act (RESPA) and its implementing Regulation 
X, administered by the Department of Housing and Urban Development 
(HUD). To be covered by this section, a transaction must be both a 
residential mortgage transaction under Sec. 226.2(a) and a federally 
related mortgage loan under RESPA. ``Federally related mortgage loan'' 
is defined under RESPA (12 USC 2602) and Regulation X (24 CFR 
3500.5(b)), and is subject to any interpretations by HUD.
    2. Timing and use of estimates. Truth in Lending disclosures must be 
given (a) before consummation or (b) within three business days after 
the creditor receives the consumer's written application, whichever is 
earlier. The three-day period for disclosing credit terms coincides with 
the time period within which creditors subject to RESPA must provide 
good faith estimates of settlement costs. If the creditor does not know 
the precise credit terms, the creditor must base the disclosures on the 
best information reasonably available and indicate that the disclosures 
are estimates under Sec. 226.17(c)(2). If many of the disclosures are 
estimates, the creditor may include a statement to that effect (such as 
``all numerical disclosures except the late-payment disclosure are 
estimates'') instead of separately labelling each estimate. In the 
alternative, the creditor may label as an estimate only the items 
primarily affected by unknown information. (See the Commentary to Sec. 
226.17(c)(2).) The creditor may provide explanatory material concerning 
the estimates and the contingencies that may affect the actual terms, in 
accordance with the commentary to Sec. 226.17(a)(1).
    3. Written application. Creditors may rely on RESPA and Regulation X 
(including any interpretations issued by HUD) in deciding

[[Page 563]]

whether a ``written application'' has been received. In general, 
Regulation X requires disclosures ``to every person from whom the Lender 
receives or for whom it prepares a written application on an application 
form or forms normally used by the Lender for a Federally Related 
Mortgage Loan'' (24 CFR 3500.6(a)). An application is received when it 
reaches the creditor in any of the ways applications are normally 
transmitted--by mail, hand delivery, or through an intermediary agent or 
broker. (See comment 19(b)-3 for guidance in determining whether or not 
the transaction involves an intermediary agent or broker.) If an 
application reaches the creditor through an intermediary agent or 
broker, the application is received when it reaches the creditor, rather 
than when it reaches the agent or broker.
    4. Exceptions. The creditor may determine within the 3-day period 
that the application will not or cannot be approved on the terms 
requested, as, for example, when a consumer applies for a type or amount 
of credit that the creditor does not offer, or the consumer's 
application cannot be approved for some other reason. In that case, the 
creditor need not make the disclosures under this section. If the 
creditor fails to provide early disclosures and the transaction is later 
consummated on the original terms, the creditor will be in violation of 
this provision. If, however, the consumer amends the application because 
of the creditor's unwillingness to approve it on its original terms, no 
violation occurs for not providing disclosures based on the original 
terms. But the amended application is a new application subject to this 
section.
    5. Itemization of amount financed. In many residential mortgage 
transactions, the itemization of the amount financed required by Sec. 
226.18(c) will contain items, such as origination fees or points, that 
also must be disclosed as part of the good faith estimates of settlement 
costs required under RESPA. Creditors furnishing the RESPA good faith 
estimates need not give consumers any itemization of the amount 
financed, either with the disclosures provided within 3 days after 
application or with the disclosures given at consummation or settlement.
    Paragraph 19(a)(2) Redisclosure required.
    1. Conditions for redisclosure. Creditors must make new disclosures 
if the annual percentage rate at consummation differs from the estimate 
originally disclosed by more than \1/8\ of 1 percentage point in regular 
transactions or \1/4\ of 1 percentage point in irregular transactions, 
as defined in footnote 46 of Sec. 226.22(a)(3). The creditor must also 
redisclose if a variable rate feature is added to the credit terms after 
the original disclosures have been made. The creditor has the option of 
redisclosing information under other circumstances, if it wishes to do 
so.
    2. Content of new disclosures. If redisclosure is required, the 
creditor may provide a complete set of new disclosures, or may 
redisclose only the terms that vary from those originally disclosed. If 
the creditor chooses to provide a complete set of new disclosures, the 
creditor may but need not highlight the new terms, provided that the 
disclosures comply with the format requirements of Sec. 226.17(a). If 
the creditor chooses to disclose only the new terms, all the new terms 
must be disclosed. For example, a different annual percentage rate will 
almost always produce a different finance charge, and often a new 
schedule of payments; all of these changes would have to be disclosed. 
If, in addition, unrelated terms such as the amount financed or 
prepayment penalty vary from those originally disclosed, the accurate 
terms must be disclosed. However, no new disclosures are required if the 
only inaccuracies involve estimates other than the annual percentage 
rate, and no variable rate feature has been added.
    3. Timing. Redisclosures, when necessary, must be given no later 
than ``consummation or settlement.'' ``Consummation'' is defined in 
Sec. 226.2(a). ``Date of settlement'' is defined in Regulation X (24 
CFR 3500.2(a)) and is subject to any interpretations issued under RESPA 
and Regulation X.
    4. Basis of disclosures. In some cases, a creditor may delay 
redisclosure until settlement, which may be at a time later than 
consummation. If a creditor chooses to redisclose at settlement, 
disclosures may be based on the terms in effect at settlement, rather 
than at consummation. For example, in a variable-rate transaction, a 
creditor may choose to base disclosures on the terms in effect at 
settlement despite the general rule in the commentary to section 18(f) 
that variable-rate disclosures should be based on the terms in effect at 
consummation.
    19(b) Certain variable-rate transactions.
    1. Coverage. Section 226.19(b) applies to all closed-end variable-
rate transactions that are secured by the consumer's principal dwelling 
and have a term greater than one year. The requirements of this section 
apply not only to transactions financing the initial acquisition of the 
consumer's principal dwelling, but also to any other closed-end 
variable-rate transaction secured by the principal dwelling. Closed-end 
variable-rate transactions that are not secured by the principal 
dwelling, or are secured by the principal dwelling but have a term of 
one year or less, are subject to the disclosure requirements of Sec. 
226.18(f)(1) rather than those of Sec. 226.19(b). (Furthermore, 
``shared-equity'' or ``shared-appreciation'' mortgages are subject to 
the disclosure requirements of Sec. 226.18(f)(1) rather than those of 
Sec. 226.19(b) regardless of the general coverage of those sections.) 
For purposes of this section, the term of a variable-rate demand loan is 
determined

[[Page 564]]

in accordance with the commentary to Sec. 226.17(c)(5). In determining 
whether a construction loan that may be permanently financed by the same 
creditor is covered under this section, the creditor may treat the 
construction and the permanent phases as separate transactions with 
distinct terms to maturity or as a single combined transaction. For 
purposes of the disclosures required under Sec. 226.18, the creditor 
may nevertheless treat the two phases either as separate transactions or 
as a single combined transaction in accordance with Sec. 226.17(c)(6). 
Finally, in any assumption of a variable-rate transaction secured by the 
consumer's principal dwelling with a term greater than one year, 
disclosures need not be provided under Sec. Sec. 226.18(f)(2)(ii) or 
226.19(b).
    2. Timing. A creditor must give the disclosures required under this 
section at the time an application form is provided or before the 
consumer pays a nonrefundable fee, whichever is earlier.
    i. Intermediary agent or broker. In cases where a creditor receives 
a written application through an intermediary agent or broker, however, 
footnote 45b provides a substitute timing rule requiring the creditor to 
deliver the disclosures or place them in the mail not later than three 
business days after the creditor receives the consumer's written 
application. (See comment 19(b)-3 for guidance in determining whether or 
not the transaction involves an intermediary agent or broker.) This 
three-day rule also applies where the creditor takes an application over 
the telephone.
    ii. Telephone request. In cases where the consumer merely requests 
an application over the telephone, the creditor must include the early 
disclosures required under this section with the application that is 
sent to the consumer.
    iii. Mail solicitations. In cases where the creditor solicits 
applications through the mail, the creditor must also send the 
disclosures required under this section if an application form is 
included with the solicitation.
    iv. Conversion. In cases where an open-end credit account will 
convert to a closed-end transaction subject to this section under a 
written agreement with the consumer, disclosures under this section may 
be given at the time of conversion. (See the commentary to Sec. 
226.20(a) for information on the timing requirements for Sec. 
226.19(b)(2) disclosures when a variable-rate feature is later added to 
a transaction.)
    v. Form of electronic disclosures provided on or with electronic 
applications. Creditors must provide the disclosures required by this 
section (including the brochure) on or with a blank application that is 
made available to the consumer in electronic form, such as on a 
creditor's Internet Web site. Creditors have flexibility in satisfying 
this requirement. Methods creditors could use to satisfy the requirement 
include, but are not limited to, the following examples:
    A. The disclosures could automatically appear on the screen when the 
application appears;
    B. The disclosures could be located on the same web page as the 
application (whether or not they appear on the initial screen), if the 
application contains a clear and conspicuous reference to the location 
of the disclosures and indicates that the disclosures contain rate, fee, 
and other cost information, as applicable;
    C. Creditors could provide a link to the electronic disclosures on 
or with the application as long as consumers cannot bypass the 
disclosures before submitting the application. The link would take the 
consumer to the disclosures, but the consumer need not be required to 
scroll completely through the disclosures; or
    D. The disclosures could be located on the same web page as the 
application without necessarily appearing on the initial screen, 
immediately preceding the button that the consumer will click to submit 
the application.
    Whatever method is used, a creditor need not confirm that the 
consumer has read the disclosures.
    3. Intermediary agent or broker. In certain transactions involving 
an ``intermediary agent or broker,'' a creditor may delay providing 
disclosures. A creditor may not delay providing disclosures in 
transactions involving either a legal agent (as determined by applicable 
law) or any other third party that is not an ``intermediary agent or 
broker.'' In determining whether or not a transaction involves an 
``intermediary agent or broker'' the following factors should be 
considered:
     The number of applications submitted by the 
broker to the creditor as compared to the total number of applications 
received by the creditor. The greater the percentage of total loan 
applications submitted by the broker in any given period of time, the 
less likely it is that the broker would be considered an ``intermediary 
agent or broker'' of the creditor during the next period.
     The number of applications submitted by the 
broker to the creditor as compared to the total number of applications 
received by the broker. (This factor is applicable only if the creditor 
has such information.) The greater the percentage of total loan 
applications received by the broker that is submitted to a creditor in 
any given period of time, the less likely it is that the broker would be 
considered an ``intermediary agent or broker'' of the creditor during 
the next period.
     The amount of work (such as document preparation) 
the creditor expects to be done by the broker on an application based on 
the creditor's prior dealings with the broker and on the creditor's 
requirements for accepting

[[Page 565]]

applications, taking into consideration the customary practice of 
brokers in a particular area. The more work that the creditor expects 
the broker to do on an application, in excess of what is usually 
expected of a broker in that area, the less likely it is that the broker 
would be considered an ``intermediary agent or broker'' of the creditor.

    An example of an ``intermediary agent or broker'' is a broker who, 
customarily within a brief period of time after receiving an 
application, inquires about the credit terms of several creditors with 
whom the broker does business and submits the application to one of 
them. The broker is responsible for only a small percentage of the 
applications received by that creditor. During the time the broker has 
the application, it might request a credit report and an appraisal (or 
even prepare an entire loan package if customary in that particular 
area).
    4. Other variable-rate regulations. Transactions in which the 
creditor is required to comply with and has complied with the disclosure 
requirements of the variable-rate regulations of other Federal agencies 
are exempt from the requirements of Sec. 226.19(b), by virtue of 
footnote 45a, and are exempt from the requirements of Sec. 226.20(c), 
by virtue of footnote 45c. Those variable-rate regulations include the 
regulations issued by the Federal Home Loan Bank Board and those issued 
by the Department of Housing and Urban Development. The exception in 
footnotes 45a and 45c is also available to creditors that are required 
by state law to comply with the federal variable-rate regulations noted 
above and to creditors that are authorized by title VIII of the 
Depository Institutions Act of 1982 (12 U.S.C. 3801 et seq.) to make 
loans in accordance with those regulations. Creditors using this 
exception should comply with the timing requirements of those 
regulations rather than the timing requirements of Regulation Z in 
making the variable-rate disclosures.
    5. Examples of variable-rate transactions.
    (i) The following transactions, if they have a term greater than one 
year and are secured by the consumer's principal dwelling, constitute 
variable-rate transactions subject to the disclosure requirements of 
Sec. 226.19(b).
    (A) Renewable balloon-payment instruments where the creditor is both 
unconditionally obligated to renew the balloon-payment loan at the 
consumer's option (or is obligated to renew subject to conditions within 
the consumer's control) and has the option of increasing the interest 
rate at the time of renewal. (See comment 17(c)(1)-11 for a discussion 
of conditions within a consumer's control in connection with renewable 
balloon-payment loans.)
    (B) Preferred-rate loans where the terms of the legal obligation 
provide that the initial underlying rate is fixed but will increase upon 
the occurrence of some event, such as an employee leaving the employ of 
the creditor, and the note reflects the preferred rate. The disclosures 
under Sec. Sec. 226.19(b)(1) and 226.19(b)(2)(v), (viii), (ix), and 
(xii) are not applicable to such loans.
    (C) ``Price-level-adjusted mortgages'' or other indexed mortgages 
that have a fixed rate of interest but provide for periodic adjustments 
to payments and the loan balance to reflect changes in an index 
measuring prices or inflation. The disclosures under Sec. 226.19(b)(1) 
are not applicable to such loans, nor are the following provisions to 
the extent they relate to the determination of the interest rate by the 
addition of a margin, changes in the interest rate, or interest rate 
discounts: Section 226.19(b)(2) (i), (iii), (iv), (v), (vi), (vii), 
(viii), and (ix). (See comments 20(c)-2 and 30-1 regarding the 
inapplicability of variable-rate adjustment notices and interest rate 
limitations to price-level-adjusted or similar mortgages.)
    (ii) Graduated-payment mortgages and step-rate transactions without 
a variable-rate feature are not considered variable-rate transactions.
    Paragraph 19(b)(1).
    1. Substitute. Creditors who wish to use publications other than the 
Consumer Handbook on Adjustable Rate Mortgages must make a good faith 
determination that their brochures are suitable substitutes to the 
Consumer Handbook. A substitute is suitable if it is, at a minimum, 
comparable to the Consumer Handbook in substance and comprehensiveness. 
Creditors are permitted to provide more detailed information than is 
contained in the Consumer Handbook.
    2. Applicability. The Consumer Handbook need not be given for 
variable-rate transactions subject to this section in which the 
underlying interest rate is fixed. (See comment 19(b)-5 for an example 
of a variable-rate transaction where the underlying interest rate is 
fixed.)
    Paragraph 19(b)(2).
    1. Disclosure for each variable-rate program. A creditor must 
provide disclosures to the consumer that fully describe each of the 
creditor's variable-rate loan programs in which the consumer expresses 
an interest. If a program is made available only to certain customers of 
an institution, a creditor need not provide disclosures for that program 
to other consumers who express a general interest in a creditor's ARM 
programs. Disclosures must be given at the time an application form is 
provided or before the consumer pays a nonrefundable fee, whichever is 
earlier. If program disclosures cannot be provided because a consumer 
expresses an interest in individually negotiating loan terms that are 
not generally offered, disclosures reflecting those terms may be 
provided as soon as reasonably possible after the terms have been 
decided upon, but not later than the

[[Page 566]]

time a non-refundable fee is paid. If a consumer who has received 
program disclosures subsequently expresses an interest in other 
available variable-rate programs subject to 226.19(b)(2), or the 
creditor and consumer decide on a program for which the consumer has not 
received disclosures, the creditor must provide appropriate disclosures 
as soon as reasonably possible. The creditor, of course, is permitted to 
give the consumer information about additional programs subject to Sec. 
226.19(b) initially.
    2. Variable-rate loan program defined. i. Generally, if the 
identification, the presence or absence, or the exact value of a loan 
feature must be disclosed under this section, variable-rate loans that 
differ as to such features constitute separate loan programs. For 
example, separate loan programs would exist based on differences in any 
of the following loan features:
    A. The index or other formula used to calculate interest rate 
adjustments.
    B. The rules relating to changes in the index value, interest rate, 
payments, and loan balance.
    C. The presence or absence of, and the amount of, rate or payment 
caps.
    D. The presence of a demand feature.
    E. The possibility of negative amortization.
    F. The possibility of interest rate carryover.
    G. The frequency of interest rate and payment adjustments.
    H. The presence of a discount feature.
    I. In addition, if a loan feature must be taken into account in 
preparing the disclosures required by Sec. 226.19(b)(2)(viii), 
variable-rate loans that differ as to that feature constitute separate 
programs under Sec. 226.19(b)(2).
    ii. If, however, a representative value may be given for a loan 
feature or the feature need not be disclosed under Sec. 226.19(b)(2), 
variable-rate loans that differ as to such features do not constitute 
separate loan programs. For example, separate programs would not exist 
based on differences in the following loan features:
    A. The amount of a discount.
    B. The amount of a margin.
    3. Form of program disclosures. A creditor may provide separate 
program disclosure forms for each ARM program it offers or a single 
disclosure form that describes multiple programs. A disclosure form may 
consist of more than one page. For example, a creditor may attach a 
separate page containing the historical payment example for a particular 
program. A disclosure form describing more than one program need not 
repeat information applicable to each program that is described. For 
example, a form describing multiple programs may disclose the 
information applicable to all of the programs in one place with the 
various program features (such as options permitting conversion to a 
fixed rate) disclosed separately. The form, however, must state if any 
program feature that is described is available only in conjunction with 
certain other program features. Both the separate and multiple program 
disclosures may illustrate more than one loan maturity or payment 
amortization--for example, by including multiple payment and loan 
balance columns in the historical payment example. Disclosures may be 
inserted or printed in the Consumer Handbook (or a suitable substitute) 
as long as they are identified as the creditor's loan program 
disclosures.
    4. As applicable. The disclosures required by this section need only 
be made as applicable. Any disclosure not relevant to a particular 
transaction may be eliminated. For example, if the transaction does not 
contain a demand feature, the disclosure required under Sec. 
226.19(b)(2)(x) need not be given. As used in this section, payment 
refers only to a payment based on the interest rate, loan balance and 
loan term, and does not refer to payment of other elements such as 
mortgage insurance premiums.
    5. Revisions. A creditor must revise the disclosures required under 
this section once a year as soon as reasonably possible after the new 
index value becomes available. Revisions to the disclosures also are 
required when the loan program changes.
    Paragraph 19(b)(2)(i).
    1. Change in interest rate, payment, or term. A creditor must 
disclose the fact that the terms of the legal obligation permit the 
creditor, after consummation of the transaction, to increase (or 
decrease) the interest rate, payment, or term of the loan initially 
disclosed to the consumer. For example, the disclosures for a variable-
rate program in which the interest rate and payment (but not loan term) 
can change might read, ``Your interest rate and payment can change 
yearly.'' In transactions where the term of the loan may change due to 
rate fluctuations, the creditor must state that fact.
    Paragraph 19(b)(2)(ii).
    1. Identification of index or formula. If a creditor ties interest 
rate changes to a particular index, this fact must be disclosed, along 
with a source of information about the index. For example, if a creditor 
uses the weekly average yield on U.S. Treasury Securities adjusted to a 
constant maturity as its index, the disclosure might read, ``Your index 
is the weekly average yield on U.S. Treasury Securities adjusted to a 
constant maturity of one year published weekly in the Wall Street 
Journal.'' If no particular index is used, the creditor must briefly 
describe the formula used to calculate interest rate changes.
    2. Changes at creditor's discretion. If interest rate changes are at 
the creditor's discretion, this fact must be disclosed. If an index is 
internally defined, such as by a creditor's

[[Page 567]]

prime rate, the creditor should either briefly describe that index or 
state that interest rate changes are at the creditor's discretion.
    Paragraph 19(b)(2)(iii).
    1. Determination of interest rate and payment. This provision 
requires an explanation of how the creditor will determine the 
consumer's interest rate and payment. In cases where a creditor bases 
its interest rate on a specific index and adjusts the index through the 
addition of a margin, for example, the disclosure might read, ``Your 
interest rate is based on the index plus a margin, and your payment will 
be based on the interest rate, loan balance, and remaining loan term.'' 
In transactions where paying the periodic payments will not fully 
amortize the outstanding balance at the end of the loan term and where 
the final payment will equal the periodic payment plus the remaining 
unpaid balance, the creditor must disclose this fact. For example, the 
disclosure might read, ``Your periodic payments will not fully amortize 
your loan and you will be required to make a single payment of the 
periodic payment plus the remaining unpaid balance at the end of the 
loan term.'' The creditor, however, need not reflect any irregular final 
payment in the historical example or in the disclosure of the initial 
and maximum rates and payments. If applicable, the creditor should also 
disclose that the rate and payment will be rounded.
    Paragraph 19(b)(2)(iv).
    1. Current margin value and interest rate. Because the disclosures 
can be prepared in advance, the interest rate and margin may be several 
months old when the disclosures are delivered. A statement, therefore, 
is required alerting consumers to the fact that they should inquire 
about the current margin value applied to the index and the current 
interest rate. For example, the disclosure might state, ``Ask us for our 
current interest rate and margin.''
    Paragraph 19(b)(2)(v).
    1. Discounted and premium interest rate. In some variable-rate 
transactions, creditors may set an initial interest rate that is not 
determined by the index or formula used to make later interest rate 
adjustments. Typically, this initial rate charged to consumers is lower 
than the rate would be if it were calculated using the index or formula. 
However, in some cases the initial rate may be higher. If the initial 
interest rate will be a discount or a premium rate, creditors must alert 
the consumer to this fact. For example, if a creditor discounted a 
consumer's initial rate, the disclosure might state, ``Your initial 
interest rate is not based on the index used to make later 
adjustments.'' (See the commentary to Sec. 226.17(c)(1) for a further 
discussion of discounted and premium variable-rate transactions.) In 
addition, the disclosure must suggest that consumers inquire about the 
amount that the program is currently discounted. For example, the 
disclosure might state, ``Ask us for the amount our adjustable rate 
mortgages are currently discounted.'' In a transaction with a consumer 
buydown or with a third-party buydown that will be incorporated in the 
legal obligation, the creditor should disclose the program as a 
discounted variable-rate transaction, but need not disclose additional 
information regarding the buydown in its program disclosures. (See the 
commentary to Sec. 226.19(b)(2)(viii) for a discussion of how to 
reflect the discount or premium in the historical example or the maximum 
rate and payment disclosure).
    Paragraph 19(b)(2)(vi).
    1. Frequency. The frequency of interest rate and payment adjustments 
must be disclosed. If interest rate changes will be imposed more 
frequently or at different intervals than payment changes, a creditor 
must disclose the frequency and timing of both types of changes. For 
example, in a variable-rate transaction where interest rate changes are 
made monthly, but payment changes occur on an annual basis, this fact 
must be disclosed. In certain ARM transactions, the interval between 
loan closing and the initial adjustment is not known and may be 
different from the regular interval for adjustments. In such cases, the 
creditor may disclose the initial adjustment period as a range of the 
minimum and maximum amount of time from consummation or closing. For 
example, the creditor might state: ``The first adjustment to your 
interest rate and payment will occur no sooner than 6 months and no 
later than 18 months after closing. Subsequent adjustments may occur 
once each year after the first adjustment.'' (See comments 
19(b)(2)(viii)(A)-7 and 19(b)(2)(viii)(B)-4 for guidance on other 
disclosures when this alternative disclosure rule is used.)
    Paragraph 19(b)(2)(vii).
    1. Rate and payment caps. The creditor must disclose limits on 
changes (increases or decreases) in the interest rate or payment. If an 
initial discount is not taken into account in applying overall or 
periodic rate limitations, that fact must be disclosed. If separate 
overall or periodic limitations apply to interest rate increases 
resulting from other events, such as the exercise of a fixed-rate 
conversion option or leaving the creditor's employ, those limitations 
must also be stated. Limitations do not include legal limits in the 
nature of usury or rate ceilings under state or Federal statutes or 
regulations. (See Sec. 226.30 for the rule requiring that a maximum 
interest rate be included in certain variable-rate transactions.) The 
creditor need not disclose each periodic or overall rate limitation that 
is currently available. As an alternative, the creditor may disclose the 
range of the lowest and highest periodic and overall rate limitations 
that may be applicable to the creditor's ARM transactions.

[[Page 568]]

For example, the creditor might state: ``The limitation on increases to 
your interest rate at each adjustment will be set at an amount in the 
following range: Between 1 and 2 percentage points at each adjustment. 
The limitation on increases to your interest rate over the term of the 
loan will be set at an amount in the following range: Between 4 and 7 
percentage points above the initial interest rate.'' A creditor using 
this alternative rule must include a statement in its program 
disclosures suggesting that the consumer ask about the overall rate 
limitations currently offered for the creditor's ARM programs. (See 
comments 19(b)(2)(viii)(A)-6 and 19(b)(2)(viii)(B)-3 for an explanation 
of the additional requirements for a creditor using this alternative 
rule for disclosure of periodic and overall rate limitations.)
    2. Negative amortization and interest rate carryover. A creditor 
must disclose, where applicable, the possibility of negative 
amortization. For example, the disclosure might state, ``If any of your 
payments is not sufficient to cover the interest due, the difference 
will be added to your loan amount.'' Loans that provide for more than 
one way to trigger negative amortization are separate variable-rate 
programs requiring separate disclosures. (See the commentary to Sec. 
226.19(b)(2) for a discussion on the definition of a variable-rate loan 
program and the format for disclosure.) If a consumer is given the 
option to cap monthly payments that may result in negative amortization, 
the creditor must fully disclose the rules relating to the option, 
including the effects of exercising the option (such as negative 
amortization will occur and the principal loan balance will increase); 
however, the disclosure in Sec. 226.19(b)(2)(viii) need not be 
provided.
    3. Conversion option. If a loan program permits consumers to convert 
their variable-rate loans to fixed-rate loans, the creditor must 
disclose that the interest rate may increase if the consumer converts 
the loan to a fixed-rate loan. The creditor must also disclose the rules 
relating to the conversion feature, such as the period during which the 
loan may be converted, that fees may be charged at conversion, and how 
the fixed rate will be determined. The creditor should identify any 
index or other measure or formula used to determine the fixed rate and 
state any margin to be added. In disclosing the period during which the 
loan may be converted and the margin, the creditor may use information 
applicable to the conversion feature during the six months preceding 
preparation of the disclosures and state that the information is 
representative of conversion features recently offered by the creditor. 
The information may be used until the program disclosures are otherwise 
revised. Although the rules relating to the conversion option must be 
disclosed, the effect of exercising the option should not be reflected 
elsewhere in the disclosures, such as in the historical example or in 
the calculation of the initial and maximum interest rate and payments.
    4. Preferred-rate loans. Section 226.19(b) applies to preferred-rate 
loans, where the rate will increase upon the occurrence of some event, 
such as an employee leaving the creditor's employ, whether or not the 
underlying rate is fixed or variable. In these transactions, the 
creditor must disclose the event that would allow the creditor to 
increase the rate such as that the rate may increase if the employee 
leaves the creditor's employ. The creditor must also disclose the rules 
relating to termination of the preferred rate, such as that fees may be 
charged when the rate is changed and how the new rate will be 
determined.
    Paragraph 19(b)(2)(viii).
    1. Historical example and initial and maximum interest rates and 
payments. A creditor may disclose both the historical example and the 
initial and maximum interest rates and payments.

                      Paragraph 19(b)(2)(viii)(A).

    1. Index movement. This section requires a creditor to provide an 
historical example, based on a $10,000 loan amount originating in 1977, 
showing how interest rate changes implemented according to the terms of 
the loan program would have affected payments and the loan balance at 
the end of each year during a 15-year period. (In all cases, the 
creditor need only calculate the payments and loan balance for the term 
of the loan. For example, in a five-year loan, a creditor would show the 
payments and loan balance for the five-year term, from 1977 to 1981, 
with a zero loan balance reflected for 1981. For the remaining ten 
years, 1982-1991, the creditor need only show the remaining index 
values, margin and interest rate and must continue to reflect all 
significant loan program terms such as rate limitations affecting them.) 
Pursuant to this section, the creditor must provide a history of index 
values for the preceding 15 years. Initially, the disclosures would give 
the index values from 1977 to the present. Each year thereafter, the 
revised program disclosures should include an additional year's index 
value until 15 years of values are shown. If the values for an index 
have not been available for 15 years, a creditor need only go back as 
far as the values are available in giving a history and payment example. 
In all cases, only one index value per year need be shown. Thus, in 
transactions where interest rate adjustments are implemented more 
frequently than once per year, a creditor may assume that the interest 
rate and payment resulting from the index value chosen will stay in 
effect for the entire year for purposes of calculating the loan balance 
as of the end of the year and for reflecting other loan program terms. 
In cases

[[Page 569]]

where interest rate changes are at the creditor's discretion (see the 
commentary to Sec. 226.19(b)(2)(ii)), the creditor must provide a 
history of the rates imposed for the preceding 15 years, beginning with 
the rates in 1977. In giving this history, the creditor need only go 
back as far as the creditor's rates can reasonably be determined.
    2. Selection of index values. The historical example must reflect 
the method by which index values are determined under the program. If a 
creditor uses an average of index values or any other index formula, the 
history given should reflect those values. The creditor should select 
one date or, when an average of single values is used as an index, one 
period and should base the example on index values measured as of that 
same date or period for each year shown in the history. A date or period 
at any time during the year may be selected, but the same date or period 
must be used for each year in the historical example. For example, a 
creditor could use values for the first business day in July or for the 
first week ending in July for each of the 15 years shown in the example.
    3. Selection of margin. For purposes of the disclosure required 
under Sec. 226.19(b)(2)(viii)(A), a creditor may select a 
representative margin that has been used during the six months preceding 
preparation of the disclosures, and should disclose that the margin is 
one that the creditor has used recently. The margin selected may be used 
until a creditor revises the disclosure form.
    4. Amount of discount or premium. For purposes of the disclosure 
required under Sec. 226.19(b)(2)(viii)(A), a creditor may select a 
discount or premium (amount and term) that has been used during the six 
months preceding preparation of the disclosures, and should disclose 
that the discount or premium is one that the creditor has used recently. 
The discount or premium should be reflected in the historical example 
for as long as the discount or premium is in effect. A creditor may 
assume that a discount that would have been in effect for any part of a 
year was in effect for the full year for purposes of reflecting it in 
the historical example. For example, a 3-month discount may be treated 
as being in effect for the entire first year of the example; a 15-month 
discount may be treated as being in effect for the first two years of 
the example. In illustrating the effect of the discount or premium, 
creditors should adjust the value of the interest rate in the historical 
example, and should not adjust the margin or index values. For example, 
if during the six months preceding preparation of the disclosures the 
fully indexed rate would have been 10% but the first year's rate under 
the program was 8%, the creditor would discount the first interest rate 
in the historical example by 2 percentage points.
    5. Term of the loan. In calculating the payments and loan balances 
in the historical example, a creditor need not base the disclosures on 
each term to maturity or payment amortization that it offers. Instead, 
disclosures for ARMs may be based upon terms to maturity or payment 
amortizations of 5, 15 and 30 years, as follows: ARMs with terms or 
amortizations from over 1 year to 10 years may be based on a 5-year term 
or amortization; ARMs with terms or amortizations from over 10 years to 
20 years may be based on a 15-year term or amortization; and ARMs with 
terms or amortizations over 20 years may be based on a 30-year term or 
amortization. Thus, disclosures for ARMs offered with any term from over 
1 year to 40 years may be based solely on terms of 5, 15 and 30 years. 
Of course, a creditor may always base the disclosures on the actual 
terms or amortizations offered. If the creditor bases the disclosures on 
5-, 15- or 30-year terms or payment amortization as provided above, the 
term or payment amortization used in making the disclosure must be 
stated.
    6. Rate caps. A creditor using the alternative rule described in 
comment 19(b)(2)(vii)-1 for disclosure of rate limitations must base the 
historical example upon the highest periodic and overall rate 
limitations disclosed under section 226.19(b)(2)(vii). In addition, the 
creditor must state the limitations used in the historical example. (See 
comment 19(b)(2)(viii)(B)-3 for an explanation of the use of the highest 
rate limitation in other disclosures.)
    7. Frequency of adjustments. In certain transactions, creditors may 
use the alternative rule described in comment 19(b)(2)(vi)-1 for 
disclosure of the frequency of rate and payment adjustments. In such 
cases, the creditor may assume for purposes of the historical example 
that the first adjustment occurred at the end of the first full year in 
which the adjustment could occur. For example, in an ARM in which the 
first adjustment may occur between 6 and 18 months after closing and 
annually thereafter, the creditor may assume that the first adjustment 
occurred at the end of the first year in the historical example. (See 
comment 19(b)(2)(viii)(B)-4 for an explanation of how to compute the 
maximum interest rate and payment when the initial adjustment period is 
not known.)
    Paragraph 19(b)(2)(viii)(B).
    1. Initial and maximum interest rates and payments. The disclosure 
form must state the initial and maximum interest rates and payments for 
a $10,000 loan originated at an initial interest rate (index value plus 
margin adjusted by the amount of any discount or premium) in effect as 
of an identified month and year for the loan program disclosure. (See 
comment 19(b)(2)-5 on revisions to the loan program disclosure.) In 
calculating the maximum payment under this paragraph, a creditor should 
assume that the interest rate increases as rapidly as possible under the

[[Page 570]]

loan program, and the maximum payment disclosed should reflect the 
amortization of the loan during this period. Thus, in a loan with 2 
percentage point annual (and 5 percentage point overall) interest rate 
limitations or ``caps,'' the maximum interest rate would be 5 percentage 
points higher than the initial interest rate disclosed. Moreover, the 
loan would not reach the maximum interest rate until the fourth year 
because of the 2 percentage point annual rate limitations, and the 
maximum payment disclosed would reflect the amortization of the loan 
during this period. If the loan program includes a discounted or premium 
initial interest rate, the initial interest rate should be adjusted by 
the amount of the discount or premium.
    2. Term of the loan. In calculating the initial and maximum 
payments, the creditor need not base the disclosures on each term to 
maturity or payment amortization offered under the program. Instead, the 
creditor may follow the rules set out in comment 19(b)(2)(viii)(A)-5.
    If a historical example is provided under Sec. 
226.19(b)(2)(viii)(A), the terms to maturity or payment amortization 
used in the historical example must be used in calculating the initial 
and maximum payment. In addition, creditors must state the term or 
payment amortization used in making the disclosures under this section.
    3. Rate caps. A creditor using the alternative rule for disclosure 
of interest rate limitations described in comment 19(b)(2)(vii)-1 must 
calculate the maximum interest rate and payment based upon the highest 
periodic and overall rate limitations disclosed under Sec. 
226.19(b)(2)(vii). In addition, the creditor must state the rate 
limitations used in calculating the maximum interest rate and payment. 
(See comment 19(b)(2)(viii)(A)-6 for an explanation of the use of the 
highest rate limitation in other disclosures.)
    4. Frequency of adjustments. In certain transactions, a creditor may 
use the alternative rule for disclosure of the frequency of rate and 
payment adjustments described in comment 19(b)(2)(vi)-1. In such cases, 
the creditor must base the calculations of the initial and maximum rates 
and payments upon the earliest possible first adjustment disclosed under 
Sec. 226.19(b)(2)(vi). (See comment 19(b)(2)(viii)(A)-7 for an 
explanation of how to disclose the historical example when the initial 
adjustment period is not known.)
    5. Periodic payment statement. The statement that the periodic 
payment may increase or decrease substantially may be satisfied by the 
disclosure in paragraph 19(b)(2)(vi) if it states for example, ``your 
monthly payment can increase or decrease substantially based on annual 
changes in the interest rate.''
    Paragraph 19(b)(2)(ix).
    1. Calculation of payments. A creditor is required to include a 
statement on the disclosure form that explains how a consumer may 
calculate his or her actual monthly payments for a loan amount other 
than $10,000. The example should be based upon the most recent payment 
shown in the historical example or upon the initial interest rate 
reflected in the maximum rate and payment disclosure. In transactions in 
which the latest payment shown in the historical example is not for the 
latest year of index values shown (such as in a five-year loan), a 
creditor may provide additional examples based on the initial and 
maximum payments disclosed under Sec. 226.19(b)(2)(viii)(B). The 
creditor, however, is not required to calculate the consumer's payments. 
(See the model clauses in appendix H-4(C).)
    Paragraph 19(b)(2)(x).
    1. Demand feature. If a variable-rate loan subject to Sec. 
226.19(b) requirements contains a demand feature as discussed in the 
commentary to Sec. 226.18(i), this fact must be disclosed. (Pursuant to 
Sec. 226.18(i), creditors would also disclose the demand feature in the 
standard disclosures given later.)
    Paragraph 19(b)(2)(xi).
    1. Adjustment notices. A creditor must disclose to the consumer the 
type of information that will be contained in subsequent notices of 
adjustments and when such notices will be provided. (See the commentary 
to Sec. 226.20(c) regarding notices of adjustments.) For example, the 
disclosure might state, ``You will be notified at least 25, but no more 
than 120, days before the due date of a payment at a new level. This 
notice will contain information about the index and interest rates, 
payment amount, and loan balance.'' In transactions where there may be 
interest rate adjustments without accompanying payment adjustments in a 
year, the disclosure might read, ``You will be notified once each year 
during which interest rate adjustments, but no payment adjustments, have 
been made to your loan. This notice will contain information about the 
index and interest rates, payment amount, and loan balance.''
    Paragraph 19(b)(2)(xii).
    1. Multiple loan programs. A creditor that offers multiple variable-
rate loan programs is required to have disclosures for each variable-
rate loan program subject to Sec. 226.19(b)(2). Unless disclosures for 
all of its variable-rate programs are provided initially, the creditor 
must inform the consumer that other closed-end variable-rate programs 
exist, and that disclosure forms are available for these additional loan 
programs. For example, the disclosure form might state, ``Information on 
other adjustable rate mortgage programs is available upon request.''
    19(c) Electronic disclosures.

[[Page 571]]

    1. Form of disclosures. Whether disclosures must be in electronic 
form depends upon the following:
    i. If a consumer accesses an ARM loan application electronically 
(other than as described under ii. below), such as online at a home 
computer, the creditor must provide the disclosures in electronic form 
(such as with the application form on its Web site) in order to meet the 
requirement to provide disclosures in a timely manner on or with the 
application. If the creditor instead mailed paper disclosures to the 
consumer, this requirement would not be met.
    ii. In contrast, if a consumer is physically present in the 
creditor's office, and accesses an ARM loan application electronically, 
such as via a terminal or kiosk (or if the consumer uses a terminal or 
kiosk located on the premises of an affiliate or third party that has 
arranged with the creditor to provide applications to consumers), the 
creditor may provide disclosures in either electronic or paper form, 
provided the creditor complies with the timing, delivery, and 
retainability requirements of the regulation.

                               References

    Statute: Section 128(b)(2) and the Real Estate Settlement Procedures 
Act (12 U.S.C. 2602).
    Other sections: Sections 226.2, 226.17, and 226.22.
    Other regulations: Regulation X (24 CFR 3500.2(a), 3500.5(b), and 
3500.6(a)).
    Previous regulation: None.
    1981 changes: This section implements section 128(b)(2), a new 
provision that requires early disclosure of credit terms in certain 
mortgage transactions.

            Section 226.20 Subsequent Disclosure Requirements

    Paragraph 20(a) Refinancings.
    1. Definition. A refinancing is a new transaction requiring a 
complete new set of disclosures. Whether a refinancing has occurred is 
determined by reference to whether the original obligation has been 
satisfied or extinguished and replaced by a new obligation, based on the 
parties' contract and applicable law. The refinancing may involve the 
consolidation of several existing obligations, disbursement of new money 
to the consumer or on the consumer's behalf, or the rescheduling of 
payments under an existing obligation. In any form, the new obligation 
must completely replace the prior one.

     Changes in the terms of an existing obligation, 
such as the deferral of individual installments, will not constitute a 
refinancing unless accomplished by the cancellation of that obligation 
and the substitution of a new obligation.
     A substitution of agreements that meets the 
refinancing definition will require new disclosures, even if the 
substitution does not substantially alter the prior credit terms.

    2. Exceptions. A transaction is subject to Sec. 226.20(a) only if 
it meets the general definition of a refinancing. Section 226.20(a) (1) 
through (5) lists 5 events that are not treated as refinancings, even if 
they are accomplished by cancellation of the old obligation and 
substitution of a new one.
    3. Variable-rate.
    i. If a variable-rate feature was properly disclosed under the 
regulation, a rate change in accord with those disclosures is not a 
refinancing. For example, no new disclosures are required when the 
variable-rate feature is invoked on a renewable balloon-payment mortgage 
that was previously disclosed as a variable-rate transaction.
    ii. Even if it is not accomplished by the cancellation of the old 
obligation and substitution of a new one, a new transaction subject to 
new disclosures results if the creditor either:
    A. Increases the rate based on a variable-rate feature that was not 
previously disclosed; or
    B. Adds a variable-rate feature to the obligation. A creditor does 
not add a variable-rate feature by changing the index of a variable-rate 
transaction to a comparable index, whether the change replaces the 
existing index or substitutes an index for one that no longer exists.
    iii. If either of the events in paragraph 20(a)3.ii.A. or ii.B. 
occurs in a transaction secured by a principal dwelling with a term 
longer than one year, the disclosures required under Sec. 226.19(b) 
also must be given at that time.
    4. Unearned finance charge. In a transaction involving precomputed 
finance charges, the creditor must include in the finance charge on the 
refinanced obligation any unearned portion of the original finance 
charge that is not rebated to the consumer or credited against the 
underlying obligation. For example, in a transaction with an add-on 
finance charge, a creditor advances new money to a consumer in a fashion 
that extinguishes the original obligation and replaces it with a new 
one. The creditor neither refunds the unearned finance charge on the 
original obligation to the consumer nor credits it to the remaining 
balance on the old obligation. Under these circumstances, the unearned 
finance charge must be included in the finance charge on the new 
obligation and reflected in the annual percentage rate disclosed on 
refinancing. Accrued but unpaid finance charges are included in the 
amount financed in the new obligation.
    5. Coverage. Section 226.20(a) applies only to refinancings 
undertaken by the original creditor or a holder or servicer of the 
original obligation. A ``refinancing'' by any other person is a new 
transaction under the regulation, not a refinancing under this section.

[[Page 572]]

    Paragraph 20(a)(1).
    1. Renewal. This exception applies both to obligations with a single 
payment of principal and interest and to obligations with periodic 
payments of interest and a final payment of principal. In determining 
whether a new obligation replacing an old one is a renewal of the 
original terms or a refinancing, the creditor may consider it a renewal 
even if:

     Accrued unpaid interest is added to the principal 
balance.
     Changes are made in the terms of renewal 
resulting from the factors listed in Sec. 226.17(c)(3).
     The principal at renewal is reduced by a 
curtailment of the obligation.

    Paragraph 20(a)(2).
    1. Annual percentage rate reduction. A reduction in the annual 
percentage rate with a corresponding change in the payment schedule is 
not a refinancing. If the annual percentage rate is subsequently 
increased (even though it remains below its original level) and the 
increase is effected in such a way that the old obligation is satisfied 
and replaced, new disclosures must then be made.
    2. Corresponding change. A corresponding change in the payment 
schedule to implement a lower annual percentage rate would be a 
shortening of the maturity, or a reduction in the payment amount or the 
number of payments of an obligation. The exception in Sec. 226.20(a)(2) 
does not apply if the maturity is lengthened, or if the payment amount 
or number of payments is increased beyond that remaining on the existing 
transaction.
    Paragraph 20(a)(3).
    1. Court agreements. This exception includes, for example, 
agreements such as reaffirmations of debts discharged in bankruptcy, 
settlement agreements, and post-judgment agreements. (See the commentary 
to Sec. 226.2(a)(14) for a discussion of court-approved agreements that 
are not considered ``credit.'')
    Paragraph 20(a)(4).
    1. Workout agreements. A workout agreement is not a refinancing 
unless the annual percentage rate is increased or additional credit is 
advanced beyond amounts already accrued plus insurance premiums.
    Paragraph 20(a)(5).
    1. Insurance renewal. The renewal of optional insurance added to an 
existing credit transaction is not a refinancing, assuming that 
appropriate Truth in Lending disclosures were provided for the initial 
purchase of the insurance.
    Paragraph 20(b) Assumptions.
    1. General definition. An assumption as defined in Sec. 226.20(b) 
is a new transaction and new disclosures must be made to the subsequent 
consumer. An assumption under the regulation requires the following 
three elements:

 A residential mortgage transaction.
 An express acceptance of the subsequent consumer by 
the creditor.
 A written agreement.

    The assumption of a nonexempt consumer credit obligation requires no 
disclosures unless all three elements are present. For example, an 
automobile dealer need not provide Truth in Lending disclosures to a 
customer who assumes an existing obligation secured by an automobile. 
However, a residential mortgage transaction with the elements described 
in Sec. 226.20(b) is an assumption that calls for new disclosures; the 
disclosures must be given whether or not the assumption is accompanied 
by changes in the terms of the obligation. (See comment 2(a)(24)-5 for a 
discussion of assumptions that are not considered residential mortgage 
transactions.)
    2. Existing residential mortgage transaction. A transaction may be a 
residential mortgage transaction as to one consumer and not to the other 
consumer. In that case, the creditor must look to the assuming consumer 
in determining whether a residential mortgage transaction exists. To 
illustrate:

     The original consumer obtained a mortgage to 
purchase a home for vacation purposes. The loan was not a residential 
mortgage transaction as to that consumer. The mortgage is assumed by a 
consumer who will use the home as a principal dwelling. As to that 
consumer, the loan is a residential mortgage transaction. For purposes 
of Sec. 226.20(b), the assumed loan is an ``existing residential 
mortgage transaction'' requiring disclosures, if the other criteria for 
an assumption are met.

    3. Express agreement. Expressly agrees means that the creditor's 
agreement must relate specifically to the new debtor and must 
unequivocally accept that debtor as a primary obligor. The following 
events are not construed to be express agreements between the creditor 
and the subsequent consumer:

     Approval of creditworthiness.
     Notification of a change in records.
     Mailing of a coupon book to the subsequent 
consumer.
     Acceptance of payments from the new consumer.

    4. Retention of original consumer. The retention of the original 
consumer as an obligor in some capacity does not prevent the change from 
being an assumption, provided the new consumer becomes a primary 
obligor. But the mere addition of a guarantor to an obligation for which 
the original consumer remains primarily liable does not give rise to an 
assumption. However, if neither party is designated as the primary 
obligor but the creditor accepts payment from the subsequent consumer, 
an assumption exists for purposes of Sec. 226.20(b).

[[Page 573]]

    5. Status of parties. Section 226.20(b) applies only if the previous 
debtor was a consumer and the obligation is assumed by another consumer. 
It does not apply, for example, when an individual takes over the 
obligation of a corporation.
    6. Disclosures. For transactions that are assumptions within this 
provision, the creditor must make disclosures based on the ``remaining 
obligation.'' For example:
     The amount financed is the remaining principal 
balance plus any arrearages or other accrued charges from the original 
transaction.
     If the finance charge is computed from time to 
time by application of a percentage rate to an unpaid balance, in 
determining the amount of the finance charge and the annual percentage 
rate to be disclosed, the creditor should disregard any prepaid finance 
charges paid by the original obligor, but must include in the finance 
charge any prepaid finance charge imposed in connection with the 
assumption.
     If the creditor requires the assuming consumer to 
pay any charges as a condition of the assumption, those sums are prepaid 
finance charges as to that consumer, unless exempt from the finance 
charge under Sec. 226.4. If a transaction involves add-on or discount 
finance charges, the creditor may make abbreviated disclosures, as 
outlined in Sec. 226.20(b) (1) through (5). Creditors providing 
disclosures pursuant to this section for assumptions of variable-rate 
transactions secured by the consumer's principal dwelling with a term 
longer than one year need not provide new disclosures under Sec. 
226.18(f)(2)(ii) or Sec. 226.19(b). In such transactions, a creditor 
may disclose the variable-rate feature solely in accordance with Sec. 
226.18(f)(1).
    7. Abbreviated disclosures. The abbreviated disclosures permitted 
for assumptions of transactions involving add-on or discount finance 
charges must be made clearly and conspicuously in writing in a form that 
the consumer may keep. However, the creditor need not comply with the 
segregation requirement of Sec. 226.17(a)(1). The terms annual 
percentage rate and total of payments, when disclosed according to Sec. 
226.20(b) (4) and (5), are not subject to the description requirements 
of Sec. 226.18 (e) and (h). The term annual percentage rate disclosed 
under Sec. 226.20(b)(4) need not be more conspicuous than other 
disclosures.
    Paragraph 20(c) Variable-rate adjustments.
    1. Timing of adjustment notices. This section requires a creditor 
(or a subsequent holder) to provide certain disclosures in cases where 
an adjustment to the interest rate is made in a variable-rate 
transaction subject to Sec. 226.19(b). There are two timing rules, 
depending on whether payment changes accompany interest rate changes. A 
creditor is required to provide at least one notice each year during 
which interest rate adjustments have occurred without accompanying 
payment adjustments. For payment adjustments, a creditor must deliver or 
place in the mail notices to borrowers at least 25, but not more than 
120, calendar days before a payment at a new level is due. The timing 
rules also apply to the notice required to be given in connection with 
the adjustment to the rate and payment that follows conversion of a 
transaction subject to Sec. 226.19(b) to a fixed-rate transaction. (In 
cases where an open-end account is converted to a closed-end transaction 
subject to Sec. 226.19(b), the requirements of this section do not 
apply until adjustments are made following conversion.)
    2. Exceptions. Section 226.20(c) does not apply to ``shared-
equity,'' ``shared-appreciation,'' or ``price level adjusted'' or 
similar mortgages.
    3. Basis of disclosures. The disclosures required under this section 
shall reflect the terms of the parties' legal obligation, as required 
under Sec. 226.17(c)(1).
    Paragraph 20(c)(1).
    1. Current and prior interest rates. The requirements under this 
paragraph are satisfied by disclosing the interest rate used to compute 
the new adjusted payment amount (``current rate'') and the adjusted 
interest rate that was disclosed in the last adjustment notice, as well 
as all other interest rates applied to the transaction in the period 
since the last notice (``prior rates''). (If there has been no prior 
adjustment notice, the prior rates are the interest rate applicable to 
the transaction at consummation, as well as all other interest rates 
applied to the transaction in the period since consummation.) If no 
payment adjustment has been made in a year, the current rate is the new 
adjusted interest rate for the transaction, and the prior rates are the 
adjusted interest rate applicable to the loan at the time of the last 
adjustment notice, and all other rates applied to the transaction in the 
period between the current and last adjustment notices. In disclosing 
all other rates applied to the transaction during the period between 
notices, a creditor may disclose a range of the highest and lowest rates 
applied during that period.
    Paragraph 20(c)(2).
    1. Current and prior index values. This section requires disclosure 
of the index or formula values used to compute the current and prior 
interest rates disclosed in Sec. 226.20(c)(1). The creditor need not 
disclose the margin used in computing the rates. If the prior interest 
rate was not based on an index or formula value, the creditor also need 
not disclose the value of the index that would otherwise have been used 
to compute the prior interest rate.
    Paragraph 20(c)(3).
    1. Unapplied index increases. The requirement that the consumer 
receive information about the extent to which the creditor has foregone 
any increase in the interest rate is

[[Page 574]]

applicable only to those transactions permitting interest rate 
carryover. The amount of increase that is foregone at an adjustment is 
the amount that, subject to rate caps, can be applied to future 
adjustments independently to increase, or offset decreases in, the rate 
that is determined according to the index or formula.
    Paragraph 20(c)(4).
    1. Contractual effects of the adjustment. The contractual effects of 
an interest rate adjustment must be disclosed including the payment due 
after the adjustment is made whether or not the payment has been 
adjusted. A contractual effect of a rate adjustment would include, for 
example, disclosure of any change in the term or maturity of the loan if 
the change resulted from the rate adjustment. In transactions where 
paying the periodic payments will not fully amortize the outstanding 
balance at the end of the loan term and where the final payment will 
equal the periodic payment plus the remaining unpaid balance, the amount 
of the adjusted payment must be disclosed if such payment has changed as 
a result of the rate adjustment. A statement of the loan balance also is 
required. The balance required to be disclosed is the balance on which 
the new adjusted payment is based. If no payment adjustment is disclosed 
in the notice, the balance disclosed should be the loan balance on which 
the payment disclosed under Sec. 226.20(c)(5) is based, if applicable, 
or the balance at the time the disclosure is prepared.
    Paragraph 20(c)(5).
    1. Fully-amortizing payment. This paragraph requires a disclosure 
only when negative amortization occurs as a result of the adjustment. A 
disclosure is not required simply because a loan calls for non-
amortizing or partially amortizing payments. For example, in a 
transaction with a five-year term and payments based on a longer 
amortization schedule, and where the final payment will equal the 
periodic payment plus the remaining unpaid balance, the creditor would 
not have to disclose the payment necessary to fully amortize the loan in 
the remainder of the five-year term. A disclosure is required, however, 
if the payment disclosed under Sec. 226.20(c)(4) is not sufficient to 
prevent negative amortization in the loan. The adjustment notice must 
state the payment required to prevent negative amortization. (This 
paragraph does not apply if the payment disclosed in Sec. 226.20(c)(4) 
is sufficient to prevent negative amortization in the loan but the final 
payment will be a different amount due to rounding.)

                               References

    Statute: None.
    Other sections: Section 226.2.
    Previous regulation: Section 226.8(j) through (l), and 
Interpretation Sections 226.807, 226.811, 226.814, and 226.817.
    1981 changes: While the previous regulation treated virtually any 
change in terms as a refinancing requiring new disclosures, this 
regulation limits refinancings to transactions in which the entire 
original obligation is extinguished and replaced by a new one. 
Redisclosure is no longer required for deferrals or extensions.
    The assumption provision retains the substance of Sec. 226.8(k) and 
Interpretation Sec. 226.807 of the previous regulation, but limits its 
scope to residential mortgage transactions.

              Section 226.21--Treatment of Credit Balances

    Paragraph 21(a).
    1. Credit balance. A credit balance arises whenever the creditor 
receives or holds funds in an account in excess of the total balance due 
from the consumer on that account. A balance might result, for example, 
from the debtor's paying off a loan by transmitting funds in excess of 
the total balance owed on the account, or from the early payoff of a 
loan entitling the consumer to a rebate of insurance premiums and 
finance charges. However, Sec. 226.21 does not determine whether the 
creditor in fact owes or holds sums for the consumer. For example, if a 
creditor has no obligation to rebate any portion of precomputed finance 
charges on prepayment, the consumer's early payoff would not create a 
credit balance with respect to those charges. Similarly, nothing in this 
provision interferes with any rights the creditor may have under the 
contract or under state law with respect to set-off, cross 
collateralization, or similar provisions.
    2. Total balance due. The phrase total balance due refers to the 
total outstanding balance. Thus, this provision does not apply where the 
consumer has simply paid an amount in excess of the payment due for a 
given period.
    3. Timing of refund. The creditor may also fulfill its obligation 
under this section by:

     Refunding any credit balance to the consumer 
immediately.
     Refunding any credit balance prior to a written 
request from the consumer.
     Making a good faith effort to refund any credit 
balance before 6 months have passed. If that attempt is unsuccessful, 
the creditor need not try again to refund the credit balance at the end 
of the 6-month period.

    Paragraph 21(b).
    1. Written requests--standing orders. The creditor is not required 
to honor standing orders requesting refunds of any credit balance that 
may be created on the consumer's account.
    Paragraph 21(c).
    1. Good faith effort to refund. The creditor must take positive 
steps to return any credit balance that has remained in the account for 
over 6 months. This includes, if necessary,

[[Page 575]]

attempts to trace the consumer through the consumer's last known address 
or telephone number, or both.
    2. Good faith effort unsuccessful. Section 226.21 imposes no further 
duties on the creditor if a good faith effort to return the balance is 
unsuccessful. The ultimate disposition of the credit balance (or any 
credit balance of $1 or less) is to be determined under other applicable 
law.

                               References

    Statute: Section 165.
    Other sections: None.
    Previous regulation: None.
    1981 changes: This section implements section 165 of the Act, which 
was expanded by the 1980 statutory amendments to apply to closed-end as 
well as open-end credit.

       Section 226.22--Determination of the Annual Percentage Rate

    22(a) Accuracy of the annual percentage rate.
    Paragraph 22(a)(1).
    1. Calculation method. The regulation recognizes both the actuarial 
method and the United States Rule Method (U.S. Rule) as measures of an 
exact annual percentage rate. Both methods yield the same annual 
percentage rate when payment intervals are equal. They differ in their 
treatment of unpaid accrued interest.
    2. Actuarial method. When no payment is made, or when the payment is 
insufficient to pay the accumulated finance charge, the actuarial method 
requires that the unpaid finance charge be added to the amount financed 
and thereby capitalized. Interest is computed on interest since in 
succeeding periods the interest rate is applied to the unpaid balance 
including the unpaid finance charge. Appendix J provides instructions 
and examples for calculating the annual percentage rate using the 
actuarial method.
    3. U.S. Rule. The U.S. Rule produces no compounding of interest in 
that any unpaid accrued interest is accumulated separately and is not 
added to principal. In addition, under the U.S. Rule, no interest 
calculation is made until a payment is received.
    4. Basis for calculations. When a transaction involves ``step 
rates'' or ``split rates''--that is, different rates applied at 
different times or to different portions of the principal balance--a 
single composite annual percentage rate must be calculated and disclosed 
for the entire transaction. Assume, for example, a step-rate transaction 
in which a $10,000 loan is repayable in 5 years at 10 percent interest 
for the first 2 years, 12 percent for years 3 and 4, and 14 percent for 
year 5. The monthly payments are $210.71 during the first 2 years of the 
term, $220.25 for years 3 and 4, and $222.59 for year 5. The composite 
annual percentage rate, using a calculator with a ``discounted cash flow 
analysis'' or ``internal rate of return'' function, is 10.75 percent.
    5. Good faith reliance on faulty calculation tools. Footnote 45d 
absolves a creditor of liability for an error in the annual percentage 
rate or finance charge that resulted from a corresponding error in a 
calculation tool used in good faith by the creditor. Whether or not the 
creditor's use of the tool was in good faith must be determined on a 
case-by-case basis, but the creditor must in any case have taken 
reasonable steps to verify the accuracy of the tool, including any 
instructions, before using it. Generally, the footnote is available only 
for errors directly attributable to the calculation tool itself, 
including software programs; it is not intended to absolve a creditor of 
liability for its own errors, or for errors arising from improper use of 
the tool, from incorrect data entry, or from misapplication of the law.
    Paragraph 22(a)(2).
    1. Regular transactions. The annual percentage rate for a regular 
transaction is considered accurate if it varies in either direction by 
not more than \1/8\ of 1 percentage point from the actual annual 
percentage rate. For example, when the exact annual percentage rate is 
determined to be 10\1/8\%, a disclosed annual percentage rate from 10% 
to 10\1/4\%, or the decimal equivalent, is deemed to comply with the 
regulation.
    Paragraph 22(a)(3).
    1. Irregular transactions. The annual percentage rate for an 
irregular transaction is considered accurate if it varies in either 
direction by not more than \1/4\ of 1 percentage point from the actual 
annual percentage rate. This tolerance is intended for more complex 
transactions that do not call for a single advance and a regular series 
of equal payments at equal intervals. The \1/4\ of 1 percentage point 
tolerance may be used, for example, in a construction loan where 
advances are made as construction progresses, or in a transaction where 
payments vary to reflect the consumer's seasonal income. It may also be 
used in transactions with graduated payment schedules where the contract 
commits the consumer to several series of payments in different amounts. 
It does not apply, however, to loans with variable rate features where 
the initial disclosures are based on a regular amortization schedule 
over the life of the loan, even though payments may later change because 
of the variable rate feature.
    22(a)(4) Mortgage loans.
    1. Example. If a creditor improperly omits a $75 fee from the 
finance charge on a regular transaction, the understated finance charge 
is considered accurate under Sec. 226.18(d)(1), and the annual 
percentage rate corresponding to that understated finance charge also is 
considered accurate even if it

[[Page 576]]

falls outside the tolerance of \1/8\ of 1 percentage point provided 
under Sec. 226.22(a)(2). Because a $75 error was made, an annual 
percentage rate corresponding to a $100 understatement of the finance 
charge would not be considered accurate.
    22(a)(5) Additional tolerance for mortgage loans.
    1. Example. This paragraph contains an additional tolerance for a 
disclosed annual percentage rate that is incorrect but is closer to the 
actual annual percentage rate than the rate that would be considered 
accurate under the tolerance in Sec. 226.22(a)(4). To illustrate: in an 
irregular transaction subject to a \1/4\ of 1 percentage point 
tolerance, if the actual annual percentage rate is 9.00 percent and a 
$75 omission from the finance charge corresponds to a rate of 8.50 
percent that is considered accurate under Sec. 226.22(a)(4), a 
disclosed APR of 8.65 percent is within the tolerance in Sec. 
226.22(a)(5). In this example of an understated finance charge, a 
disclosed annual percentage rate below 8.50 or above 9.25 percent will 
not be considered accurate.
    22(b) Computation tools.
    Paragraph 22(b)(1).
    1. Board tables. Volumes I and II of the Board's Annual Percentage 
Rate Tables provide a means of calculating annual percentage rates for 
regular and irregular transactions, respectively. An annual percentage 
rate computed in accordance with the instructions in the tables is 
deemed to comply with the regulation, even where use of the tables 
produces a rate that falls outside the general standard of accuracy. To 
illustrate:

     Volume I may be used for single advance 
transactions with completely regular payment schedules or with payment 
schedules that are regular except for an odd first payment, odd first 
period or odd final payment. When used for a transaction with a large 
final balloon payment, Volume I may produce a rate that is considerably 
higher than the exact rate produced using a computer program based 
directly on appendix J. However, the Volume I rate--produced using 
certain adjustments in that volume--is considered to be in compliance.

    Paragraph 22(b)(2).
    1. Other calculation tools. Creditors need not use the Board tables 
in calculating the annual percentage rates. Any computation tools may be 
used, so long as they produce annual percentage rates within \1/8\ or 
\1/4\ of 1 percentage point, as applicable, of the precise actuarial or 
U.S. Rule annual percentage rate.
    22(c) Single add-on rate transactions.
    1. General rule. Creditors applying a single add-on rate to all 
transactions up to 60 months in length may disclose the same annual 
percentage rate for all those transactions, although the actual annual 
percentage rate varies according to the length of the transaction. 
Creditors utilizing this provision must show the highest of those rates. 
For example:

     An add-on rate of 10 percent converted to an 
annual percentage rate produce the following actual annual percentage 
rates at various maturities: at 3 months, 14.94 percent; at 21 months, 
18.18 percent; and at 60 months, 17.27 percent. The creditor must 
disclose an annual percentage rate of 18.18 percent (the highest annual 
percentage rate) for any transaction up to 5 years, even though that 
rate is precise only for a transaction of 21 months.

    22(d) Certain transactions involving ranges of balances.
    1. General rule. Creditors applying a fixed dollar finance charge to 
all balances within a specified range of balances may understate the 
annual percentage rate by up to 8 percent of that rate, by disclosing 
for all those balances the annual percentage rate computed on the median 
balance within that range. For example:

     If a finance charge of $9 applies to all balances 
between $91 and $100, an annual percentage rate of 10 percent (the rate 
on the median balance) may be disclosed as the annual percentage rate 
for all balances, even though a $9 finance charge applied to the lowest 
balance ($91) would actually produce an annual percentage rate of 10.7 
percent.

                               References

    Statute: Section 107.
    Other sections: Section 226.17(c)(4) and appendix J.
    Previous regulation: Section 226.5(b) through (e).
    1981 changes: The section now provides a larger tolerance (\1/4\ of 
1 percentage point) for irregular transactions.

                   Section 226.23--Right of Rescission

    1. Transactions not covered. Credit extensions that are not subject 
to the regulation are not covered by Sec. 226.23 even if a customer's 
principal dwelling is the collateral securing the credit. For example, 
the right of rescission does not apply to a business purpose loan, even 
though the loan is secured by the customer's principal dwelling.
    23(a) Consumer's right to rescind.
    Paragraph 23(a)(1).
    1. Security interest arising from transaction. In order for the 
right of rescission to apply, the security interest must be retained as 
part of the credit transaction. For example:

     A security interest that is acquired by a 
contractor who is also extending the credit in the transaction.
     A mechanic's or materialman's lien that is 
retained by a subcontractor or supplier of the contractor-creditor, even 
when the latter

[[Page 577]]

has waived its own security interest in the consumer's home.

    The security interest is not part of the credit transaction and 
therefore the transaction is not subject to the right of rescission 
when, for example:

     A mechanic's or materialman's lien is obtained by 
a contractor who is not a party to the credit transaction but is merely 
paid with the proceeds of the consumer's unsecured bank loan.
     All security interests that may arise in 
connection with the credit transaction are validly waived.
     The creditor obtains a lien and completion bond 
that in effect satisfies all liens against the consumer's principal 
dwelling as a result of the credit transaction.

    Although liens arising by operation of law are not considered 
security interests for purposes of disclosure under Sec. 226.2, that 
section specifically includes them in the definition for purposes of the 
right of rescission. Thus, even though an interest in the consumer's 
principal dwelling is not a required disclosure under Sec. 226.18(m), 
it may still give rise to the right of rescission.
    2. Consumer. To be a consumer within the meaning of Sec. 226.2, 
that person must at least have an ownership interest in the dwelling 
that is encumbered by the creditor's security interest, although that 
person need not be a signatory to the credit agreement. For example, if 
only one spouse signs a credit contract, the other spouse is a consumer 
if the ownership interest of that spouse is subject to the security 
interest.
    3. Principal dwelling. A consumer can only have one principal 
dwelling at a time. (But see comment 23(a)(1)-4.) A vacation or other 
second home would not be a principal dwelling. A transaction secured by 
a second home (such as a vacation home) that is not currently being used 
as the consumer's principal dwelling is not rescindable, even if the 
consumer intends to reside there in the future. When a consumer buys or 
builds a new dwelling that will become the consumer's principal dwelling 
within one year or upon completion of construction, the new dwelling is 
considered the principal dwelling if it secures the acquisition or 
construction loan. In that case, the transaction secured by the new 
dwelling is a residential mortgage transaction and is not rescindable. 
For example, if a consumer whose principal dwelling is currently A 
builds B, to be occupied by the consumer upon completion of 
construction, a construction loan to finance B and secured by B is a 
residential mortgage transaction. Dwelling, as defined in Sec. 226.2, 
includes structures that are classified as personalty under state law. 
For example, a transaction secured by a mobile home, trailer, or 
houseboat used as the consumer's principal dwelling may be rescindable.
    4. Special rule for principal dwelling. Notwithstanding the general 
rule that consumers may have only one principal dwelling, when the 
consumer is acquiring or constructing a new principal dwelling, any loan 
subject to Regulation Z and secured by the equity in the consumer's 
current principal dwelling (for example, a bridge loan) is subject to 
the right of rescission regardless of the purpose of that loan. For 
example, if a consumer whose principal dwelling is currently A builds B, 
to be occupied by the consumer upon completion of construction, a 
construction loan to finance B and secured by A is subject to the right 
of rescission. A loan secured by both A and B is, likewise, rescindable.
    5. Addition of a security interest. Under footnote 47, the addition 
of a security interest in a consumer's principal dwelling to an existing 
obligation is rescindable even if the existing obligation is not 
satisfied and replaced by a new obligation, and even if the existing 
obligation was previously exempt (because it was credit over $25,000 not 
secured by real property or a consumer's principal dwelling). The right 
of rescission applies only to the added security interest, however, and 
not to the original obligation. In those situations, only the Sec. 
226.23(b) notice need be delivered, not new material disclosures; the 
rescission period will begin to run from the delivery of the notice.
    Paragraph 23(a)(2).
    1. Consumer's exercise of right. The consumer must exercise the 
right of rescission in writing but not necessarily on the notice 
supplied under Sec. 226.23(b). Whatever the means of sending the 
notification of rescission--mail, telegram or other written means--the 
time period for the creditor's performance under Sec. 226.23(d)(2) does 
not begin to run until the notification has been received. The creditor 
may designate an agent to receive the notification so long as the 
agent's name and address appear on the notice provided to the consumer 
under Sec. 226.23(b). Where the creditor fails to provide the consumer 
with a designated address for sending the notification of rescission, 
delivering notification to the person or address to which the consumer 
has been directed to send, payments constitutes delivery to the creditor 
or assignee. State law determines whether delivery of the notification 
to a third party other than the person to whom payments are made is 
delivery to the creditor or assignee, in the case where the creditor 
fails to designate an address for sending the notification of 
rescission.
    Paragraph 23(a)(3).
    1. Rescission period. The period within which the consumer may 
exercise the right to rescind runs for 3 business days from the last of 
3 events:

     Consummation of the transaction.
     Delivery of all material disclosures.

[[Page 578]]

     Delivery to the consumer of the required 
rescission notice.

    For example, if a transaction is consummated on Friday, June 1, and 
the disclosures and notice of the right to rescind were given on 
Thursday, May 31, the rescission period will expire at midnight of the 
third business day after June 1--that is, Tuesday, June 5. In another 
example, if the disclosures are given and the transaction consummated on 
Friday, June 1, and the rescission notice is given on Monday, June 4, 
the rescission period expires at midnight of the third business day 
after June 4--that is, Thursday, June 7. The consumer must place the 
rescission notice in the mail, file it for telegraphic transmission, or 
deliver it to the creditor's place of business within that period in 
order to exercise the right.
    2. Material disclosures. Footnote 48 sets forth the material 
disclosures that must be provided before the rescission period can begin 
to run. Failure to provide information regarding the annual pecentage 
rate also includes failure to inform the consumer of the existence of a 
variable rate feature. Failure to give the other required disclosures 
does not prevent the running of the rescission period, although that 
failure may result in civil liability or administrative sanctions.
    3. Unexpired right of rescission. When the creditor has failed to 
take the action necessary to start the three-business day rescission 
period running, the right to rescind automatically lapses on the 
occurrence of the earliest of the following three events:

 The expiration of three years after consummation of 
the transaction.
 Transfer of all the consumer's interest in the 
property.
 Sale of the consumer's interest in the property, 
including a transaction in which the consumer sells the dwelling and 
takes back a purchase money note and mortgage or retains legal title 
through a device such as an installment sale contract.

    Transfer of all the consumers' interest includes such transfers as 
bequests and gifts. A sale or transfer of the property need not be 
voluntary to terminate the right to rescind. For example, a foreclosure 
sale would terminate an unexpired right to rescind. As provided in 
section 125 of the Act, the three-year limit may be extended by an 
administrative proceeding to enforce the provisions of this section. A 
partial transfer of the consumer's interest, such as a transfer 
bestowing co-ownership on a spouse, does not terminate the right of 
rescission.
    Paragraph 23(a)(4).
    1. Joint owners. When more than one consumer has the right to 
rescind a transaction, any of them may exercise that right and cancel 
the transaction on behalf of all. For example, if both husband and wife 
have the right to rescind a transaction, either spouse acting alone may 
exercise the right and both are bound by the rescission.
    23(b) Notice of right to rescind.
    1. Who receives notice. Each consumer entitled to rescind must be 
given:
     Two copies of the rescission notice.
     The material disclosures.
    In a transaction involving joint owners, both of whom are entitled 
to rescind, both must receive the notice of the right to rescind and 
disclosures. For example, if both spouses are entitled to rescind a 
transaction, each must receive two copies of the rescission notice (one 
copy to each if the notice is provided in electronic form in accordance 
with the consumer consent and other applicable provisions of the E-Sign 
Act) and one copy of the disclosures.
    2. Format. The notice must be on a separate piece of paper, but may 
appear with other information such as the itemization of the amount 
financed. The material must be clear and conspicuous, but no minimum 
type size or other technical requirements are imposed. The notices in 
appendix H provide models that creditors may use in giving the notice.
    3. Content. The notice must include all of the information outlined 
in Section 226.23(b)(1)(i) through (v). The requirement in Sec. 
226.23(b) that the transaction be identified may be met by providing the 
date of the transaction. The creditor may provide a separate form that 
the consumer may use to exercise the right of rescission, or that form 
may be combined with the other rescission disclosures, as illustrated in 
appendix H. The notice may include additional information related to the 
required information, such as:

     A description of the property subject to the 
security interest.
     A statement that joint owners may have the right 
to rescind and that a rescission by one is effective for all.
     The name and address of an agent of the creditor 
to receive notice of rescission.

    4. Time of providing notice. The notice required by Sec. 226.23(b) 
need not be given before consummation of the transaction. The creditor 
may deliver the notice after the transaction is consummated, but the 
rescission period will not begin to run until the notice is given. For 
example, if the creditor provides the notice on May 15, but disclosures 
were given and the transaction was consummated on May 10, the 3-business 
day rescission period will run from May 15.
    23(c) Delay of creditor's performance.
    1. General rule. Until the rescission period has expired and the 
creditor is reasonably satisfied that the consumer has not rescinded, 
the creditor must not, either directly or through a third party:

     Disburse loan proceeds to the consumer.
     Begin performing services for the consumer.
     Deliver materials to the consumer.


[[Page 579]]


    2. Escrow. The creditor may disburse loan proceeds during the 
rescission period in a valid escrow arrangement. The creditor may not, 
however, appoint the consumer as ``trustee'' or ``escrow agent'' and 
distribute funds to the consumer in that capacity during the delay 
period.
    3. Actions during the delay period. Section 226.23(c) does not 
prevent the creditor from taking other steps during the delay, short of 
beginning actual performance. Unless otherwise prohibited, such as by 
state law, the creditor may, for example:
     Prepare the loan check.
     Perfect the security interest.
     Prepare to discount or assign the contract to a 
third party.
     Accrue finance charges during the delay period.

    4. Delay beyond rescission period. The creditor must wait until it 
is reasonably satisfied that the consumer has not rescinded. For 
example, the creditor may satisfy itself by doing one of the following:

     Waiting a reasonable time after expiration of the 
rescission period to allow for delivery of a mailed notice.
     Obtaining a written statement from the consumer 
that the right has not been exercised.

    When more than one consumer has the right to rescind, the creditor 
cannot reasonably rely on the assurance of only one consumer, because 
other consumers may exercise the right.
    23(d) Effects of rescission.
    Paragraph 23(d)(1).
    1. Termination of security interest. Any security interest giving 
rise to the right of rescission becomes void when the consumer exercises 
the right of rescission. The security interest is automatically negated 
regardless of its status and whether or not it was recorded or 
perfected. Under Sec. 226.23(d)(2), however, the creditor must take any 
action necessary to reflect the fact that the security interest no 
longer exists.
    Paragraph 23(d)(2).
    1. Refunds to consumer. The consumer cannot be required to pay any 
amount in the form of money or property either to the creditor or to a 
third party as part of the credit transaction. Any amounts of this 
nature already paid by the consumer must be refunded. ``Any amount'' 
includes finance charges already accrued, as well as other charges, such 
as broker fees, application and commitment fees, or fees for a title 
search or appraisal, whether paid to the creditor, paid directly to a 
third party, or passed on from the creditor to the third party. It is 
irrelevant that these amounts may not represent profit to the creditor.
    2. Amounts not refundable to consumer. Creditors need not return any 
money given by the consumer to a third party outside of the credit 
transaction, such as costs incurred for a building permit or for a 
zoning variance. Similarly, the term any amount does not apply to any 
money or property given by the creditor to the consumer; those amounts 
must be tendered by the consumer to the creditor under Sec. 
226.23(d)(3).
    3. Reflection of security interest termination. The creditor must 
take whatever steps are necessary to indicate that the security interest 
is terminated. Those steps include the cancellation of documents 
creating the security interest, and the filing of release or termination 
statements in the public record. In a transaction involving 
subcontractors or suppliers that also hold security interests related to 
the credit transaction, the creditor must insure that the termination of 
their security interests is also reflected. The 20-day period for the 
creditor's action refers to the time within which the creditor must 
begin the process. It does not require all necessary steps to have been 
completed within that time, but the creditor is responsible for seeing 
the process through to completion.
    Paragraph 23(d)(3).
    1. Property exchange. Once the creditor has fulfilled its 
obligations under Sec. 226.23(d)(2), the consumer must tender to the 
creditor any property or money the creditor has already delivered to the 
consumer. At the consumer's option, property may be tendered at the 
location of the property. For example, if lumber or fixtures have been 
delivered to the consumer's home, the consumer may tender them to the 
creditor by making them available for pick-up at the home, rather than 
physically returning them to the creditor's premises. Money already 
given to the consumer must be tendered at the creditor's place of 
business.
    2. Reasonable value. If returning the property would be extremely 
burdensome to the consumer, the consumer may offer the creditor its 
reasonable value rather than returning the property itself. For example, 
if building materials have already been incorporated into the consumer's 
dwelling, the consumer may pay their reasonable value.
    Paragraph 23(d)(4).
    1. Modifications. The procedures outlined in Sec. 226.23(d)(2) and 
(3) may be modified by a court. For example, when a consumer is in 
bankruptcy proceedings and prohibited from returning anything to the 
creditor, or when the equities dictate, a modification might be made. 
The sequence of procedures under Sec. 226.23(d)(2) and (3), or a 
court's modification of those procedures under Sec. 226.23(d)(4), does 
not affect a consumer's substantive right to rescind and to have the 
loan amount adjusted accordingly. Where the consumer's right to rescind 
is contested by the creditor, a court would normally determine whether

[[Page 580]]

the consumer has a right to rescind and determine the amounts owed 
before establishing the procedures for the parties to tender any money 
or property.
    23(e) Consumer's waiver of right to rescind.
    1. Need for waiver. To waive the right to rescind, the consumer must 
have a bona fide personal financial emergency that must be met before 
the end of the rescission period. The existence of the consumer's waiver 
will not, of itself, automatically insulate the creditor from liability 
for failing to provide the right of rescission.
    2. Procedure. To waive or modify the right to rescind, the consumer 
must give a written statement that specifically waives or modifies the 
right, and also includes a brief description of the emergency. Each 
consumer entitled to rescind must sign the waiver statement. In a 
transaction involving multiple consumers, such as a husband and wife 
using their home as collateral, the waiver must bear the signatures of 
both spouses.
    23(f) Exempt transactions.
    1. Residential mortgage transaction. Any transaction to construct or 
acquire a principal dwelling, whether considered real or personal 
property, is exempt. (See the commentary to Sec. 226.23(a).) For 
example, a credit transaction to acquire a mobile home or houseboat to 
be used as the consumer's principal dwelling would not be rescindable.
    2. Lien status. The lien status of the mortgage is irrelevant for 
purposes of the exemption in Sec. 226.23(f)(1); the fact that a loan 
has junior lien status does not by itself preclude application of this 
exemption. For example, a home buyer may assume the existing first 
mortgage and create a second mortgage to finance the balance of the 
purchase price. Such a transaction would not be rescindable.
    3. Combined-purpose transaction. A loan to acquire a principal 
dwelling and make improvements to that dwelling is exempt if treated as 
one transaction. If, on the other hand, the loan for the acquisition of 
the principal dwelling and the subsequent advances for improvements are 
treated as more than one transaction, then only the transaction that 
finances the acquisition of that dwelling is exempt.
    4. New advances. The exemption in Sec. 226.23(f)(2) applies only to 
refinancings (including consolidations) by the original creditor. The 
original creditor is the creditor to whom the written agreement was 
initially made payable. In a merger, consolidation or acquisition, the 
successor institution is considered the original creditor for purposes 
of the exemption in Sec. 226.23(f)(2). If the refinancing involves a 
new advance of money, the amount of the new advance is rescindable. In 
determining whether there is a new advance, a creditor may rely on the 
amount financed, refinancing costs, and other figures stated in the 
latest Truth in Lending disclosures provided to the consumer and is not 
required to use, for example, more precise information that may only 
become available when the loan is closed. For purposes of the right of 
rescission, a new advance does not include amounts attributed solely to 
the costs of the refinancing. These amounts would include Sec. 
226.4(c)(7) charges (such as attorneys fees and title examination and 
insurance fees, if bona fide and reasonable in amount), as well as 
insurance premiums and other charges that are not finance charges. 
(Finance charges on the new transaction--points, for example--would not 
be considered in determining whether there is a new advance of money in 
a refinancing since finance charges are not part of the amount 
financed.) To illustrate, if the sum of the outstanding principal 
balance plus the earned unpaid finance charge is $50,000 and the new 
amount financed is $51,000, then the refinancing would be exempt if the 
extra $1,000 is attributed solely to costs financed in connection with 
the refinancing that are not finance charges. Of course, if new advances 
of money are made (for example, to pay for home improvements) and the 
consumer exercises the right of rescission, the consumer must be placed 
in the same position as he or she was in prior to entering into the new 
credit transaction. Thus, all amounts of money (which would include all 
the costs of the refinancing) already paid by the consumer to the 
creditor or to a third party as part of the refinancing would have to be 
refunded to the consumer. (See the commentary to Sec. 226.23(d)(2) for 
a discussion of refunds to consumers.) A model rescission notice 
applicable to transactions involving new advances appears in appendix H. 
The general rescission notice (model form H-8) is the appropriate form 
for use by creditors not considered original creditors in refinancing 
transactions.
    5. State creditors. Cities and other political subdivisions of 
states acting as creditors are not exempted from this section.
    6. Multiple advances. Just as new disclosures need not be made for 
subsequent advances when treated as one transaction, no new rescission 
rights arise so long as the appropriate notice and disclosures are given 
at the outset of the transaction. For example, the creditor extends 
credit for home improvements secured by the consumer's principal 
dwelling, with advances made as repairs progress. As permitted by Sec. 
226.17(c)(6), the creditor makes a single set of disclosures at the 
beginning of the construction period, rather than separate disclosures 
for each advance. The right of rescission does not arise with each 
advance. However, if the advances are treated as separate transactions, 
the right of rescission applies to each advance.
    7. Spreader clauses. When the creditor holds a mortgage or deed of 
trust on the consumer's principal dwelling and that mortgage or deed of 
trust contains a ``spreader

[[Page 581]]

clause,'' subsequent loans made are separate transactions and are 
subject to the right of rescission. Those loans are rescindable unless 
the creditor effectively waives its security interest under the spreader 
clause with respect to the subsequent transactions.
    8. Converting open-end to closed-end credit. Under certain state 
laws, consummation of a closed-end credit transaction may occur at the 
time a consumer enters into the intitial open-end credit agreement. As 
provided in the commentary to Sec. 226.17(b), closed-end credit 
disclosures may be delayed under these circumstances until the 
conversion of the open-end account to a closed-end transaction. In 
accounts secured by the consumer's principal dwelling, no new right of 
rescission arises at the time of conversion. Rescission rights under 
Sec. 226.15 are unaffected.
    23(g) Tolerances for accuracy.
    23(g)(2) One percent tolerance.
    1. New advance. The phrase ``new advance'' has the same meaning as 
in comment 23(f)-4.
    23(h) Special Rules for Foreclosures.
    1. Rescission. Section 226.23(h) applies only to transactions that 
are subject to rescission under Sec. 226.23(a)(1).
    Paragraph 23(h)(1)(i).
    1. Mortgage broker fees. A consumer may rescind a loan in 
foreclosure if a mortgage broker fee that should have been included in 
the finance charge was omitted, without regard to the dollar amount 
involved. If the amount of the mortgage broker fee is included but 
misstated the rule in Sec. 226.23(h)(2) applies.
    23(h)(2) Tolerance for disclosures.
    1. General. This section is based on the accuracy of the total 
finance charge rather than its component charges.

                               References

    Statute: Sections 113, 125, and 130.
    Other sections: Section 226.2 and appendix H.
    Previous regulation: Section 226.9.
    1981 changes: The right to rescind applies not only to real property 
used as the consumer's principal dwelling, but to personal property as 
well. The regulation provides no specific text or format for the notice 
of the right to rescind.

                       Section 226.24--Advertising

    1. Clear and conspicuous standard. This section is subject to the 
general ``clear and conspicous'' standard for this subpart but 
prescribes no specific rules for the format of the necessary 
disclosures. The credit terms need not be printed in a certain type size 
nor need they appear in any particular place in the advertisment. For 
example, a merchandise tag that is an advertisement under the regulation 
complies with this section if the necessary credit terms are on both 
sides of the tag, so long as each side is accessible.
    24(a) Actually available terms.
    1. General rule. To the extent that an advertisement mentions 
specific credit terms, it may state only those terms that the creditor 
is actually prepared to offer. For example, a creditor may not advertise 
a very low annual percentage rate that will not in fact be available at 
any time. This provision is not intended to inhibit the promotion of new 
credit programs, but to bar the advertising of terms that are not and 
will not be available. For example, a creditor may advertise terms that 
will be offered for only a limited period, or terms that will become 
available at a future date.
    24(b) Advertisment of rate of finance charge.
    1. Annual percentage rate. Advertised rates must be stated in terms 
of an annual percentage rate, as defined in Sec. 226.22. Even though 
state or local law permits the use of add-on, discount, time-price 
differential, or other methods of stating rates, advertisements must 
state them as annual percentage rates. Unlike the transactional 
disclosure of an annual percentage rate under Sec. 226.18(e), the 
advertised annual percentage rate need not include a descriptive 
explanation of the term and may be expressed using the abbreviation APR. 
The advertisement must state that the rate is subject to increase after 
consummation if that is the case, but the advertisement need not 
describe the rate increase, its limits, or how it would affect the 
payment schedule. As under Sec. 226.18(f), relating to disclosure of a 
variable rate, the rate increase disclosure requirement in this 
provision does not apply to any rate increase due to delinquency 
(including late payment), default, acceleration, assumption, or transfer 
of collateral.
    2. Simple or periodic rates. The advertisement may not 
simultaneously state any other rate, except that a simple annual rate or 
periodic rate applicable to an unpaid balance may appear along with (but 
not more conspicuously than) the annual percentage rate. For example:

     In an advertisement for real estate, a simple 
interest rate may be shown in the same type size as the annual 
percentage rate for the advertised credit.

    3. Buydowns. When a third party (such as a seller) or a creditor 
wishes to promote the availability of reduced interest rates (consumer 
or seller buydowns), the advertised annual percentage rate must be 
determined in accordance with the rules in the commentary to Sec. 
226.17(c) regarding the basis of transactional disclosures for buydowns. 
The seller or creditor may advertise the reduced simple interest rate, 
provided the advertisement shows the limited term to which the reduced 
rate applies and states the simple interest rate applicable to the 
balance of the

[[Page 582]]

term. The advertisement may also show the effect of the buydown 
agreement on the payment schedule for the buydown period without 
triggering the additional disclosures under Sec. 226.24(c)(2). For 
example, the advertisement may state that ``with this buydown 
arrangement, your monthly payments for the first 3 years of the mortgage 
term will be only $350'' or ``this buydown arrangement will reduce your 
monthly payments for the first 3 years of the mortgage term by $150.''
    4. Effective rates. In some transactions the consumer's payments may 
be based upon an interest rate lower than the rate at which interest is 
accruing. The lower rate may be referred to as the effective rate, 
payment rate or qualifying rate. A creditor or seller may advertise such 
rates by stating: The term of the reduced payment schedule, the interest 
rate upon which the reduced payments are calculated, the rate at which 
the interest is in fact accruing, and the annual percentage rate. The 
advertised annual percentage rate that must accompany this rate must 
take into account the interest that will accrue but will not be paid 
during this period. For example, an advertisement may state ``An 
effective first year interest rate of 10 percent. Interest being earned 
at 14 percent. Annual percentage rate 15 percent.''
    5. Discounted variable-rate transactions. The advertised annual 
percentage rate for discounted variable-rate transactions must be 
determined in accordance with comment 17(c)(1)-10 regarding the basis of 
transactional disclosures for such financing. A creditor or seller may 
promote the availability of the initial rate reduction in such 
transactions by advertising the reduced initial rate, provided the 
advertisement shows the limited term to which the reduced rate applies.
     Limits or caps on periodic rate or payment 
adjustments need not be stated. To illustrate using the second example 
in comment 17(c)(1)-10, the fact that the rate is presumed to be 11 
percent in the second year and 12 percent for the remaining 28 years 
need not be included in the advertisement.
     The advertisement may also show the effect of the 
discount on the payment schedule for the discount period without 
triggering the additional disclosures under Sec. 226.24(c). For 
example, the advertisement may state that ``with this discount, your 
monthly payments for the first year of the mortgage term will be only 
$577'' or ``this discount will reduce your monthly payments for the 
first year of the mortgage term by $223.''
    24(c) Advertisement of terms that require additional disclosures.
    1. General rule. Under Sec. 226.24(c)(1), whenever certain 
triggering terms appear in credit advertisements, the additional credit 
terms enumerated in Sec. 226.24(c)(2) must also appear. These 
provisions apply even if the triggering term is not stated explicitly, 
but may be readily determined from the advertisement. For example, an 
advertisement may state ``80% financing available,'' which is in fact 
indicating that a 20% downpayment is required.
    Paragraph 24(c)(1).
    1. Downpayment. The dollar amount of a downpayment or a statement of 
the downpayment as a percentage of the price requires further 
information. By virtue of the definition of downpayment in Sec. 226.2, 
this triggering term is limited to credit sale transactions. It includes 
such statements as:
     Only 5% down.
     As low as $100 down.
     Total move-in costs of $800.

    This provision applies only if a downpayment is actually required; 
statements such as no downpayment or no trade-in required do not trigger 
the additional disclosures under this paragraph.
    2. Payment period. The number of payments required or the total 
period of repayment includes such statements as:

     48-month payment terms.
     30-year mortgage.
     Repayment in as many as 36 monthly installments.

    But it does not include such statements as ``pay weekly,'' ``monthly 
payment terms arranged,'' or ``take years to repay,'' since these 
statements do not indicate a time period over which a loan may be 
financed.
    3. Payment amount. The dollar amount of any payment includes 
statements such as:

     ``Payable in installments of $103.''
     ``$25 weekly.''
     ``$1,200 balance payable in 10 equal 
installments.''

    In the last example, the amount of each payment is readily 
determinable, even though not explicitly stated. But statements such as 
``monthly payments to suit your needs'' or ``regular monthly payments'' 
are not covered.
    4. Finance charge. The dollar amount of the finance charge or any 
portion of it includes statements such as:

     ``$500 total cost of credit.''
     ``$2 monthly carrying charge.''
     ``$50,000 mortgages, 2 points to the borrower.''

    In the last example, the $1,000 prepaid finance charge can be 
readily determined from the information given. Statements of the annual 
percentage rate or statements that there is no particular charge for 
credit (such as ``no closing costs'') are not triggering terms under 
this paragraph.
    Paragraph 24(c)(2).
    1. Disclosure of downpayment. The total downpayment as a dollar 
amount or percentage must be shown, but the word ``downpayment'' need 
not be used in making this disclosure. For example, ``10% cash required

[[Page 583]]

from buyer'' or ``credit terms require minimum $100 trade-in'' would 
suffice.
    2. Disclosure of repayment terms. While the phrase terms of 
repayment generally has the same meaning as the payment schedule 
required to be disclosed under Sec. 226.18(g), Sec. 226.24(c)(2)(ii) 
provides greater flexibility to creditors in making this disclosure for 
advertising purposes. Repayment terms may be expressed in a variety of 
ways in addition to an exact repayment schedule; this is particularly 
true for advertisements that do not contemplate a single specific 
transaction. For example:

     A creditor may use a unit-cost approach in making 
the required disclosure, such as ``48 monthly payments of $27.83 per 
$1,000 borrowed.''
     In an advertisement for credit secured by a 
dwelling, when any series of payments varies because of a graduated 
payment feature or because of the inclusion of mortgage insurance 
premiums, a creditor may state the number and timing of payments, the 
amounts of the largest and smallest of those payments, and the fact that 
other payments will vary between those amounts.

    3. Annual percentage rate. The advertised annual percentage rate may 
be expressed using the abbreviation ``APR.'' The advertisement must also 
state, if applicable, that the annual percentage rate is subject to 
increase after consummation.
    4. Use of examples. Footnote 49 authorizes the use of illustrative 
credit transactions to make the necessary disclosures under Sec. 
226.24(c)(2). That is, where a range of possible combinations of credit 
terms is offered, the advertisement may use examples of typical 
transactions, so long as each example contains all of the applicable 
terms required by Sec. 226.24(c). The examples must be labelled as such 
and must reflect representative credit terms that are made available by 
the creditor to present and prospective customers.
    24(d) Catalogs or Other Multiple-page Advertisements; Electronic 
Advertisements
    1. Definition. The multiple-page advertisements to which this 
section refers are advertisements consisting of a series of sequentially 
numbered pages--for example, a supplement to a newspaper. A mailing 
consisting of several separate flyers or pieces of promotional material 
in a single envelope does not constitute a single multiple-page 
advertisement for purposes of Sec. 226.24(d).
    2. General. Section 226.24(d) permits creditors to put credit 
information together in one place in a catalog or other multiple-page 
advertisement, or in an electronic advertisement (such as an 
advertisement appearing on an Internet Web site). The rule applies only 
if the advertisement contains one or more of the triggering terms from 
Sec. 226.24(c)(1). A list of different annual percentage rates 
applicable to different balances, for example, does not trigger further 
disclosures under Sec. 226.24(c)(2) and so is not covered by Sec. 
226.24(d).
    3. Representative examples. The table or schedule must state all the 
necessary information for a representative sampling of amounts of 
credit. This must reflect amounts of credit the creditor actually 
offers, up to and including the higher-priced items. This does not mean 
that the chart must make the disclosures for the single most expensive 
item the seller offers, but only that the chart cannot be limited to 
information about less expensive sales when the seller commonly offers a 
distinct level of more expensive goods or services. The range of 
transactions shown in the table or schedule in a particular catalog or 
multiple-page advertisement need not exceed the range of transactions 
actually offered in that advertisement.
    4. Electronic advertisement. If an electronic advertisement (such as 
an advertisement appearing on an Internet Web site) contains the table 
or schedule permitted under Sec. 226.24(d)(1), any statement of terms 
set forth in Sec. 226.24(c)(1) appearing anywhere else in the 
advertisement must clearly direct the consumer to the location where the 
table or schedule begins. For example, a term triggering additional 
disclosures may be accompanied by a link that directly takes the 
consumer to the additional information.

                               References

    Statute: Sections 141, 142, and 144.
    Other sections: Sections 226.2, 226.4, and 226.22.
    Previous regulation: Section 226.10 (a), (b), and (d).
    1981 changes: This section retains the advertising rules in a form 
very similar to the previous regulation, but with certain changes to 
reflect the 1980 statutory amendments. For example, if triggering terms 
appear in any advertisement, the additional disclosures required no 
longer include the cash price. The special rule for FHA section 235 
financing has been eliminated, as well as the rule for advertising 
credit payable in more than four installments with no identified finance 
charge. Interpretation Sec. 226.1002, requiring disclosure of 
representative amounts of credit in catalogs and multiple-page 
advertisements, has been incorporated in simplified form in Sec. 
226.24(d).
    Unlike the previous regulation, if the advertised annual percentage 
rate is subject to increase, that fact must now be disclosed.

                        Subpart D--Miscellaneous

                    Section 226.25--Record Retention

    25(a) General rule.
    1. Evidence of required actions. The creditor must retain evidence 
that it performed the required actions as well as made the required

[[Page 584]]

disclosures. This includes, for example, evidence that the creditor 
properly handled adverse credit reports in connection with amounts 
subject to a billing dispute under Sec. 226.13, and properly handled 
the refunding of credit balances under Sec. Sec. 226.11 and 226.21.
    2. Methods of retaining evidence. Adequate evidence of compliance 
does not necessarily mean actual paper copies of disclosure statements 
or other business records. The evidence may be retained on microfilm, 
microfiche, or by any other method that reproduces records accurately 
(including computer programs). The creditor need retain only enough 
information to reconstruct the required disclosures or other records. 
Thus, for example, the creditor need not retain each open-end periodic 
statement, so long as the specific information on each statement can be 
retrieved.
    3. Certain variable-rate transactions. In variable-rate transactions 
that are subject to the disclosure requirements of Sec. 226.19(b), 
written procedures for compliance with those requirements as well as a 
sample disclosure form for each loan program represent adequate evidence 
of compliance. (See comment 25(a)-2 pertaining to permissible methods of 
retaining the required disclosures.)
    4. Home equity plans. In home equity plans that are subject to the 
requirements of Sec. 226.5b, written procedures for compliance with 
those requirements as well as a sample disclosure form and contract for 
each home equity program represent adequate evidence of compliance. (See 
comment 25(a)-2 pertaining to permissible methods of retaining the 
required disclosures.)

                               References

    Statute: Sections 105 and 108.
    Other sections: Appendix I.
    Previous regulation: Section 226.6(i).
    1981 changes: Section 226.25 substitutes a uniform 2-year record-
retention rule for the previous requirement that certain creditors 
retain records through at least one compliance examination. It also 
states more explicitly that the record-retention requirements apply to 
evidence of required actions.

    Section 226.26--Use of Annual Percentage Rate in Oral Disclosures

    1. Application of rules. The restrictions of Sec. 226.26 apply only 
if the creditor chooses to respond orally to the consumer's request for 
credit cost information. Nothing in the regulation requires the creditor 
to supply rate information orally. If the creditor volunteers 
information (including rate information) through oral solicitations 
directed generally to prospective customers, as through a telephone 
solicitation, those communications may be advertisements subject to the 
rules in Sec. Sec. 226.16 and 226.24.
    26(a) Open-end credit.
    1. Information that may be given. The creditor may state periodic 
rates in addition to the required annual percentage rate, but it need 
not do so. If the annual percentage rate is unknown because transaction 
charges, loan fees, or similar finance charges may be imposed, the 
creditor must give the corresponding annual percentage rate (that is, 
the periodic rate multiplied by the number of periods in a year, as 
described in Sec. Sec. 226.6(a)(2) and 226.7(d)). In such cases, the 
creditor may, but need not, also give the consumer information about 
other finance charges and other charges.
    26(b) Closed-end credit.
    1. Information that may be given. The creditor may state other 
annual or periodic rates that are applied to an unpaid balance, along 
with the required annual percentage rate. This rule permits disclosure 
of a simple interest rate, for example, but not an add-on, discount, or 
similar rate. If the creditor cannot give a precise annual percentage 
rate in its oral response because of variables in the transaction, it 
must give the annual percentage rate for a comparable sample 
transaction; in this case, other cost information may, but need not, be 
given. For example, the creditor may be unable to state a precise annual 
percentage rate for a mortgage loan without knowing the exact amount to 
be financed, the amount of loan fees or mortgage insurance premiums, or 
similar factors. In this situation, the creditor should state an annual 
percentage rate for a sample transaction; it may also provide 
information about the consumer's specific case, such as the contract 
interest rate, points, other finance charges, and other charges.

                               References

    Statute: Section 146.
    Other sections: Sections 226.6(a)(2) and 226.7(d).
    Previous regulation: Interpretation Sec. 226.101.
    1981 changes: This section implements amended section 146 of the 
Act, which added a provision dealing with oral disclosures, and 
incorporates Interpretation Sec. 226.101.

                 Section 226.27--Language of Disclosures

    1. Subsequent disclosures. If a creditor provides initial 
disclosures in a language other than English, subsequent disclosures 
need not be in that other language. For example, if the creditor gave 
Spanish-language initial disclosures, periodic statements and change-in-
terms notices may be made in English.
    2. [Reserved]

                               References

    Statute: None.
    Other sections: None.
    Previous regulation: Section 226.6(a).
    1981 changes: No substantive change.

[[Page 585]]

                  Section 226.28--Effect on State Laws

    28(a) Inconsistent disclosure requirements
    1. General. There are 3 sets of preemption criteria: 1 applies to 
the general disclosure and advertising rules of the regulation, and 2 
apply to the credit billing provisions. Section 226.28 also provides for 
Board determinations of preemption.
    2. Rules for chapters 1, 2, and 3. The standard for judging whether 
State laws that cover the types of requirements in chapters 1 (General 
provisions), 2 (Credit transactions), and 3 (Credit advertising) of the 
Act are inconsistent and therefore preempted, is contradiction of the 
Federal law. Examples of laws that would be preempted include:

     A State law that requires use of the term finance 
charge, but defines the term to include fees that the Federal law 
excludes, or to exclude fees the Federal law includes.
     A State law that requires a label such as nominal 
annual interest rate to be used for what the Federal law calls the 
annual percentage rate.

    3. Laws not contradictory to chapters 1, 2, and 3. Generally, State 
law requirements that call for the disclosure of items of information 
not covered by the Federal law, or that require more detailed 
disclosures, do not contradict the Federal requirements. Examples of 
laws that are not preempted include:

     A State law that requires disclosure of the 
minimum periodic payment for open-end credit, even though not required 
by Sec. 226.7.
     A State law that requires contracts to contain 
warnings such as: ``Read this contract before you sign. Do not sign if 
any spaces are left blank. You are entitled to a copy of this 
contract.''

    Similarly, a State law that requires itemization of the amount 
financed does not automatically contradict the permissive itemization 
under Sec. 226.18(c). However, a State law requirement that the 
itemization appear with the disclosure of the amount financed in the 
segregated closed-end credit disclosures is inconsistent, and this 
location requirement would be preempted.
    4. Creditor's options. Before the Board makes a determination about 
a specific State law, the creditor has certain options. Since the 
prohibition against giving the State disclosures does not apply until 
the Board makes its determination, the creditor may choose to give State 
disclosures until the Board formally determines that the State law is 
inconsistent. (The Board will provide sufficient time for creditors to 
revise forms and procedures as necessary to conform to its 
determinations.)

     Under this first approach, as in all cases, the 
Federal disclosures must be clear and conspicuous, and the closed-end 
disclosures must be properly segregated in accordance with Sec. 
226.17(a)(1).
     This ability to give State disclosures relieves 
any uncertainty that the creditor might have prior to Board 
determinations of inconsistency.

    As a second option, the creditor may apply the preemption standards 
to a State law, conclude that it is inconsistent, and choose not to give 
the state-required disclosures. However, nothing in Sec. 226.28(a) 
provides the creditor with immunity for violations of State law if the 
creditor chooses not to make State disclosures and the Board later 
determines that the State law is not preempted.
    5. Rules for correction of billing errors and regulation of credit 
reports. The preemption criteria for the fair credit billing provisions 
set forth in Sec. 226.28 have 2 parts. With respect to the rules on 
correction of billing errors and regulation of credit reports (which are 
in Sec. 226.13), Sec. 226.28(a)(2)(i) provides that a State law is 
inconsistent and preempted if its requirements are different from the 
Federal law. An exception is made, however, for State laws that allow 
the consumer to inquire about an account and require the creditor to 
respond to such inquiries beyond the time limits in the Federal law. 
Such a State law is not preempted with respect to the extra time period. 
For example, Sec. 226.13 requires the consumer to submit a written 
notice of billing error within 60 days after transmittal of the periodic 
statement showing the alleged error. If a State law allows the consumer 
90 days to submit a notice, the State law remains in effect to provide 
the extra 30 days. Any State law disclosures concerning this extended 
state time limit must reflect the qualifications and conform to the 
format specified in Sec. 226.28(a)(2)(i). Examples of laws that would 
be preempted include:

     A State law that has a narrower or broader 
definition of billing error.
     A State law that requires the creditor to take 
different steps to resolve errors.
     A State law that provides different timing rules 
for error resolution (subject to the exception discussed above).

    6. Rules for other fair credit billing provisions. The second part 
of the criteria for fair credit billing relates to the other rules 
implementing chapter 4 of the Act (addressed in Sec. Sec. 226.4(c)(8), 
226.5(b)(2)(ii), 226.6(d), 226.7(k), 226.9(a), 226.10, 226.11, 226.12 
(c) through (f), 226.13, and 226.21). Section 226.28(a)(2)(ii) provides 
that the test of inconsistency is whether the creditor can comply with 
State law without violating Federal law. For example:

     A State law that allows the card issuer to offset 
the consumer's credit-card indebtedness against funds held by the card 
issuer would be preempted, since Sec. 226.12(d) prohibits such action.
     A State law that requires periodic statements to 
be sent more than 14 days before the

[[Page 586]]

end of a free-ride period would not be preempted.
     A State law that permits consumers to assert 
claims and defenses against the card issuer without regard to the $50 
and 100-mile limitations of Sec. 226.12(c)(3)(ii) would not be 
preempted.

    In the last 2 cases, compliance with State law would involve no 
violation of the Federal law.
    7. Who may receive a chapter 4 determination. Only states (through 
their authorized officials) may request and receive determinations on 
inconsistency with respect to the fair credit billing provisions.
    8. Preemption determination--Arizona. Effective October 1, 1983, the 
Board has determined that the following provisions in the State law of 
Arizona are preempted by the Federal law:

 Section 44-287 B.5--Disclosure of final cash price 
balance. This provision is preempted in those transactions in which the 
amount of the final cash price balance is the same as the Federal amount 
financed, since in such transactions the State law requires the use of a 
term different from the Federal term to represent the same amount.
 Section 44-287 B.6--Disclosure of finance charge. 
This provision is preempted in those transactions in which the amount of 
the finance charge is different from the amount of the Federal finance 
charge, since in such transactions the State law requires the use of the 
same term as the Federal law to represent a different amount.
 Section 44-287 B.7--Disclosure of the time balance. 
The time balance disclosure provision is preempted in those transactions 
in which the amount is the same as the amount of the Federal total of 
payments, since in such transactions the State law requires the use of a 
term different from the Federal term to represent the same amount.

    9. Preemption determination--Florida. Effective October 1, 1983, the 
Board has determined that the following provisions in the State law of 
Florida are preempted by the Federal law:

 Sections 520.07(2)(f) and 520.34(2)(f)--Disclosure of 
amount financed. This disclosure is preempted in those transactions in 
which the amount is different from the Federal amount financed, since in 
such transactions the State law requires the use of the same term as the 
Federal law to represent a different amount.
 Sections 520.07(2)(g), 520.34(2)(g), and 
520.35(2)(d)--Disclosure of finance charge and a description of its 
components. The finance charge disclosure is preempted in those 
transactions in which the amount of the finance charge is different from 
the Federal amount, since in such transactions the State law requires 
the use of the same term as the Federal law to represent a different 
amount. The requirement to describe or itemize the components of the 
finance charge, which is also included in these provisions, is not 
preempted.
 Sections 520.07(2)(h) and 520.34(2)(h)--Disclosure of 
total of payments. The total of payments disclosure is preempted in 
those transactions in which the amount differs from the amount of the 
Federal total of payments, since in such transactions the State law 
requires the use of the same term as the Federal law to represent a 
different amount than the Federal law.
 Sections 520.07(2)(i) and 520.34(2)(i)--Disclosure of 
deferred payment price. This disclosure is preempted in those 
transactions in which the amount is the same as the Federal total sale 
price, since in such transactions the State law requires the use of a 
different term than the Federal law to represent the same amount as the 
Federal law.

    10. Preemption determination--Missouri. Effective October 1, 1983, 
the Board has determined that the following provisions in the State law 
of Missouri are preempted by the Federal law:

 Sections 365.070-6(9) and 408.260-5(6)--Disclosure of 
principal balance. This disclosure is preempted in those transactions in 
which the amount of the principal balance is the same as the Federal 
amount financed, since in such transactions the State law requires the 
use of a term different from the Federal term to represent the same 
amount.
 Sections 365.070-6(10) and 408.260-5(7)--Disclosure 
of time price differential and time charge, respectively. These 
disclosures are preempted in those transactions in which the amount is 
the same as the Federal finance charge, since in such transactions the 
State law requires the use of a term different from the Federal law to 
represent the same amount.
 Sections 365.070-2 and 408.260-2--Use of the terms 
time price differential and time charge in certain notices to the buyer. 
In those transactions in which the State disclosure of the time price 
differential or time charge is preempted, the use of the terms in this 
notice also is preempted. The notice itself is not preempted.
 Sections 365.070-6(11) and 408.260-5(8)--Disclosure 
of time balance. The time balance disclosure is preempted in those 
transactions in which the amount is the same as the amount of the 
Federal total of payments, since in such transactions the State law 
requires the use of a different term than the Federal law to represent 
the same amount.
 Sections 365.070-6(12) and 408.260-5(9)--Disclosure 
of time sale price. This disclosure

[[Page 587]]

is preempted in those transactions in which the amount is the same as 
the Federal total sale price, since in such transactions the State law 
requires the use of a different term from the Federal law to represent 
the same amount.

    11. Preemption determination--Mississippi. Effective October 1, 
1984, the Board has determined that the following provision in the State 
law of Mississippi is preempted by the Federal law:
     Section 63-19-31(2)(g)--Disclosure of finance 
charge. This disclosure is preempted in those cases in which the term 
finance charge would be used under State law to describe a different 
amount than the finance charge disclosed under Federal law.
    12. Preemption determination--South Carolina. Effective October 1, 
1984, the Board has determined that the following provision in the State 
law of South Carolina is preempted by the Federal law.
     Section 37-10-102(c)--Disclosure of due-on-sale 
clause. This provision is preempted, but only to the extent that the 
creditor is required to include the disclosure with the segregated 
Federal disclosures. If the creditor may comply with the State law by 
placing the due-on-sale notice apart from the Federal disclosures, the 
state law is not preempted.
    13. Preemption determination--Arizona. Effective October 1, 1986, 
the Board has determined that the following provision in the State law 
of Arizona is preempted by the Federal law:
     Section 6-621A.2--Use of the term the total sum 
of $-------- in certain notices provided to borrowers. This term 
describes the same item that is disclosed under Federal law as the total 
of payments. Since the State law requires the use of a different term 
than Federal law to describe the same item, the State-required term is 
preempted. The notice itself is not preempted.

    Note: The State disclosure notice that incorporated the above 
preempted term was amended on May 4, 1987, to provide that disclosures 
must now be made pursuant to the Federal disclosure provisions.)

    14. Preemption determination--Indiana. Effective October 1, 1988, 
the Board has determined that the following provision in the State law 
of Indiana is preempted by the Federal law:
     Section 23-2-5-8--Inclusion of the loan broker's 
fees and charges in the calculation of, among other items, the finance 
charge and annual percentage rate disclosed to potential borrowers. This 
disclosure is inconsistent with sections 106(a) and Sec. 226.4(a) of 
the Federal statute and regulation, respectively, and is preempted in 
those instances where the use of the same term would disclose a 
different amount than that required to be disclosed under Federal law.
    15. Preemption determination--Wisconsin. Effective October 1, 1991, 
the Board has determined that the following provisions in the state law 
of Wisconsin are preempted by the federal law:
     Section 422.308(1)--the disclosure of the annual 
percentage rate in cases where the amount of the annual percentage rate 
disclosed to consumers under the state law differs from the amount that 
would be disclosed under federal law, since in those cases the state law 
requires the use of the same term as the federal law to represent a 
different amount than the federal law.
     Section 766.565(5)--the provision permitting a 
creditor to include in an open-end home equity agreement authorization 
to declare the account balance due and payable upon receiving notice of 
termination from a non-obligor spouse, since such provision is 
inconsistent with the purpose of the federal law.
    28(b) Equivalent disclosure requirements.
    1. General. A state disclosure may be substituted for a Federal 
disclosure only after the Board has made a finding of substantial 
similarity. Thus, the creditor may not unilaterally choose to make a 
state disclosure in place of a Federal disclosure, even if it believes 
that the state disclosure is substantially similar. Since the rule 
stated in Sec. 226.28(b) does not extend to any requirement relating to 
the finance charge or annual percentage rate, no state provision on 
computation, description, or disclosure of these terms may be 
substituted for the Federal provision.

             28(d) Special Rule for Credit and Charge Cards

    1. General. The standard that applies to preemption of state laws as 
they affect transactions of the type subject to Sec. Sec. 226.5a and 
226.9(e) differs from the preemption standards generally applicable 
under the Truth in Lending Act. The Fair Credit and Charge Card 
Disclosure Act fully preempts state laws relating to the disclosure of 
credit information in consumer credit or charge card applications or 
solicitations. (For purposes of this section, a single credit or charge 
card application or solicitation that may be used to open either an 
account for consumer purposes or an account for business purposes is 
deemed to be a ``consumer credit or charge card application or 
solicitation.'') For example, a state law requiring disclosure of credit 
terms in direct mail solicitations for consumer credit card accounts is 
preempted. A state law requiring disclosures in telephone applications 
for consumer credit card accounts also is preempted, even if it applies 
to applications initiated by the consumer rather than the issuer, 
because the state law relates to the disclosure of credit information in 
applications or solicitations within the general field of preemption, 
that is, consumer credit and charge cards.

[[Page 588]]

    2. Limitations on field of preemption. Preemption under the Fair 
Credit and Charge Card Disclosure Act does not extend to state laws 
applying to types of credit other than open-end consumer credit and 
charge card accounts. Thus, for example, a state law is not preempted as 
it applies to disclosures in credit and charge card applications and 
solicitations solely for business-purpose accounts. On the other hand, 
state credit disclosure laws will not apply to a single application or 
solicitation to open either an account for consumer purposes or an 
account for business purposes. Such ``dual purpose'' applications and 
solicitations are treated as ``consumer credit or charge card 
applications or solicitations'' under this section and state credit 
disclosure laws applicable to them are preempted. Preemption under this 
statute does not extend to state laws applicable to home equity plans; 
preemption determinations in this area are based on the Home Equity Loan 
Consumer Protection Act, as implemented in Sec. 226.5b of the 
regulation.
    3. Laws not preempted. State laws relating to disclosures concerning 
credit and charge cards other than in applications, solicitations, or 
renewal notices are not preempted under Sec. 226.28(d). In addition, 
state laws regulating the terms of credit and charge card accounts are 
not preempted, nor are laws preempted that regulate the form or content 
of information unrelated to the information required to be disclosed 
under Sec. Sec. 226.5a and 226.9(e). Finally, state laws concerning the 
enforcement of the requirements of Sec. Sec. 226.5a and 226.9(e) and 
state laws prohibiting unfair or deceptive acts or practices concerning 
credit and charge card applications, solicitations and renewals are not 
preempted. Examples of laws that are not preempted include:
     A state law that requires card issuers to offer a 
grace period or that prohibits certain fees in credit and charge card 
transactions.
     A state retail installment sales law or a state 
plain language law, except to the extent that it regulates the 
disclosure of credit information in applications, solicitations and 
renewals of accounts of the type subject to Sec. Sec. 226.5a and 
226.9(e).
     A state law requiring notice of a consumer's 
rights under antidiscrimination or similar laws or a state law requiring 
notice about credit information available from state authorities.

                               References

    Statute: Sections 111 and 171 (a) and (c).
    Other sections: Appendix A.
    Previous regulation: Section 226.6 (b) and (c), and Interpretation 
Sec. 226.604.
    1981 changes: Section 226.28 implements amended section 111 of the 
Act. The test for preemption of state laws relating to disclosure and 
advertising is now whether the state law ``contradicts'' the Federal, 
rather than whether state requirements are ``different.''
    The revised regulation contains no counterpart to Sec. 226.6(c) of 
the previous regulation concerning placement of inconsistent 
disclosures. It also reflects the statutory amendment providing that 
once the Board determines that a state-required disclosure is 
inconsistent with Federal law, the creditor may not make the state 
disclosure.

                    Section 226.29--State Exemptions

    29(a) General rule.
    1. Classes eligible. The state determines the classes of 
transactions for which it will request an exemption, and makes its 
application for those classes. Classes might be, for example, all open-
end credit transactions, all open-end and closed-end transactions, or 
all transactions in which the creditor is a bank.
    2. Substantial similarity. The ``substantially similar'' standard 
requires that state statutory or regulatory provisions and state 
interpretations of those provisions be generally the same as the Federal 
Act and Regulation Z. This includes the requirement that state 
provisions for reimbursement to consumers for overcharges be at least 
equivalent to those required in section 108 of the act. A State will be 
eligible for an exemption even if its law covers classes of transactions 
not covered by the Federal law. For example, if a state's law covers 
agricultural credit, this will not prevent the Board from granting an 
exemption for consumer credit, even though agricultural credit is not 
covered by the Federal law.
    3. Adequate enforcement. The standard requiring adequate provision 
for enforcement generally means that appropriate state officials must be 
authorized to enforce the state law through procedures and sanctions 
comparable to those available to Federal enforcement agencies. 
Furthermore, state law must make adequate provision for enforcement of 
the reimbursement rules.
    4. Exemptions granted. Effective October 1, 1982, the Board has 
granted the following exemptions from portions of the revised Truth in 
Lending Act:

     Maine. Credit or 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 creditor or lessor.)
     Connecticut. Credit transactions subject to the 
Connecticut Truth in Lending Act are exempt from chapters 2 and 4 of the 
Federal Act. (The exemption does not apply to transactions in which a 
federally chartered institution is a creditor.)
     Massachusetts. Credit transactions subject to the 
Massachusetts Truth in Lending Act are exempt from chapters 2 and 4 of 
the

[[Page 589]]

Federal Act. (The exemption does not apply to transactions in which a 
federally chartered institution is a creditor.)
     Oklahoma. Credit or 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 creditor or lessor.)
     Wyoming. Credit transactions subject to the 
Wyoming Consumer Credit Code are exempt from chapter 2 of the Federal 
Act. (The exemption does not apply to transactions in which a federally 
chartered institution is a creditor.)

    29(b) Civil liability.
    1. Not eligible for exemption. The provision that an exemption may 
not extend to sections 130 and 131 of the Act assures that consumers 
retain access to both Federal and State courts in seeking damages or 
civil penalties for violations, while creditors retain the defenses 
specified in those sections.

                               References

    Statute: Sections 108, 123, and 171(b).
    Other sections: Appendix B.
    Previous regulation: Section 226.12.
    1981 changes: The procedures that states must follow to seek 
exemptions are now located in an appendix. Exemptions under the previous 
regulation will be automatically revoked on April 1, 1982, when 
compliance with the new regulation is mandatory.

                   Section 226.30--Limitation on Rates

    1. Scope of coverage. The requirement of this section applies to 
consumer credit obligations secured by a dwelling (as dwelling is 
defined in Sec. 226.2(a)(19)) in which the annual percentage rate may 
increase after consummation (or during the term of the plan, in the case 
of open-end credit) as a result of an increase in the interest rate 
component of the finance charge--whether those increases are tied to an 
index or formula or are within a creditor's discretion. The section 
applies to credit sales as well as loans. Examples of credit obligations 
subject to this section include:

     Dwelling-secured credit obligations that require 
variable-rate disclosures under the regulation because the interest rate 
may increase during the term of the obligation.
     Dwelling-secured open-end credit plans entered 
into before November 7, 1989 (the effective date of the home equity 
rules) that are not considered variable-rate obligations for purposes of 
disclosure under the regulation but where the creditor reserves the 
contractual right to increase the interest rate--periodic rate and 
corresponding annual percentage rate--during the term of the plan.

In contrast, credit obligations in which there is no contractual right 
to increase the interest rate during the term of the obligation are not 
subject to this section. Examples include:

     ``Shared-equity'' or ``shared-appreciation'' 
mortgage loans that have a fixed rate of interest and a shared-
appreciation feature based on the consumer's equity in the mortgaged 
property. (The appreciation share is payable in a lump sum at a 
specified time.)
     Dwelling-secured fixed-rate closed-end balloon-
payment mortgage loans and dwelling-secured fixed-rate open-end plans 
with a stated term that the creditor may renew at maturity. (Contrast 
with the renewable balloon-payment mortgage instrument described in 
comment 17(c)(1)-11.)
     Dwelling-secured fixed rate closed-end multiple 
advance transactions in which each advance is disclosed as a separate 
transaction.
     ``Price level adjusted mortgages'' or other 
indexed mortgages that have a fixed rate of interest but provide for 
periodic adjustments to payments and the loan balance to reflect changes 
in an index measuring prices or inflation.

The requirement of this section does not apply to credit obligations 
entered into prior to December 9, 1987. Consequently, new advances under 
open-end credit plans existing prior to December 9, 1987, are not 
subject to this section.
    2. Refinanced obligations. On or after December 9, 1987, when a 
credit obligation is refinanced, as defined in Sec. 226.20(a), the new 
obligation is subject to this section if it is dwelling-secured and 
allows for increases in the interest rate.
    3. Assumptions. On or after December 9, 1987, when a credit 
obligation is assumed, as defined in Sec. 226.20(b), the obligation 
becomes subject to this section if it is dwelling-secured and allows for 
increases in the interest rate.
    4. Modifications of obligations. The modification of an obligation, 
regardless of when the obligation was entered into, is generally not 
covered by this section. For example, increasing the credit limit on a 
dwelling-secured, open-end plan with a variable interest rate entered 
into before the effective date of the rule does not make the obligation 
subject to this section. If, however, a security interest in a dwelling 
is added on or after December 9, 1987, to a credit obligation that 
allows for interest rate increases, the obligation becomes subject to 
this section. Similarly, if a variable interest rate feature is added to 
a dwelling-secured credit obligation, the obligation becomes subject to 
this section.
    5. Land trusts. In some states, a land trust is used in residential 
real estate transactions. (See discussion in comment 3(a)-8).)

[[Page 590]]

If a consumer-purpose loan that allows for interest rate increases is 
secured by an assignment of a beneficial interest in a land trust that 
holds title to a consumer's dwelling, that loan is subject to this 
section.
    6. Relationship to other sections. Unless otherwise provided for in 
the commentary to this section, other provisions of the regulation such 
as definitions, exemptions, rules and interpretations also apply to this 
section where appropriate. To illustrate:
     An adjustable interest rate business-purpose loan 
is not subject to this section even if the loan is secured by a dwelling 
because such credit extensions are not subject to the regulation. (See 
generally Sec. 226.3(a).)
     Creditors subject to this section are only those 
that fall within the definition of a creditor in Sec. 226.2(a)(17).
    7. Consumer credit contract. Creditors are required to specify a 
lifetime maximum interest rate in their credit contracts--the instrument 
that creates personal liability and generally contains the terms and 
conditions of the agreement (for example, a promissory note or home-
equity line of credit agreement). In some states, the signing of a 
commitment letter may create a binding obligation, for example, 
constituting consummation as defined in Sec. 226.2(a)(13). The maximum 
interest rate must be included in the credit contract, but a creditor 
may include the rate ceiling in the commitment instrument as well.
    8. Manner of stating the maximum interest rate. The maximum interest 
rate must be stated in the credit contract either as a specific amount 
or in any other manner that would allow the consumer to easily 
ascertain, at the time of entering into the obligation, what the rate 
ceiling will be over the term of the obligation. For example, the 
following statements would be sufficiently specific:
     The maximum interest rate will not exceed X%.
     The interest rate will never be higher than X 
percentage points above the initial rate of Y%.
     The interest rate will not exceed X%, or X 
percentage points about [a rate to be determined at some future point in 
time], whichever is less.
     The maximum interest rate will not exceed X%, or 
the state usury ceiling, whichever is less.
    The following statements would not comply with this section:
     The interest rate will never be higher than X 
percentage points over the prevailing market rate.
     The interest rate will never be higher than X 
percentage points above [a rate to be determined at some future point in 
time].
     The interest rate will not exceed the state usury 
ceiling which is currently X%.
    A creditor may state the maximum rate in terms of a maximum annual 
percentage rate that may be imposed. Under an open-end credit plan, this 
normally would be the corresponding annual percentage rate. (See 
generally Sec. 226.6(a)(2).)
    9. Multiple interest rate ceilings. Creditors are not prohibited 
from setting multiple interest rate ceilings. For example, on loans with 
multiple variable-rate features, creditors may establish a maximum 
interest rate for each feature. To illustrate, in a variable-rate loan 
that has an option to convert to a fixed rate, a creditor may set one 
maximum interest rate for the initially imposed index-based variable-
rate feature and another for the conversion option. Of course, a 
creditor may establish one maximum interest rate applicable to all 
features.
    10. Interest rate charged after default. State law may allow an 
interest rate after default higher than the contract rate in effect at 
the time of default; however, the interest rate after default is subject 
to a maximum interest rate set forth in a credit obligation that is 
otherwise subject to this section. This rule applies only in situations 
in which a post-default agreement is still considered part of the 
original obligation.
    11. Increasing the maximum interest rate--general rule. Generally, a 
creditor may not increase the maximum interest rate originally set on a 
credit obligation subject to this section unless the consumer and the 
creditor enter into a new obligation. Therefore, under an open-end plan, 
a creditor may not increase the rate ceiling imposed merely because 
there is an increase in the credit limit. If an open-end plan is closed 
and another opened, a new rate ceiling may be imposed. Furthermore, 
where an open-end plan has a fixed maturity and a creditor renews the 
plan at maturity, or enters into a closed-end credit transaction, a new 
maximum interest rate may be set at that time. If the open-end plan 
provides for a repayment phase, the maximum interest rate cannot be 
increased when the repayment phase begins unless the agreement provided 
for such an increase. For a closed-end credit transaction, a new maximum 
interest rate may be set only if the transaction is satisfied and 
replaced by a new obligation. (The exceptions in Sec. 226.20(a)(1)-(5) 
which limit what transactions are considered refinancings for purposes 
of disclosure do not apply with respect to increasing a rate ceiling 
that has been imposed; if a transaction is satisfied and replaced, the 
rate ceiling may be increased.)
    12. Increasing the maximum interest rate--assumption of an 
obligation. If an obligation subject to this section is assumed by a new 
obligor and the original obligor is released from liability, the maximum 
interest rate set on the obligation may be increased as part of the 
assumption agreement. (This rule

[[Page 591]]

applies whether or not the transaction constitutes an assumption as 
defined in Sec. 226.20(b).)
    13. Transition rules. Under footnote 50, if creditors properly 
include the maximum rate in their credit contracts, creditors need not 
revise their Truth in Lending disclosure statement forms to add the 
disclosures about limitations on rate increases as part of the variable-
rate disclosures, until October 1, 1988. On or after that date, 
creditors must have the maximum rate set forth in their credit contracts 
and, where applicable, as part of their truth in lending disclosures in 
the manner prescribed in the applicable sections of the regulation.

                               References

    Statute: Competitive Equality Banking Act of 1987, Pub. L. No. 100-
86, 101 Stat. 552
    Other sections: Sections 226.6, 226.18, and 226.19
    Previous regulation: None
    1987 changes: This section implements section 1204 of the 
Competitive Equality Banking Act of 1987, Pub. L. No. 100-86, 101 Stat. 
552 which provides that, effective December 9, 1987, adjustable-rate 
mortgages must include a limitation on the interest rate that may apply 
during the term of the mortgage loan. An adjustable-rate mortgage loan 
is defined in section 1204 as ``any loan secured by a lien on a one-to-
four family dwelling unit, including a condominium unit, cooperative 
housing unit, or mobile home, where the loan is made pursuant to an 
agreement under which the creditor may, from time to time, adjust the 
rate of interest.'' The rule in this section incorporates section 1204 
into Regulation Z and limits the scope of section 1204 to dwelling-
secured consumer credit subject to the Truth in Lending Act, in which a 
creditor has the contractual right to increase the interest rate during 
the term of the credit obligation.

     Subpart E--Special Rules for Certain Home Mortgage Transactions

                      Section 226.31--General Rules

    31(c) Timing of disclosure.
    1. Furnishing disclosures. Disclosures are considered furnished when 
received by the consumer.
    Paragraph 31(c)(1) Disclosures for certain closed-end home 
mortgages.
    1. Pre-consummation waiting period. A creditor must furnish Sec. 
226.32 disclosures at least three business days prior to consummation. 
Under Sec. 226.32, ``business day'' has the same meaning as the 
rescission rule in comment 2(a)(6)-2--all calendar days except Sundays 
and the federal legal holidays listed in 5 USC 6103(a). However, while 
the disclosure rule under Sec. Sec. 226.15 and 226.23 extends to 
midnight of the third business day, the rule under Sec. 226.32 does 
not. For example, under Sec. 226.32, if disclosures were provided on a 
Friday, consummation could occur any time on Tuesday, the third business 
day following receipt of the disclosures. If the timing of the 
rescission rule were to be used, consummation could not occur until 
after midnight on Tuesday.
    Paragraph 31(c)(1)(i) Change in terms.
    1. Redisclosure required. Creditors must provide new disclosures 
when a change in terms makes disclosures previously provided under Sec. 
226.32(c) inaccurate, including disclosures based on and labeled as an 
estimate. A change in terms may result from a formal written agreement 
or otherwise.
    2. Sale of optional products at consummation. If the consumer 
finances the purchase of optional products such as credit insurance and 
as a result the monthly payment differs from what was previously 
disclosed under Sec. 226.32, redisclosure is required and a new three-
day waiting period applies. (See comment 32(c)(3)-1 on when optional 
items may be included in the regular payment disclosure.)
    Paragraph 31(c)(1)(ii) Telephone disclosures.
    1. Telephone disclosures. Disclosures by telephone must be furnished 
at least three business days prior to consummation, calculated in accord 
with the timing rules under Sec. 226.31(c)(1).
    Paragraph 31(c)(1)(iii) Consumer's waiver of waiting period before 
consummation.
    1. Modification or waiver. A consumer may modify or waive the right 
to the three-day waiting period only after receiving the disclosures 
required by Sec. 226.32 and only if the circumstances meet the criteria 
for establishing a bona fide personal financial emergency under Sec. 
226.23(e). Whether these criteria are met is determined by the facts 
surrounding individual situations. The imminent sale of the consumer's 
home at foreclosure during the three-day period is one example of a bona 
fide personal financial emergency. Each consumer entitled to the three-
day waiting period must sign the handwritten statement for the waiver to 
be effective.
    Paragraph 31(c)(2) Disclosures for reverse mortgages.
    1. Business days. For purposes of providing reverse mortgage 
disclosures, ``business day'' has the same meaning as in comment 
31(c)(1)-2--all calendar days except Sundays and the federal legal 
holidays listed in 5 USC 6103(a). This means if disclosures are provided 
on a Friday, consummation could occur any time on Tuesday, the third 
business day following receipt of the disclosures.
    2. Open-end plans. Disclosures for open-end reverse mortgages must 
be provided at least three business days before the first transaction 
under the plan (see Sec. 226.5(b)(1)).
    31(d) Basis of disclosures and use of estimates.
    1. Redisclosure. Section 226.31(d) allows the use of estimates when 
information necessary

[[Page 592]]

for an accurate disclosure is unknown to the creditor, provided that the 
disclosure is clearly identified as an estimate. For purposes of Subpart 
E, the rule in Sec. 226.31(c)(1)(i) requiring new disclosures when the 
creditor changes terms also applies to disclosures labeled as estimates.
    31(d)(3) Per-diem interest.
    1. Per-diem interest. This paragraph applies to the disclosure of 
any numerical amount (such as the finance charge, annual percentage 
rate, or payment amount) that is affected by the amount of the per-diem 
interest charge that will be collected at consummation. If the amount of 
per-diem interest used in preparing the disclosures for consummation is 
based on the information known to the creditor at the time the 
disclosure document is prepared, the disclosures are considered accurate 
under this rule, and affected disclosures are also considered accurate, 
even if the disclosures were not labeled as estimates. (See comment 
17(c)(2)(ii)-1 generally.)

   Section 226.32--Requirements for Certain Closed-End Home Mortgages

    32(a) Coverage.
    Paragraph 32(a)(1)(i).
    1. Application date. An application is deemed received when it 
reaches the creditor in any of the ways applications are normally 
transmitted. (See Sec. 226.19(a).) For example, if a borrower applies 
for a 10-year loan on September 30 and the creditor counteroffers with a 
7-year loan on October 10, the application is deemed received in 
September and the creditor must measure the annual percentage rate 
against the appropriate Treasury security yield as of August 15. An 
application transmitted through an intermediary agent or broker is 
received when it reaches the creditor, rather than when it reaches the 
agent or broker. (See comment 19(b)-3 to determine whether a transaction 
involves an intermediary agent or broker.)
    2. When fifteenth not a business day. If the 15th day of the month 
immediately preceding the application date is not a business day, the 
creditor must use the yield as of the business day immediately preceding 
the 15th.
    3. Calculating annual percentage rates for variable-rate loans and 
discount loans. Creditors must use the rules set out in the commentary 
to Sec. 226.17(c)(1) in calculating the annual percentage rate for 
variable-rate loans (assume the rate in effect at the time of disclosure 
remains unchanged) and for discount, premium, and stepped-rate 
transactions (which must reflect composite annual percentage rates).
    4. Treasury securities. To determine the yield on comparable 
Treasury securities for the annual percentage rate test, creditors may 
use the yield on actively traded issues adjusted to constant maturities 
published in the Board's ``Selected Interest Rates'' (statistical 
release H-15). Creditors must use the yield corresponding to the 
constant maturity that is closest to the loan's maturity. If the loan's 
maturity is exactly halfway between security maturities, the annual 
percentage rate on the loan should be compared with the yield for 
Treasury securities having the lower yield. In determining the loan's 
maturity, creditors may rely on the rules in Sec. 226.17(c)(4) 
regarding irregular first payment periods. For example:
    i. If the H-15 contains a yield for Treasury securities with 
constant maturities of 7 years and 10 years and no maturity in between, 
the annual percentage rate for an 8-year mortgage loan is compared with 
the yield of securities having a 7-year maturity, and the annual 
percentage rate for a 9-year mortgage loan is compared with the yield of 
securities having a 10-year maturity.
    ii. If a mortgage loan has a term of 15 years, and the H-15 contains 
a yield of 5.21 percent for constant maturities of 10 years, and also 
contains a yield of 6.33 percent for constant maturities of 20 years, 
then the creditor compares the annual percentage rate for a 15-year 
mortgage loan with the yield for constant maturities of 10 years.
    iii. If a mortgage loan has a term of 30 years, and the H-15 does 
not contain a yield for 30-year constant maturities, but contains a 
yield for 20-year constant maturities, and an average yield for 
securities with remaining terms to maturity of 25 years and over, then 
the annual percentage rate on the loan is compared with the yield for 
20-year constant maturities.
    Paragraph 32(a)(1)(ii).
    1. Total loan amount. For purposes of the ``points and fees'' test, 
the total loan amount is calculated by taking the amount financed, as 
determined according to Sec. 226.18(b), and deducting any cost listed 
in Sec. 226.32(b)(1)(iii) and Sec. 226.32(b)(1)(iv) that is both 
included as points and fees under Sec. 226.32(b)(1) and financed by the 
creditor. Some examples follow, each using a $10,000 amount borrowed, a 
$300 appraisal fee, and $400 in points. A $500 premium for optional 
credit life insurance is used in one example.
    i. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and pays $400 in points at closing, the amount financed under 
Sec. 226.18(b) is $9,900 ($10,000 plus the $300 appraisal fee that is 
paid to and financed by the creditor, less $400 in prepaid finance 
charges). The $300 appraisal fee paid to the creditor is added to other 
points and fees under Sec. 226.32(b)(1)(iii). It is deducted from the 
amount financed ($9,900) to derive a total loan amount of $9,600.
    ii. If the consumer pays the $300 fee for the creditor-conducted 
appraisal in cash at closing, the $300 is included in the points and 
fees calculation because it is paid to the creditor. However, because 
the $300 is not financed by the creditor, the fee is not part of

[[Page 593]]

the amount financed under Sec. 226.18(b). In this case, the amount 
financed is the same as the total loan amount: $9,600 ($10,000, less 
$400 in prepaid finance charges).
    iii. If the consumer finances a $300 fee for an appraisal conducted 
by someone other than the creditor or an affiliate, the $300 fee is not 
included with other points and fees under Sec. 226.32(b)(1)(iii). The 
amount financed under Sec. 226.18(b) is $9,900 ($10,000 plus the $300 
fee for an independently-conducted appraisal that is financed by the 
creditor, less the $400 paid in cash and deducted as prepaid finance 
charges).
    iv. If the consumer finances a $300 fee for a creditor-conducted 
appraisal and a $500 single premium for optional credit life insurance, 
and pays $400 in points at closing, the amount financed under Sec. 
226.18(b) is $10,400 ($10,000, plus the $300 appraisal fee that is paid 
to and financed by the creditor, plus the $500 insurance premium that is 
financed by the creditor, less $400 in prepaid finance charges). The 
$300 appraisal fee paid to the creditor is added to other points and 
fees under Sec. 226.32(b)(1)(iii), and the $500 insurance premium is 
added under 226.32(b)(1)(iv). The $300 and $500 costs are deducted from 
the amount financed ($10,400) to derive a total loan amount of $9,600.
    2. Annual adjustment of $400 amount. A mortgage loan is covered by 
Sec. 226.32 if the total points and fees payable by the consumer at or 
before loan consummation exceed the greater of $400 or 8 percent of the 
total loan amount. The $400 figure is adjusted annually on January 1 by 
the annual percentage change in the CPI that was in effect on the 
preceding June 1. The Board will publish adjustments after the June 
figures become available each year. The adjustment for the upcoming year 
will be included in any proposed commentary published in the fall, and 
incorporated into the commentary the following spring. The adjusted 
figures are:
    i. For 1996, $412, reflecting a 3.00 percent increase in the CPI-U 
from June 1994 to June 1995, rounded to the nearest whole dollar.
    ii. For 1997, $424, reflecting a 2.9 percent increase in the CPI-U 
from June 1995 to June 1996, rounded to the nearest whole dollar.
    iii. For 1998, $435, reflecting a 2.5 percent increase in the CPI-U 
from June 1996 to June 1997, rounded to the nearest whole dollar.
    iv. For 1999, $441, reflecting a 1.4 percent increase in the CPI-U 
from June 1997 to June 1998, rounded to the nearest whole dollar.
    v. For 2000, $451, reflecting a 2.3 percent increase in the CPI-U 
from June 1998 to June 1999, rounded to the nearest whole dollar.
    vi. For 2001, $465, reflecting a 3.1 percent increase in the CPI-U 
from June 1999 to June 2000, rounded to the nearest whole dollar.
    vii. For 2002, $480, reflecting a 3.27 percent increase in the CPI-U 
from June 2000 to June 2001, rounded to the nearest whole dollar.
    viii. For 2003, $488, reflecting a 1.64 percent increase in the CPI-
U from June 2001 to June 2002, rounded to the nearest whole dollar.
    ix. For 2004, $499, reflecting a 2.22 percent increase in the CPI-U 
from June 2002 to June 2003, rounded to the nearest whole dollar.
    x. For 2005, $510, reflecting a 2. 29 percent increase in the CPI-U 
from June 2003 to June 2004, rounded to the nearest whole dollar.
    xi. For 2006, $528, reflecting a 3.51 percent increase in the CPI-U 
from June 2004 to June 2005, rounded to the nearest whole dollar.
    xii. For 2007, $547, reflecting a 3.55 percent increase in the CPI-U 
from June 2005 to June 2006, rounded to the nearest whole dollar.
    xiii. For 2008, $561, reflecting a 2.56 percent increase in the CPI-
U from June 2006 to June 2007, rounded to the nearest whole dollar.
    xiv. For 2009, $583, reflecting a 3.94 percent increase in the CPI-U 
from June 2007 to June 2008, rounded to the nearest whole dollar.

                            32(b) Definitions

    Paragraph 32(b)(1)(i).
    1. General. Section 226.32(b)(1)(i) includes in the total ``points 
and fees'' items defined as finance charges under Sec. Sec. 226.4(a) 
and 226.(4)(b). Items excluded from the finance charge under other 
provisions of Sec. 226.4 are not included in the total ``points and 
fees'' under paragraph 32(b)(1)(i), but may be included in ``points and 
fees'' under paragraphs 32(b)(1)(ii) and 32(b)(1)(iii). Interest, 
including per-diem interest, is excluded from ``points and fees'' under 
Sec. 226.32(b)(1).
    Paragraph 32(b)(1)(ii).
    1. Mortgage broker fees. In determining ``points and fees'' for 
purposes of this section, compensation paid by a consumer to a mortgage 
broker (directly or through the creditor for delivery to the broker) is 
included in the calculation whether or not the amount is disclosed as a 
finance charge. Mortgage broker fees that are not paid by the consumer 
are not included. Mortgage broker fees already included in the 
calculation as finance charges under Sec. 226.32(b)(1)(i) need not be 
counted again under Sec. 226.32(b)(1)(ii).
    2. Example. Section 226.32(b)(1)(iii) defines ``points and fees'' to 
include all items listed in Sec. 226.4(c)(7), other than amounts held 
for the future payment of taxes. An item listed in Sec. 226.4(c)(7) may 
be excluded from the ``points and fees'' calculation, however, if the 
charge is reasonable, the creditor receives no direct or indirect 
compensation from the charge, and the charge is not paid to an affiliate 
of the creditor. For example, a reasonable fee paid by the consumer to 
an independent, third-party appraiser may be excluded from the ``points 
and fees'' calculation (assuming no compensation is paid to the 
creditor). A fee paid by the consumer for an appraisal performed by the 
creditor must be included in the calculation, even though the fee may be 
excluded from the finance

[[Page 594]]

charge if it is bona fide and reasonable in amount.
    Paragraph 32(b)(1)(iv).
    1. Premium amount. In determining ``points and fees'' for purposes 
of this section, premiums paid at or before closing for credit insurance 
are included whether they are paid in cash or financed, and whether the 
amount represents the entire premium for the coverage or an initial 
payment.
    32(c) Disclosures.
    1. Format. The disclosures must be clear and conspicuous but need 
not be in any particular type size or typeface, nor presented in any 
particular manner. The disclosures need not be a part of the note or 
mortgage document.
    Paragraph 32(c)(3) Regular payment; balloon payment.
    1. General. The regular payment is the amount due from the borrower 
at regular intervals, such as monthly, bimonthly, quarterly, or 
annually. There must be at least two payments, and the payments must be 
in an amount and at such intervals that they fully amortize the amount 
owed. In disclosing the regular payment, creditors may rely on the rules 
set forth in Sec. 226.18(g); however, the amounts for voluntary items, 
such as credit life insurance, may be included in the regular payment 
disclosure only if the consumer has previously agreed to the amounts.
    i. If the loan has more than one payment level, the regular payment 
for each level must be disclosed. For example:
    A. In a 30-year graduated payment mortgage where there will be 
payments of $300 for the first 120 months, $400 for the next 120 months, 
and $500 for the last 120 months, each payment amount must be disclosed, 
along with the length of time that the payment will be in effect.
    B. If interest and principal are paid at different times, the 
regular amount for each must be disclosed.
    C. In discounted or premium variable-rate transactions where the 
creditor sets the initial interest rate and later rate adjustments are 
determined by an index or formula, the creditor must disclose both the 
initial payment based on the discount or premium and the payment that 
will be in effect thereafter. Additional explanatory material which does 
not detract from the required disclosures may accompany the disclosed 
amounts. For example, if a monthly payment is $250 for the first six 
months and then increases based on an index and margin, the creditor 
could use language such as the following: ``Your regular monthly payment 
will be $250 for six months. After six months your regular monthly 
payment will be based on an index and margin, which currently would make 
your payment $350. Your actual payment at that time may be higher or 
lower.''
    Paragraph 32(c)(4) Variable-rate.
    1. Calculating ``worst-case'' payment example. Creditors may rely on 
instructions in Sec. 226.19(b)(2)(viii)(B) for calculating the maximum 
possible increases in rates in the shortest possible timeframe, based on 
the face amount of the note (not the hypothetical loan amount of $10,000 
required by Sec. 226.19(b)(2)(viii)(B)). The creditor must provide a 
maximum payment for each payment level, where a payment schedule 
provides for more than one payment level and more than one maximum 
payment amount is possible.
    Paragraph 32(c)(5) Amount borrowed.
    1. Optional insurance; debt-cancellation coverage. This disclosure 
is required when the amount borrowed in a refinancing includes premiums 
or other charges for credit life, accident, health, or loss-of-income 
insurance, or debt-cancellation coverage (whether or not the debt-
cancellation coverage is insurance under applicable law) that provides 
for cancellation of all or part of the consumer's liability in the event 
of the loss of life, health, or income or in the case of accident. See 
comment 4(d)(3)-2 and comment app. G and H-2 regarding terminology for 
debt-cancellation coverage.
    32(d) Limitations.

                            32(d) Limitations

    Paragraph 32(d)(1)(i) Balloon payment.
    1. Regular periodic payments. The repayment schedule for a Sec. 
226.32 mortgage loan with a term of less than five years must fully 
amortize the outstanding principal balance through ``regular periodic 
payments.'' A payment is a ``regular periodic payment'' if it is not 
more than twice the amount of other payments.
    Paragraph 32(d)(2) Negative amortization.
    1. Negative amortization. The prohibition against negative 
amortization in a mortgage covered by Sec. 226.32 does not preclude 
reasonable increases in the principal balance that result from events 
permitted by the legal obligation unrelated to the payment schedule. For 
example, when a consumer fails to obtain property insurance and the 
creditor purchases insurance, the creditor may add a reasonable premium 
to the consumer's principal balance, to the extent permitted by the 
legal obligation.
    Paragraph 32(d)(4) Increased interest rate.
    1. Variable-rate transactions. The limitation on interest rate 
increases does not apply to rate increases resulting from changes in 
accordance with the legal obligation in a variable-rate transaction, 
even if the increase occurs after default by the consumer.
    Paragraph 32(d)(5) Rebates.
    1. Calculation of refunds. The limitation applies only to refunds of 
precomputed (such as add-on) interest and not to any other charges that 
are considered finance charges under Sec. 226.4 (for example, points 
and fees

[[Page 595]]

paid at closing). The calculation of the refund of interest includes 
odd-days interest, whether paid at or after consummation.
    Paragraph 32(d)(6) Prepayment penalties.
    1. State law. For purposes of computing a refund of unearned 
interest, if using the actuarial method defined by applicable state law 
results in a refund that is greater than the refund calculated by using 
the method described in section 933(d) of the Housing and Community 
Development Act of 1992, creditors should use the state law definition 
in determining if a refund is a prepayment penalty.
    32(d)(7) Prepayment penalty exception.
    Paragraph 32(d)(7)(iii).
    1. Calculating debt-to-income ratio. ``Debt'' does not include 
amounts paid by the borrower in cash at closing or amounts from the loan 
proceeds that directly repay an existing debt. Creditors may consider 
combined debt-to-income ratios for transactions involving joint 
applicants.
    2. Verification. Verification of employment satisfies the 
requirement for payment records for employment income.
    32(d)(8) Due-on-demand clause.
    Paragraph 32(d)(8)(ii).
    1. Failure to meet repayment terms. A creditor may terminate a loan 
and accelerate the balance when the consumer fails to meet the repayment 
terms provided for in the agreement; a creditor may do so, however, only 
if the consumer actually fails to make payments. For example, a creditor 
may not terminate and accelerate if the consumer, in error, sends a 
payment to the wrong location, such as a branch rather than the main 
office of the creditor. If a consumer files for or is placed in 
bankruptcy, the creditor may terminate and accelerate under this 
provision if the consumer fails to meet the repayment terms of the 
agreement. Section 226.32(d)(8)(ii) does not override any state or other 
law that requires a creditor to notify a borrower of a right to cure, or 
otherwise places a duty on the creditor before it can terminate a loan 
and accelerate the balance.
    Paragraph 32(d)(8)(iii).
    1. Impairment of security. A creditor may terminate a loan and 
accelerate the balance if the consumer's action or inaction adversely 
affects the creditor's security for the loan, or any right of the 
creditor in that security. Action or inaction by third parties does not, 
in itself, permit the creditor to terminate and accelerate.
    2. Examples. i. A creditor may terminate and accelerate, for 
example, if:
    A. The consumer transfers title to the property or sells the 
property without the permission of the creditor.
    B. The consumer fails to maintain required insurance on the 
dwelling.
    C. The consumer fails to pay taxes on the property.
    D. The consumer permits the filing of a lien senior to that held by 
the creditor.
    E. The sole consumer obligated on the credit dies.
    F. The property is taken through eminent domain.
    G. A prior lienholder forecloses.
    ii. By contrast, the filing of a judgment against the consumer would 
permit termination and acceleration only if the amount of the judgment 
and collateral subject to the judgment is such that the creditor's 
security is adversely affected. If the consumer commits waste or 
otherwise destructively uses or fails to maintain the property such that 
the action adversely affects the security, the loan may be terminated 
and the balance accelerated. Illegal use of the property by the consumer 
would permit termination and acceleration if it subjects the property to 
seizure. If one of two consumers obligated on a loan dies, the creditor 
may terminate the loan and accelerate the balance if the security is 
adversely affected. If the consumer moves out of the dwelling that 
secures the loan and that action adversely affects the security, the 
creditor may terminate a loan and accelerate the balance.
    Paragraph 32(e)(1) Repayment ability.
    1. Determining repayment ability. The information provided to the 
creditor in connection with Sec. 226.32(d)(7) may be used to show that 
the creditor considered the consumer's income and obligations before 
extending the credit. Any expected income can be considered by the 
creditor, except equity income that the consumer would obtain through 
the foreclosure of a mortgage covered by Sec. 226.32. For example, a 
creditor may use information about income other than regular salary or 
wages such as gifts, expected retirement payments, or income from 
housecleaning or childcare. The creditor also may use unverified income, 
as long as the creditor has a reasonable basis for believing that the 
income exists and will support the loan.
    Paragraph 32(e)(2) Home-Improvement Contracts.
    Paragraph 32(e)(2)(i).
    1. Joint payees. If a creditor pays a contractor with an instrument 
jointly payable to the contractor and the consumer, the instrument must 
name as payee each consumer who is primarily obligated on the note.
    Paragraph 32(e)(3) Notice to Assignee.
    1. Subsequent sellers or assignors. Any person, whether or not the 
original creditor, that sells or assigns a mortgage subject to this 
section must furnish the notice of potential liability to the purchaser 
or assignee.
    2. Format. While the notice of potential liability need not be in 
any particular format, the notice must be prominent. Placing it on the 
face of the note, such as with a stamp, is one means of satisfying the 
prominence requirement.

[[Page 596]]

           Section 226.33--Requirements for Reverse Mortgages

    33(a) Definition.
    1. Nonrecourse transaction. A nonrecourse reverse mortgage 
transaction limits the homeowner's liability to the proceeds of the sale 
of the home (or any lesser amount specified in the credit obligation). 
If a transaction structured as a closed-end reverse mortgage transaction 
allows recourse against the consumer, and the annual percentage rate or 
the points and fees exceed those specified under Sec. 226.32(a)(1), the 
transaction is subject to all the requirements of Sec. 226.32, 
including the limitations concerning balloon payments and negative 
amortization.
    Paragraph 33(a)(2).
    1. Default. Default is not defined by the statute or regulation, but 
rather by the legal obligation between the parties and state or other 
law.
    2. Definite term or maturity date. To meet the definition of a 
reverse mortgage transaction, a creditor cannot require any principal, 
interest, or shared appreciation or equity to be due and payable (other 
than in the case of default) until after the consumer's death, transfer 
of the dwelling, or the consumer ceases to occupy the dwelling as a 
principal dwelling. Some state laws require legal obligations secured by 
a mortgage to specify a definite maturity date or term of repayment in 
the instrument. An obligation may state a definite maturity date or term 
of repayment and still meet the definition of a reverse-mortgage 
transaction if the maturity date or term of repayment used would not 
operate to cause maturity prior to the occurrence of any of the maturity 
events recognized in the regulation. For example, some reverse mortgage 
programs specify that the final maturity date is the borrower's 150th 
birthday; other programs include a shorter term but provide that the 
term is automatically extended for consecutive periods if none of the 
other maturity events has yet occurred. These programs would be 
permissible.
    33(c) Projected total cost of credit.
    Paragraph 33(c)(1) Costs to consumer.
    1. Costs and charges to consumer--relation to finance charge. All 
costs and charges to the consumer that are incurred in a reverse 
mortgage transaction are included in the projected total cost of credit, 
and thus in the total annual loan cost rates, whether or not the cost or 
charge is a finance charge under Sec. 226.4.
    2. Annuity costs. As part of the credit transaction, some creditors 
require or permit a consumer to purchase an annuity that immediately--or 
at some future time--supplements or replaces the creditor's payments. 
The amount paid by the consumer for the annuity is a cost to the 
consumer under this section, regardless of whether the annuity is 
purchased through the creditor or a third party, or whether the purchase 
is mandatory or voluntary. For example, this includes the costs of an 
annuity that a creditor offers, arranges, assists the consumer in 
purchasing, or that the creditor is aware the consumer is purchasing as 
a part of the transaction.
    3. Disposition costs excluded. Disposition costs incurred in 
connection with the sale or transfer of the property subject to the 
reverse mortgage are not included in the costs to the consumer under 
this paragraph. (However, see the definition of Valn in 
appendix K to the regulation to determine the effect certain disposition 
costs may have on the total annual loan cost rates.)
    Paragraph 33(c)(2) Payments to consumer.
    1. Payments upon a specified event. The projected total cost of 
credit should not reflect contingent payments in which a credit to the 
outstanding loan balance or a payment to the consumer's estate is made 
upon the occurrence of an event (for example, a ``death benefit'' 
payable if the consumer's death occurs within a certain period of time). 
Thus, the table of total annual loan cost rates required under Sec. 
226.33(b)(2) would not reflect such payments. At its option, however, a 
creditor may put an asterisk, footnote, or similar type of notation in 
the table next to the applicable total annual loan cost rate, and state 
in the body of the note, apart from the table, the assumption upon which 
the total annual loan cost is made and any different rate that would 
apply if the contingent benefit were paid.
    Paragraph 33(c)(3) Additional creditor compensation.
    1. Shared appreciation or equity. Any shared appreciation or equity 
that the creditor is entitled to receive pursuant to the legal 
obligation must be included in the total cost of a reverse mortgage 
loan. For example, if a creditor agrees to a reduced interest rate on 
the transaction in exchange for a portion of the appreciation or equity 
that may be realized when the dwelling is sold, that portion is included 
in the projected total cost of credit.
    Paragraph 33(c)(4) Limitations on consumer liability.
    1. In general. Creditors must include any limitation on the 
consumer's liability (such as a nonrecourse limit or an equity 
conservation agreement) in the projected total cost of credit. These 
limits and agreements protect a portion of the equity in the dwelling 
for the consumer or the consumer's estate. For example, the following 
are limitations on the consumer's liability that must be included in the 
projected total cost of credit:
    i. A limit on the consumer's liability to a certain percentage of 
the projected value of the home.
    ii. A limit on the consumer's liability to the net proceeds from the 
sale of the property subject to the reverse mortgage.

[[Page 597]]

    2. Uniform assumption for ``net proceeds'' recourse limitations. If 
the legal obligation between the parties does not specify a percentage 
for the ``net proceeds'' liability of the consumer, for purposes of the 
disclosures required by Sec. 226.33, a creditor must assume that the 
costs associated with selling the property will equal 7 percent of the 
projected sale price (see the definition of the Valn symbol 
under appendix K(b)(6)).

 Section 226.34--Prohibited Acts or Practices in Connection with Credit 
            Secured by a Consumer s Dwelling; Open-end Credit

    34(a) Prohibited acts or practices for loans subject to Sec. 
226.32.
    Paragraph 34(a)(1) Home-improvement contracts.
    Paragraph 34(a)(1)(i).
    1. Joint payees. If a creditor pays a contractor with an instrument 
jointly payable to the contractor and the consumer, the instrument must 
name as payee each consumer who is primarily obligated on the note.
    Paragraph 34(a)(2) Notice to Assignee.
    1. Subsequent sellers or assignors. Any person, whether or not the 
original creditor, that sells or assigns a mortgage subject to Sec. 
226.32 must furnish the notice of potential liability to the purchaser 
or assignee.
    2. Format. While the notice of potential liability need not be in 
any particular format, the notice must be prominent. Placing it on the 
face of the note, such as with a stamp, is one means of satisfying the 
prominence requirement.
    3. Assignee liability. Pursuant to section 131(d) of the act, the 
act's general holder-in-due course protections do not apply to 
purchasers and assignees of loans covered by Sec. 226.32. For such 
loans, a purchaser's or other assignee's liability for all claims and 
defenses that the consumer could assert against the creditor is not 
limited to violations of the act.
    Paragraph 34(a)(3) Refinancings within one-year period.
    1. In the borrower's interest. The determination of whether or not a 
refinancing covered by Sec. 226.34(a)(3) is in the borrower's interest 
is based on the totality of the circumstances, at the time the credit is 
extended. A written statement by the borrower that ``this loan is in my 
interest'' alone does not meet this standard.
    i. A refinancing would be in the borrower's interest if needed to 
meet the borrower's ``bona fide personal financial emergency'' (see 
generally Sec. 226.23(e) and Sec. 226.31(c)(1)(iii)).
    ii. In connection with a refinancing that provides additional funds 
to the borrower, in determining whether a loan is in the borrower's 
interest consideration should be given to whether the loan fees and 
charges are commensurate with the amount of new funds advanced, and 
whether the real estate-related charges are bona fide and reasonable in 
amount (see generally Sec. 226.4(c)(7)).
    2. Application of the one-year refinancing prohibition to creditors 
and assignees. The prohibition in Sec. 226.34(a)(3) applies where an 
extension of credit subject to Sec. 226.32 is refinanced into another 
loan subject to Sec. 226.32. The prohibition is illustrated by the 
following examples. Assume that Creditor A makes a loan subject to Sec. 
226.32 on January 15, 2003, secured by a first lien; this loan is 
assigned to Creditor B on February 15, 2003:
    i. Creditor A is prohibited from refinancing the January 2003 loan 
(or any other loan subject to Sec. 226.32 to the same borrower) into a 
loan subject to Sec. 226.32, until January 15, 2004. Creditor B is 
restricted until January 15, 2004, or such date prior to January 15, 
2004 that Creditor B ceases to hold or service the loan. During the 
prohibition period, Creditors A and B may make a subordinate lien loan 
that does not refinance a loan subject to Sec. 226.32. Assume that on 
April 1, 2003, Creditor A makes but does not assign a second-lien loan 
subject to Sec. 226.32. In that case, Creditor A would be prohibited 
from refinancing either the first-lien or second-lien loans (or any 
other loans to that borrower subject to Sec. 226.32) into another loan 
subject to Sec. 226.32 until April 1, 2004.
    ii. The loan made by Creditor A on January 15, 2003 (and assigned to 
Creditor B) may be refinanced by Creditor C at any time. If Creditor C 
refinances this loan on March 1, 2003 into a new loan subject to Sec. 
226.32, Creditor A is prohibited from refinancing the loan made by 
Creditor C (or any other loan subject to Sec. 226.32 to the same 
borrower) into another loan subject to Sec. 226.32 until January 15, 
2004. Creditor C is similarly prohibited from refinancing any loan 
subject to Sec. 226.32 to that borrower into another until March 1, 
2004. (The limitations of Sec. 226.34(a)(3) no longer apply to Creditor 
B after Creditor C refinanced the January 2003 loan and Creditor B 
ceased to hold or service the loan.)
    Paragraph 34(a)(4) Repayment ability.
    1. Income. Any expected income can be considered by the creditor, 
except equity income that would be realized from collateral. For 
example, a creditor may use information about income other than regular 
salary or wages such as gifts, expected retirement payments, or income 
from self-employment, such as housecleaning or childcare.
    2. Pattern or practice of extending credit--repayment ability. 
Whether a creditor is engaging or has engaged in a pattern or practice 
of violations of this section depends on the totality of the 
circumstances in the particular case. While a pattern or practice is not 
established by isolated, random, or accidental acts, it can be 
established without the use of a statistical process. In addition, a 
creditor might act under a lending policy (whether written or unwritten) 
and that action alone

[[Page 598]]

could establish a pattern or practice of making loans in violation of 
this section.
    3. Discounted introductory rates. In transactions where the creditor 
sets an initial interest rate to be adjusted later (whether fixed or to 
be determined by an index or formula), in determining repayment ability 
the creditor must consider the consumer's ability to make loan payments 
based on the non-discounted or fully-indexed rate at the time of 
consummation.
    4. Verifying and documenting income and obligations. Creditors may 
verify and document a consumer's repayment ability in various ways. A 
creditor may verify and document a consumer's income and current 
obligations through any reliable source that provides the creditor with 
a reasonable basis for believing that there are sufficient funds to 
support the loan. Reliable sources include, but are not limited to, a 
credit report, tax returns, pension statements, and payment records for 
employment income.
    Paragraph 34(b) Prohibited acts or practices for dwelling-secured 
loans; open-end credit.
    1. Amount of credit extended. Where a loan is documented as open-end 
credit but the features and terms or other circumstances demonstrate 
that it does not meet the definition of open-end credit, the loan is 
subject to the rules for closed-end credit, including Sec. 226.32 if 
the rate or fee trigger is met. In applying the triggers under Sec. 
226.32, the ``amount financed,'' including the ``principal loan amount'' 
must be determined. In making the determination, the amount of credit 
that would have been extended if the loan had been documented as a 
closed-end loan is a factual determination to be made in each case. 
Factors to be considered include the amount of money the consumer 
originally requested, the amount of the first advance or the highest 
outstanding balance, or the amount of the credit line. The full amount 
of the credit line is considered only to the extent that it is 
reasonable to expect that the consumer might use the full amount of 
credit.

                    Appendix A--Effect on State Laws

    1. Who may make requests. Appendix A sets forth the procedures for 
preemption determinations. As discussed in Sec. 226.28, which contains 
the standards for preemption, a request for a determination of whether a 
state law is inconsistent with the requirements of chapters 1, 2, or 3 
may be made by creditors, states, or any interested party. However, only 
states may request and receive determinations in connection with the 
fair credit billing provisions of chapter 4.

                               References

    Statute: Sections 111 and 171(a).
    Other sections: Section 226.28.
    Previous regulation: Sections 226.6(b) and 226.70 (Supplement V, 
Section II).
    1981 changes: The procedures in appendix A were largely adapted from 
Supplement V, Section II of the previous regulation (Sec. 226.70), with 
changes made to streamline the procedures.

                      Appendix B--State Exemptions

    1. General. Appendix B sets forth the procedures for exemption 
applications. The exemption standards are found in Sec. 226.29 and are 
discussed in the commentary to that section.

                               References

    Statute: Sections 123 and 171(b).
    Other sections: Section 226.29.
    Previous regulation: Sections 226.12, 226.50 (Supplement II), 226.60 
(Supplement IV), and 226.70 (Supplement V, Section I).
    1981 changes: The procedures in appendix B represent a combination 
and streamlining of the procedures set forth in the supplements to the 
previous regulation.

              Appendix C--Issuance of Staff Interpretations

    1. General. This commentary is the vehicle for providing official 
staff interpretations. Individual interpretations generally will not be 
issued separately from the commentary.

                               References

    Statute: Sections 105 and 130(f).
    Other sections: None.
    Previous regulation: Section 226.1(d).
    1981 changes: Appendix C reflects the Board's intention that this 
commentary serve as the vehicle for interpreting the regulation, rather 
than individual interpretive letters.

             Appendix D--Multiple-Advance Construction Loans

    1. General rule. Appendix D provides a special procedure that 
creditors may use, at their option, to estimate and disclose the terms 
of multiple-advance construction loans when the amounts or timing of 
advances is unknown at consummation of the transaction. This appendix 
reflects the approach taken in Sec. 226.17(c)(6)(ii), which permits 
creditors to provide separate or combined disclosures for the 
construction period and for the permanent financing, if any; i.e., the 
construction phase and the permanent phase may be treated as one 
transaction or more than one transaction. Appendix D may also be used in 
multiple-advance transactions other than construction loans, when the 
amounts or timing of advances is unknown at consummation.
    2. Variable-rate multiple-advance loans. The hypothetical disclosure 
required in variable-

[[Page 599]]

rate transactions by Sec. 226.18(f)(1)(iv) is not required for 
multiple-advance loans disclosed pursuant to appendix D, part I.
    3. Calculation of the total of payments. When disclosures are made 
pursuant to appendix D, the total of payments may reflect either the sum 
of the payments or the sum of the amount financed and the finance 
charge.
    4. Annual percentage rate. Appendix D does not require the use of 
Volume I of the Board's Annual Percentage Rate Tables for calculation of 
the annual percentage rate. Creditors utilizing appendix D in making 
calculations and disclosures may use other computation tools to 
determine the estimated annual percentage rate, based on the finance 
charge and payment schedule obtained by use of the appendix.
    5. Interest reserves. In a multiple-advance construction loan, a 
creditor may establish an ``interest reserve'' to ensure that interest 
is paid as it accrues by designating a portion of the loan to be used 
for paying the interest that accrues on the loan. An interest reserve is 
not treated as a prepaid finance charge, whether the interest reserve is 
the same as or different from the estimated interest figure calculated 
under appendix D.
     If a creditor permits a consumer to make interest 
payments as they become due, the interest reserve should be disregarded 
in the disclosures and calculations under appendix D.
     If a creditor requires the establishment of an 
interest reserve and automatically deducts interest payments from the 
reserve amount rather than allow the consumer to make interest payments 
as they become due, the fact that interest will accrue on those interest 
payments as well as the other loan proceeds must be reflected in the 
calculations and disclosures. To reflect the effects of such 
compounding, a creditor should first calculate interest on the 
commitment amount (exclusive of the interest reserve) and then add the 
figure obtained by assuming that one-half of that interest is 
outstanding at the contract interest rate for the entire construction 
period. For example, using the example shown under paragraph A, part I 
of appendix D, the estimated interest would be $1,117.68 ($1093.75 plus 
an additional $23.93 calculated by assuming half of $1093.75 is 
outstanding at the contract interest rate for the entire construction 
period), and the estimated annual percentage rate would be 21.18%.

                               References

    Statute: None.
    Other sections: Sections 226.17 and 226.22.
    Previous regulation: Interpretation Sec. 226.813.
    1981 Changes: The use of appendix D is limited to multiple-advance 
loans for construction purposes or analogous types of transactions.

    Appendix E--Rules for Card Issuers That Bill on a Transaction-by-
                            Transaction Basis

    Statute: None.
    Previous regulation: Interpretation Sec. 226.709.
    Other sections: Sections 226.6 through 226.13, and 226.15.
    1981 changes: The rules in this appendix have been streamlined and 
clarified to indicate how certain card issuers that bill on a 
transaction basis may comply with the requirements of Subpart B.

  Appendix F--Annual Percentage Rate Computations for Certain Open-End 
                              Credit Plans

    1. Daily rate with specific transaction charge. If the finance 
charge results from a charge relating to a specific transaction and the 
application of a daily periodic rate, see comment 14(c)-6 for guidance 
on an appropriate calculation method.

                               References

    Statute: Section 107.
    Previous regulation: Section 226.5(a)(3)(ii), footnote 5(a).
    Other sections: Section 226.14.
    1981 changes: This appendix incorporates a sixth example in which 
the transaction amount exceeds the amount of the balance subject to the 
periodic rate.

   Appendixes G and H--Open-End and Closed-End Model Forms and Clauses

    1. Permissible changes. Although use of the model forms and clauses 
is not required, creditors using them properly will be deemed to be in 
compliance with the regulation with regard to those disclosures. 
Creditors may make certain changes in the format or content of the forms 
and clauses and may delete any disclosures that are inapplicable to a 
transaction or a plan without losing the act's protection from 
liability. (But see appendix G comment 5 for special rules concerning 
certain disclosures required under Sec. 226.5a for credit and charge 
card applications and solicitations). The rearrangement of the model 
forms and clauses may not be so extensive as to affect the substance, 
clarity, or meaningful sequence of the forms and clauses. Creditors 
making revisions with that effect will lose their protection from civil 
liability. Acceptable changes include, for example:

     Using the first person, instead of the second 
person, in referring to the borrower.
     Using ``borrower'' and ``creditor'' instead of 
pronouns.
     Rearranging the sequence of the disclosures.
     Not using bold type for headings.
     Incorporating certain state ``plain English'' 
requirements.

[[Page 600]]

     Deleting inapplicable disclosures by whiting out, 
blocking out, filling in ``N/A'' (not applicable) or ``0'', crossing 
out, leaving blanks, checking a box for applicable items, or circling 
applicable items. (This should permit use of multi-purpose standard 
forms.)
     Substituting appropriate references, such as 
``bank,'' ``we,'' or a specific name, for ``creditor'' in the initial 
open-end disclosures.
     Using a vertical, rather than a horizontal, 
format for the boxes in the closed-end disclosures.
    2. Debt cancellation coverage. This regulation does not authorize 
creditors to characterize debt cancellation fees as insurance premiums 
for purposes of this regulation. Creditors may provide a disclosure that 
refers to debt cancellation coverage whether or not the coverage is 
considered insurance. Creditors may use the model credit insurance 
disclosures only if the debt cancellation coverage constitutes insurance 
under state law.

              Appendix G--Open-End Model Forms and Clauses

    1. Model G-1. The model disclosures in G-1 (different balance 
computation methods) may be used in both the initial disclosures under 
Sec. 226.6 and the periodic disclosures under Sec. 226.7. As is clear 
from the models given, ``short-hand'' descriptions of the balance 
computation methods are not sufficient. The phrase ``a portion of'' the 
finance charge should be included if the total finance charge includes 
other amounts, such as transaction charges, that are not due to the 
application of a periodic rate. In addition, if unpaid finance charges 
are subtracted in calculating the balance, that fact must be stated so 
that the disclosure of the computation method is accurate. Only Model G-
1(b) contains a final sentence appearing in brackets which reflects the 
total dollar amount of payments and credits received during the billing 
cycle. The other models do not contain this language because they 
reflect plans in which payments and credits received during the billing 
cycle are subtracted. If this is not the case, however, the language 
relating to payments and credits should be changed, and the creditor 
should add either the disclosure of the dollar amount as in Model G-1(b) 
or an indication of which credits (disclosed elsewhere on the periodic 
statement) will not be deducted in determining the balance. (Such an 
indication may also substitute for the bracketed sentence in Model G-
1(b)). See the commentary to Sec. 226.7(e).
    2. Model G-2. This model contains the notice of liability for 
unauthorized use of a credit card.
    3. Models G-3 and G-4. These set out models for the long form 
billing error rights statement (for use with the initial disclosures and 
as an annual disclosure or, at the creditor's option, with each periodic 
statement) and the alternative billing error rights statement (for use 
with each periodic statement), respectively. Creditors must provide the 
billing error rights statements in a form substantially similar to the 
models in order to comply with the regulation. The model billing rights 
statements may be modified in any of the ways set forth in the first 
paragraph to the commentary on appendices G and H. The models may, 
furthermore, be modified by deleting inapplicable information, such as:

     The paragraph concerning stopping a debit in 
relation to a disputed amount, if the creditor does not have the ability 
to debit automatically the consumer's saving or checking account for 
payment.
     The rights stated in the special rule for credit 
card purchases and any limitations on those rights.

    The model billing rights statements also contain optional language 
that creditors may use. For example, the creditor may:

     Include a statement to the effect that notice of 
a billing error must be submitted on something other than the payment 
ticket or other material accompanying the periodic disclosures.
     Insert its address or refer to the address that 
appears elsewhere on the bill.

Additional information may be included on the statements as long as it 
does not detract from the required disclosures. For instance, 
information concerning the reporting of errors in connection with a 
checking account may be included on a combined statement as long as the 
disclosures required by the regulation remain clear and conspicuous.
    4. Models G-5 through G-9. These models set out notices of the right 
to rescind that would be used at different times in an open-end plan. 
The last paragraph of each of the rescission model forms contains a 
blank for the date by which the consumer's notice of cancellation must 
be sent or delivered. A parenthetical is included to address the 
situation in which the consumer's right to rescind the transaction 
exists beyond 3 business days following the date of the transaction, for 
example, when the notice or material disclosures are delivered late or 
when the date of the transaction in paragraph 1 of the notice is an 
estimate. The language of the parenthetical is not optional. See the 
commentary to section 226.2(a)(25) regarding the specificity of the 
security interest disclosure for model form G-7.
    5. Model G-10(A), Sample G-10(B) and Model G-10(C). i. Model G-10(A) 
and Sample G-10(B) illustrate, in the tabular format, all of the 
disclosures required under Sec. 226.5a for applications and 
solicitations for credit cards other than charge cards. Model G-10(B) is 
a sample disclosure illustrating an account with a lower introductory 
rate and

[[Page 601]]

penalty rate. Model G-10(C) illustrates the tabular format disclosure 
for charge card applications and solicitations and reflects all of the 
disclosures in the table.
    ii. Except as otherwise permitted, disclosures must be substantially 
similar in sequence and format to model forms G-10(A) and (C). The 
disclosures may, however, be arranged vertically or horizontally and 
need not be highlighted aside from being included in the table. While 
proper use of the model forms will be deemed in compliance with the 
regulation, card issuers are permitted to use headings and disclosures 
other than those in the forms (with an exception relating to the use of 
``grace period'') if they are clear and concise and are substantially 
similar to the headings and disclosures contained in model forms. For 
further discussion of requirements relating to form, see the commentary 
to Sec. 226.5a(a)(2).
    6. Models G-11 and G-12. Model G-11 contains clauses that illustrate 
the general disclosures required under Sec. 226.5a(e) in applications 
and solicitations made available to the general public. Model G-12 is a 
model clause for the disclosure required under Sec. 226.5a(f) when a 
charge card accesses an open-end plan offered by another creditor.
    7. Models G-13(A) and G-13(B). These model forms illustrate the 
disclosures required under Sec. 226.9(f) when the card issuer changes 
the entity providing insurance on a credit card account. Model G-13(A) 
contains the items set forth in Sec. 226.9(f)(3) as examples of 
significant terms of coverage that may be affected by the change in 
insurance provider. The card issuer may either list all of these 
potential changes in coverage and place a check mark by the applicable 
changes, or list only the actual changes in coverage. Under either 
approach, the card issuer must either explain the changes or refer to an 
accompanying copy of the policy or group certificate for details of the 
new terms of coverage. Model G-13(A) also illustrates the permissible 
combination of the two notices required by Sec. 226.9(f)--the notice 
required for a planned change in provider and the notice required once a 
change has occurred. This form may be modified for use in providing only 
the disclosures required before the change if the card issuer chooses to 
send two separate notices. Thus, for example, the references to the 
attached policy or certificate would not be required in a separate 
notice prior to a change in the insurance provider since the policy or 
certificate need not be provided at that time. Model G-13(B) illustrates 
the disclosures required under Sec. 226.9(f)(2) when the insurance 
provider is changed.

             Appendix H--Closed-End Model Forms and Clauses

    1. Models H-1 and H-2. Creditors may make several types of changes 
to closed-end model forms H-1 (credit sale) and H-2 (loan) and still be 
deemed to be in compliance with the regulation, provided that the 
required disclosures are made clearly and conspicuously. Permissible 
changes include the addition of the information permitted by footnote 37 
to Sec. 226.17 and ``directly related'' information as set forth in the 
commentary to Sec. 226.17(a).
    The creditor may also delete or, on multi-purpose forms, indicate 
inapplicable disclosures, such as:
     The itemization of the amount financed option. 
(See Samples H-12 through H-15.)
     The credit life and disability insurance 
disclosures. (See Samples H-11 and H-12.)
     The property insurance disclosures. (See Samples 
H-10 through H-12, and H-14.)
     The ``filing fees'' and ``non-filing insurance'' 
disclosures. (See Samples H-11 and H-12.)
     The prepayment penalty or rebate disclosures. 
(See Samples H-12 and H-14.)
     The total sale price. (See Samples H-11 through 
H-15.)
    Other permissible changes include:
     Adding the creditor's address or telephone 
number. (See the commentary to Sec. 226.18(a).)
     Combining required terms where several numerical 
disclosures are the same, for instance, if the ``total of payments'' 
equals the ``total sale price.'' (See the commentary to Sec. 226.18.)
     Rearranging the sequence or location of the 
disclosures--for instance, by placing the descriptive phrases outside 
the boxes containing the corresponding disclosures, or by grouping the 
descriptors together as a glossary of terms in a separate section of the 
segregated disclosures; by placing the payment schedule at the top of 
the form; or by changing the order of the disclosures in the boxes, 
including the annual percentage rate and finance charge boxes.
     Using brackets, instead of checkboxes, to 
indicate inapplicable disclosures.
     Using a line for the consumer to initial, rather 
than a checkbox, to indicate an election to receive an itemization of 
the amount financed.
     Deleting captions for disclosures.
     Using a symbol, such as an asterisk, for 
estimated disclosures, instead of an ``e.''
     Adding a signature line to the insurance 
disclosures to reflect joint policies.
     Separately itemizing the filing fees.
     Revising the late charge disclosure in accordance 
with the commentary to Sec. 226.18(l).
    2. Model H-3. Creditors have considerable flexibility in filling out 
Model H-3 (itemization of the amount financed). Appropriate revisions, 
such as those set out in the commentary to Sec. 226.18(c), may be made 
to this form without loss of protection from civil liability for proper 
use of the model forms.
    3. Models H-4 through H-7. The model clauses are not included in the 
model forms

[[Page 602]]

although they are mandatory for certain transactions. Creditors using 
the model clauses when applicable to a transaction are deemed to be in 
compliance with the regulation with regard to that disclosure.
    4. Model H-4(A). This model contains the variable rate model clauses 
applicable to transactions subject to Sec. 226.18(f)(1) and is intended 
to give creditors considerable flexibility in structuring variable rate 
disclosures to fit individual plans. The information about 
circumstances, limitations, and effects of an increase may be given in 
terms of the contract interest rate or the annual percentage rate. 
Clauses are shown for hypothetical examples based on the specific amount 
of the transaction and based on a representative amount. Creditors may 
preprint the variable rate disclosures based on a representative amount 
for similar types of transactions, instead of constructing an 
individualized example for each transaction. In both representative 
examples and transaction-specific examples, creditors may refer either 
to the incremental change in rate, payment amount, or number of 
payments, or to the resulting rate, payment amount, or number of 
payments. For example, creditors may state that the rate will increase 
by 2%, with a corresponding $150 increase in the payment, or creditors 
may state that the rate will increase to 16%, with a corresponding 
payment of $850.
    5. Model H-4(B). This model clause illustrates the variable-rate 
disclosure required under Sec. 226.18(f)(2), which would alert 
consumers to the fact that the transaction contains a variable-rate 
feature and that disclosures were provided earlier.
    6. Model H-4(C). This model clause illustrates the early disclosures 
required generally under Sec. 226.19(b). It includes information on how 
the consumer's interest rate is determined and how it can change over 
the term of the loan, and explains changes that may occur in the 
borrower's monthly payment. It contains an example of how to disclose 
historical changes in the index or formula values used to compute 
interest rates for the preceding 15 years. The model clause also 
illustrates the disclosure of the initial and maximum interest rates and 
payments based on an initial interest rate (index value plus margin, 
adjusted by the amount of any discount or premium) in effect as of an 
identified month and year for the loan program disclosure and 
illustrates how to provide consumers with a method for calculating the 
monthly payment for the loan amount to be borrowed.
    7. Model H-4(D). This model clause illustrates the adjustment notice 
required under Sec. 226.20(c), and provides examples of payment change 
notices and annual notices of interest rate changes.
    8. Model H-5. This contains the demand feature clause.
    9. Model H-6. This contains the assumption clause.
    10. Model H-7. This contains the required deposit clause.
    11. Models H-8 and H-9. These models contain the rescission notices 
for a typical closed-end transaction and a refinancing, respectively. 
The last paragraph of each model form contains a blank for the date by 
which the consumer's notice of cancellation must be sent or delivered. A 
parenthetical is included to address the situation in which the 
consumer's right to rescind the transaction exists beyond 3 business 
days following the date of the transaction, for example, where the 
notice or material disclosures are delivered late or where the date of 
the transaction in paragraph 1 of the notice is an estimate. The 
language of the parenthetical is not optional. See the commentary to 
section 226.2(a)(25) regarding the specificity of the security interest 
disclosure for model form H-9. The prior version of model form H-9 is 
substantially similar to the current version and creditors may continue 
to use it, as appropriate. Creditors are encouraged, however, to use the 
current version when reordering or reprinting forms.
    12. Sample forms. The sample forms (H-10 through H-15) serve a 
different purpose than the model forms. The samples illustrate various 
ways of adapting the model forms to the individual transactions 
described in the commentary to appendix H. The deletions and 
rearrangments shown relate only to the specific transactions described. 
As a result, the samples do not provide the general protection from 
civil liability provided by the model forms and clauses.
    13. Sample H-10. This sample illustrates an automobile credit sale. 
The cash price is $7,500 with a downpayment of $1,500. There is an 8% 
add-on interest rate and a term of 3 years, with 36 equal monthly 
payments. The credit life insurance premium and the filing fees are 
financed by the creditor. There is a $25 credit report fee paid by the 
consumer before consummation, which is a prepaid finance charge.
    14. Sample H-11. This sample illustrates an installment loan. The 
amount of the loan is $5,000. There is a 12% simple interest rate and a 
term of 2 years. The date of the transaction is expected to be April 15, 
1981, with the first payment due on June 1, 1981. The first payment 
amount is labelled as an estimate since the transaction date is 
uncertain. The odd days' interest ($26.67) is collected with the first 
payment. The remaining 23 monthly payments are equal.
    15. Sample H-12. This sample illustrates a refinancing and 
consolidation loan. The amount of the loan is $5,000. There is a 15% 
simple interest rate and a term of 3 years. The date of the transaction 
is April 1, 1981, with the first payment due on May 1, 1981. The first 
35 monthly payments are equal,

[[Page 603]]

with an odd final payment. The credit disability insurance premium is 
financed. In calculating the annual percentage rate, the U.S. Rule has 
been used. Since an itemization of the amount financed is included with 
the disclosures, the statement regarding the consumer's option to 
receive an itemization is deleted.
    16. Samples H-13 through H-15. These samples illustrate various 
mortgage transactions. They assume that the mortgages are subject to the 
Real Estate Settlement Procedures Act (RESPA). As a result, no option 
regarding the itemization of the amount financed has been included in 
the samples, because providing the good faith estimates of settlement 
costs required by RESPA satisfies Truth in Lending's amount financed 
itemization requirement. (See footnote 39 to Sec. 226.18(c).)
    17. Sample H-13. This sample illustrates a mortgage with a demand 
feature. The loan amount is $44,900, payable in 360 monthly installments 
at a simple interest rate of 14.75%. The 15 days of interim interest 
($294.34) is collected as a prepaid finance charge at the time of 
consummation of the loan (April 15, 1981). In calculating the disclosure 
amounts, the minor irregularities provision in Sec. 226.17(c)(4) has 
been used. The property insurance premiums are not included in the 
payment schedule. This disclosure statement could be used for notes with 
the 7-year call option required by the Federal National Mortgage 
Association (FNMA) in states where due-on-sale clauses are prohibited.
    18. Sample H-14. This sample disclosure form illustrates the 
disclosures under Sec. 226.19(b) for a variable-rate transaction 
secured by the consumer's principal dwelling with a term greater than 
one year. The sample form shows a creditor how to adapt the model 
clauses in appendix H-4(C) to the creditor's own particular variable-
rate program. The sample disclosure form describes the features of a 
specific variable-rate mortgage program and alerts the consumer to the 
fact that information on the creditor's other closed-end variable-rate 
programs is available upon request. It includes information on how the 
interest rate is determined and how it can change over time. Section 
226.19(b)(2)(viii) permits creditors the option to provide either a 
historical example or an initial and maximum interest rates and payments 
disclosure; both are illustrated in the sample disclosure. The 
historical example explains how the monthly payment can change based on 
a $10,000 loan amount, payable in 360 monthly installments, based on 
historical changes in the values for the weekly average yield on U.S. 
Treasury Securities adjusted to a constant maturity of one year. Index 
values are measured for 15 years, as of the first week ending in July. 
This reflects the requirement that the index history be based on values 
for the same date or period each year in the example. The sample 
disclosure also illustrates the alternative disclosure under Sec. 
226.19(b)(2)(viii)(B) that the initial and the maximum interest rates 
and payments be shown for a $10,000 loan originated at an initial 
interest rate of 12.41 percent (which was in effect July 1996) and to 
have 2 percentage point annual (and 5 percentage point overall) interest 
rate limitations or caps. Thus, the maximum amount that the interest 
rate could rise under this program is 5 percentage points higher than 
the 12.41 percent initial rate to 17.41 percent, and the monthly payment 
could rise from $106.03 to a maximum of $145.34. The loan would not 
reach the maximum interest rate until its fourth year because of the 2 
percentage point annual rate limitations, and the maximum payment 
disclosed reflects the amortization of the loan during that period. The 
sample form also illustrates how to provide consumers with a method for 
calculating their actual monthly payment for a loan amount other than 
$10,000.
    19. Sample H-15. This sample illustrates a graduated payment 
mortgage with a 5-year graduation period and a 7\1/2\ percent yearly 
increase in payments. The loan amount is $44,900, payable in 360 monthly 
installments at a simple interest rate of 14.75%. Two points ($898), as 
well as an initial mortgage guarantee insurance premium of $225.00, are 
included in the prepaid finance charge. The mortgage guarantee insurance 
premiums are calculated on the basis of \1/4\ of 1% of the outstanding 
principal balance under an annual reduction plan. The abbreviated 
disclosure permitted under Sec. 226.18(g)(2) is used for the payment 
schedule for years 6 through 30. The prepayment disclosure refers to 
both penalties and rebates because information about penalties is 
required for the simple interest portion of the obligation and 
information about rebates is required for the mortgage insurance portion 
of the obligation.
    20. Sample H-16. This sample illustrates the disclosures required 
under Sec. 226.32(c). The sample illustrates the amount borrowed and 
the disclosures about optional insurance that are required for mortgage 
refinancings under Sec. 226.32(c)(5). Creditors may, at their option, 
include these disclosures for all loans subject to Sec. 226.32. The 
sample also includes disclosures required under Sec. 226.32(c)(3) when 
the legal obligation includes a balloon payment.
    21. HRSA-500-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-1 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved. 
The form may be used for all Health Education Assistance Loans (HEAL) 
with a variable interest rate that are interim student credit extensions 
as defined in Regulation Z.

[[Page 604]]

    22. HRSA-500-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-500-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved. 
The form may be used for all HEAL loans with a fixed interest rate that 
are interim student credit extensions as defined in Regulation Z.
    23. HRSA-502-1 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-1 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved. 
The form may be used for all HEAL loans with a variable interest rate in 
which the borrower has reached repayment status and is making payments 
of both interest and principal.
    24. HRSA-502-2 9-82. Pursuant to section 113(a) of the Truth in 
Lending Act, Form HRSA-502-2 9-82 issued by the U.S. Department of 
Health and Human Services for certain student loans has been approved. 
The form may be used for all HEAL loans with a fixed interest rate in 
which the borrower has reached repayment status and is making payments 
of both interest and principal.

                               References

    Statute: Sections 105 and 130.
    Other sections: Sections 226.6, 226.7, 226.9, 226.12, 226.15, 
226.18, and 226.23.
    Previous regulation: None.
    1981 changes: The model forms and clauses have no counterpart in the 
previous regulation.

                Appendix I--Federal Enforcement Agencies

    Statute: Section 108.
    Other sections: None.
    Previous regulation: Section 226.1(b).
    1981 changes: None.

 Appendix J--Annual Percentage Rate Computations for Closed-End Credit 
                              Transactions

    1. Use of appendix J. Appendix J sets forth the actuarial equations 
and instructions for calculating the annual percentage rate in closed-
end credit transactions. While the formulas contained in this appendix 
may be directly applied to calculate the annual percentage rate for an 
individual transaction, they may also be utilized to program calculators 
and computers to perform the calculations.
    2. Relation to Board tables. The Board's Annual Percentage Rate 
Tables also provide creditors with a calculation tool that applies the 
technical information in appendix J. An annual percentage rate computed 
in accordance with the instructions in the tables is deemed to comply 
with the regulation. Volume I of the tables may be used for credit 
transactions involving equal payment amounts and periods, as well as for 
transactions involving any of the following irregularities: odd first 
period, odd first payment and odd last payment. Volume II of the tables 
may be used for transactions that involve any type of irregularities. 
These tables may be obtained from any Federal Reserve Bank or from the 
Board in Washington, DC 20551, upon request.

                               References

    Statute: Section 107.
    Other sections: Section 226.22.
    Previous regulation: Section 226.40 (Supplement I).
    1981 changes: Paragraph (b)(2) has been revised to clarify that the 
term of the transaction never begins earlier than consummation of the 
transaction. Paragraph (b)(5)(vi) has been revised to permit creditors 
in single-advance, single-payment transactions in which the term is less 
than a year and is equal to a whole number of months, to use either the 
12-month method or the 365-day method to compute the number of unit-
periods per year.

    Appendix K--Total Annual Loan Cost Rate Computations for Reverse 
                          Mortgage Transactions

    1. General. The calculation of total annual loan cost rates under 
appendix K is based on the principles set forth and the estimation or 
``iteration'' procedure used to compute annual percentage rates under 
appendix J. Rather than restate this iteration process in full, the 
regulation cross-references the procedures found in appendix J. In other 
aspects the appendix reflects the special nature of reverse mortgage 
transactions. Special definitions and instructions are included where 
appropriate.
    (b) Instructions and equations for the total annual loan cost rate.
    (b)(5) Number of unit-periods between two given dates.
    1. Assumption as to when transaction begins. The computation of the 
total annual loan cost rate is based on the assumption that the reverse 
mortgage transaction begins on the first day of the month in which 
consummation is estimated to occur. Therefore, fractional unit-periods 
(used under appendix J for calculating annual percentage rates) are not 
used.
    (b)(9) Assumption for discretionary cash advances.
    1. Amount of credit. Creditors should compute the total annual loan 
cost rates for transactions involving discretionary cash advances by 
assuming that 50 percent of the initial amount of the credit available 
under the transaction is advanced at closing or, in an open-end 
transaction, when the consumer becomes obligated under the plan. (For 
the purposes of this assumption, the initial amount of the credit is the 
principal loan

[[Page 605]]

amount less any costs to the consumer under section 226.33(c)(1).)
    (b)(10) Assumption for variable-rate reverse mortgage transactions.
    1. Initial discount or premium rate. Where a variable-rate reverse 
mortgage transaction includes an initial discount or premium rate, the 
creditor should apply the same rules for calculating the total annual 
loan cost rate as are applied when calculating the annual percentage 
rate for a loan with an initial discount or premium rate (see the 
commentary to Sec. 226.17(c)).
    (d) Reverse mortgage model form and sample form.
    (d)(2) Sample form.
    1. General. The ``clear and conspicuous'' standard for reverse 
mortgage disclosures does not require disclosures to be printed in any 
particular type size. Disclosures may be made on more than one page, and 
use both the front and the reverse sides, as long as the pages 
constitute an integrated document and the table disclosing the total 
annual loan cost rates is on a single page.

 Appendix L--Assumed Loan Periods for Computations of Total Annual Loan 
                               Cost Rates

    1. General. The life expectancy figures used in appendix L are those 
found in the U.S. Decennial Life Tables for women, as rounded to the 
nearest whole year and as published by the U. S. Department of Health 
and Human Services. The figures contained in appendix L must be used by 
creditors for all consumers (men and women). Appendix L will be revised 
periodically by the Board to incorporate revisions to the figures made 
in the Decennial Tables.

[46 FR 50288, Oct. 9, 1981]

    Editorial Note: For Federal Register citations affecting supplement 
I of part 226, see the List of CFR Sections Affected, which appears in 
the Finding Aids section of the printed volume and on GPO Access.

    Effective Date Note: At 73 FR 44604 through 44613, July 30, 2008, 
supplement I of part 226 was amended accordingly: under Section 226.1--
Authority, Purpose, Coverage, Organization, Enforcement and Liability, 
new headings 1(d) Organization and Paragraph 1(d)(5), and new paragraph 
1(d)(5)-1 were added; under Section 226.2--Definitions and Rules of 
Construction, 2(a) Definitions, 2(a)(6) Business day, paragraph 2(a)(6)-
2 was revised, and under 2(a)(24) Residential mortgage transaction, 
paragraphs 2(a)(24)-1 and 2(a)(24)-5.ii were revised; under Section 
226.16--Advertising, paragraph 16-1 was revised, paragraph 16-2 was 
redesignated as paragraph 16-6, and new paragraphs 16-2 through 16-5 and 
16-7 were added; under 16(d) Additional requirements for home-equity 
plans, paragraph 16(d)-3 was revised, paragraphs 16(d)-5, 16(d)-6, and 
16(d)-7 were redesignated as paragraphs 16(d)-7, 16(d)-8, and 16(d)-9, 
respectively, new paragraphs 16(d)-5 and 16(d)-6 were added, and newly 
designated paragraphs 16(d)-7 and 16(d)-9 were revised; and new heading 
16(e) Alternative disclosures--television or radio advertisements was 
added, and new paragraphs 16(e)-1 and 16(e)-2 were added; under Section 
226.17--General Disclosure Requirements, 17(c) Basis of disclosures and 
use of estimates, Paragraph 17(c)(1), paragraph 17(c)(1)-8 was revised, 
and under 17(f) Early disclosures, paragraph 17(f)-4 was revised; under 
Section 226.19--Certain Residential Mortgage and Variable-Rate 
Transactions, the heading was revised, heading 19(a)(1) Time of 
disclosure was redesignated as heading 19(a)(1)(i) Time of disclosure, 
paragraphs 19(a)(1)(i)-1 and 19(a)(1)(i)-5 were revised, new heading 
19(a)(1)(ii) Imposition of fees and new paragraphs 19(a)(1)(ii)-1 
through 19(a)(1)(ii)-3 were added, and new heading 19(a)(1)(iii) 
Exception to fee restriction and new paragraph 19(a)(1)(iii)-1 were 
added; under Section 226.24--Advertising, paragraph 24-1 is revised; 
heading 24(d) Catalogs or other multiple-page advertisements; electronic 
advertisements and paragraphs 24(d)-1 through 24(d)-4 were redesignated 
as heading 24(e) Catalogs or other multiple-page advertisements; 
electronic advertisements and paragraphs 24(e)-1 through 24(e)-4, 
respectively; headings 24(c) Advertisements of terms that require 
additional disclosures, Paragraph 24(c)(1), and Paragraph 24(c)(2) and 
paragraphs 24(c)-1, 24(c)(1)-1 through 24(c)(1)-4, and 24(c)(2)-1 
through 24(c)(2)-4 were redesignated as headings 24(d) Advertisements of 
terms that require additional disclosures, Paragraph 24(d)(1), and 
Paragraph 24(d)(2) and paragraphs 24(d)-1, 24(d)(1)-1 through 24(d)(1)-
4, and 24(d)(2)-1 through 24(d)(2)-4, respectively; heading 24(b) 
Advertisement of rate of finance charge and paragraphs 24(b)-1 through 
24(b)-5 were redesignated as heading 24(c) Advertisement of rate of 
finance charge and paragraphs 24(c)-1 through 24(c)-5, respectively; new 
heading 24(b) Clear and conspicuous standard and new paragraphs 24(b)-1 
through 24(b)-5 were added; newly designated paragraphs 24(c)-2 and 
24(c)-3 were revised, newly designated paragraph 24(c)-4 was removed, 
and newly designated paragraph 24(c)-5 was further redesignated as 
24(c)-4 and revised; newly designated paragraphs 24(d)-1, 24(d)(1)-3, 
and 24(d)(2)-2 were revised, newly designated paragraphs 24(d)(2)-3 and 
24(d)(2)-4 were further redesignated as 24(d)(2)-4 and 24(d)(2)-5, 
respectively, new paragraph 24(d)(2)-3 was added, and newly designated 
paragraph 24(d)(2)-5 was revised; newly designated paragraph 24(e)-1, 
24(e)-2, and 24(e)-4 were revised; and new headings 24(f) Disclosure of 
rates and payments in advertisements for credit secured by a dwelling, 
24(f)(3) Disclosure of payments, 24(g)

[[Page 606]]

Alternative disclosures--television or radio advertisements, and 24(i) 
Prohibited acts or practices in advertisements for credit secured by a 
dwelling and new paragraphs 24(f)-1 through 24(f)-6, 24(f)(3)-1, 
24(f)(3)-2, 24(g)-1, 24(g)-2, and 24(i)-1 through 24(i)-3 were added; 
under Section 226.32-Requirements for Certain Closed-End Home Mortgages, 
32(a) Coverage, new heading Paragraph 32(a)(2) and new paragraph 
32(a)(2)-1 were added, under 32(d) Limitations, new paragraphs 32(d)-1 
and 32(d)-2 were added, and under 32(d)(7) Prepayment penalty exception, 
Paragraph 32(d)(7)(iii), paragraphs 32(d)(7)(iii)-1 and 32(d)(7)(iii)-2 
were removed and new paragraphs 32(d)(7)(iii)-1 through 32(d)(7)(iii)-3 
were added, and new heading Paragraph 32(d)(7)(iv) and new paragraphs 
32(d)(7)(iv)-1 and 32(d)(7)(iv)-2 were added; under Section 226.34--
Prohibited Acts or Practices in Connection with Credit Secured by a 
Consumer's Dwelling; Open-end Credit, the heading was revised, and under 
34(a) Prohibited acts or practices for loans subject to Sec. 226.32, 
34(a)(4) Repayment ability, paragraphs 34(a)(4)-1 through 34(a)(4)-4 
were removed, and new paragraphs 34(a)(4)-1 through 34(a)(4)-7, new 
heading 34(a)(4)(i) Mortgage-related obligations and new paragraph 
34(a)(4)(i)-1, new heading 34(a)(4)(ii) Verification of repayment 
ability and new paragraphs 34(a)(4)(ii)-1 through 34(a)(4)(ii)-3, new 
heading Paragraph 34(a)(4)(ii)(A) and new paragraphs 34(a)(4)(ii)(A)-1 
through 34(a)(4)(ii)(A)-5, new heading Paragraph 34(a)(4)(ii)(B) and new 
paragraphs 34(a)(4)(ii)(B)-1 and 34(a)(4)(ii)(B)-2, new heading 
Paragraph 34(a)(4)(ii)(C) and new paragraph 34(a)(4)(ii)(C)-1, new 
heading 34(a)(4)(iii) Presumption of compliance and new paragraph 
34(a)(4)(iii)-1, new heading Paragraph 34(a)(4)(iii)(B) and new 
paragraph 34(a)(4)(iii)(B)-1, new heading Paragraph 34(a)(4)(iii)(C) and 
new paragraph 34(a)(4)(iii)(C)-1, and new heading 34(a)(4)(iv) 
Exclusions from the presumption of compliance and new paragraphs 
34(a)(4)(iv)-1 and 34(a)(4)(iv)-2 were added; a new Section 226.35--
Prohibited Acts or Practices in Connection with Higher-priced Mortgage 
Loans was added;  Section 226.36--Prohibited Acts or Practices in 
Connection with Credit Secured by a Consumer's Principal Dwelling was 
added, effective Oct. 1, 2009. For the convenience of the user, the 
added and revised text is set forth as follows:



      Sec. Supplement I to Part 226--Official Staff Interpretations

                                * * * * *

 Section 226.1--Authority, Purpose, Coverage, Organization, Enforcement 
                              and Liability

                                * * * * *

    1(d) Organization.
    Paragraph 1(d)(5).
    1. Effective dates. The Board's revisions to Regulation Z published 
on July 30, 2008 (the ``final rules''), apply to covered loans 
(including refinance loans and assumptions considered new transactions 
under Sec. 226.20), for which the creditor receives an application on 
or after October 1, 2009, except for the final rules on advertising, 
escrows, and loan servicing. The final rules on escrows in Sec. 
226.35(b)(3) are effective for covered loans, (including refinancings 
and assumptions in Sec. 226.20) for which the creditor receives an 
application on or after April 1, 2010; but for such loans secured by 
manufactured housing on or after October 1, 2010. The final rules 
applicable to servicers in Sec. 226.36(c) apply to all covered loans 
serviced on or after October 1, 2009. The final rules on advertising 
apply to advertisements occurring on or after October 1, 2009. For 
example, a radio ad occurs on the date it is first broadcast; a 
solicitation occurs on the date it is mailed to the consumer. The 
following examples illustrate the application of the effective dates for 
the final rules.
    i. General. A refinancing or assumption as defined in Sec. 
226.20(a) or (b) is a new transaction and is covered by a provision of 
the final rule if the creditor receives an application for the 
transaction on or after that provision's effective date. For example, if 
a creditor receives an application for a refinance loan covered by Sec. 
226.35(a) on or after October 1, 2009, and the refinance loan is 
consummated on October 15, 2009, the provision restricting prepayment 
penalties in Sec. 226.35(b)(2) applies. However, If the transaction 
were a modification of an existing obligation's terms that does not 
constitute a refinance loan under Sec. 226.20(a), the final rules, 
including for example the restriction on prepayment penalties would not 
apply.
    ii. Escrows. Assume a consumer applies for a refinance loan to be 
secured by a dwelling (that is not a manufactured home) on March 15, 
2010, and the loan is consummated on April 2, 2010, the escrow rule in 
Sec. 226.35(b)(3) does not apply.
    iii. Servicing. Assume that a consumer applies for a new loan on 
August 1, 2009. The loan is consummated on September 1, 2009. The 
servicing rules in Sec. 226.36(c) apply to the servicing of that loan 
as of October 1, 2009.

                                * * * * *

          Section 226.2--Definitions and Rules of Construction

    2(a) Definitions.

                                * * * * *

[[Page 607]]

    2(a)(6) Business day.

                                * * * * *

    2. Recission rule. A more precise rule for what is a business day 
(all calendar days except Sundays and the federal legal holidays listed 
in 5 U.S.C. 6103(a)) applies when the right of rescission, the receipt 
of disclosures for certain mortgage transactions under section 
226.19(a)(1)(ii), or mortgages subject to section 226.32 are involved. 
(See also comment 31(c)(1)-1.) Four federal legal holidays are 
identified in 5 U.S.C. 6103(a) by a specific date: New Year's Day, 
January 1; Independence Day, July 4; Veterans Day, November 11; and 
Christmas Day, December 25. When one of these holidays (July 4, for 
example) falls on a Saturday, federal offices and other entities might 
observe the holiday on the preceding Friday (July 3). The observed 
holiday (in the example, July 3) is a business day for purposes of 
rescission, the receipt of disclosures for certain mortgage transactions 
under section 226.19(a)(1)(ii), or the delivery of disclosures for 
certain high-cost mortgages covered by section 226.32.

                                * * * * *

    2(a)(24) Residential mortgage transaction.
    1. Relation to other sections. This term is important in five 
provisions in the regulation:
    i. Sec. 226.4(c)(7)--exclusions from the finance charge.
    ii. Sec. 226.15(f)--exemption from the right of rescission.
    iii. Sec. 226.18(q)--whether or not the obligation is assumable.
    iv. Sec. 226.20(b)--disclosure requirements for assumptions.
    v. Sec. 226.23(f)--exemption from the right of rescission.

                                * * * * *

    5. Acquisition. * * *

                                * * * * *

    ii. Examples of new transactions involving a previously acquired 
dwelling include the financing of a balloon payment due under a land 
sale contract and an extension of credit made to a joint owner of 
property to buy out the other joint owner's interest. In these 
instances, disclosures are not required under Sec. 226.18(q) 
(assumability policies). However, the rescission rules of Sec. Sec. 
226.15 and 226.23 do apply to these new transactions.

                                * * * * *

                       Section 226.16--Advertising

    1. Clear and conspicuous standard--general. Section 226.16 is 
subject to the general ``clear and conspicuous'' standard for subpart B 
(see Sec. 226.5(a)(1)) but prescribes no specific rules for the format 
of the necessary disclosures, aside from the format requirements related 
to the disclosure of a promotional rate under Sec. 226.16(d)(6). Aside 
from the terms described in Sec. 226.16(d)(6), the credit terms need 
not be printed in a certain type size nor need they appear in any 
particular place in the advertisement.
    2. Clear and conspicuous standard--promotional rates or payments for 
home-equity plans. For purposes of Sec. 226.16(d)(6), a clear and 
conspicuous disclosure means that the required information in Sec. 
226.16(d)(6)(ii)(A)-(C) is disclosed with equal prominence and in close 
proximity to the promotional rate or payment to which it applies. If the 
information in Sec. 226.16(d)(6)(ii)(A)-(C) is the same type size and 
is located immediately next to or directly above or below the 
promotional rate or payment to which it applies, without any intervening 
text or graphical displays, the disclosures would be deemed to be 
equally prominent and in close proximity. Notwithstanding the above, for 
electronic advertisements that disclose promotional rates or payments, 
compliance with the requirements of Sec. 226.16(c) is deemed to satisfy 
the clear and conspicuous standard.
    3. Clear and conspicuous standard--Internet advertisements for home-
equity plans. For purposes of this section, a clear and conspicuous 
disclosure for visual text advertisements on the Internet for home-
equity plans subject to the requirements of Sec. 226.5b means that the 
required disclosures are not obscured by techniques such as graphical 
displays, shading, coloration, or other devices and comply with all 
other requirements for clear and conspicuous disclosures under Sec. 
226.16(d). See also comment 16(c)(1)-2.
    4. Clear and conspicuous standard--televised advertisements for 
home-equity plans. For purposes of this section, including alternative 
disclosures as provided for by Sec. 226.16(e), a clear and conspicuous 
disclosure in the context of visual text advertisements on television 
for home-equity plans subject to the requirements of Sec. 226.5b means 
that the required disclosures are not obscured by techniques such as 
graphical displays, shading, coloration, or other devices, are displayed 
in a manner that allows for a consumer to read the information required 
to be disclosed, and comply with all other requirements for clear and 
conspicuous disclosures under Sec. 226.16(d). For example, very fine 
print in a television advertisement would not meet the clear and 
conspicuous standard if consumers cannot see and read the information 
required to be disclosed.
    5. Clear and conspicuous standard--oral advertisements for home-
equity plans. For purposes of this section, including alternative 
disclosures as provided for by Sec. 226.16(e), a

[[Page 608]]

clear and conspicuous disclosure in the context of an oral advertisement 
for home-equity plans subject to the requirements of Sec. 226.5b, 
whether by radio, television, the Internet, or other medium, means that 
the required disclosures are given at a speed and volume sufficient for 
a consumer to hear and comprehend them. For example, information stated 
very rapidly at a low volume in a radio or television advertisement 
would not meet the clear and conspicuous standard if consumers cannot 
hear and comprehend the information required to be disclosed.
    6. Expressing the annual percentage rate in abbreviated form. * * *
    7. Effective date. For guidance on the applicability of the Board's 
revisions to Sec. 226.16 published on July 30, 2008, see comment 
1(d)(5)-1.

                                * * * * *

    16(d) Additional requirements for home-equity plans.

                                * * * * *

    3. Statements of tax deductibility. An advertisement that refers to 
deductibility for tax purposes is not misleading if it includes a 
statement such as ``consult a tax advisor regarding the deductibility of 
interest.'' An advertisement distributed in paper form or through the 
Internet (rather than by radio or television) that states that the 
advertised extension of credit may exceed the fair market value of the 
consumer's dwelling is not misleading if it clearly and conspicuously 
states the required information in Sec. Sec. 226.16(d)(4)(i) and (ii).

                                * * * * *

    5. Promotional rates and payments in advertisements for home-equity 
plans. Section 226.16(d)(6) requires additional disclosures for 
promotional rates or payments.
    i. Variable-rate plans. In advertisements for variable-rate plans, 
if the advertised annual percentage rate is based on (or the advertised 
payment is derived from) the index and margin that will be used to make 
rate (or payment) adjustments over the term of the loan, then there is 
no promotional rate or promotional payment. If, however, the advertised 
annual percentage rate is not based on (or the advertised payment is not 
derived from) the index and margin that will be used to make rate (or 
payment) adjustments, and a reasonably current application of the index 
and margin would result in a higher annual percentage rate (or, given an 
assumed balance, a higher payment) then there is a promotional rate or 
promotional payment.
    ii. Equal prominence, close proximity. Information required to be 
disclosed in Sec. 226.16(d)(6)(ii) that is immediately next to or 
directly above or below the promotional rate or payment (but not in a 
footnote) is deemed to be closely proximate to the listing. Information 
required to be disclosed in Sec. 226.16(d)(6)(ii) that is in the same 
type size as the promotional rate or payment is deemed to be equally 
prominent.
    iii. Amounts and time periods of payments. Section 
226.16(d)(6)(ii)(C) requires disclosure of the amount and time periods 
of any payments that will apply under the plan. This section may require 
disclosure of several payment amounts, including any balloon payment. 
For example, if an advertisement for a home-equity plan offers a 
$100,000 five-year line of credit and assumes that the entire line is 
drawn resulting in a minimum payment of $800 per month for the first six 
months, increasing to $1,000 per month after month six, followed by a 
$50,000 balloon payment after five years, the advertisement must 
disclose the amount and time period of each of the two monthly payment 
streams, as well as the amount and timing of the balloon payment, with 
equal prominence and in close proximity to the promotional payment. 
However, if the final payment could not be more than twice the amount of 
other minimum payments, the final payment need not be disclosed.
    iv. Plans other than variable-rate plans. For a plan other than a 
variable-rate plan, if an advertised payment is calculated in the same 
way as other payments based on an assumed balance, the fact that the 
minimum payment could increase solely if the consumer made an additional 
draw does not make the payment a promotional payment. For example, if a 
payment of $500 results from an assumed $10,000 draw, and the payment 
would increase to $1,000 if the consumer made an additional $10,000 
draw, the payment is not a promotional payment.
    v. Conversion option. Some home-equity plans permit the consumer to 
repay all or part of the balance during the draw period at a fixed rate 
(rather than a variable rate) and over a specified time period. The 
fixed-rate conversion option does not, by itself, make the rate or 
payment that would apply if the consumer exercised the fixed-rate 
conversion option a promotional rate or payment.
    vi. Preferred-rate provisions. Some home-equity plans contain a 
preferred-rate provision, where the rate will increase upon the 
occurrence of some event, such as the consumer-employee leaving the 
creditor's employ, the consumer closing an existing deposit account with 
the creditor, or the consumer revoking an election to make automated 
payments. A preferred-rate provision does not, by itself, make the rate 
or payment under the preferred-rate provision a promotional rate or 
payment.
    6. Reasonably current index and margin. For the purposes of this 
section, an index and margin is considered reasonably current if:

[[Page 609]]

    i. For direct mail advertisements, it was in effect within 60 days 
before mailing;
    ii. For advertisements in electronic form it was in effect within 30 
days before the advertisement is sent to a consumer's e-mail address, or 
in the case of an advertisement made on an Internet Web site, when 
viewed by the public; or
    iii. For printed advertisements made available to the general 
public, including ones contained in a catalog, magazine, or other 
generally available publication, it was in effect within 30 days before 
printing.
    7. Relation to other sections. Advertisements for home-equity plans 
must comply with all provisions in Sec. 226.16 not solely the rules in 
Sec. 226.16(d). If an advertisement contains information (such as the 
payment terms) that triggers the duty under Sec. 226.16(d) to state the 
annual percentage rate, the additional disclosures in Sec. 226.16(b) 
must be provided in the advertisement. While Sec. 226.16(d) does not 
require a statement of fees to use or maintain the plan (such as 
membership fees and transaction charges), such fees must be disclosed 
under Sec. 226.16(b)(1) and (3).

                                * * * * *

    9. Balloon payment. See comment 5b(d)(5)(ii)-3 for information not 
required to be stated in advertisements, and on situations in which the 
balloon payment requirement does not apply.
    16(e) Alternative disclosures--television or radio advertisements.
    1. Multi-purpose telephone number. When an advertised telephone 
number provides a recording, disclosures should be provided early in the 
sequence to ensure that the consumer receives the required disclosures. 
For example, in providing several options--such as providing directions 
to the advertiser's place of business--the option allowing the consumer 
to request disclosures should be provided early in the telephone message 
to ensure that the option to request disclosures is not obscured by 
other information.
    2. Statement accompanying telephone number. Language must accompany 
a telephone number indicating that disclosures are available by calling 
the telephone number, such as ``call 1-800-000-0000 for details about 
credit costs and terms.''

                                * * * * *

             Section 226.17--General Disclosure Requirements

                                * * * * *

    17(c) Basis of disclosures and use of estimates.

                                * * * * *

    Paragraph 17(c)(1).

                                * * * * *

    8. Basis of disclosures in variable-rate transactions. The 
disclosures for a variable-rate transaction must be given for the full 
term of the transaction and must be based on the terms in effect at the 
time of consummation. Creditors should base the disclosures only on the 
initial rate and should not assume that this rate will increase. For 
example, in a loan with an initial rate of 10 percent and a 5 percentage 
points rate cap, creditors should base the disclosures on the initial 
rate and should not assume that this rate will increase 5 percentage 
points. However, in a variable-rate transaction with a seller buydown 
that is reflected in the credit contract, a consumer buydown, or a 
discounted or premium rate, disclosures should not be based solely on 
the initial terms. In those transactions, the disclosed annual 
percentage rate should be a composite rate based on the rate in effect 
during the initial period and the rate that is the basis of the 
variable-rate feature for the remainder of the term. (See the commentary 
to Sec. 226.17(c) for a discussion of buydown, discounted, and premium 
transactions and the commentary to Sec. 226.19(a)(2) for a discussion 
of the redisclosure in certain mortgage transactions with a variable-
rate feature.)

                                * * * * *

    17(f) Early disclosures.

                                * * * * *

    4. Special rules. In mortgage transactions subject to Sec. 226.19, 
the creditor must redisclose if, between the delivery of the required 
early disclosures and consummation, the annual percentage rate changes 
by more than a stated tolerance. When subsequent events occur after 
consummation, new disclosures are required only if there is a 
refinancing or an assumption within the meaning of Sec. 226.20.

                                * * * * *

     Section 226.19--Certain Mortgage and Variable-Rate Transactions

    19(a)(1)(i) Time of disclosure.
    1. Coverage. This section requires early disclosure of credit terms 
in mortgage transactions that are secured by a consumer's principal 
dwelling and also subject to the Real Estate Settlement Procedures Act 
(RESPA) and its implementing Regulation X, administered by the 
Department of Housing and Urban Development (HUD). To be covered by 
Sec. 226.19, a transaction must be a federally related mortgage loan 
under RESPA. ``Federally related mortgage loan''

[[Page 610]]

is defined under RESPA (12 U.S.C. 2602) and Regulation X (24 CFR 
3500.2), and is subject to any interpretations by HUD. RESPA coverage 
includes such transactions as loans to purchase dwellings, refinancings 
of loans secured by dwellings, and subordinate-lien home-equity loans, 
among others. Although RESPA coverage relates to any dwelling, Sec. 
226.19(a) applies to such transactions only if they are secured by a 
consumer's principal dwelling. Also, home equity lines of credit subject 
to Sec. 226.5b are not covered by Sec. 226.19(a). For guidance on the 
applicability of the Board's revisions to Sec. 226.19(a) published on 
July 30, 2008, see comment 1(d)(5)-1.

                                * * * * *

    5. Itemization of amount financed. In many mortgage transactions, 
the itemization of the amount financed required by Sec. 226.18(c) will 
contain items, such as origination fees or points, that also must be 
disclosed as part of the good faith estimates of settlement costs 
required under RESPA. Creditors furnishing the RESPA good faith 
estimates need not give consumers any itemization of the amount 
financed, either with the disclosures provided within three days after 
application or with the disclosures given at consummation or settlement.
    19(a)(1)(ii) Imposition of fees.
    1. Timing of fees. The consumer must receive the disclosures 
required by this section before paying or incurring any fee imposed by a 
creditor or other person in connection with the consumer's application 
for a mortgage transaction that is subject to Sec. 226.19(a)(1)(i), 
except as provided in Sec. 226.19(a)(1)(iii). If the creditor delivers 
the disclosures to the consumer in person, a fee may be imposed anytime 
after delivery. If the creditor places the disclosures in the mail, the 
creditor may impose a fee after the consumer receives the disclosures 
or, in all cases, after midnight on the third business day following 
mailing of the disclosures. For purposes of Sec. 226.19(a)(1)(ii), the 
term ``business day'' means all calendar days except Sundays and legal 
public holidays referred to in Sec. 226.2(a)(6). See Comment 2(a)(6)-2. 
For example, assuming that there are no intervening legal public 
holidays, a creditor that receives the consumer's written application on 
Monday and mails the early mortgage loan disclosure on Tuesday may 
impose a fee on the consumer after midnight on Friday.
    2. Fees restricted. A creditor or other person may not impose any 
fee, such as for an appraisal, underwriting, or broker services, until 
the consumer has received the disclosures required by Sec. 
226.19(a)(1)(i). The only exception to the fee restriction allows the 
creditor or other person to impose a bona fide and reasonable fee for 
obtaining a consumer's credit history, such as for a credit report(s).
    3. Collection of fees. A creditor complies with Sec. 
226.19(a)(1)(ii) if--
    i. The creditor receives a consumer's written application directly 
from the consumer and does not collect any fee, other than a fee for 
obtaining a consumer's credit history, until the consumer receives the 
early mortgage loan disclosure.
    ii. A third party submits a consumer's written application to a 
creditor and both the creditor and third party do not collect any fee, 
other than a fee for obtaining a consumer's credit history, until the 
consumer receives the early mortgage loan disclosure from the creditor.
    iii. A third party submits a consumer's written application to a 
second creditor following a prior creditor's denial of an application 
made by the same consumer (or following the consumer's withdrawal), and, 
if a fee already has been assessed, the new creditor or third party does 
not collect or impose any additional fee until the consumer receives an 
early mortgage loan disclosure from the new creditor.
    19(a)(1)(iii) Exception to fee restriction.
    1. Requirements. A creditor or other person may impose a fee before 
the consumer receives the required disclosures if it is for obtaining 
the consumer's credit history, such as by purchasing a credit report(s) 
on the consumer. The fee also must be bona fide and reasonable in 
amount. For example, a creditor may collect a fee for obtaining a credit 
report(s) if it is in the creditor's ordinary course of business to 
obtain a credit report(s). If the criteria in Sec. 226.19(a)(1)(iii) 
are met, the creditor may describe or refer to this fee, for example, as 
an ``application fee.''

                                * * * * *

                       Section 226.24--Advertising

    1. Effective date. For guidance on the applicability of the Board's 
changes to Sec. 226.24 published on July 30, 2008, see comment 1(d)(5)-
1.

                                * * * * *

    24(b) Clear and conspicuous standard.
    1. Clear and conspicuous standard--general. This section is subject 
to the general ``clear and conspicuous'' standard for this subpart, see 
Sec. 226.17(a)(1), but prescribes no specific rules for the format of 
the necessary disclosures, other than the format requirements related to 
the advertisement of rates and payments as described in comment 24(b)-2 
below. The credit terms need not be printed in a certain type size nor 
need they appear in any particular place in the advertisement. For 
example, a merchandise tag that is an advertisement under the regulation 
complies with this section if the necessary credit

[[Page 611]]

terms are on both sides of the tag, so long as each side is accessible.
    2. Clear and conspicuous standard--rates and payments in 
advertisements for credit secured by a dwelling. For purposes of Sec. 
226.24(f), a clear and conspicuous disclosure means that the required 
information in Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i)(A) and (B) 
is disclosed with equal prominence and in close proximity to the 
advertised rates or payments triggering the required disclosures, and 
that the required information in Sec. 226.24(f)(3)(i)(C) is disclosed 
prominently and in close proximity to the advertised rates or payments 
triggering the required disclosures. If the required information in 
Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i)(A) and (B) is the same 
type size as the advertised rates or payments triggering the required 
disclosures, the disclosures are deemed to be equally prominent. The 
information in Sec. 226.24(f)(3)(i)(C) must be disclosed prominently, 
but need not be disclosed with equal prominence or be the same type size 
as the payments triggering the required disclosures. If the required 
information in Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i) is located 
immediately next to or directly above or below the advertised rates or 
payments triggering the required disclosures, without any intervening 
text or graphical displays, the disclosures are deemed to be in close 
proximity. Notwithstanding the above, for electronic advertisements that 
disclose rates or payments, compliance with the requirements of Sec. 
226.24(e) is deemed to satisfy the clear and conspicuous standard.
    3. Clear and conspicuous standard--Internet advertisements for 
credit secured by a dwelling. For purposes of this section, a clear and 
conspicuous disclosure for visual text advertisements on the Internet 
for credit secured by a dwelling means that the required disclosures are 
not obscured by techniques such as graphical displays, shading, 
coloration, or other devices and comply with all other requirements for 
clear and conspicuous disclosures under Sec. 226.24. See also comment 
24(e)-4.
    4. Clear and conspicuous standard--televised advertisements for 
credit secured by a dwelling. For purposes of this section, including 
alternative disclosures as provided for by Sec. 226.24(g), a clear and 
conspicuous disclosure in the context of visual text advertisements on 
television for credit secured by a dwelling means that the required 
disclosures are not obscured by techniques such as graphical displays, 
shading, coloration, or other devices, are displayed in a manner that 
allows a consumer to read the information required to be disclosed, and 
comply with all other requirements for clear and conspicuous disclosures 
under Sec. 226.24. For example, very fine print in a television 
advertisement would not meet the clear and conspicuous standard if 
consumers cannot see and read the information required to be disclosed.
    5. Clear and conspicuous standard--oral advertisements for credit 
secured by a dwelling. For purposes of this section, including 
alternative disclosures as provided for by Sec. 226.24(g), a clear and 
conspicuous disclosure in the context of an oral advertisement for 
credit secured by a dwelling, whether by radio, television, or other 
medium, means that the required disclosures are given at a speed and 
volume sufficient for a consumer to hear and comprehend them. For 
example, information stated very rapidly at a low volume in a radio or 
television advertisement would not meet the clear and conspicuous 
standard if consumers cannot hear and comprehend the information 
required to be disclosed.
    24(c) Advertisement of rate of finance charge.

                                * * * * *

    2. Simple or periodic rates. The advertisement may not 
simultaneously state any other rate, except that a simple annual rate or 
periodic rate applicable to an unpaid balance may appear along with (but 
not more conspicuously than) the annual percentage rate. An 
advertisement for credit secured by a dwelling may not state a periodic 
rate, other than a simple annual rate, that is applied to an unpaid 
balance. For example, in an advertisement for credit secured by a 
dwelling, a simple annual interest rate may be shown in the same type 
size as the annual percentage rate for the advertised credit, subject to 
the requirements of section 226.24(f). A simple annual rate or periodic 
rate that is applied to an unpaid balance is the rate at which interest 
is accruing; those terms do not include a rate lower than the rate at 
which interest is accruing, such as an effective rate, payment rate, or 
qualifying rate.
    3. Buydowns. When a third party (such as a seller) or a creditor 
wishes to promote the availability of reduced interest rates (consumer 
or seller buydowns), the advertised annual percentage rate must be 
determined in accordance with the commentary to Sec. 226.17(c) 
regarding the basis of transactional disclosures for buydowns. The 
seller or creditor may advertise the reduced simple interest rate, 
provided the advertisement shows the limited term to which the reduced 
rate applies and states the simple interest rate applicable to the 
balance of the term. The advertisement may also show the effect of the 
buydown agreement on the payment schedule for the buydown period, but 
this will trigger the additional disclosures under Sec. 226.24(d)(2).
    4. Discounted variable-rate transactions. The advertised annual 
percentage rate for discounted variable-rate transactions must be 
determined in accordance with comment 17(c)(1)-10 regarding the basis of 
transactional disclosures for such financing.

[[Page 612]]

    i. A creditor or seller may promote the availability of the initial 
rate reduction in such transactions by advertising the reduced simple 
annual rate, provided the advertisement shows with equal prominence and 
in close proximity the limited term to which the reduced rate applies 
and the annual percentage rate that will apply after the term of the 
initial rate reduction expires. See Sec. 226.24(f).
    ii. Limits or caps on periodic rate or payment adjustments need not 
be stated. To illustrate using the second example in comment 17(c)(1)-
10, the fact that the rate is presumed to be 11 percent in the second 
year and 12 percent for the remaining 28 years need not be included in 
the advertisement.
    iii. The advertisement may also show the effect of the discount on 
the payment schedule for the discount period, but this will trigger the 
additional disclosures under Sec. 226.24(d).
    24(d) Advertisement of terms that require additional disclosures.
    1. General rule. Under Sec. 226.24(d)(1), whenever certain 
triggering terms appear in credit advertisements, the additional credit 
terms enumerated in Sec. 226.24(d)(2) must also appear. These 
provisions apply even if the triggering term is not stated explicitly 
but may be readily determined from the advertisement. For example, an 
advertisement may state ``80 percent financing available,'' which is in 
fact indicating that a 20 percent downpayment is required.
    Paragraph 24(d)(1).

                                * * * * *

    3. Payment amount. The dollar amount of any payment includes 
statements such as:
     ``Payable in installments of $103''.
     ``$25 weekly''.
     ``$500,000 loan for just $1,650 per month''.
     ``$1,200 balance payable in 10 equal 
installments''.

In the last example, the amount of each payment is readily determinable, 
even though not explicitly stated. But statements such as ``monthly 
payments to suit your needs'' or ``regular monthly payments'' are not 
deemed to be statements of the amount of any payment.

                                * * * * *

    Paragraph 24(d)(2).

                                * * * * *

    2. Disclosure of repayment terms. The phrase ``terms of repayment'' 
generally has the same meaning as the ``payment schedule'' required to 
be disclosed under Sec. 226.18(g). Section 226.24(d)(2)(ii) provides 
flexibility to creditors in making this disclosure for advertising 
purposes. Repayment terms may be expressed in a variety of ways in 
addition to an exact repayment schedule; this is particularly true for 
advertisements that do not contemplate a single specific transaction. 
Repayment terms, however, must reflect the consumer's repayment 
obligations over the full term of the loan, including any balloon 
payment, see comment 24(d)(2)-3, not just the repayment terms that will 
apply for a limited period of time. For example:
    i. A creditor may use a unit-cost approach in making the required 
disclosure, such as ``48 monthly payments of $27.83 per $1,000 
borrowed.''
    ii. In an advertisement for credit secured by a dwelling, when any 
series of payments varies because of the inclusion of mortgage insurance 
premiums, a creditor may state the number and timing of payments, the 
fact that payments do not include amounts for mortgage insurance 
premiums, and that the actual payment obligation will be higher.
    iii. In an advertisement for credit secured by a dwelling, when one 
series of monthly payments will apply for a limited period of time 
followed by a series of higher monthly payments for the remaining term 
of the loan, the advertisement must state the number and time period of 
each series of payments, and the amounts of each of those payments. For 
this purpose, the creditor must assume that the consumer makes the lower 
series of payments for the maximum allowable period of time.
    3. Balloon payment; disclosure of repayment terms. In some 
transactions, a balloon payment will occur when the consumer only makes 
the minimum payments specified in an advertisement. A balloon payment 
results if paying the minimum payments does not fully amortize the 
outstanding balance by a specified date or time, usually the end of the 
term of the loan, and the consumer must repay the entire outstanding 
balance at such time. If a balloon payment will occur when the consumer 
only makes the minimum payments specified in an advertisement, the 
advertisement must state with equal prominence and in close proximity to 
the minimum payment statement the amount and timing of the balloon 
payment that will result if the consumer makes only the minimum payments 
for the maximum period of time that the consumer is permitted to make 
such payments.
    4. Annual percentage rate. * * *
    5. Use of examples. A creditor may use illustrative credit 
transactions to make the necessary disclosures under Sec. 226.24(d)(2). 
That is, where a range of possible combinations of credit terms is 
offered, the advertisement may use examples of typical transactions, so

[[Page 613]]

long as each example contains all of the applicable terms required by 
Sec. 226.24(d). The examples must be labeled as such and must reflect 
representative credit terms made available by the creditor to present 
and prospective customers.
    24(e) Catalogs or other multiple-page advertisements; electronic 
advertisements.
    1. Definition. The multiple-page advertisements to which this 
section refers are advertisements consisting of a series of sequentially 
numbered pages--for example, a supplement to a newspaper. A mailing 
consisting of several separate flyers or pieces of promotional material 
in a single envelope does not constitute a single multiple-page 
advertisement for purposes of Sec. 226.24(e).
    2. General. Section 226.24(e) permits creditors to put credit 
information together in one place in a catalog or other multiple-page 
advertisement or in an electronic advertisement (such as an 
advertisement appearing on an Internet Web site). The rule applies only 
if the advertisement contains one or more of the triggering terms from 
Sec. 226.24(d)(1). A list of different annual percentage rates 
applicable to different balances, for example, does not trigger further 
disclosures under Sec. 226.24(d)(2) and so is not covered by Sec. 
226.24(e).

                                * * * * *

    4. Electronic advertisement. If an electronic advertisement (such as 
an advertisement appearing on an Internet Web site) contains the table 
or schedule permitted under Sec. 226.24(e)(1), any statement of terms 
set forth in Sec. 226.24(d)(1) appearing anywhere else in the 
advertisement must clearly direct the consumer to the location where the 
table or schedule begins. For example, a term triggering additional 
disclosures may be accompanied by a link that directly takes the 
consumer to the additional information.
    24(f) Disclosure of rates and payments in advertisements for credit 
secured by a dwelling.
    1. Applicability. The requirements of Sec. 226.24(f)(2) apply to 
advertisements for loans where more than one simple annual rate of 
interest will apply. The requirements of Sec. 226.24(f)(3)(i)(A) 
require a clear and conspicuous disclosure of each payment that will 
apply over the term of the loan. In determining whether a payment will 
apply when the consumer may choose to make a series of lower monthly 
payments that will apply for a limited period of time, the creditor must 
assume that the consumer makes the series of lower payments for the 
maximum allowable period of time. See comment 24(d)(2)-2.iii. However, 
for purposes of Sec. 226.24(f), the creditor may, but need not, assume 
that specific events which trigger changes to the simple annual rate of 
interest or to the applicable payments will occur. For example:
    i. Fixed-rate conversion loans. If a loan program permits consumers 
to convert their variable-rate loans to fixed rate loans, the creditor 
need not assume that the fixed-rate conversion option, by itself, means 
that more than one simple annual rate of interest will apply to the loan 
under Sec. 226.24(f)(2) and need not disclose as a separate payment 
under Sec. 226.24(f)(3)(i)(A) the payment that would apply if the 
consumer exercised the fixed-rate conversion option.
    ii. Preferred-rate loans. Some loans contain a preferred-rate 
provision, where the rate will increase upon the occurrence of some 
event, such as the consumer-employee leaving the creditor's employ or 
the consumer closing an existing deposit account with the creditor or 
the consumer revoking an election to make automated payments. A creditor 
need not assume that the preferred-rate provision, by itself, means that 
more than one simple annual rate of interest will apply to the loan 
under Sec. 226.24(f)(2) and the payments that would apply upon 
occurrence of the event that triggers the rate increase need not be 
disclosed as a separate payments under Sec. 226.24(f)(3)(i)(A).
    iii. Rate reductions. Some loans contain a provision where the rate 
will decrease upon the occurrence of some event, such as if the consumer 
makes a series of payments on time. A creditor need not assume that the 
rate reduction provision, by itself, means that more than one simple 
annual rate of interest will apply to the loan under Sec. 226.24(f)(2) 
and need not disclose the payments that would apply upon occurrence of 
the event that triggers the rate reduction as a separate payments under 
Sec. 226.24(f)(3)(i)(A).
    2. Equal prominence, close proximity. Information required to be 
disclosed under Sec. Sec. 226.24(f)(2)(i) and 226.24(f)(3)(i) that is 
immediately next to or directly above or below the simple annual rate or 
payment amount (but not in a footnote) is deemed to be closely proximate 
to the listing. Information required to be disclosed under Sec. Sec. 
226.24(f)(2)(i) and 226.24(f)(3)(i)(A) and (B) that is in the same type 
size as the simple annual rate or payment amount is deemed to be equally 
prominent.
    3. Clear and conspicuous standard. For more information about the 
applicable clear and conspicuous standard, see comment 24(b)-2.
    4. Comparisons in advertisements. When making any comparison in an 
advertisement between actual or hypothetical credit payments or rates 
and the payments or rates available under the advertised product, the 
advertisement must state all applicable payments or rates for the 
advertised product and the time periods for which those payments or 
rates will apply, as required by this section.
    5. Application to variable-rate transactions--disclosure of rates. 
In advertisements for variable-rate transactions, if a simple annual

[[Page 614]]

rate that applies at consummation is not based on the index and margin 
that will be used to make subsequent rate adjustments over the term of 
the loan, the requirements of Sec. 226.24(f)(2)(i) apply.
    6. Reasonably current index and margin. For the purposes of this 
section, an index and margin is considered reasonably current if:
    i. For direct mail advertisements, it was in effect within 60 days 
before mailing;
    ii. For advertisements in electronic form it was in effect within 30 
days before the advertisement is sent to a consumer's e-mail address, or 
in the case of an advertisement made on an Internet Web site, when 
viewed by the public; or
    iii. For printed advertisements made available to the general 
public, including ones contained in a catalog, magazine, or other 
generally available publication, it was in effect within 30 days before 
printing.
    24(f)(3) Disclosure of payments.
    1. Amounts and time periods of payments. Section 226.24(f)(3)(i) 
requires disclosure of the amounts and time periods of all payments that 
will apply over the term of the loan. This section may require 
disclosure of several payment amounts, including any balloon payment. 
For example, if an advertisement for credit secured by a dwelling offers 
$300,000 of credit with a 30-year loan term for a payment of $600 per 
month for the first six months, increasing to $1,500 per month after 
month six, followed by a balloon payment of $30,000 at the end of the 
loan term, the advertisement must disclose the amount and time periods 
of each of the two monthly payment streams, as well as the amount and 
timing of the balloon payment, with equal prominence and in close 
proximity to each other. However, if the final scheduled payment of a 
fully amortizing loan is not greater than two times the amount of any 
other regularly scheduled payment, the final payment need not be 
disclosed.
    2. Application to variable-rate transactions--disclosure of 
payments. In advertisements for variable-rate transactions, if the 
payment that applies at consummation is not based on the index and 
margin that will be used to make subsequent payment adjustments over the 
term of the loan, the requirements of Sec. 226.24(f)(3)(i) apply.
    24(g) Alternative disclosures--television or radio advertisements.
    1. Multi-purpose telephone number. When an advertised telephone 
number provides a recording, disclosures should be provided early in the 
sequence to ensure that the consumer receives the required disclosures. 
For example, in providing several options--such as providing directions 
to the advertiser's place of business--the option allowing the consumer 
to request disclosures should be provided early in the telephone message 
to ensure that the option to request disclosures is not obscured by 
other information.
    2. Statement accompanying telephone number. Language must accompany 
a telephone number indicating that disclosures are available by calling 
the telephone number, such as ``call 1-800-000-0000 for details about 
credit costs and terms.''
    24(i) Prohibited acts or practices in advertisements for credit 
secured by a dwelling.
    1. Comparisons in advertisements. The requirements of Sec. 
226.24(i)(2) apply to all advertisements for credit secured by a 
dwelling, including radio and television advertisements. A comparison 
includes a claim about the amount a consumer may save under the 
advertised product. For example, a statement such as ``save $300 per 
month on a $300,000 loan'' constitutes an implied comparison between the 
advertised product's payment and a consumer's current payment.
    2. Misrepresentations about government endorsement. A statement that 
the federal Community Reinvestment Act entitles the consumer to 
refinance his or her mortgage at the low rate offered in the 
advertisement is prohibited because it conveys a misleading impression 
that the advertised product is endorsed or sponsored by the federal 
government.
    3. Misleading claims of debt elimination. The prohibition against 
misleading claims of debt elimination or waiver or forgiveness does not 
apply to legitimate statements that the advertised product may reduce 
debt payments, consolidate debts, or shorten the term of the debt. 
Examples of misleading claims of debt elimination or waiver or 
forgiveness of loan terms with, or obligations to, another creditor of 
debt include: ``Wipe-Out Personal Debts!'', ``New DEBT-FREE Payment'', 
``Set yourself free; get out of debt today'', ``Refinance today and wipe 
your debt clean!'', ``Get yourself out of debt * * * Forever!'', and 
``Pre-payment Penalty Waiver.''

                                * * * * *

Section 226.32--Requirements for Certain Closed-End Home Mortgages 32(a) 
                                Coverage.

                                * * * * *

    Paragraph 32(a)(2).
    1. Exemption limited. Section 226.32(a)(2) lists certain 
transactions exempt from the provisions of Sec. 226.32. Nevertheless, 
those transactions may be subject to the provisions of Sec. 226.35, 
including any provisions of Sec. 226.32 to which Sec. 226.35 refers. 
See 12 CFR 226.35(a).

                                * * * * *

    32(d) Limitations.
    1. Additional prohibitions applicable under other sections. Section 
226.34 sets forth certain prohibitions in connection with mortgage 
credit subject to Sec. 226.32, in addition to

[[Page 615]]

the limitations in Sec. 226.32(d). Further, Sec. 226.35(b) prohibits 
certain practices in connection with transactions that meet the coverage 
test in Sec. 226.35(a). Because the coverage test in Sec. 226.35(a) is 
generally broader than the coverage test in Sec. 226.32(a), most Sec. 
226.32 mortgage loans are also subject to the prohibitions set forth in 
Sec. 226.35(b) (such as escrows), in addition to the limitations in 
Sec. 226.32(d).
    2. Effective date. For guidance on the application of the Board's 
revisions published on July 30, 2008 to Sec. 226.32, see comment 
1(d)(5)-1.

                                * * * * *

    32(d)(7) Prepayment penalty exception.
    Paragraph 32(d)(7)(iii).
    1. Calculating debt-to-income ratio. ``Debt'' does not include 
amounts paid by the borrower in cash at closing or amounts from the loan 
proceeds that directly repay an existing debt. Creditors may consider 
combined debt-to-income ratios for transactions involving joint 
applicants. For more information about obligations and inflows that may 
constitute ``debt'' or ``income'' for purposes of Sec. 
226.32(d)(7)(iii), see comment 34(a)(4)-6 and comment 34(a)(4)(iii)(C)-
1.
    2. Verification. Creditors shall verify income in the manner 
described in Sec. 226.34(a)(4)(ii) and the related comments. Creditors 
may verify debt with a credit report. However, a credit report may not 
reflect certain obligations undertaken just before or at consummation of 
the transaction and secured by the same dwelling that secures the 
transaction. Section 226.34(a)(4) may require creditors to consider such 
obligations; see comment 34(a)(4)-3 and comment 34(a)(4)(ii)(C)-1.
    3. Interaction with Regulation B. Section 226.32(d)(7)(iii) does not 
require or permit the creditor to make inquiries or verifications that 
would be prohibited by Regulation B, 12 CFR part 202.
    Paragraph 32(d)(7)(iv).
    1. Payment change. Section 226.32(d)(7) sets forth the conditions 
under which a mortgage transaction subject to this section may have a 
prepayment penalty. Section 226.32(d)(7)(iv) lists as a condition that 
the amount of the periodic payment of principal or interest or both may 
not change during the four-year period following consummation. The 
following examples show whether prepayment penalties are permitted or 
prohibited under Sec. 226.32(d)(7)(iv) in particular circumstances.
    i. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due is 
January 1, 2014. A prepayment penalty is permitted with this mortgage 
transaction provided that the other Sec. 226.32(d)(7) conditions are 
met, that is: provided that the prepayment penalty is permitted by other 
applicable law, the penalty expires on or before Dec. 31, 2011, the 
penalty will not apply if the source of the prepayment funds is a 
refinancing by the creditor or its affiliate, and at consummation the 
consumer's total monthly debts do not exceed 50 percent of the 
consumer's monthly gross income, as verified.
    ii. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due is 
December 31, 2013. A prepayment penalty is prohibited with this mortgage 
transaction because the payment may change within the four-year period 
following consummation.
    iii. Initial payments for a graduated-payment transaction 
consummated on January 1, 2010 are $1,000 per month. Under the loan 
agreement, the first possible date that a payment in a different amount 
may be due is January 1, 2014. A prepayment penalty is permitted with 
this mortgage transaction provided that the other Sec. 226.32(d)(7) 
conditions are met, that is: provided that the prepayment penalty is 
permitted by other applicable law, the penalty expires on or before 
December 31, 2011, the penalty will not apply if the source of the 
prepayment funds is a refinancing by the creditor or its affiliate, and 
at consummation the consumer's total monthly debts do not exceed 50 
percent of the consumer's monthly gross income, as verified.
    iv. Initial payments for a step-rate transaction consummated on 
January 1, 2010 are $1,000 per month. Under the loan agreement, the 
first possible date that a payment in a different amount may be due is 
December 31, 2013. A prepayment penalty is prohibited with this mortgage 
transaction because the payment may change within the four-year period 
following consummation.
    2. Payment changes excluded. Payment changes due to the following 
circumstances are not considered payment changes for purposes of this 
section:
    i. A change in the amount of a periodic payment that is allocated to 
principal or interest that does not change the total amount of the 
periodic payment.
    ii. The borrower's actual unanticipated late payment, delinquency, 
or default; and
    iii. The borrower's voluntary payment of additional amounts (for 
example when a consumer chooses to make a payment of interest and 
principal on a loan that only requires the consumer to pay interest).

                                * * * * *

[[Page 616]]

 Section 226.34--Prohibited Acts or Practices in Connection with Credit 
                         Subject to Sec. 226.32

    34(a) Prohibited acts or practices for loans subject to Sec. 
226.32.

                                * * * * *

    34(a)(4) Repayment ability.
    1. Application of repayment ability rule. The Sec. 226.34(a)(4) 
prohibition against making loans without regard to consumers' repayment 
ability applies to mortgage loans described in Sec. 226.32(a). In 
addition, the Sec. 226.34(a)(4) prohibition applies to higher-priced 
mortgage loans described in Sec. 226.35(a). See 12 CFR 226.35(b)(1). 
For guidance on the application of the Board's revisions to Sec. 
226.34(a)(4) published on July 30, 2008, see comment 1(d)(5)-1.
    2. General prohibition. Section 226.34(a)(4) prohibits a creditor 
from extending credit subject to Sec. 226.32 to a consumer based on the 
value of the consumer's collateral without regard to the consumer's 
repayment ability as of consummation, including the consumer's current 
and reasonably expected income, employment, assets other than the 
collateral, current obligations, and property tax and insurance 
obligations. A creditor may base its determination of repayment ability 
on current or reasonably expected income from employment or other 
sources, on assets other than the collateral, or both.
    3. Other dwelling-secured obligations. For purposes of Sec. 
226.34(a)(4), current obligations include another credit obligation of 
which the creditor has knowledge undertaken prior to or at consummation 
of the transaction and secured by the same dwelling that secures the 
transaction subject to Sec. 226.32 or Sec. 226.35. For example, where 
a transaction subject to Sec. 226.35 is a first-lien transaction for 
the purchase of a home, a creditor must consider a ``piggyback'' second-
lien transaction of which it has knowledge that is used to finance part 
of the down payment on the house.
    4. Discounted introductory rates and non-amortizing or negatively-
amortizing payments. A credit agreement may determine a consumer's 
initial payments using a temporarily discounted interest rate or permit 
the consumer to make initial payments that are non-amortizing or 
negatively amortizing. (Negative amortization is permissible for loans 
covered by Sec. 226.35(a), but not Sec. 226.32). In such cases the 
creditor may determine repayment ability using the assumptions provided 
in Sec. 226.34(a)(4)(iv).
    5. Repayment ability as of consummation. Section 226.34(a)(4) 
prohibits a creditor from disregarding repayment ability based on the 
facts and circumstances known to the creditor as of consummation. In 
general, a creditor does not violate this provision if a consumer 
defaults because of a significant reduction in income (for example, a 
job loss) or a significant obligation (for example, an obligation 
arising from a major medical expense) that occurs after consummation. 
However, if a creditor has knowledge as of consummation of reductions in 
income, for example, if a consumer's written application states that the 
consumer plans to retire within twelve months without obtaining new 
employment, or states that the consumer will transition from full-time 
to part-time employment, the creditor must consider that information.
    6. Income, assets, and employment. Any current or reasonably 
expected assets or income may be considered by the creditor, except the 
collateral itself. For example, a creditor may use information about 
current or expected salary, wages, bonus pay, tips, and commissions. 
Employment may be full-time, part-time, seasonal, irregular, military, 
or self-employment. Other sources of income could include interest or 
dividends; retirement benefits; public assistance; and alimony, child 
support, or separate maintenance payments. A creditor may also take into 
account assets such as savings accounts or investments that the consumer 
can or will be able to use.
    7. Interaction with Regulation B. Section 226.34(a)(4) does not 
require or permit the creditor to make inquiries or verifications that 
would be prohibited by Regulation B, 12 CFR part 202.
    34(a)(4)(i) Mortgage-related obligations.
    1. Mortgage-related obligations. A creditor must include in its 
repayment ability analysis the expected property taxes and premiums for 
mortgage-related insurance required by the creditor as set forth in 
Sec. 226.35(b)(3)(i), as well as similar mortgage-related expenses. 
Similar mortgage-related expenses include homeowners' association dues 
and condominium or cooperative fees.
    34(a)(4)(ii) Verification of repayment ability.
    1. Income and assets relied on. A creditor must verify the income 
and assets the creditor relies on to evaluate the consumer's repayment 
ability. For example, if a consumer earns a salary and also states that 
he or she is paid an annual bonus, but the creditor only relies on the 
applicant's salary to evaluate repayment ability, the creditor need only 
verify the salary.
    2. Income and assets--co-applicant. If two persons jointly apply for 
credit and both list income or assets on the application, the creditor 
must verify repayment ability with respect to both applicants unless the 
creditor relies only on the income or assets of one of the applicants in 
determining repayment ability.
    3. Expected income. If a creditor relies on expected income, the 
expectation must be reasonable and it must be verified with

[[Page 617]]

third-party documents that provide reasonably reliable evidence of the 
consumer's expected income. For example, if the creditor relies on an 
expectation that a consumer will receive an annual bonus, the creditor 
may verify the basis for that expectation with documents that show the 
consumer's past annual bonuses and the expected bonus must bear a 
reasonable relationship to past bonuses. Similarly, if the creditor 
relies on a consumer's expected salary following the consumer's receipt 
of an educational degree, the creditor may verify that expectation with 
a written statement from an employer indicating that the consumer will 
be employed upon graduation at a specified salary.
    Paragraph 34(a)(4)(ii)(A).
    1. Internal Revenue Service (IRS) Form W-2. A creditor may verify a 
consumer's income using a consumer's IRS Form W-2 (or any subsequent 
revisions or similar IRS Forms used for reporting wages and tax 
withholding). The creditor may also use an electronic retrieval service 
for obtaining the consumer's W-2 information.
    2. Tax returns. A creditor may verify a consumer's income or assets 
using the consumer's tax return. A creditor may also use IRS Form 4506 
``Request for Copy of Tax Return,'' Form 4506-T ``Request for Transcript 
of Tax Return,'' or Form 8821 ``Tax Information Authorization'' (or any 
subsequent revisions or similar IRS Forms appropriate for obtaining tax 
return information directly from the IRS) to verify the consumer's 
income or assets. The creditor may also use an electronic retrieval 
service for obtaining tax return information.
    3. Other third-party documents that provide reasonably reliable 
evidence of consumer's income or assets. Creditors may verify income and 
assets using documents produced by third parties. Creditors may not rely 
on information provided orally by third parties, but may rely on 
correspondence from the third party, such as by letter or e-mail. The 
creditor may rely on any third-party document that provides reasonably 
reliable evidence of the consumer's income or assets. For example, 
creditors may verify the consumer's income using receipts from a check-
cashing or remittance service, or by obtaining a written statement from 
the consumer's employer that states the consumer's income.
    4. Information specific to the consumer. Creditors must verify a 
consumer's income or assets using information that is specific to the 
individual consumer. Creditors may use third-party databases that 
contain individual-specific data about a consumer's income or assets, 
such as a third-party database service used by the consumer's employer 
for the purpose of centralizing income verification requests, so long as 
the information is reasonably current and accurate. Information about 
average incomes for the consumer's occupation in the consumer's 
geographic location or information about average incomes paid by the 
consumer's employer, however, would not be specific to the individual 
consumer.
    5. Duplicative collection of documentation. A creditor that has made 
a loan to a consumer and is refinancing or extending new credit to the 
same consumer need not collect from the consumer a document the creditor 
previously obtained if the creditor has no information that would 
reasonably lead the creditor to believe that document has changed since 
it was initially collected. For example, if the creditor has obtained 
the consumer's 2006 tax return to make a home purchase loan in May 2007, 
the creditor may rely on the 2006 tax return if the creditor makes a 
home equity loan to the same consumer in August 2007. Similarly, if the 
creditor has obtained the consumer's bank statement for May 2007 in 
making the first loan, the creditor may rely on that bank statement for 
that month in making the subsequent loan in August 2007.
    Paragraph 34(a)(4)(ii)(B).
    1. No violation if income or assets relied on not materially greater 
than verifiable amounts. A creditor that does not verify income or 
assets used to determine repayment ability with reasonably reliable 
third-party documents does not violate Sec. 226.34(a)(4)(ii) if the 
creditor demonstrates that the income or assets it relied upon were not 
materially greater than the amounts that the creditor would have been 
able to verify pursuant to Sec. 226.34(a)(4)(ii). For example, if a 
creditor determines a consumer's repayment ability by relying on the 
consumer's annual income of $40,000 but fails to obtain documentation of 
that amount before extending the credit, the creditor will not have 
violated this section if the creditor later obtains evidence that would 
satisfy Sec. 226.34(a)(4)(ii)(A), such as tax return information, 
showing that the creditor could have documented, at the time the loan 
was consummated, that the consumer had an annual income not materially 
less than $40,000.
    2. Materially greater than. Amounts of income or assets relied on 
are not materially greater than amounts that could have been verified at 
consummation if relying on the verifiable amounts would not have altered 
a reasonable creditor's decision to extend credit or the terms of the 
credit.
    Paragraph 34(a)(4)(ii)(C).
    1. In general. A credit report may be used to verify current 
obligations. A credit report, however, might not reflect an obligation 
that a consumer has listed on an application. The creditor is 
responsible for considering such an obligation, but the creditor is not 
required to independently verify the obligation. Similarly, a creditor 
is responsible for considering certain obligations undertaken just 
before or at consummation of the

[[Page 618]]

transaction and secured by the same dwelling that secures the 
transaction (for example, a ``piggy back'' loan), of which the creditor 
knows, even if not reflected on a credit report. See comment 34(a)(4)-3.
    34(a)(4)(iii) Presumption of compliance.
    1. In general. A creditor is presumed to have complied with Sec. 
226.34(a)(4) if the creditor follows the three underwriting procedures 
specified in paragraph 34(a)(4)(iii) for verifying repayment ability, 
determining the payment obligation, and measuring the relationship of 
obligations to income. The procedures for verifying repayment ability 
are required under paragraph 34(a)(4)(ii); the other procedures are not 
required but, if followed along with the required procedures, create a 
presumption that the creditor has complied with Sec. 226.34(a)(4). The 
consumer may rebut the presumption with evidence that the creditor 
nonetheless disregarded repayment ability despite following these 
procedures. For example, evidence of a very high debt-to-income ratio 
and a very limited residual income could be sufficient to rebut the 
presumption, depending on all of the facts and circumstances. If a 
creditor fails to follow one of the non-required procedures set forth in 
paragraph 34(a)(4)(iii), then the creditor's compliance is determined 
based on all of the facts and circumstances without there being a 
presumption of either compliance or violation.
    Paragraph 34(a)(4)(iii)(B).
    1. Determination of payment schedule. To retain a presumption of 
compliance under Sec. 226.34(a)(4)(iii), a creditor must determine the 
consumer's ability to pay the principal and interest obligation based on 
the maximum scheduled payment in the first seven years following 
consummation. In general, a creditor should determine a payment schedule 
for purposes of Sec. 226.34(a)(4)(iii)(B) based on the guidance in the 
staff commentary to Sec. 226.17(c)(1). Examples of how to determine the 
maximum scheduled payment in the first seven years are provided as 
follows (all payment amounts are rounded):
    i. Balloon-payment loan; fixed interest rate. A loan in an amount of 
$100,000 with a fixed interest rate of 8.0 percent (no points) has a 7-
year term but is amortized over 30 years. The monthly payment scheduled 
for 7 years is $733 with a balloon payment of remaining principal due at 
the end of 7 years. The creditor will retain the presumption of 
compliance if it assesses repayment ability based on the payment of 
$733.
    ii. Fixed-rate loan with interest-only payment for five years. A 
loan in an amount of $100,000 with a fixed interest rate of 8.0 percent 
(no points) has a 30-year term. The monthly payment of $667 scheduled 
for the first 5 years would cover only the interest due. After the fifth 
year, the scheduled payment would increase to $772, an amount that fully 
amortizes the principal balance over the remaining 25 years. The 
creditor will retain the presumption of compliance if it assesses 
repayment ability based on the payment of $772.
    iii. Fixed-rate loan with interest-only payment for seven years. A 
loan in an amount of $100,000 with a fixed interest rate of 8.0 percent 
(no points) has a 30-year term. The monthly payment of $667 scheduled 
for the first 7 years would cover only the interest due. After the 
seventh year, the scheduled payment would increase to $793, an amount 
that fully amortizes the principal balance over the remaining 23 years. 
The creditor will retain the presumption of compliance if it assesses 
repayment ability based on the interest-only payment of $667.
    iv. Variable-rate loan with discount for five years. A loan in an 
amount of $100,000 has a 30-year term. The loan agreement provides for a 
fixed interest rate of 7.0 percent for an initial period of 5 years. 
Accordingly, the payment scheduled for the first 5 years is $665. The 
agreement provides that, after 5 years, the interest rate will adjust 
each year based on a specified index and margin. As of consummation, the 
sum of the index value and margin (the fully-indexed rate) is 8.0 
percent. Accordingly, the payment scheduled for the remaining 25 years 
is $727. The creditor will retain the presumption of compliance if it 
assesses repayment ability based on the payment of $727.
    v. Variable-rate loan with discount for seven years. A loan in an 
amount of $100,000 has a 30-year term. The loan agreement provides for a 
fixed interest rate of 7.125 percent for an initial period of 7 years. 
Accordingly, the payment scheduled for the first 7 years is $674. After 
7 years, the agreement provides that the interest rate will adjust each 
year based on a specified index and margin. As of consummation, the sum 
of the index value and margin (the fully-indexed rate) is 8.0 percent. 
Accordingly, the payment scheduled for the remaining years is $725. The 
creditor will retain the presumption of compliance if it assesses 
repayment ability based on the payment of $674.
    vi. Step-rate loan. A loan in an amount of $100,000 has a 30-year 
term. The agreement provides that the interest rate will be 5 percent 
for two years, 6 percent for three years, and 7 percent thereafter. 
Accordingly, the payment amounts are $537 for two years, $597 for three 
years, and $654 thereafter. To retain the presumption of compliance, the 
creditor must assess repayment ability based on the payment of $654.
    Paragraph 34(a)(4)(iii)(C).
    1. ``Income'' and ``debt''. To determine whether to classify 
particular inflows or obligations as ``income'' or ``debt,'' creditors 
may look to widely accepted governmental and non-governmental 
underwriting standards, including, for example, those set forth in the 
Federal Housing Administration's handbook on Mortgage Credit Analysis 
for

[[Page 619]]

Mortgage Insurance on One- to Four-Unit Mortgage Loans.
    34(a)(4)(iv) Exclusions from the presumption of compliance.
    1. In general. The exclusions from the presumption of compliance 
should be interpreted consistent with staff comments 32(d)(1)(i)-1 and 
32(d)(2)-1.
    2. Renewable balloon loan. If a creditor is unconditionally 
obligated to renew a balloon-payment loan at the consumer's option (or 
is obligated to renew subject to conditions within the consumer's 
control), the full term resulting from such renewal is the relevant term 
for purposes of the exclusion of certain balloon-payment loans. See 
comment 17(c)(1)-11 for a discussion of conditions within a consumer's 
control in connection with renewable balloon-payment loans.

                                * * * * *

 Section 226.35--Prohibited Acts or Practices in Connection With Higher-
                          priced Mortgage Loans

    35(a) Higher-priced mortgage loans.
    Paragraph 35(a)(2).
    1. Average prime offer rate. Average prime offer rates are annual 
percentage rates derived from average interest rates, points, and other 
loan pricing terms currently offered to consumers by a representative 
sample of creditors for mortgage transactions that have low-risk pricing 
characteristics. Other pricing terms include commonly used indices, 
margins, and initial fixed-rate periods for variable-rate transactions. 
Relevant pricing characteristics include a consumer's credit history and 
transaction characteristics such as the loan-to-value ratio, owner-
occupant status, and purpose of the transaction. To obtain average prime 
offer rates, the Board uses a survey of creditors that both meets the 
criteria of Sec. 226.35(a)(2) and provides pricing terms for at least 
two types of variable-rate transactions and at least two types of non-
variable-rate transactions. An example of such a survey is the Freddie 
Mac Primary Mortgage Market Survey[reg].
    2. Comparable transaction. A higher-priced mortgage loan is a 
consumer credit transaction secured by the consumer's principal dwelling 
with an annual percentage rate that exceeds the average prime offer rate 
for a comparable transaction as of the date the interest rate is set by 
the specified margin. The table of average prime offer rates published 
by the Board indicates how to identify the comparable transaction.
    3. Rate set. A transaction's annual percentage rate is compared to 
the average prime offer rate as of the date the transaction's interest 
rate is set (or ``locked'') before consummation. Sometimes a creditor 
sets the interest rate initially and then re-sets it at a different 
level before consummation. The creditor should use the last date the 
interest rate is set before consummation.
    4. Board table. The Board publishes on the Internet, in table form, 
average prime offer rates for a wide variety of transaction types. The 
Board calculates an annual percentage rate, consistent with Regulation Z 
(see Sec. 226.22 and appendix J), for each transaction type for which 
pricing terms are available from a survey. The Board estimates annual 
percentage rates for other types of transactions for which direct survey 
data are not available based on the loan pricing terms available in the 
survey and other information. The Board publishes on the Internet the 
methodology it uses to arrive at these estimates.
    35(b) Rules for higher-priced mortgage loans.
    1. Effective date. For guidance on the applicability of the rules in 
Sec. 226.35(b), see comment 1(d)(5)-1.
    Paragraph 35(b)(2)(ii)(C).
    1. Payment change. Section 226.35(b)(2) provides that a loan subject 
to this section may not have a penalty described by Sec. 226.32(d)(6) 
unless certain conditions are met. Section 226.35(b)(2)(ii)(C) lists as 
a condition that the amount of the periodic payment of principal or 
interest or both may not change during the four-year period following 
consummation. For examples showing whether a prepayment penalty is 
permitted or prohibited in connection with particular payment changes, 
see comment 32(d)(7)(iv)-1. Those examples, however, include a condition 
that Sec. 226.35(b)(2) does not include: the condition that, at 
consummation, the consumer's total monthly debt payments may not exceed 
50 percent of the consumer's monthly gross income. For guidance about 
circumstances in which payment changes are not considered payment 
changes for purposes of this section, see comment 32(d)(7)(iv)-2.
    2. Negative amortization. Section 226.32(d)(2) provides that a loan 
described in Sec. 226.32(a) may not have a payment schedule with 
regular periodic payments that cause the principal balance to increase. 
Therefore, the commentary to Sec. 226.32(d)(7)(iv) does not include 
examples of payment changes in connection with negative amortization. 
The following examples show whether, under Sec. 226.35(b)(2), 
prepayment penalties are permitted or prohibited in connection with 
particular payment changes, when a loan agreement permits negative 
amortization:
    i. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month and the loan agreement permits 
negative amortization to occur. Under the loan agreement, the first date 
that a scheduled payment in a different amount may be due is January 1, 
2014 and the creditor does not have the right to change scheduled 
payments prior to that date even if negative amortization occurs. A 
prepayment penalty is permitted with this

[[Page 620]]

mortgage transaction provided that the other Sec. 226.35(b)(2) 
conditions are met, that is: provided that the prepayment penalty is 
permitted by other applicable law, the penalty expires on or before 
December 31, 2011, and the penalty will not apply if the source of the 
prepayment funds is a refinancing by the creditor or its affiliate.
    ii. Initial payments for a variable-rate transaction consummated on 
January 1, 2010 are $1,000 per month and the loan agreement permits 
negative amortization to occur. Under the loan agreement, the first date 
that a scheduled payment in a different amount may be due is January 1, 
2014, but the creditor has the right to change scheduled payments prior 
to that date if negative amortization occurs. A prepayment penalty is 
prohibited with this mortgage transaction because the payment may change 
within the four-year period following consummation.
    35(b)(3) Escrows.
    Paragraph 35(b)(3)(i).
    1. Section 226.35(b)(3) applies to principal dwellings, including 
structures that are classified as personal property under state law. For 
example, an escrow account must be established on a higher-priced 
mortgage loan secured by a first-lien on a mobile home, boat or a 
trailer used as the consumer's principal dwelling. See the commentary 
under Sec. Sec. 226.2(a)(19), 226.2(a)(24), 226.15 and 226.23. Section 
226.35(b)(3) also applies to higher-priced mortgage loans secured by a 
first lien on a condominium or a cooperative unit if it is in fact used 
as principal residence.
    2. Administration of escrow accounts. Section 226.35(b)(3) requires 
creditors to establish before the consummation of a loan secured by a 
first lien on a principal dwelling an escrow account for payment of 
property taxes and premiums for mortgage-related insurance required by 
creditor. Section 6 of RESPA, 12 U.S.C. 2605, and Regulation X address 
how escrow accounts must be administered.
    3. Optional insurance items. Section 226.35(b)(3) does not require 
that escrow accounts be established for premiums for mortgage-related 
insurance that the creditor does not require in connection with the 
credit transaction, such as an earthquake insurance or debt-protection 
insurance.
    Paragraph 35(b)(3)(ii)(B).
    1. Limited exception. A creditor is required to escrow for payment 
of property taxes for all first lien loans secured by condominium units 
regardless of whether the creditors escrows insurance premiums for 
condominium unit.

 Section 226.36--Prohibited Acts or Practices in Connection With Credit 
               Secured by a Consumer's Principal Dwelling

    1. Effective date. For guidance on the applicability of the rules in 
Sec. 226.36, see comment 1(d)(5)-1.
    36(a) Mortgage broker defined.
    1. Meaning of mortgage broker. Section 226.36(a) provides that a 
mortgage broker is any person who for compensation or other monetary 
gain arranges, negotiates, or otherwise obtains an extension of consumer 
credit for another person, but is not an employee of a creditor. In 
addition, this definition expressly includes any person that satisfies 
this definition but makes use of ``table funding.'' Table funding occurs 
when a transaction is consummated with the debt obligation initially 
payable by its terms to one person, but another person provides the 
funds for the transaction at consummation and receives an immediate 
assignment of the note, loan contract, or other evidence of the debt 
obligation. Although Sec. 226.2(a)(17)(1)(B) provides that a person to 
whom a debt obligation is initially payable on its face generally is a 
creditor, Sec. 226.36(a) provides that, solely for the purposes of 
Sec. 226.36, such a person is considered a mortgage broker. In 
addition, although consumers themselves often arrange, negotiate, or 
otherwise obtain extensions of consumer credit on their own behalf, they 
do not do so for compensation or other monetary gain or for another 
person and, therefore, are not mortgage brokers under this section.
    36(b) Misrepresentation of value of consumer's principal dwelling.
    36(b)(2) When extension of credit prohibited.
    1. Reasonable diligence. A creditor will be deemed to have acted 
with reasonable diligence under Sec. 226.36(b)(2) if the creditor 
extends credit based on an appraisal other than the one subject to the 
restriction in Sec. 226.36(b)(2).
    2. Material misstatement or misrepresentation. Section 226.36(b)(2) 
prohibits a creditor who knows of a violation of Sec. 226.36(b)(1) in 
connection with an appraisal from extending credit based on such 
appraisal, unless the creditor documents that it has acted with 
reasonable diligence to determine that the appraisal does not materially 
misstate or misrepresent the value of such dwelling. A misstatement or 
misrepresentation of such dwelling's value is not material if it does 
not affect the credit decision or the terms on which credit is extended.
    36(c) Servicing practices.
    Paragraph 36(c)(1)(i).
    1. Crediting of payments. Under Sec. 226.36(c)(1)(i), a mortgage 
servicer must credit a payment to a consumer's loan account as of the 
date of receipt. This does not require that a mortgage servicer post the 
payment to the consumer's loan account on a particular date; the 
servicer is only required to credit the payment as of the date of 
receipt. Accordingly, a servicer that receives a payment on or before 
its due date (or within any grace period), and does not enter the 
payment on its books or in its system until after the payment's due date 
(or expiration of any grace period), does not violate this

[[Page 621]]

rule as long as the entry does not result in the imposition of a late 
charge, additional interest, or similar penalty to the consumer, or in 
the reporting of negative information to a consumer reporting agency.
    2. Payments to be credited. Payments should be credited based on the 
legal obligation between the creditor and consumer. The legal obligation 
is determined by applicable state or other law.
    3. Date of receipt. The ``date of receipt'' is the date that the 
payment instrument or other means of payment reaches the mortgage 
servicer. For example, payment by check is received when the mortgage 
servicer receives it, not when the funds are collected. If the consumer 
elects to have payment made by a third-party payor such as a financial 
institution, through a preauthorized payment or telephone bill-payment 
arrangement, payment is received when the mortgage servicer receives the 
third-party payor's check or other transfer medium, such as an 
electronic fund transfer.
    Paragraph 36(c)(1)(ii).
    1. Pyramiding of late fees. The prohibition on pyramiding of late 
fees in this subsection should be construed consistently with the 
``credit practices rule'' of Regulation AA, 12 CFR 227.15.
    Paragraph 36(c)(1)(iii).
    1. Reasonable time. The payoff statement must be provided to the 
consumer, or person acting on behalf of the consumer, within a 
reasonable time after the request. For example, it would be reasonable 
under most circumstances to provide the statement within five business 
days of receipt of a consumer's request. This time frame might be 
longer, for example, when the servicer is experiencing an unusually high 
volume of refinancing requests.
    2. Person acting on behalf of the consumer. For purposes of Sec. 
226.36(c)(1)(iii), a person acting on behalf of the consumer may include 
the consumer's representative, such as an attorney representing the 
individual, a non-profit consumer counseling or similar organization, or 
a creditor with which the consumer is refinancing and which requires the 
payoff statement to complete the refinancing. A servicer may take 
reasonable measures to verify the identity of any person acting on 
behalf of the consumer and to obtain the consumer's authorization to 
release information to any such person before the ``reasonable time'' 
period begins to run.
    3. Payment requirements. The servicer may specify reasonable 
requirements for making payoff requests, such as requiring requests to 
be in writing and directed to a mailing address, e-mail address or fax 
number specified by the servicer or orally to a telephone number 
specified by the servicer, or any other reasonable requirement or 
method. If the consumer does not follow these requirements, a longer 
time frame for responding to the request would be reasonable.
    4. Accuracy of payoff statements. Payoff statements must be accurate 
when issued.
    Paragraph 36(c)(2).
    1. Payment requirements. The servicer may specify reasonable 
requirements for making payments in writing, such as requiring that 
payments be accompanied by the account number or payment coupon; setting 
a cut-off hour for payment to be received, or setting different hours 
for payment by mail and payments made in person; specifying that only 
checks or money orders should be sent by mail; specifying that payment 
is to be made in U.S. dollars; or specifying one particular address for 
receiving payments, such as a post office box. The servicer may be 
prohibited, however, from requiring payment solely by preauthorized 
electronic fund transfer. (See section 913 of the Electronic Fund 
Transfer Act, 15 U.S.C. 1693k.)
    2. Payment requirements--limitations. Requirements for making 
payments must be reasonable; it should not be difficult for most 
consumers to make conforming payments. For example, it would be 
reasonable to require a cut-off time of 5 p.m. for receipt of a mailed 
check at the location specified by the servicer for receipt of such 
check.
    3. Implied guidelines for payments. In the absence of specified 
requirements for making payments, payments may be made at any location 
where the servicer conducts business; any time during the servicer's 
normal business hours; and by cash, money order, draft, or other similar 
instrument in properly negotiable form, or by electronic fund transfer 
if the servicer and consumer have so agreed.

                                * * * * *



PART 227_UNFAIR OR DECEPTIVE ACTS OR PRACTICES (REGULATION AA)--Table of 

Contents




                      Subpart A_Consumer Complaints

Sec.
227.1 Definitions.
227.2 Consumer complaint procedure.

                     Subpart B_Credit Practices Rule

227.11 Authority, purpose, and scope.
227.12 Definitions.
227.13 Unfair credit contract provisions.
227.14 Unfair or deceptive practices involving cosigners.
227.15 Unfair late charges.
227.16 State exemptions.

[[Page 622]]



                      Subpart A_Consumer Complaints

    Authority: Sec. 18(f), Federal Trade Commission Act, as amended by 
Pub. L. 93-637.



Sec. 227.1  Definitions.

    For the purposes of this part,\1\ unless the context indicates 
otherwise, the following definitions apply:
---------------------------------------------------------------------------

    \1\ The words this part, as used herein, mean title 12, chapter II, 
part 227 of the Code of Federal Regulations, cited as 12 CFR part 227 
and designated as Regulation AA.
---------------------------------------------------------------------------

    (a) Board means the Board of Governors of the Federal Reserve 
System.
    (b) Consumer complaint means an allegation by or on behalf of an 
individual, group of individuals, or other entity that a particular act 
or practice of a State member bank is unfair or deceptive, or in 
violation of a regulation issued by the Board pursuant to a Federal 
statute, or in violation of any other Act or regulation under which the 
bank must operate.
    (c) State member bank means a bank that is chartered by a State and 
is a member of the Federal Reserve System.
    (d) Unless the context indicates otherwise, bank shall be construed 
to mean a State member bank, and complaint to mean a consumer complaint.

[Reg. AA, 41 FR 44362, Oct. 8, 1976]



Sec. 227.2  Consumer complaint procedure.

    (a) Submission of complaints. (1) Any consumer having a complaint 
regarding a State member bank is invited to submit it to the Federal 
Reserve System. The complaint should be submitted in writing, if 
possible, and should include the following information:
    (i) A description of the act or practice that is thought to be 
unfair or deceptive, or in violation of existing law or regulation, 
including all relevant facts;
    (ii) The name and address of the bank that is the subject of the 
complaint; and
    (iii) The name and address of the complainant.
    (2) Consumer complaints should be made to--Federal Reserve Consumer 
Help Center, P.O. Box 1200, Minneapolis, MN 55480, Toll-free number: 
(888) 851-1920, Fax number: (877) 888-2520, TDD number: (877) 766-8533.
    (b) Response to complaints. Within 15 business days of receipt of a 
written complaint by the Board or a Federal Reserve Bank, a substantive 
response or an acknowledgment setting a reasonable time for a 
substantive response will be sent to the individual making the 
complaint.
    (c) Referrals to other agencies. Complaints received by the Board or 
a Federal Reserve Bank regarding an act or practice of an institution 
other than a State member bank will be forwarded to the Federal agency 
having jurisdiction over that institution.

[Reg. AA, 41 FR 44362, Oct. 8, 1976, as amended at 42 FR 2950, Jan. 14, 
1977; 71 FR 11297, Mar. 7, 2006; 72 FR 55021, Sept. 28, 2007]



                     Subpart B_Credit Practices Rule

    Authority: 15 U.S.C. 57a.

    Source: Reg. AA, 50 FR 16697, Apr. 29, 1985, unless otherwise noted.



Sec. 227.11  Authority, purpose, and scope.

    (a) Authority. This subpart is issued by the Board under section 
18(f) of the Federal Trade Commission Act, 15 U.S.C. 57a(f) (section 
202(a) of the Magnuson-Moss Warranty--Federal Trade Commission 
Improvement Act, Pub. L. 93-637).
    (b) Purpose. Unfair or deceptive acts or practices in or affecting 
commerce are unlawful under section 5(a)(1) of the Federal Trade 
Commission Act, 15 U.S.C. 45(a)(1). This subpart defines unfair or 
deceptive acts or practices of banks in connection with extensions of 
credit to consumers.
    (c) Scope. This subpart applies to all banks and their subsidiaries, 
except savings banks that are members of the Federal Home Loan Bank 
System. Compliance is to be enforced by:
    (1) The Comptroller of the Currency, in the case of national banks, 
banks operating under the code of laws for the District of Columbia, and 
federal branches and federal agencies of foreign banks;
    (2) The Board of Governors of the Federal Reserve System, in the 
case of banks that are members of the Federal

[[Page 623]]

Reserve System (other than banks referred to in paragraph (c)(1) of this 
section), 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; and
    (3) The Federal Deposit Insurance Corporation, in the case of banks 
insured by the Federal Deposit Insurance Corporation (other than banks 
referred to in paragraphs (c)(1) and (c)(2) of this section), and 
insured state branches of foreign banks.
    (d) The terms used in paragraph (c) of this section that are not 
defined in the Federal Trade Commission Act or in section 3(s) of the 
Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall have the meaning 
given to them in section 1(b) of the International Banking Act of 1978 
(12 U.S.C. 3101).

[Reg. AA, 50 FR 16697, Apr. 29, 1985, as amended at 57 FR 20401, May 13, 
1992]



Sec. 227.12  Definitions.

    For the purposes of this subpart, the following definitions apply:
    (a) Consumer means a natural person who seeks or acquires goods, 
services, or money for personal, family, or household use other than for 
the purchase of real property.
    (b)(1) Cosigner means a natural person who assumes liability for the 
obligation of a consumer without receiving goods, services, or money in 
return for the obligation, or, in the case of an open-end credit 
obligation, without receiving the contractual right to obtain extensions 
of credit under the account.
    (2) Cosigner includes any person whose signature is requested as a 
condition to granting credit to a consumer, or as a condition for 
forbearance on collection of a consumer's obligation that is in default. 
The term does not include a spouse whose signature is required on a 
credit obligation to perfect a security interest pursuant to state law.
    (3) A person who meets the definition in this paragraph is a 
cosigner, whether or not the person is designated as such on the credit 
obligation.
    (c) Earnings means compensation paid or payable to an individual or 
for the individual's account for personal services rendered or to be 
rendered by the individual, whether denominated as wages, salary, 
commission, bonus, or otherwise, including periodic payments pursuant to 
a pension, retirement, or disability program.
    (d) Household goods means clothing, furniture, appliances, linens, 
china, crockery, kitchenware, and personal effects of the consumer and 
the consumer's dependents. The term household goods does not include:
    (1) Works of art;
    (2) Electronic entertainment equipment (other than one television 
and one radio);
    (3) Items acquired as antiques; that is, items over one hundred 
years of age, including such items that have been repaired or renovated 
without changing their original form or character; and
    (4) Jewelry (other than wedding rings).
    (e) Obligation means an agreement between a consumer and a creditor.
    (f) Person means an individual, corporation, or other business 
organization.



Sec. 227.13  Unfair credit contract provisions.

    It is an unfair act or practice for a bank to enter into a consumer 
credit obligation that contains, or to enforce in a consumer credit 
obligation purchased by the bank, any of the following provisions:
    (a) Confession of judgment. A cognovit or confession of judgment 
(for purposes other than executory process in the State of Louisiana), 
warrant of attorney, or other waiver of the right of notice and the 
opportunity to be heard in the event of suit or process thereon.
    (b) Waiver of exemption. An executory waiver or a limitation of 
exemption from attachment, execution, or other process on real or 
personal property held, owned by, or due to the consumer, unless the 
waiver applies solely to property subject to a security interest 
executed in connection with the obligation.
    (c) Assignment of wages. An assignment of wages or other earnings 
unless:

[[Page 624]]

    (1) The assignment by its terms is revocable at the will of the 
debtor;
    (2) The assignment is a payroll deduction plan or preauthorized 
payment plan, commencing at the time of the transaction, in which the 
consumer authorizes a series of wage deductions as a method of making 
each payment; or
    (3) The assignment applies only to wages or other earnings already 
earned at the time of the assignment.
    (d) Security interest in household goods. A nonpossessory security 
interest in household goods other than a purchase money security 
interest.



Sec. 227.14  Unfair or deceptive practices involving cosigners.

    (a) Prohibited practices. In connection with the extension of credit 
to consumers, it is:
    (1) A deceptive act or practice for a bank to misrepresent the 
nature or extent of cosigner liability to any person; and
    (2) An unfair act or practice for a bank to obligate a cosigner 
unless the cosigner is informed prior to becoming obligated of the 
nature of the cosigner's liability.
    (b) Disclosure requirement. (1) A clear and conspicuous disclosure 
statement shall be given in writing to the cosigner prior to becoming 
obligated. The disclosure statement shall be substantially similar to 
the following statement and shall either be a separate document or 
included in the documents evidencing the consumer credit obligation.

                           Notice to Cosigner

    You are being asked to guarantee this debt. Think carefully before 
you do. If the borrower doesn't pay the debt, you will have to. Be sure 
you can afford to pay if you have to, and that you want to accept this 
responsibility.
    You may have to pay up to the full amount of the debt if the 
borrower does not pay. You may also have to pay late fees or collection 
costs, which increase this amount.
    The bank can collect this debt from you without first trying to 
collect from the borrower. The bank can use the same collection methods 
against you that can be used against the borrower, such as suing you, 
garnishing your wages, etc. If this debt is ever in default, that fact 
may become a part of your credit record.
    This notice is not the contract that makes you liable for the debt.

    (2) In the case of open-end credit, the disclosure statement shall 
be given to the cosigner prior to the time that the cosigner becomes 
obligated for fees or transactions on the account.
    (3) A bank that is in compliance with this paragraph may not be held 
in violation of paragraph (a)(2) of this section.



Sec. 227.15  Unfair late charges.

    (a) In connection with collecting a debt arising out of an extension 
of credit to a consumer, it is an unfair act or practice for a bank to 
levy or collect any delinquency charge on a payment, when the only 
delinquency is attributable to late fees or delinquency charges assessed 
on earlier installments, and the payment is otherwise a full payment for 
the applicable period and is paid on its due date or within an 
applicable grace period.
    (b) For the purposes of this section, collecting a debt means any 
activity, other than the use of judicial process, that is intended to 
bring about or does bring about repayment of all or part of money due 
(or alleged to be due) from a consumer.



Sec. 227.16  State exemptions.

    (a) General rule. (1) An appropriate state agency may apply to the 
Board for a determination that:
    (i) There is a state requirement or prohibition in effect that 
applies to any transaction to which a provision of this subpart applies; 
and
    (ii) The state requirement or prohibition affords a level of 
protection to consumers that is substantially equivalent to, or greater 
than, the protection afforded by this subpart.
    (2) If the Board makes such a determination, the provision of this 
subpart will not be in effect in that state to the extent specified by 
the Board in its determination, for as long as the state administers and 
enforces the state requirement or prohibition effectively.
    (b) Applications. The procedures under which a state agency may 
apply for an exemption under this section are the same as those set 
forth in appendix B to Regulation Z (12 CFR part 226).

[[Page 625]]



PART 228_COMMUNITY REINVESTMENT (REGULATION BB)--Table of Contents




Sec.
228.1-228.2 [Reserved]

                            Subpart A_General

228.11 Authority, purposes, and scope.
228.12 Definitions.

              Subpart B_Standards for Assessing Performance

228.21 Performance tests, standards, and ratings, in general.
228.22 Lending test.
228.23 Investment test.
228.24 Service test.
228.25 Community development test for wholesale or limited purpose 
          banks.
228.26 Small bank performance standards.
228.27 Strategic plan.
228.28 Assigned ratings.
228.29 Effect of CRA performance on applications.

        Subpart C_Records, Reporting, and Disclosure Requirements

228.41 Assessment area delineation.
228.42 Data collection, reporting, and disclosure.
228.43 Content and availability of public file.
228.44 Public notice by banks.
228.45 Publication of planned examination schedule.

Appendix A to Part 228--Ratings
Appendix B to Part 228--CRA Notice

    Authority: 12 U.S.C. 321, 325, 1828(c), 1842, 1843, 1844, and 2901 
et seq.

    Source: 43 FR 47148, Oct. 12, 1978, unless otherwise noted.



Sec. Sec. 228.1-228.2  [Reserved]



                            Subpart A_General

    Source: Reg. BB, 60 FR 22190, May 4, 1995, unless otherwise noted.



Sec. 228.11  Authority, purposes, and scope.

    (a) Authority. The Board of Governors of the Federal Reserve System 
(the Board) issues this part to implement the Community Reinvestment Act 
(12 U.S.C. 2901 et seq.) (CRA). The regulations comprising this part are 
issued under the authority of the CRA and under the provisions of the 
United States Code authorizing the Board:
    (1) To conduct examinations of State-chartered banks that are 
members of the Federal Reserve System (12 U.S.C. 325);
    (2) To conduct examinations of bank holding companies and their 
subsidiaries (12 U.S.C. 1844); and
    (3) To consider applications for:
    (i) Domestic branches by State member banks (12 U.S.C. 321);
    (ii) Mergers in which the resulting bank would be a State member 
bank (12 U.S.C. 1828(c));
    (iii) Formations of, acquisitions of banks by, and mergers of, bank 
holding companies (12 U.S.C. 1842); and
    (iv) The acquisition of savings associations by bank holding 
companies (12 U.S.C. 1843).
    (b) Purposes. In enacting the CRA, the Congress required each 
appropriate Federal financial supervisory agency to assess an 
institution's record of helping to meet the credit needs of the local 
communities in which the institution is chartered, consistent with the 
safe and sound operation of the institution, and to take this record 
into account in the agency's evaluation of an application for a deposit 
facility by the institution. This part is intended to carry out the 
purposes of the CRA by:
    (1) Establishing the framework and criteria by which the Board 
assesses a bank's record of helping to meet the credit needs of its 
entire community, including low- and moderate-income neighborhoods, 
consistent with the safe and sound operation of the bank; and
    (2) Providing that the Board takes that record into account in 
considering certain applications.
    (c) Scope--(1) General. This part applies to all banks except as 
provided in paragraph (c)(3) of this section.
    (2) Foreign bank acquisitions. This part also applies to an 
uninsured State branch (other than a limited branch) of a foreign bank 
that results from an acquisition described in section 5(a)(8) of the 
International Banking Act of 1978 (12 U.S.C. 3103(a)(8)). The terms 
``State branch'' and ``foreign bank'' have the same meanings as in 
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101 et 
seq.); the term ``uninsured State branch'' means a State branch the 
deposits of which are not insured

[[Page 626]]

by the Federal Deposit Insurance Corporation; the term ``limited 
branch'' means a State branch that accepts only deposits that are 
permissible for a corporation organized under section 25A of the Federal 
Reserve Act (12 U.S.C. 611 et seq.).
    (3) Certain special purpose banks. This part does not apply to 
special purpose banks that do not perform commercial or retail banking 
services by granting credit to the public in the ordinary course of 
business, other than as incident to their specialized operations. These 
banks include banker's banks, as defined in 12 U.S.C. 24 (Seventh), and 
banks that engage only in one or more of the following activities: 
providing cash management controlled disbursement services or serving as 
correspondent banks, trust companies, or clearing agents.



Sec. 228.12  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Affiliate means any company that controls, is controlled by, or 
is under common control with another company. The term ``control'' has 
the meaning given to that term in 12 U.S.C. 1841(a)(2), and a company is 
under common control with another company if both companies are directly 
or indirectly controlled by the same company.
    (b) Area median income means:
    (1) The median family income for the MSA, if a person or geography 
is located in an MSA, or for the metropolitan division, if a person or 
geography is located in an MSA that has been subdivided into 
metropolitan divisions; or
    (2) The statewide nonmetropolitan median family income, if a person 
or geography is located outside an MSA.
    (c) Assessment area means a geographic area delineated in accordance 
with Sec. 228.41.
    (d) Automated teller machine (ATM) means an automated, unstaffed 
banking facility owned or operated by, or operated exclusively for, the 
bank at which deposits are received, cash dispersed, or money lent.
    (e) Bank means a State member bank as that term is defined in 
section 3(d)(2) of the Federal Deposit Insurance Act (12 U.S.C. 
1813(d)(2)), except as provided in Sec. 228.11(c)(3), and includes an 
uninsured State branch (other than a limited branch) of a foreign bank 
described in Sec. 228.11(c)(2).
    (f) Branch means a staffed banking facility approved as a branch, 
whether shared or unshared, including, for example, a mini-branch in a 
grocery store or a branch operated in conjunction with any other local 
business or nonprofit organization.
    (g) Community development means:
    (1) Affordable housing (including multifamily rental housing) for 
low- or moderate-income individuals;
    (2) Community services targeted to low- or moderate-income 
individuals;
    (3) Activities that promote economic development by financing 
businesses or farms that meet the size eligibility standards of the 
Small Business Administration's Development Company or Small Business 
Investment Company programs (13 CFR 121.301) or have gross annual 
revenues of $1 million or less; or
    (4) Activities that revitalize or stabilize--
    (i) Low-or moderate-income geographies;
    (ii) Designated disaster areas; or
    (iii) Distressed or underserved nonmetropolitan middle-income 
geographies designated by the Board, Federal Deposit Insurance 
Corporation, and Office of the Comptroller of the Currency, based on--
    (A) Rates of poverty, unemployment, and population loss; or
    (B) Population size, density, and dispersion. Activities revitalize 
and stabilize geographies designated based on population size, density, 
and dispersion if they help to meet essential community needs, including 
needs of low- and moderate-income individuals.
    (h) Community development loan means a loan that:
    (1) Has as its primary purpose community development; and
    (2) Except in the case of a wholesale or limited purpose bank:
    (i) Has not been reported or collected by the bank or an affiliate 
for consideration in the bank's assessment as a home mortgage, small 
business, small farm, or consumer loan, unless it is a multifamily 
dwelling loan (as described

[[Page 627]]

in appendix A to part 203 of this chapter); and
    (ii) Benefits the bank's assessment area(s) or a broader statewide 
or regional area that includes the bank's assessment area(s).
    (i) Community development service means a service that:
    (1) Has as its primary purpose community development;
    (2) Is related to the provision of financial services; and
    (3) Has not been considered in the evaluation of the bank's retail 
banking services under Sec. 228.24(d).
    (j) Consumer loan means a loan to one or more individuals for 
household, family, or other personal expenditures. A consumer loan does 
not include a home mortgage, small business, or small farm loan. 
Consumer loans include the following categories of loans:
    (1) Motor vehicle loan, which is a consumer loan extended for the 
purchase of and secured by a motor vehicle;
    (2) Credit card loan, which is a line of credit for household, 
family, or other personal expenditures that is accessed by a borrower's 
use of a ``credit card,'' as this term is defined in Sec. 226.2 of this 
chapter;
    (3) Home equity loan, which is a consumer loan secured by a 
residence of the borrower;
    (4) Other secured consumer loan, which is a secured consumer loan 
that is not included in one of the other categories of consumer loans; 
and
    (5) Other unsecured consumer loan, which is an unsecured consumer 
loan that is not included in one of the other categories of consumer 
loans.
    (k) Geography means a census tract delineated by the United States 
Bureau of the Census in the most recent decennial census.
    (l) Home mortgage loan means a ``home improvement loan,'' ``home 
purchase loan,'' or a ``refinancing'' as defined in Sec. 203.2 of this 
title.
    (m) Income level includes:
    (1) Low-income, which means an individual income that is less than 
50 percent of the area median income, or a median family income that is 
less than 50 percent, in the case of a geography.
    (2) Moderate-income, which means an individual income that is at 
least 50 percent and less than 80 percent of the area median income, or 
a median family income that is at least 50 and less than 80 percent, in 
the case of a geography.
    (3) Middle-income, which means an individual income that is at least 
80 percent and less than 120 percent of the area median income, or a 
median family income that is at least 80 and less than 120 percent, in 
the case of a geography.
    (4) Upper-income, which means an individual income that is 120 
percent or more of the area median income, or a median family income 
that is 120 percent or more, in the case of a geography.
    (n) Limited purpose bank means a bank that offers only a narrow 
product line (such as credit card or motor vehicle loans) to a regional 
or broader market and for which a designation as a limited purpose bank 
is in effect, in accordance with Sec. 228.25(b).
    (o) Loan location. A loan is located as follows:
    (1) A consumer loan is located in the geography where the borrower 
resides;
    (2) A home mortgage loan is located in the geography where the 
property to which the loan relates is located; and
    (3) A small business or small farm loan is located in the geography 
where the main business facility or farm is located or where the loan 
proceeds otherwise will be applied, as indicated by the borrower.
    (p) Loan production office means a staffed facility, other than a 
branch, that is open to the public and that provides lending-related 
services, such as loan information and applications.
    (q) Metropolitan division means a metropolitan division as defined 
by the Director of the Office of Management and Budget.
    (r) MSA means a metropolitan statistical area as defined by the 
Director of the Office of Management and Budget.
    (s) Nonmetropolitan area means any area that is not located in an 
MSA.
    (t) Qualified investment means a lawful investment, deposit, 
membership share, or grant that has as its primary purpose community 
development.
    (u) Small bank--(1) Definition. Small bank means a bank that, as of 
December 31 of either of the prior two calendar years, had assets of 
less than

[[Page 628]]

$1.109 billion. Intermediate small bank means a small bank with assets 
of at least $277 million as of December 31 of both of the prior two 
calendar years and less than $1.109 billion as of December 31 of either 
of the prior two calendar years.
    (2) Adjustment. The dollar figures in paragraph (u)(1) of this 
section shall be adjusted annually and published by the Board, 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.
    (v) Small business loan means a loan included in ``loans to small 
businesses'' as defined in the instructions for preparation of the 
Consolidated Report of Condition and Income.
    (w) Small farm loan means a loan included in ``loans to small 
farms'' as defined in the instructions for preparation of the 
Consolidated Report of Condition and Income.
    (x) Wholesale bank means a bank that is not in the business of 
extending home mortgage, small business, small farm, or consumer loans 
to retail customers, and for which a designation as a wholesale bank is 
in effect, in accordance with Sec. 228.25(b).

[Reg. BB, 60 FR 22190, May 4, 1995, as amended at 60 FR 66050, Dec. 20, 
1995; 61 FR 21363, May 10, 1996; 69 FR 41187, July 8, 2004; 70 FR 44267, 
Aug. 2, 2005; 71 FR 78336, Dec. 29, 2006; 72 FR 72573, Dec. 21, 2007; 73 
FR 78154, Dec. 22, 2008]



              Subpart B_Standards for Assessing Performance

    Source: Reg. BB, 60 FR 22191, May 4, 1995, unless otherwise noted.



Sec. 228.21  Performance tests, standards, and ratings, in general.

    (a) Performance tests and standards. The Board assesses the CRA 
performance of a bank in an examination as follows:
    (1) Lending, investment, and service tests. The Board applies the 
lending, investment, and service tests, as provided in Sec. Sec. 228.22 
through 228.24, in evaluating the performance of a bank, except as 
provided in paragraphs (a)(2), (a)(3), and (a)(4) of this section.
    (2) Community development test for wholesale or limited purpose 
banks. The Board applies the community development test for a wholesale 
or limited purpose bank, as provided in Sec. 228.25, except as provided 
in paragraph (a)(4) of this section.
    (3) Small bank performance standards. The Board applies the small 
bank performance standards as provided in Sec. 228.26 in evaluating the 
performance of a small bank or a bank that was a small bank during the 
prior calendar year, unless the bank elects to be assessed as provided 
in paragraphs (a)(1), (a)(2), or (a)(4) of this section. The bank may 
elect to be assessed as provided in paragraph (a)(1) of this section 
only if it collects and reports the data required for other banks under 
Sec. 228.42.
    (4) Strategic plan. The Board evaluates the performance of a bank 
under a strategic plan if the bank submits, and the Board approves, a 
strategic plan as provided in Sec. 228.27.
    (b) Performance context. The Board applies the tests and standards 
in paragraph (a) of this section and also considers whether to approve a 
proposed strategic plan in the context of:
    (1) Demographic data on median income levels, distribution of 
household income, nature of housing stock, housing costs, and other 
relevant data pertaining to a bank's assessment area(s);
    (2) Any information about lending, investment, and service 
opportunities in the bank's assessment area(s) maintained by the bank or 
obtained from community organizations, state, local, and tribal 
governments, economic development agencies, or other sources;
    (3) The bank's product offerings and business strategy as determined 
from data provided by the bank;
    (4) Institutional capacity and constraints, including the size and 
financial condition of the bank, the economic climate (national, 
regional, and local), safety and soundness limitations, and any other 
factors that significantly affect the bank's ability to provide lending, 
investments, or services in its assessment area(s);
    (5) The bank's past performance and the performance of similarly 
situated lenders;

[[Page 629]]

    (6) The bank's public file, as described in Sec. 228.43, and any 
written comments about the bank's CRA performance submitted to the bank 
or the Board; and
    (7) Any other information deemed relevant by the Board.
    (c) Assigned ratings. The Board assigns to a bank one of the 
following four ratings pursuant to Sec. 228.28 and appendix A of this 
part: ``outstanding''; ``satisfactory''; ``needs to improve''; or 
``substantial noncompliance'' as provided in 12 U.S.C. 2906(b)(2). The 
rating assigned by the Board reflects the bank's record of helping to 
meet the credit needs of its entire community, including low- and 
moderate-income neighborhoods, consistent with the safe and sound 
operation of the bank.
    (d) Safe and sound operations. This part and the CRA do not require 
a bank to make loans or investments or to provide services that are 
inconsistent with safe and sound operations. To the contrary, the Board 
anticipates banks can meet the standards of this part with safe and 
sound loans, investments, and services on which the banks expect to make 
a profit. Banks are permitted and encouraged to develop and apply 
flexible underwriting standards for loans that benefit low- or moderate-
income geographies or individuals, only if consistent with safe and 
sound operations.



Sec. 228.22  Lending test.

    (a) Scope of test. (1) The lending test evaluates a bank's record of 
helping to meet the credit needs of its assessment area(s) through its 
lending activities by considering a bank's home mortgage, small 
business, small farm, and community development lending. If consumer 
lending constitutes a substantial majority of a bank's business, the 
Board will evaluate the bank's consumer lending in one or more of the 
following categories: motor vehicle, credit card, home equity, other 
secured, and other unsecured loans. In addition, at a bank's option, the 
Board will evaluate one or more categories of consumer lending, if the 
bank has collected and maintained, as required in Sec. 228.42(c)(1), 
the data for each category that the bank elects to have the Board 
evaluate.
    (2) The Board considers originations and purchases of loans. The 
Board will also consider any other loan data the bank may choose to 
provide, including data on loans outstanding, commitments and letters of 
credit.
    (3) A bank may ask the Board to consider loans originated or 
purchased by consortia in which the bank participates or by third 
parties in which the bank has invested only if the loans meet the 
definition of community development loans and only in accordance with 
paragraph (d) of this section. The Board will not consider these loans 
under any criterion of the lending test except the community development 
lending criterion.
    (b) Performance criteria. The Board evaluates a bank's lending 
performance pursuant to the following criteria:
    (1) Lending activity. The number and amount of the bank's home 
mortgage, small business, small farm, and consumer loans, if applicable, 
in the bank's assessment area(s);
    (2) Geographic distribution. The geographic distribution of the 
bank's home mortgage, small business, small farm, and consumer loans, if 
applicable, based on the loan location, including:
    (i) The proportion of the bank's lending in the bank's assessment 
area(s);
    (ii) The dispersion of lending in the bank's assessment area(s); and
    (iii) The number and amount of loans in low-, moderate-, middle-, 
and upper-income geographies in the bank's assessment area(s);
    (3) Borrower characteristics. The distribution, particularly in the 
bank's assessment area(s), of the bank's home mortgage, small business, 
small farm, and consumer loans, if applicable, based on borrower 
characteristics, including the number and amount of:
    (i) Home mortgage loans to low-, moderate-, middle-, and upper-
income individuals;
    (ii) Small business and small farm loans to businesses and farms 
with gross annual revenues of $1 million or less;
    (iii) Small business and small farm loans by loan amount at 
origination; and

[[Page 630]]

    (iv) Consumer loans, if applicable, to low-, moderate-, middle-, and 
upper-income individuals;
    (4) Community development lending. The bank's community development 
lending, including the number and amount of community development loans, 
and their complexity and innovativeness; and
    (5) Innovative or flexible lending practices. The bank's use of 
innovative or flexible lending practices in a safe and sound manner to 
address the credit needs of low- or moderate-income individuals or 
geographies.
    (c) Affiliate lending. (1) At a bank's option, the Board will 
consider loans by an affiliate of the bank, if the bank provides data on 
the affiliate's loans pursuant to Sec. 228.42.
    (2) The Board considers affiliate lending subject to the following 
constraints:
    (i) No affiliate may claim a loan origination or loan purchase if 
another institution claims the same loan origination or purchase; and
    (ii) If a bank elects to have the Board consider loans within a 
particular lending category made by one or more of the bank's affiliates 
in a particular assessment area, the bank shall elect to have the Board 
consider, in accordance with paragraph (c)(1) of this section, all the 
loans within that lending category in that particular assessment area 
made by all of the bank's affiliates.
    (3) The Board does not consider affiliate lending in assessing a 
bank's performance under paragraph (b)(2)(i) of this section.
    (d) Lending by a consortium or a third party. Community development 
loans originated or purchased by a consortium in which the bank 
participates or by a third party in which the bank has invested:
    (1) Will be considered, at the bank's option, if the bank reports 
the data pertaining to these loans under Sec. 228.42(b)(2); and
    (2) May be allocated among participants or investors, as they 
choose, for purposes of the lending test, except that no participant or 
investor:
    (i) May claim a loan origination or loan purchase if another 
participant or investor claims the same loan origination or purchase; or
    (ii) May claim loans accounting for more than its percentage share 
(based on the level of its participation or investment) of the total 
loans originated by the consortium or third party.
    (e) Lending performance rating. The Board rates a bank's lending 
performance as provided in appendix A of this part.



Sec. 228.23  Investment test.

    (a) Scope of test. The investment test evaluates a bank's record of 
helping to meet the credit needs of its assessment area(s) through 
qualified investments that benefit its assessment area(s) or a broader 
statewide or regional area that includes the bank's assessment area(s).
    (b) Exclusion. Activities considered under the lending or service 
tests may not be considered under the investment test.
    (c) Affiliate investment. At a bank's option, the Board will 
consider, in its assessment of a bank's investment performance, a 
qualified investment made by an affiliate of the bank, if the qualified 
investment is not claimed by any other institution.
    (d) Disposition of branch premises. Donating, selling on favorable 
terms, or making available on a rent-free basis a branch of the bank 
that is located in a predominantly minority neighborhood to a minority 
depository institution or women's depository institution (as these terms 
are defined in 12 U.S.C. 2907(b)) will be considered as a qualified 
investment.
    (e) Performance criteria. The Board evaluates the investment 
performance of a bank pursuant to the following criteria:
    (1) The dollar amount of qualified investments;
    (2) The innovativeness or complexity of qualified investments;
    (3) The responsiveness of qualified investments to credit and 
community development needs; and
    (4) The degree to which the qualified investments are not routinely 
provided by private investors.
    (f) Investment performance rating. The Board rates a bank's 
investment performance as provided in appendix A of this part.

[[Page 631]]



Sec. 228.24  Service test.

    (a) Scope of test. The service test evaluates a bank's record of 
helping to meet the credit needs of its assessment area(s) by analyzing 
both the availability and effectiveness of a bank's systems for 
delivering retail banking services and the extent and innovativeness of 
its community development services.
    (b) Area(s) benefitted. Community development services must benefit 
a bank's assessment area(s) or a broader statewide or regional area that 
includes the bank's assessment area(s).
    (c) Affiliate service. At a bank's option, the Board will consider, 
in its assessment of a bank's service performance, a community 
development service provided by an affiliate of the bank, if the 
community development service is not claimed by any other institution.
    (d) Performance criteria--retail banking services. The Board 
evaluates the availability and effectiveness of a bank's systems for 
delivering retail banking services, pursuant to the following criteria:
    (1) The current distribution of the bank's branches among low-,

moderate-, middle-, and upper-income geographies;
    (2) In the context of its current distribution of the bank's 
branches, the bank's record of opening and closing branches, 
particularly branches located in low- or moderate-income geographies or 
primarily serving low- or moderate-income individuals;
    (3) The availability and effectiveness of alternative systems for 
delivering retail banking services (e.g., ATMs, ATMs not owned or 
operated by or exclusively for the bank, banking by telephone or 
computer, loan production offices, and bank-at-work or bank-by-mail 
programs) in low- and moderate-income geographies and to low- and 
moderate-income individuals; and
    (4) The range of services provided in low-, moderate-, middle-, and 
upper-income geographies and the degree to which the services are 
tailored to meet the needs of those geographies.
    (e) Performance criteria--community development services. The Board 
evaluates community development services pursuant to the following 
criteria:
    (1) The extent to which the bank provides community development 
services; and
    (2) The innovativeness and responsiveness of community development 
services.
    (f) Service performance rating. The Board rates a bank's service 
performance as provided in appendix A of this part.



Sec. 228.25  Community development test for wholesale or limited purpose 

banks.

    (a) Scope of test. The Board assesses a wholesale or limited purpose 
bank's record of helping to meet the credit needs of its assessment 
area(s) under the community development test through its community 
development lending, qualified investments, or community development 
services.
    (b) Designation as a wholesale or limited purpose bank. In order to 
receive a designation as a wholesale or limited purpose bank, a bank 
shall file a request, in writing, with the Board, at least three months 
prior to the proposed effective date of the designation. If the Board 
approves the designation, it remains in effect until the bank requests 
revocation of the designation or until one year after the Board notifies 
the bank that the Board has revoked the designation on its own 
initiative.
    (c) Performance criteria. The Board evaluates the community 
development performance of a wholesale or limited purpose bank pursuant 
to the following criteria:
    (1) The number and amount of community development loans (including 
originations and purchases of loans and other community development loan 
data provided by the bank, such as data on loans outstanding, 
commitments, and letters of credit), qualified investments, or community 
development services;
    (2) The use of innovative or complex qualified investments, 
community development loans, or community development services and the 
extent to which the investments are not routinely provided by private 
investors; and
    (3) The bank's responsiveness to credit and community development 
needs.

[[Page 632]]

    (d) Indirect activities. At a bank's option, the Board will consider 
in its community development performance assessment:
    (1) Qualified investments or community development services provided 
by an affiliate of the bank, if the investments or services are not 
claimed by any other institution; and
    (2) Community development lending by affiliates, consortia and third 
parties, subject to the requirements and limitations in Sec. 228.22(c) 
and (d).
    (e) Benefit to assessment area(s)--(1) Benefit inside assessment 
area(s). The Board considers all qualified investments, community 
development loans, and community development services that benefit areas 
within the bank's assessment area(s) or a broader statewide or regional 
area that includes the bank's assessment area(s).
    (2) Benefit outside assessment area(s). The Board considers the 
qualified investments, community development loans, and community 
development services that benefit areas outside the bank's assessment 
area(s), if the bank has adequately addressed the needs of its 
assessment area(s).
    (f) Community development performance rating. The Board rates a 
bank's community development performance as provided in appendix A of 
this part.



Sec. 228.26  Small bank performance standards.

    (a) Performance criteria--(1) Small banks that are not intermediate 
small banks. The Board evaluates the record of a small bank that is not, 
or that was not during the prior calendar year, an intermediate small 
bank, of helping to meet the credit needs of its assessment area(s) 
pursuant to the criteria set forth in paragraph (b) of this section.
    (2) Intermediate small banks. The Board evaluates the record of a 
small bank that is, or that was during the prior calendar year, an 
intermediate small bank, of helping to meet the credit needs of its 
assessment area(s) pursuant to the criteria set forth in paragraphs (b) 
and (c) of this section.
    (b) Lending test. A small bank's lending performance is evaluated 
pursuant to the following criteria:
    (1) The bank's loan-to-deposit ratio, adjusted for seasonal 
variation, and, as appropriate, other lending-related activities, such 
as loan originations for sale to the secondary markets, community 
development loans, or qualified investments;
    (2) The percentage of loans and, as appropriate, other lending-
related activities located in the bank's assessment area(s);
    (3) The bank's record of lending to and, as appropriate, engaging in 
other lending-related activities for borrowers of different income 
levels and businesses and farms of different sizes;
    (4) The geographic distribution of the bank's loans; and
    (5) The bank's record of taking action, if warranted, in response to 
written complaints about its performance in helping to meet credit needs 
in its assessment area(s).
    (c) Community development test. An intermediate small bank's 
community development performance also is evaluated pursuant to the 
following criteria:
    (1) The number and amount of community development loans;
    (2) The number and amount of qualified investments;
    (3) The extent to which the bank provides community development 
services; and
    (4) The bank's responsiveness through such activities to community 
development lending, investment, and services needs.
    (d) Small bank performance rating. The Board rates the performance 
of a bank evaluated under this section as provided in appendix A of this 
part.

[70 FR 44268, Aug. 2, 2005, as amended at 71 FR 78337, Dec. 29, 2006; 72 
FR 72573, Dec. 21, 2007]



Sec. 228.27  Strategic plan.

    (a) Alternative election. The Board will assess a bank's record of 
helping to meet the credit needs of its assessment area(s) under a 
strategic plan if:
    (1) The bank has submitted the plan to the Board as provided for in 
this section;
    (2) The Board has approved the plan;
    (3) The plan is in effect; and
    (4) The bank has been operating under an approved plan for at least 
one year.
    (b) Data reporting. The Board's approval of a plan does not affect 
the

[[Page 633]]

bank's obligation, if any, to report data as required by Sec. 228.42.
    (c) Plans in general--(1) Term. A plan may have a term of no more 
than five years, and any multi-year plan must include annual interim 
measurable goals under which the Board will evaluate the bank's 
performance.
    (2) Multiple assessment areas. A bank with more than one assessment 
area may prepare a single plan for all of its assessment areas or one or 
more plans for one or more of its assessment areas.
    (3) Treatment of affiliates. Affiliated institutions may prepare a 
joint plan if the plan provides measurable goals for each institution. 
Activities may be allocated among institutions at the institutions' 
option, provided that the same activities are not considered for more 
than one institution.
    (d) Public participation in plan development. Before submitting a 
plan to the Board for approval, a bank shall:
    (1) Informally seek suggestions from members of the public in its 
assessment area(s) covered by the plan while developing the plan;
    (2) Once the bank has developed a plan, formally solicit public 
comment on the plan for at least 30 days by publishing notice in at 
least one newspaper of general circulation in each assessment area 
covered by the plan; and
    (3) During the period of formal public comment, make copies of the 
plan available for review by the public at no cost at all offices of the 
bank in any assessment area covered by the plan and provide copies of 
the plan upon request for a reasonable fee to cover copying and mailing, 
if applicable.
    (e) Submission of plan. The bank shall submit its plan to the Board 
at least three months prior to the proposed effective date of the plan. 
The bank shall also submit with its plan a description of its informal 
efforts to seek suggestions from members of the public, any written 
public comment received, and, if the plan was revised in light of the 
comment received, the initial plan as released for public comment.
    (f) Plan content--(1) Measurable goals. (i) A bank shall specify in 
its plan measurable goals for helping to meet the credit needs of each 
assessment area covered by the plan, particularly the needs of low- and 
moderate-income geographies and low- and moderate-income individuals, 
through lending, investment, and services, as appropriate.
    (ii) A bank shall address in its plan all three performance 
categories and, unless the bank has been designated as a wholesale or 
limited purpose bank, shall emphasize lending and lending-related 
activities. Nevertheless, a different emphasis, including a focus on one 
or more performance categories, may be appropriate if responsive to the 
characteristics and credit needs of its assessment area(s), considering 
public comment and the bank's capacity and constraints, product 
offerings, and business strategy.
    (2) Confidential information. A bank may submit additional 
information to the Board on a confidential basis, but the goals stated 
in the plan must be sufficiently specific to enable the public and the 
Board to judge the merits of the plan.
    (3) Satisfactory and outstanding goals. A bank shall specify in its 
plan measurable goals that constitute ``satisfactory'' performance. A 
plan may specify measurable goals that constitute ``outstanding'' 
performance. If a bank submits, and the Board approves, both 
``satisfactory'' and ``outstanding'' performance goals, the Board will 
consider the bank eligible for an ``outstanding'' performance rating.
    (4) Election if satisfactory goals not substantially met. A bank may 
elect in its plan that, if the bank fails to meet substantially its plan 
goals for a satisfactory rating, the Board will evaluate the bank's 
performance under the lending, investment, and service tests, the 
community development test, or the small bank performance standards, as 
appropriate.
    (g) Plan approval--(1) Timing. The Board will act upon a plan within 
60 calendar days after the Board receives the complete plan and other 
material required under paragraph (e) of this section. If the Board 
fails to act within this time period, the plan shall be deemed approved 
unless the Board extends the review period for good cause.
    (2) Public participation. In evaluating the plan's goals, the Board 
considers the public's involvement in formulating the plan, written 
public comment on the plan, and any response by

[[Page 634]]

the bank to public comment on the plan.
    (3) Criteria for evaluating plan. The Board evaluates a plan's 
measurable goals using the following criteria, as appropriate:
    (i) The extent and breadth of lending or lending-related activities, 
including, as appropriate, the distribution of loans among different 
geographies, businesses and farms of different sizes, and individuals of 
different income levels, the extent of community development lending, 
and the use of innovative or flexible lending practices to address 
credit needs;
    (ii) The amount and innovativeness, complexity, and responsiveness 
of the bank's qualified investments; and
    (iii) The availability and effectiveness of the bank's systems for 
delivering retail banking services and the extent and innovativeness of 
the bank's community development services.
    (h) Plan amendment. During the term of a plan, a bank may request 
the Board to approve an amendment to the plan on grounds that there has 
been a material change in circumstances. The bank shall develop an 
amendment to a previously approved plan in accordance with the public 
participation requirements of paragraph (d) of this section.
    (i) Plan assessment. The Board approves the goals and assesses 
performance under a plan as provided for in appendix A of this part.

[Reg. BB, 60 FR 22193, May 4, 1995, as amended at 60 FR 66050, Dec. 20, 
1995; 69 FR 41187, July 8, 2004]



Sec. 228.28  Assigned ratings.

    (a) Ratings in general. Subject to paragraphs (b) and (c) of this 
section, the Board assigns to a bank a rating of ``outstanding,'' 
``satisfactory,'' ``needs to improve,'' or ``substantial noncompliance'' 
based on the bank's performance under the lending, investment and 
service tests, the community development test, the small bank 
performance standards, or an approved strategic plan, as applicable.
    (b) Lending, investment, and service tests. The Board assigns a 
rating for a bank assessed under the lending, investment, and service 
tests in accordance with the following principles:
    (1) A bank that receives an ``outstanding'' rating on the lending 
test receives an assigned rating of at least ``satisfactory'';
    (2) A bank that receives an ``outstanding'' rating on both the 
service test and the investment test and a rating of at least ``high 
satisfactory'' on the lending test receives an assigned rating of 
``outstanding''; and
    (3) No bank may receive an assigned rating of ``satisfactory'' or 
higher unless it receives a rating of at least ``low satisfactory'' on 
the lending test.
    (c) Effect of evidence of discriminatory or other illegal credit 
practices. (1) The Board's evaluation of a bank's CRA performance is 
adversely affected by evidence of discriminatory or other illegal credit 
practices in any geography by the bank or in any assessment area by any 
affiliate whose loans have been considered as part of the bank's lending 
performance. In connection with any type of lending activity described 
in Sec. 228.22(a), evidence of discriminatory or other credit practices 
that violate an applicable law, rule, or regulation includes, but is not 
limited to:
    (i) Discrimination against applicants on a prohibited basis in 
violation, for example, of the Equal Credit Opportunity Act or the Fair 
Housing Act;
    (ii) Violations of the Home Ownership and Equity Protection Act;
    (iii) Violations of section 5 of the Federal Trade Commission Act;
    (iv) Violations of section 8 of the Real Estate Settlement 
Procedures Act; and
    (v) Violations of the Truth in Lending Act provisions regarding a 
consumer's right of rescission.
    (2) In determining the effect of evidence of practices described in 
paragraph (c)(1) of this section on the bank's assigned rating, the 
Board considers the nature, extent, and strength of the evidence of the 
practices; the policies and procedures that the bank (or affiliate, as 
applicable) has in place to prevent the practices; any corrective action 
that the bank (or affiliate, as applicable) has taken or has committed 
to take, including voluntary corrective action resulting from self-
assessment; and any other relevant information.

[43 FR 47148, Oct. 12, 1978, as amended at 70 FR 44268, Aug. 2, 2005]

[[Page 635]]



Sec. 228.29  Effect of CRA performance on applications.

    (a) CRA performance. Among other factors, the Board takes into 
account the record of performance under the CRA of:
    (1) Each applicant bank for the:
    (i) Establishment of a domestic branch by a State member bank; and
    (ii) Merger, consolidation, acquisition of assets, or assumption of 
liabilities requiring approval under the Bank Merger Act (12 U.S.C. 
1828(c)) if the acquiring, assuming, or resulting bank is to be a State 
member bank; and
    (2) Each insured depository institution (as defined in 12 U.S.C. 
1813) controlled by an applicant and subsidiary bank or savings 
association proposed to be controlled by an applicant:
    (i) To become a bank holding company in a transaction that requires 
approval under section 3 of the Bank Holding Company Act (12 U.S.C. 
1842);
    (ii) To acquire ownership or control of shares or all or 
substantially all of the assets of a bank, to cause a bank to become a 
subsidiary of a bank holding company, or to merge or consolidate a bank 
holding company with any other bank holding company in a transaction 
that requires approval under section 3 of the Bank Holding Company Act 
(12 U.S.C. 1842); and
    (iii) To own, control or operate a savings association in a 
transaction that requires approval under section 4 of the Bank Holding 
Company Act (12 U.S.C. 1843).
    (b) Interested parties. In considering CRA performance in an 
application described in paragraph (a) of this section, the Board takes 
into account any views expressed by interested parties that are 
submitted in accordance with the Board's Rules of Procedure set forth in 
part 262 of this chapter.
    (c) Denial or conditional approval of application. A bank's record 
of performance may be the basis for denying or conditioning approval of 
an application listed in paragraph (a) of this section.
    (d) Definitions. For purposes of paragraph (a)(2) of this section, 
``bank,'' ``bank holding company,'' ``subsidiary,'' and ``savings 
association'' have the meanings given to those terms in section 2 of the 
Bank Holding Company Act (12 U.S.C. 1841).



        Subpart C_Records, Reporting, and Disclosure Requirements

    Source: Reg. BB, 60 FR 22195, May 4, 1995, unless otherwise noted.



Sec. 228.41  Assessment area delineation.

    (a) In general. A bank shall delineate one or more assessment areas 
within which the Board evaluates the bank's record of helping to meet 
the credit needs of its community. The Board does not evaluate the 
bank's delineation of its assessment area(s) as a separate performance 
criterion, but the Board reviews the delineation for compliance with the 
requirements of this section.
    (b) Geographic area(s) for wholesale or limited purpose banks. The 
assessment area(s) for a wholesale or limited purpose bank must consist 
generally of one or more MSAs or metropolitan divisions (using the MSA 
or metropolitan division boundaries that were in effect as of January 1 
of the calendar year in which the delineation is made) or one or more 
contiguous political subdivisions, such as counties, cities, or towns, 
in which the bank has its main office, branches, and deposit-taking 
ATMs.
    (c) Geographic area(s) for other banks. The assessment area(s) for a 
bank other than a wholesale or limited purpose bank must:
    (1) Consist generally of one or more MSAs or metropolitan divisions 
(using the MSA or metropolitan division boundaries that were in effect 
as of January 1 of the calendar year in which the delineation is made) 
or one or more contiguous political subdivisions, such as counties, 
cities, or towns; and
    (2) Include the geographies in which the bank has its main office, 
its branches, and its deposit-taking ATMs, as well as the surrounding 
geographies in which the bank has originated or purchased a substantial 
portion of its loans (including home mortgage loans, small business and 
small farm loans, and any other loans the bank chooses, such as those 
consumer loans on which

[[Page 636]]

the bank elects to have its performance assessed).
    (d) Adjustments to geographic area(s). A bank may adjust the 
boundaries of its assessment area(s) to include only the portion of a 
political subdivision that it reasonably can be expected to serve. An 
adjustment is particularly appropriate in the case of an assessment area 
that otherwise would be extremely large, of unusual configuration, or 
divided by significant geographic barriers.
    (e) Limitations on the delineation of an assessment area. Each 
bank's assessment area(s):
    (1) Must consist only of whole geographies;
    (2) May not reflect illegal discrimination;
    (3) May not arbitrarily exclude low- or moderate-income geographies, 
taking into account the bank's size and financial condition; and
    (4) May not extend substantially beyond an MSA boundary or beyond a 
state boundary unless the assessment area is located in a multistate 
MSA. If a bank serves a geographic area that extends substantially 
beyond a state boundary, the bank shall delineate separate assessment 
areas for the areas in each state. If a bank serves a geographic area 
that extends substantially beyond an MSA boundary, the bank shall 
delineate separate assessment areas for the areas inside and outside the 
MSA.
    (f) Banks serving military personnel. Notwithstanding the 
requirements of this section, a bank whose business predominantly 
consists of serving the needs of military personnel or their dependents 
who are not located within a defined geographic area may delineate its 
entire deposit customer base as its assessment area.
    (g) Use of assessment area(s). The Board uses the assessment area(s) 
delineated by a bank in its evaluation of the bank's CRA performance 
unless the Board determines that the assessment area(s) do not comply 
with the requirements of this section.

[Reg. BB, 60 FR 22195, May 4, 1995, as amended at 69 FR 41187, July 8, 
2004]



Sec. 228.42  Data collection, reporting, and disclosure.

    (a) Loan information required to be collected and maintained. A 
bank, except a small bank, shall collect, and maintain in machine 
readable form (as prescribed by the Board) until the completion of its 
next CRA examination, the following data for each small business or 
small farm loan originated or purchased by the bank:
    (1) A unique number or alpha-numeric symbol that can be used to 
identify the relevant loan file;
    (2) The loan amount at origination;
    (3) The loan location; and
    (4) An indicator whether the loan was to a business or farm with 
gross annual revenues of $1 million or less.
    (b) Loan information required to be reported. A bank, except a small 
bank or a bank that was a small bank during the prior calendar year, 
shall report annually by March 1 to the Board in machine readable form 
(as prescribed by the Board) the following data for the prior calendar 
year:
    (1) Small business and small farm loan data. For each geography in 
which the bank originated or purchased a small business or small farm 
loan, the aggregate number and amount of loans:
    (i) With an amount at origination of $100,000 or less;
    (ii) With amount at origination of more than $100,000 but less than 
or equal to $250,000;
    (iii) With an amount at origination of more than $250,000; and
    (iv) To businesses and farms with gross annual revenues of $1 
million or less (using the revenues that the bank considered in making 
its credit decision);
    (2) Community development loan data. The aggregate number and 
aggregate amount of community development loans originated or purchased; 
and
    (3) Home mortgage loans. If the bank is subject to reporting under 
part 203 of this chapter, the location of each home mortgage loan 
application, origination, or purchase outside the MSAs in which the bank 
has a home or branch office (or outside any MSA) in accordance with the 
requirements of part 203 of this chapter.
    (c) Optional data collection and maintenance--(1) Consumer loans. A 
bank may

[[Page 637]]

collect and maintain in machine readable form (as prescribed by the 
Board) data for consumer loans originated or purchased by the bank for 
consideration under the lending test. A bank may maintain data for one 
or more of the following categories of consumer loans: motor vehicle, 
credit card, home equity, other secured, and other unsecured. If the 
bank maintains data for loans in a certain category, it shall maintain 
data for all loans originated or purchased within that category. The 
bank shall maintain data separately for each category, including for 
each loan:
    (i) A unique number or alpha-numeric symbol that can be used to 
identify the relevant loan file;
    (ii) The loan amount at origination or purchase;
    (iii) The loan location; and
    (iv) The gross annual income of the borrower that the bank 
considered in making its credit decision.
    (2) Other loan data. At its option, a bank may provide other 
information concerning its lending performance, including additional 
loan distribution data.
    (d) Data on affiliate lending. A bank that elects to have the Board 
consider loans by an affiliate, for purposes of the lending or community 
development test or an approved strategic plan, shall collect, maintain, 
and report for those loans the data that the bank would have collected, 
maintained, and reported pursuant to paragraphs (a), (b), and (c) of 
this section had the loans been originated or purchased by the bank. For 
home mortgage loans, the bank shall also be prepared to identify the 
home mortgage loans reported under part 203 of this chapter by the 
affiliate.
    (e) Data on lending by a consortium or a third party. A bank that 
elects to have the Board consider community development loans by a 
consortium or third party, for purposes of the lending or community 
development tests or an approved strategic plan, shall report for those 
loans the data that the bank would have reported under paragraph (b)(2) 
of this section had the loans been originated or purchased by the bank.
    (f) Small banks electing evaluation under the lending, investment, 
and service tests. A bank that qualifies for evaluation under the small 
bank performance standards but elects evaluation under the lending, 
investment, and service tests shall collect, maintain, and report the 
data required for other banks pursuant to paragraphs (a) and (b) of this 
section.
    (g) Assessment area data. A bank, except a small bank or a bank that 
was a small bank during the prior calendar year, shall collect and 
report to the Board by March 1 of each year a list for each assessment 
area showing the geographies within the area.
    (h) CRA Disclosure Statement. The Board prepares annually for each 
bank that reports data pursuant to this section a CRA Disclosure 
Statement that contains, on a state-by-state basis:
    (1) For each county (and for each assessment area smaller than a 
county) with a population of 500,000 persons or fewer in which the bank 
reported a small business or small farm loan:
    (i) The number and amount of small business and small farm loans 
reported as originated or purchased located in low-, moderate-, middle-, 
and upper-income geographies;
    (ii) A list grouping each geography according to whether the 
geography is low-, moderate-, middle-, or upper-income;
    (iii) A list showing each geography in which the bank reported a 
small business or small farm loan; and
    (iv) The number and amount of small business and small farm loans to 
businesses and farms with gross annual revenues of $1 million or less;
    (2) For each county (and for each assessment area smaller than a 
county) with a population in excess of 500,000 persons in which the bank 
reported a small business or small farm loan:
    (i) The number and amount of small business and small farm loans 
reported as originated or purchased located in geographies with median 
income relative to the area median income of less than 10 percent, 10 or 
more but less than 20 percent, 20 or more but less than 30 percent, 30 
or more but less than 40 percent, 40 or more but less than 50 percent, 
50 or more but less than 60 percent, 60 or more but less than 70 
percent, 70 or more but less than 80 percent, 80 or more but less

[[Page 638]]

than 90 percent, 90 or more but less than 100 percent, 100 or more but 
less than 110 percent, 110 or more but less than 120 percent, and 120 
percent or more;
    (ii) A list grouping each geography in the county or assessment area 
according to whether the median income in the geography relative to the 
area median income is less than 10 percent, 10 or more but less than 20 
percent, 20 or more but less than 30 percent, 30 or more but less than 
40 percent, 40 or more but less than 50 percent, 50 or more but less 
than 60 percent, 60 or more but less than 70 percent, 70 or more but 
less than 80 percent, 80 or more but less than 90 percent, 90 or more 
but less than 100 percent, 100 or more but less than 110 percent, 110 or 
more but less than 120 percent, and 120 percent or more;
    (iii) A list showing each geography in which the bank reported a 
small business or small farm loan; and
    (iv) The number and amount of small business and small farm loans to 
businesses and farms with gross annual revenues of $1 million or less;
    (3) The number and amount of small business and small farm loans 
located inside each assessment area reported by the bank and the number 
and amount of small business and small farm loans located outside the 
assessment area(s) reported by the bank; and
    (4) The number and amount of community development loans reported as 
originated or purchased.
    (i) Aggregate disclosure statements. The Board, in conjunction with 
the Office of the Comptroller of the Currency, the Federal Deposit 
Insurance Corporation, and the Office of Thrift Supervision, prepares 
annually, for each MSA or metropolitan division (including an MSA or 
metropolitan division that crosses a state boundary) and the 
nonmetropolitan portion of each state, an aggregate disclosure statement 
of small business and small farm lending by all institutions subject to 
reporting under this part or parts 25, 345, or 563e of this title. These 
disclosure statements indicate, for each geography, the number and 
amount of all small business and small farm loans originated or 
purchased by reporting institutions, except that the Board may adjust 
the form of the disclosure if necessary, because of special 
circumstances, to protect the privacy of a borrower or the competitive 
position of an institution.
    (j) Central data depositories. The Board makes the aggregate 
disclosure statements, described in paragraph (i) of this section, and 
the individual bank CRA Disclosure Statements, described in paragraph 
(h) of this section, available to the public at central data 
depositories. The Board publishes a list of the depositories at which 
the statements are available.

[Reg. BB, 60 FR 22195, May 4, 1995, as amended at 69 FR 41187, July 8, 
2004]



Sec. 228.43  Content and availability of public file.

    (a) Information available to the public. A bank shall maintain a 
public file that includes the following information:
    (1) All written comments received from the public for the current 
year and each of the prior two calendar years that specifically relate 
to the bank's performance in helping to meet community credit needs, and 
any response to the comments by the bank, if neither the comments nor 
the responses contain statements that reflect adversely on the good name 
or reputation of any persons other than the bank or publication of which 
would violate specific provisions of law;
    (2) A copy of the public section of the bank's most recent CRA 
Performance Evaluation prepared by the Board. The bank shall place this 
copy in the public file within 30 business days after its receipt from 
the Board;
    (3) A list of the bank's branches, their street addresses, and 
geographies;
    (4) A list of branches opened or closed by the bank during the 
current year and each of the prior two calendar years, their street 
addresses, and geographies;
    (5) A list of services (including hours of operation, available loan 
and deposit products, and transaction fees) generally offered at the 
bank's branches and descriptions of material differences in the 
availability or cost of services at particular branches, if any. At its 
option, a bank may include information regarding the availability of 
alternative systems for delivering retail

[[Page 639]]

banking services (e.g., ATMs, ATMs not owned or operated by or 
exclusively for the bank, banking by telephone or computer, loan 
production offices, and bank-at-work or bank-by-mail programs);
    (6) A map of each assessment area showing the boundaries of the area 
and identifying the geographies contained within the area, either on the 
map or in a separate list; and
    (7) Any other information the bank chooses.
    (b) Additional information available to the public--(1) Banks other 
than small banks. A bank, except a small bank or a bank that was a small 
bank during the prior calendar year, shall include in its public file 
the following information pertaining to the bank and its affiliates, if 
applicable, for each of the prior two calendar years:
    (i) If the bank has elected to have one or more categories of its 
consumer loans considered under the lending test, for each of these 
categories, the number and amount of loans:
    (A) To low-, moderate-, middle-, and upper-income individuals;
    (B) Located in low-, moderate-, middle-, and upper-income census 
tracts; and
    (C) Located inside the bank's assessment area(s) and outside the 
bank's assessment area(s); and
    (ii) The bank's CRA Disclosure Statement. The bank shall place the 
statement in the public file within three business days of its receipt 
from the Board.
    (2) Banks required to report Home Mortgage Disclosure Act (HMDA) 
data. A bank required to report home mortgage loan data pursuant to part 
203 of this chapter shall include in its public file a copy of the HMDA 
Disclosure Statement provided by the Federal Financial Institutions 
Examination Council pertaining to the bank for each of the prior two 
calendar years. In addition, a bank that elected to have the Board 
consider the mortgage lending of an affiliate for any of these years 
shall include in its public file the affiliate's HMDA Disclosure 
Statement for those years. The bank shall place the statement(s) in the 
public file within three business days after its receipt.
    (3) Small banks. A small bank or a bank that was a small bank during 
the prior calendar year shall include in its public file:
    (i) The bank's loan-to-deposit ratio for each quarter of the prior 
calendar year and, at its option, additional data on its loan-to-deposit 
ratio; and
    (ii) The information required for other banks by paragraph (b)(1) of 
this section, if the bank has elected to be evaluated under the lending, 
investment, and service tests.
    (4) Banks with strategic plans. A bank that has been approved to be 
assessed under a strategic plan shall include in its public file a copy 
of that plan. A bank need not include information submitted to the Board 
on a confidential basis in conjunction with the plan.
    (5) Banks with less than satisfactory ratings. A bank that received 
a less than satisfactory rating during its most recent examination shall 
include in its public file a description of its current efforts to 
improve its performance in helping to meet the credit needs of its 
entire community. The bank shall update the description quarterly.
    (c) Location of public information. A bank shall make available to 
the public for inspection upon request and at no cost the information 
required in this section as follows:
    (1) At the main office and, if an interstate bank, at one branch 
office in each state, all information in the public file; and
    (2) At each branch:
    (i) A copy of the public section of the bank's most recent CRA 
Performance Evaluation and a list of services provided by the branch; 
and
    (ii) Within five calendar days of the request, all the information 
in the public file relating to the assessment area in which the branch 
is located.
    (d) Copies. Upon request, a bank shall provide copies, either on 
paper or in another form acceptable to the person making the request, of 
the information in its public file. The bank may charge a reasonable fee 
not to exceed the cost of copying and mailing (if applicable).
    (e) Updating. Except as otherwise provided in this section, a bank 
shall ensure that the information required by

[[Page 640]]

this section is current as of April 1 of each year.



Sec. 228.44  Public notice by banks.

    A bank shall provide in the public lobby of its main office and each 
of its branches the appropriate public notice set forth in appendix B of 
this part. Only a branch of a bank having more than one assessment area 
shall include the bracketed material in the notice for branch offices. 
Only a bank that is an affiliate of a holding company shall include the 
next to the last sentence of the notices. A bank shall include the last 
sentence of the notices only if it is an affiliate of a holding company 
that is not prevented by statute from acquiring additional banks.



Sec. 228.45  Publication of planned examination schedule.

    The Board publishes at least 30 days in advance of the beginning of 
each calendar quarter a list of banks scheduled for CRA examinations in 
that quarter.



                  Sec. Appendix A to Part 228--Ratings

    (a) Ratings in general. (1) In assigning a rating, the Board 
evaluates a bank's performance under the applicable performance criteria 
in this part, in accordance with Sec. 228.21, and Sec. 228.28, which 
provides for adjustments on the basis of evidence of discriminatory or 
other illegal credit practices.
    (2) A bank's performance need not fit each aspect of a particular 
rating profile in order to receive that rating, and exceptionally strong 
performance with respect to some aspects may compensate for weak 
performance in others. The bank's overall performance, however, must be 
consistent with safe and sound banking practices and generally with the 
appropriate rating profile as follows.
    (b) Banks evaluated under the lending, investment, and service 
tests--(1) Lending performance rating. The Board assigns each bank's 
lending performance one of the five following ratings.
    (i) Outstanding. The Board rates a bank's lending performance 
``outstanding'' if, in general, it demonstrates:
    (A) Excellent responsiveness to credit needs in its assessment 
area(s), taking into account the number and amount of home mortgage, 
small business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A substantial majority of its loans are made in its assessment 
area(s);
    (C) An excellent geographic distribution of loans in its assessment 
area(s);
    (D) An excellent distribution, particularly in its assessment 
area(s), of loans among individuals of different income levels and 
businesses (including farms) of different sizes, given the product lines 
offered by the bank;
    (E) An excellent record of serving the credit needs of highly 
economically disadvantaged areas in its assessment area(s), low-income 
individuals, or businesses (including farms) with gross annual revenues 
of $1 million or less, consistent with safe and sound operations;
    (F) Extensive use of innovative or flexible lending practices in a 
safe and sound manner to address the credit needs of low- or moderate-
income individuals or geographies; and
    (G) It is a leader in making community development loans.
    (ii) High satisfactory. The Board rates a bank's lending performance 
``high satisfactory'' if, in general, it demonstrates:
    (A) Good responsiveness to credit needs in its assessment area(s), 
taking into account the number and amount of home mortgage, small 
business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A high percentage of its loans are made in its assessment 
area(s);
    (C) A good geographic distribution of loans in its assessment 
area(s);
    (D) A good distribution, particularly in its assessment area(s), of 
loans among individuals of different income levels and businesses 
(including farms) of different sizes, given the product lines offered by 
the bank;
    (E) A good record of serving the credit needs of highly economically 
disadvantaged areas in its assessment area(s), low-income individuals, 
or businesses (including farms) with gross annual revenues of $1 million 
or less, consistent with safe and sound operations;
    (F) Use of innovative or flexible lending practices in a safe and 
sound manner to address the credit needs of low- or moderate-income 
individuals or geographies; and
    (G) It has made a relatively high level of community development 
loans.
    (iii) Low satisfactory. The Board rates a bank's lending performance 
``low satisfactory'' if, in general, it demonstrates:
    (A) Adequate responsiveness to credit needs in its assessment 
area(s), taking into account the number and amount of home mortgage, 
small business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) An adequate percentage of its loans are made in its assessment 
area(s);
    (C) An adequate geographic distribution of loans in its assessment 
area(s);
    (D) An adequate distribution, particularly in its assessment 
area(s), of loans among individuals of different income levels and 
businesses (including farms) of different sizes, given the product lines 
offered by the bank;

[[Page 641]]

    (E) An adequate record of serving the credit needs of highly 
economically disadvantaged areas in its assessment area(s), low-income 
individuals, or businesses (including farms) with gross annual revenues 
of $1 million or less, consistent with safe and sound operations;
    (F) Limited use of innovative or flexible lending practices in a 
safe and sound manner to address the credit needs of low- or moderate-
income individuals or geographies; and
    (G) It has made an adequate level of community development loans.
    (iv) Needs to improve. The Board rates a bank's lending performance 
``needs to improve'' if, in general, it demonstrates:
    (A) Poor responsiveness to credit needs in its assessment area(s), 
taking into account the number and amount of home mortgage, small 
business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A small percentage of its loans are made in its assessment 
area(s);
    (C) A poor geographic distribution of loans, particularly to low- or 
moderate-income geographies, in its assessment area(s);
    (D) A poor distribution, particularly in its assessment area(s), of 
loans among individuals of different income levels and businesses 
(including farms) of different sizes, given the product lines offered by 
the bank;
    (E) A poor record of serving the credit needs of highly economically 
disadvantaged areas in its assessment area(s), low-income individuals, 
or businesses (including farms) with gross annual revenues of $1 million 
or less, consistent with safe and sound operations;
    (F) Little use of innovative or flexible lending practices in a safe 
and sound manner to address the credit needs of low- or moderate-income 
individuals or geographies; and
    (G) It has made a low level of community development loans.
    (v) Substantial noncompliance. The Board rates a bank's lending 
performance as being in ``substantial noncompliance'' if, in general, it 
demonstrates:
    (A) A very poor responsiveness to credit needs in its assessment 
area(s), taking into account the number and amount of home mortgage, 
small business, small farm, and consumer loans, if applicable, in its 
assessment area(s);
    (B) A very small percentage of its loans are made in its assessment 
area(s);
    (C) A very poor geographic distribution of loans, particularly to 
low- or moderate-income geographies, in its assessment area(s);
    (D) A very poor distribution, particularly in its assessment 
area(s), of loans among individuals of different income levels and 
businesses (including farms) of different sizes, given the product lines 
offered by the bank;
    (E) A very poor record of serving the credit needs of highly 
economically disadvantaged areas in its assessment area(s), low-income 
individuals, or businesses (including farms) with gross annual revenues 
of $1 million or less, consistent with safe and sound operations;
    (F) No use of innovative or flexible lending practices in a safe and 
sound manner to address the credit needs of low- or moderate-income 
individuals or geographies; and
    (G) It has made few, if any, community development loans.
    (2) Investment performance rating. The Board assigns each bank's 
investment performance one of the five following ratings.
    (i) Outstanding. The Board rates a bank's investment performance 
``outstanding'' if, in general, it demonstrates:
    (A) An excellent level of qualified investments, particularly those 
that are not routinely provided by private investors, often in a 
leadership position;
    (B) Extensive use of innovative or complex qualified investments; 
and
    (C) Excellent responsiveness to credit and community development 
needs.
    (ii) High satisfactory. The Board rates a bank's investment 
performance ``high satisfactory'' if, in general, it demonstrates:
    (A) A significant level of qualified investments, particularly those 
that are not routinely provided by private investors, occasionally in a 
leadership position;
    (B) Significant use of innovative or complex qualified investments; 
and
    (C) Good responsiveness to credit and community development needs.
    (iii) Low satisfactory. The Board rates a bank's investment 
performance ``low satisfactory'' if, in general, it demonstrates:
    (A) An adequate level of qualified investments, particularly those 
that are not routinely provided by private investors, although rarely in 
a leadership position;
    (B) Occasional use of innovative or complex qualified investments; 
and
    (C) Adequate responsiveness to credit and community development 
needs.
    (iv) Needs to improve. The Board rates a bank's investment 
performance ``needs to improve'' if, in general, it demonstrates:
    (A) A poor level of qualified investments, particularly those that 
are not routinely provided by private investors;
    (B) Rare use of innovative or complex qualified investments; and
    (C) Poor responsiveness to credit and community development needs.
    (v) Substantial noncompliance. The Board rates a bank's investment 
performance as being in ``substantial noncompliance'' if, in general, it 
demonstrates:
    (A) Few, if any, qualified investments, particularly those that are 
not routinely provided by private investors;
    (B) No use of innovative or complex qualified investments; and
    (C) Very poor responsiveness to credit and community development 
needs.

[[Page 642]]

    (3) Service performance rating. The Board assigns each bank's 
service performance one of the five following ratings.
    (i) Outstanding. The Board rates a bank's service performance 
``outstanding'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are readily accessible to 
geographies and individuals of different income levels in its assessment 
area(s);
    (B) To the extent changes have been made, its record of opening and 
closing branches has improved the accessibility of its delivery systems, 
particularly in low- or moderate-income geographies or to low- or 
moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) are 
tailored to the convenience and needs of its assessment area(s), 
particularly low- or moderate-income geographies or low- or moderate-
income individuals; and
    (D) It is a leader in providing community development services.
    (ii) High satisfactory. The Board rates a bank's service performance 
``high satisfactory'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are accessible to geographies and 
individuals of different income levels in its assessment area(s);
    (B) To the extent changes have been made, its record of opening and 
closing branches has not adversely affected the accessibility of its 
delivery systems, particularly in low- and moderate-income geographies 
and to low- and moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) do 
not vary in a way that inconveniences its assessment area(s), 
particularly low- and moderate-income geographies and low- and moderate-
income individuals; and
    (D) It provides a relatively high level of community development 
services.
    (iii) Low satisfactory. The Board rates a bank's service performance 
``low satisfactory'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are reasonably accessible to 
geographies and individuals of different income levels in its assessment 
area(s);
    (B) To the extent changes have been made, its record of opening and 
closing branches has generally not adversely affected the accessibility 
of its delivery systems, particularly in low- and moderate-income 
geographies and to low- and moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) do 
not vary in a way that inconveniences its assessment area(s), 
particularly low- and moderate-income geographies and low- and moderate-
income individuals; and
    (D) It provides an adequate level of community development services.
    (iv) Needs to improve. The Board rates a bank's service performance 
``needs to improve'' if, in general, the bank demonstrates:
    (A) Its service delivery systems are unreasonably inaccessible to 
portions of its assessment area(s), particularly to low- or moderate-
income geographies or to low- or moderate-income individuals;
    (B) To the extent changes have been made, its record of opening and 
closing branches has adversely affected the accessibility its delivery 
systems, particularly in low- or moderate-income geographies or to low- 
or moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) vary 
in a way that inconveniences its assessment area(s), particularly low- 
or moderate-income geographies or low- or moderate-income individuals; 
and
    (D) It provides a limited level of community development services.
    (v) Substantial noncompliance. The Board rates a bank's service 
performance as being in ``substantial noncompliance'' if, in general, 
the bank demonstrates:
    (A) Its service delivery systems are unreasonably inaccessible to 
significant portions of its assessment area(s), particularly to low- or 
moderate-income geographies or to low- or moderate-income individuals;
    (B) To the extent changes have been made, its record of opening and 
closing branches has significantly adversely affected the accessibility 
of its delivery systems, particularly in low- or moderate-income 
geographies or to low- or moderate-income individuals;
    (C) Its services (including, where appropriate, business hours) vary 
in a way that significantly inconveniences its assessment area(s), 
particularly low- or moderate-income geographies or low- or moderate-
income individuals; and
    (D) It provides few, if any, community development services.
    (c) Wholesale or limited purpose banks. The Board assigns each 
wholesale or limited purpose bank's community development performance 
one of the four following ratings.
    (1) Outstanding. The Board rates a wholesale or limited purpose 
bank's community development performance ``outstanding'' if, in general, 
it demonstrates:
    (i) A high level of community development loans, community 
development services, or qualified investments, particularly investments 
that are not routinely provided by private investors;
    (ii) Extensive use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Excellent responsiveness to credit and community development 
needs in its assessment area(s).
    (2) Satisfactory. The Board rates a wholesale or limited purpose 
bank's community

[[Page 643]]

development performance ``satisfactory'' if, in general, it 
demonstrates:
    (i) An adequate level of community development loans, community 
development services, or qualified investments, particularly investments 
that are not routinely provided by private investors;
    (ii) Occasional use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Adequate responsiveness to credit and community development 
needs in its assessment area(s).
    (3) Needs to improve. The Board rates a wholesale or limited purpose 
bank's community development performance as ``needs to improve'' if, in 
general, it demonstrates:
    (i) A poor level of community development loans, community 
development services, or qualified investments, particularly investments 
that are not routinely provided by private investors;
    (ii) Rare use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Poor responsiveness to credit and community development needs 
in its assessment area(s).
    (4) Substantial noncompliance. The Board rates a wholesale or 
limited purpose bank's community development performance in 
``substantial noncompliance'' if, in general, it demonstrates:
    (i) Few, if any, community development loans, community development 
services, or qualified investments, particularly investments that are 
not routinely provided by private investors;
    (ii) No use of innovative or complex qualified investments, 
community development loans, or community development services; and
    (iii) Very poor responsiveness to credit and community development 
needs in its assessment area(s).
    (d) Banks evaluated under the small bank performance standards--(1) 
Lending test ratings. (i) Eligibility for a satisfactory lending test 
rating. The Board rates a small bank's lending performance 
``satisfactory'' if, in general, the bank demonstrates:
    (A) A reasonable loan-to-deposit ratio (considering seasonal 
variations) given the bank's size, financial condition, the credit needs 
of its assessment area(s), and taking into account, as appropriate, 
other lending-related activities such as loan originations for sale to 
the secondary markets and community development loans and qualified 
investments;
    (B) A majority of its loans and, as appropriate, other lending-
related activities, are in its assessment area;
    (C) A distribution of loans to and, as appropriate, other lending-
related activities for individuals of different income levels (including 
low- and moderate-income individuals) and businesses and farms of 
different sizes that is reasonable given the demographics of the bank's 
assessment area(s);
    (D) A record of taking appropriate action, when warranted, in 
response to written complaints, if any, about the bank's performance in 
helping to meet the credit needs of its assessment area(s); and
    (E) A reasonable geographic distribution of loans given the bank's 
assessment area(s).
    (ii) Eligibility for an ``outstanding'' lending test rating. A small 
bank that meets each of the standards for a ``satisfactory'' rating 
under this paragraph and exceeds some or all of those standards may 
warrant consideration for a lending test rating of ``outstanding.''
    (iii) Needs to improve or substantial noncompliance ratings. A small 
bank may also receive a lending test rating of ``needs to improve'' or 
``substantial noncompliance'' depending on the degree to which its 
performance has failed to meet the standard for a ``satisfactory'' 
rating.
    (2) Community development test ratings for intermediate small 
banks--(i) Eligibility for a satisfactory community development test 
rating. The Board rates an intermediate small bank's community 
development performance ``satisfactory'' if the bank demonstrates 
adequate responsiveness to the community development needs of its 
assessment area(s) through community development loans, qualified 
investments, and community development services. The adequacy of the 
bank's response will depend on its capacity for such community 
development activities, its assessment area's need for such community 
development activities, and the availability of such opportunities for 
community development in the bank's assessment area(s).
    (ii) Eligibility for an outstanding community development test 
rating. The Board rates an intermediate small bank's community 
development performance ``outstanding'' if the bank demonstrates 
excellent responsiveness to community development needs in its 
assessment area(s) through community development loans, qualified 
investments, and community development services, as appropriate, 
considering the bank's capacity and the need and availability of such 
opportunities for community development in the bank's assessment 
area(s).
    (iii) Needs to improve or substantial noncompliance ratings. An 
intermediate small bank may also receive a community development test 
rating of ``needs to improve'' or ``substantial noncompliance'' 
depending on the degree to which its performance has failed to meet the 
standards for a ``satisfactory'' rating.
    (3) Overall rating--(i) Eligibility for a satisfactory overall 
rating. No intermediate small bank may receive an assigned overall 
rating

[[Page 644]]

of ``satisfactory'' unless it receives a rating of at least 
``satisfactory'' on both the lending test and the community development 
test.
    (ii) Eligibility for an outstanding overall rating. (A) An 
intermediate small bank that receives an ``outstanding'' rating on one 
test and at least ``satisfactory'' on the other test may receive an 
assigned overall rating of ``outstanding.''
    (B) A small bank that is not an intermediate small bank that meets 
each of the standards for a ``satisfactory'' rating under the lending 
test and exceeds some or all of those standards may warrant 
consideration for an overall rating of ``outstanding.'' In assessing 
whether a bank's performance is ``outstanding,'' the Board considers the 
extent to which the bank exceeds each of the performance standards for a 
``satisfactory'' rating and its performance in making qualified 
investments and its performance in providing branches and other services 
and delivery systems that enhance credit availability in its assessment 
area(s).
    (iii) Needs to improve or substantial noncompliance overall ratings. 
A small bank may also receive a rating of ``needs to improve'' or 
``substantial noncompliance'' depending on the degree to which its 
performance has failed to meet the standards for a ``satisfactory'' 
rating.
    (e) Strategic plan assessment and rating--(1) Satisfactory goals. 
The Board approves as ``satisfactory'' measurable goals that adequately 
help to meet the credit needs of the bank's assessment area(s).
    (2) Outstanding goals. If the plan identifies a separate group of 
measurable goals that substantially exceed the levels approved as 
``satisfactory,'' the Board will approve those goals as ``outstanding.''
    (3) Rating. The Board assesses the performance of a bank operating 
under an approved plan to determine if the bank has met its plan goals:
    (i) If the bank substantially achieves its plan goals for a 
satisfactory rating, the Board will rate the bank's performance under 
the plan as ``satisfactory.''
    (ii) If the bank exceeds its plan goals for a satisfactory rating 
and substantially achieves its plan goals for an outstanding rating, the 
Board will rate the bank's performance under the plan as 
``outstanding.''
    (iii) If the bank fails to meet substantially its plan goals for a 
satisfactory rating, the Board will rate the bank as either ``needs to 
improve'' or ``substantial noncompliance,'' depending on the extent to 
which it falls short of its plan goals, unless the bank elected in its 
plan to be rated otherwise, as provided in Sec. 228.27(f)(4).

[Reg. BB, 60 FR 22198, May 4, 1995, as amended at 70 FR 44268, Aug. 2, 
2005]



                 Sec. Appendix B to Part 228--CRA Notice

    (a) Notice for main offices and, if an interstate bank, one branch 
office in each state.

                    Community Reinvestment Act Notice

    Under the Federal Community Reinvestment Act (CRA), the Federal 
Reserve Board (Board) evaluates our record of helping to meet the credit 
needs of this community consistent with safe and sound operations. The 
Board also takes this record into account when deciding on certain 
applications submitted by us.
    Your involvement is encouraged.
    You are entitled to certain information about our operations and our 
performance under the CRA, including, for example, information about our 
branches, such as their location and services provided at them; the 
public section of our most recent CRA Performance Evaluation, prepared 
by the Federal Reserve Bank of -------- (Reserve Bank); and comments 
received from the public relating to our performance in helping to meet 
community credit needs, as well as our responses to those comments. You 
may review this information today.
    At least 30 days before the beginning of each quarter, the Federal 
Reserve System publishes a list of the banks that are scheduled for CRA 
examination by the Reserve Bank in that quarter. This list is available 
from (title of responsible official), Federal Reserve Bank of -------- 
(address). You may send written comments about our performance in 
helping to meet community credit needs to (name and address of official 
at bank) and (title of responsible official), Federal Reserve Bank of --
------ (address). Your letter, together with any response by us, will be 
considered by the Federal Reserve System in evaluating our CRA 
performance and may be made public.
    You may ask to look at any comments received by the Reserve Bank. 
You may also request from the Reserve Bank an announcement of our 
applications covered by the CRA filed with the Reserve Bank. We are an 
affiliate of (name of holding company), a bank holding company. You may 
request from (title of responsible official), Federal Reserve Bank of --
------ (address) an announcement of applications covered by the CRA 
filed by bank holding companies.
    (b) Notice for branch offices.

                    Community Reinvestment Act Notice

    Under the Federal Community Reinvestment Act (CRA), the Federal 
Reserve Board (Board) evaluates our record of helping to meet the credit 
needs of this community consistent with safe and sound operations. The 
Board also takes this record into account when deciding on certain 
applications submitted by us.

[[Page 645]]

    Your involvement is encouraged.
    You are entitled to certain information about our operations and our 
performance under the CRA. You may review today the public section of 
our most recent CRA evaluation, prepared by the Federal Reserve Bank of 
-------- (address), and a list of services provided at this branch. You 
may also have access to the following additional information, which we 
will make available to you at this branch within five calendar days 
after you make a request to us: (1) a map showing the assessment area 
containing this branch, which is the area in which the Board evaluates 
our CRA performance in this community; (2) information about our 
branches in this assessment area; (3) a list of services we provide at 
those locations; (4) data on our lending performance in this assessment 
area; and (5) copies of all written comments received by us that 
specifically relate to our CRA performance in this assessment area, and 
any responses we have made to those comments. If we are operating under 
an approved strategic plan, you may also have access to a copy of the 
plan.
    [If you would like to review information about our CRA performance 
in other communities served by us, the public file for our entire bank 
is available at (name of office located in state), located at 
(address).]
    At least 30 days before the beginning of each quarter, the Federal 
Reserve System publishes a list of the banks that are scheduled for CRA 
examination by the Reserve Bank in that quarter. This list is available 
from (title of responsible official), Federal Reserve Bank of -------- 
(address). You may send written comments about our performance in 
helping to meet community credit needs to (name and address of official 
at bank) and (title of responsible official), Federal Reserve Bank of --
------ (address). Your letter, together with any response by us, will be 
considered by the Federal Reserve System in evaluating our CRA 
performance and may be made public.
    You may ask to look at any comments received by the Reserve Bank. 
You may also request from the Reserve Bank an announcement of our 
applications covered by the CRA filed with the Reserve Bank. We are an 
affiliate of (name of holding company), a bank holding company. You may 
request from (title of responsible official), Federal Reserve Bank of --
------ (address) an announcement of applications covered by the CRA 
filed by bank holding companies.

[Reg. BB, 60 FR 22200, May 4, 1995]



PART 229_AVAILABILITY OF FUNDS AND COLLECTION OF CHECKS (REGULATION CC)--Table 

of Contents




                            Subpart A_General

Sec.
229.1 Authority and purpose; organization.
229.2 Definitions.
229.3 Administrative enforcement.

  Subpart B_Availability of Funds and Disclosure of Funds Availability 
                                Policies

229.10 Next-day availability.
229.11 [Reserved]
229.12 Availability schedule.
229.13 Exceptions.
229.14 Payment of interest.
229.15 General disclosure requirements.
229.16 Specific availability policy disclosure.
229.17 Initial disclosures.
229.18 Additional disclosure requirements.
229.19 Miscellaneous.
229.20 Relation to state law.
229.21 Civil liability.

                     Subpart C_Collection of Checks

229.30 Paying bank's responsibility for return of checks.
229.31 Returning bank's responsibility for return of checks.
229.32 Depositary bank's responsibility for returned checks.
229.33 Notice of nonpayment.
229.34 Warranties.
229.35 Indorsements.
229.36 Presentment and issuance of checks.
229.37 Variation by agreement.
229.38 Liability.
229.39 Insolvency of bank.
229.40 Effect of merger transaction.
229.41 Relation to State law.
229.42 Exclusions.
229.43 Checks payable in Guam, American Samoa, and the Northern Mariana 
          Islands.

                       Subpart D_Substitute Checks

229.51 General provisions governing substitute checks.
229.52 Substitute check warranties.
229.53 Substitute check indemnity.
229.54 Expedited recredit for consumers.
229.55 Expedited recredit for banks.
229.56 Liability.
229.57 Consumer awareness.
229.58 Mode of delivery of information.
229.59 Relation to other law.
229.60 Variation by agreement.

Appendix A to Part 229--Routing Number Guide to Next-Day Availability 
          Checks and Local Checks

[[Page 646]]

Appendix B to Part 229--[Reserved]
Appendix C to Part 229--Model Availability Policy Disclosures, Clauses, 
          and Notices; Model Substitute Check Policy Disclosure and 
          Notices
Appendix D to Part 229--Indorsement, Reconverting Bank Identification, 
          and Truncating Bank Identification Standards
Appendix E to Part 229--Commentary
Appendix F to Part 229--Official Board Interpretations; Preemption 
          Determinations

    Authority: 12 U.S.C. 4001-4010, 12 U.S.C. 5001-5018.

    Source: 53 FR 19433, May 27, 1988, unless otherwise noted.



                            Subpart A_General



Sec. 229.1  Authority and purpose; organization.

    (a) Authority and purpose. This part is issued by the Board of 
Governors of the Federal Reserve System (Board) to implement the 
Expedited Funds Availability Act (12 U.S.C. 4001-4010) (the EFA Act) and 
the Check Clearing for the 21st Century Act (12 U.S.C. 5001-5018) (the 
Check 21 Act).
    (b) Organization. This part is divided into subparts and appendices 
as follows--
    (1) Subpart A contains general information. It sets forth--
    (i) The authority, purpose, and organization;
    (ii) Definition of terms; and
    (iii) Authority for administrative enforcement of this part's 
provisions.
    (2) Subpart B of this part contains rules regarding the duty of 
banks to make funds deposited into accounts available for withdrawal, 
including availability schedules. Subpart B of this part also contains 
rules regarding exceptions to the schedules, disclosure of funds 
availability policies, payment of interest, liability of banks for 
failure to comply with Subpart B of this part, and other matters.
    (3) Subpart C of this part contains rules to expedite the collection 
and return of checks by banks. These rules cover the direct return of 
checks, the manner in which the paying bank and returning banks must 
return checks to the depositary bank, notification of nonpayment by the 
paying bank, indorsement and presentment of checks, same-day settlement 
for certain checks, the liability of banks for failure to comply with 
subpart C of this part, and other matters.
    (4) Subpart D of this part contains rules relating to substitute 
checks. These rules address the creation and legal status of substitute 
checks; the substitute check warranties and indemnity; expedited 
recredit procedures for resolving improper charges and warranty claims 
associated with substitute checks provided to consumers; and the 
disclosure and notices that banks must provide.

[53 FR 19433, May 27, 1988, as amended at 57 FR 36598, Aug. 14, 1992; 57 
FR 46972, Oct. 14, 1992; Reg. CC, 60 FR 51670, Oct. 3, 1995; 69 FR 
47309, Aug. 4, 2004]



Sec. 229.2  Definitions.

    As used in this part, and unless the context requires otherwise, the 
following terms have the meanings set forth in this section, and the 
terms not defined in this section have the meanings set forth in the 
Uniform Commercial Code:
    (a) Account. (1) Except as provided in paragraphs (a)(2) and (a)(3) 
of this section, account means a deposit as defined in 12 CFR 
204.2(a)(1)(i) that is a transaction account as described in 12 CFR 
204.2(e). As defined in these sections, account generally includes 
accounts at a bank from which the account holder is permitted to make 
transfers or withdrawals by negotiable or transferable instrument, 
payment order of withdrawal, telephone transfer, electronic payment, or 
other similar means for the purpose of making payments or transfers to 
third persons or others. Account also includes accounts at a bank from 
which the account holder may make third party payments at an ATM, remote 
service unit, or other electronic device, including by debit card, but 
the term does not include savings deposits or accounts described in 12 
CFR 204.2(d)(2) even though such accounts permit third party transfers. 
An account may be in the form of--
    (i) A demand deposit account,
    (ii) A negotiable order of withdrawal account,
    (iii) A share draft account,

[[Page 647]]

    (iv) An automatic transfer account, or
    (v) Any other transaction account described in 12 CFR 204.2(e).
    (2) For purposes of subpart B of this part and, in connection 
therewith, this subpart A, account does not include an account where the 
account holder is a bank, where the account holder is an office of an 
institution described in paragraphs (e)(1) through (e)(6) of this 
section or an office of a ``foreign bank'' as defined in section 1(b) of 
the International Banking Act (12 U.S.C. 3101) that is located outside 
the United States, or where the direct or indirect account holder is the 
Treasury of the United States.
    (3) For purposes of subpart D of this part and, in connection 
therewith, this subpart A, account means any deposit, as defined in 12 
CFR 204.2(a)(1)(i), at a bank, including a demand deposit or other 
transaction account and a savings deposit or other time deposit, as 
those terms are defined in 12 CFR 204.2.
    (b) Automated clearinghouse or ACH means a facility that processes 
debit and credit transfers under rules established by a Federal Reserve 
Bank operating circular on automated clearinghouse items or under rules 
of an automated clearinghouse association.
    (c) Automated teller machine or ATM means an electronic device at 
which a natural person may make deposits to an account by cash or check 
and perform other account transactions.
    (d) Available for withdrawal with respect to funds deposited means 
available for all uses generally permitted to the customer for actually 
and finally collected funds under the bank's account agreement or 
policies, such as for payment of checks drawn on the account, 
certification of checks drawn on the account, electronic payments, 
withdrawals by cash, and transfers between accounts.
    (e) Bank means--
    (1) An insured bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 18I3) or a bank that is eligible to apply to 
become an insured bank under section 5 of that Act (12 U.S.C. 1815);
    (2) A mutual savings bank as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813);
    (3) A savings bank as defined in section 3 of the Federal Deposit 
Insurance Act (12 U.S.C. 1813);
    (4) An insured credit union as defined in section 101 of the Federal 
Credit Union Act (12 U.S.C. 1752) or a credit union that is eligible to 
make application to become an insured credit union under section 201 of 
that Act (12 U.S.C. 1781);
    (5) A member as defined in section 2 of the Federal Home Loan Bank 
Act (12 U.S.C. 1422);
    (6) A savings association as defined in section 3 of the Federal 
Deposit Insurance Act (12 U.S.C. 1813) that is an insured depository 
institution as defined in section 3 of that Act (12 U.S.C. 1813(c)(2)) 
or that is eligible to apply to become an insured depository institution 
under section 5 of that Act (12 U.S.C. 1815); or
    (7) An agency or a branch of a foreign bank as defined in section 
l(b) of the International Banking Act (12 U.S.C. 3101).

For purposes of subparts C and D of this part and, in connection 
therewith, this subpart A, the term bank also includes any person 
engaged in the business of banking, as well as a Federal Reserve Bank, a 
Federal Home Loan Bank, and a state or unit of general local government 
to the extent that the state or unit of general local government acts as 
a paying bank. Unless otherwise specified, the term bank includes all of 
a bank's offices in the United States, but not offices located outside 
the United States.

    Note: For purposes of subpart D of this part and, in connection 
therewith, this subpart A, bank also includes the Treasury of the United 
States or the United States Postal Service to the extent that the 
Treasury or the Postal Service acts as a paying bank.

    (f) Banking day means that part of any business day on which an 
office of a bank is open to the public for carrying on substantially all 
of its banking functions.
    (g) Business day means a calendar day other than a Saturday or a 
Sunday, January 1, the third Monday in January, the third Monday in 
February, the last Monday in May, July 4, the first Monday in September, 
the second Monday in October, November 11, the

[[Page 648]]

fourth Thursday in November, or December 25. If January 1, July 4, 
November 11, or December 25 fall on a Sunday, the next Monday is not a 
business day.
    (h) Cash means United States coins and currency.
    (i) Cashier's check means a check that is--
    (1) Drawn on a bank;
    (2) Signed by an officer or employee of the bank on behalf of the 
bank as drawer;
    (3) A direct obligation of the bank; and
    (4) Provided to a customer of the bank or acquired from the bank for 
remittance purposes.
    (j) Certified check means a check with respect to which the drawee 
bank certifies by signature on the check of an officer or other 
authorized employee of the bank that--
    (1) (i) The signature of the drawer on the check is genuine; and
    (ii) The bank has set aside funds that--
    (A) Are equal to the amount of the check, and
    (B) Will be used to pay the check; or
    (2) The bank will pay the check upon presentment.
    (k) Check means--
    (1) A negotiable demand draft drawn on or payable through or at an 
office of a bank;
    (2) A negotiable demand draft drawn on a Federal Reserve Bank or a 
Federal Home Loan Bank;
    (3) A negotiable demand draft drawn on the Treasury of the United 
States;
    (4) A demand draft drawn on a state government or unit of general 
local government that is not payable through or at a bank;
    (5) A United States Postal Service money order; or
    (6) A traveler's check drawn on or payable through or at a bank.
    (7) The term check includes an original check and a substitute 
check.

    Note: The term check does not include a noncash item or an item 
payable in a medium other than United States money. A draft may be a 
check even though it is described on its face by another term, such as 
money order. For purposes of subparts C and D, and in connection 
therewith, subpart A, of this part, the term check also includes a 
demand draft of the type described above that is nonnegotiable.

    (l) [Reserved]
    (m) Check processing region means the geographical area served by an 
office of a Federal Reserve Bank for purposes of its check processing 
activities.
    (n) Consumer account means any account used primarily for personal, 
family, or household purposes.
    (o) Depositary bank means the first bank to which a check is 
transferred even though it is also the paying bank or the payee. A check 
deposited in an account is deemed to be transferred to the bank holding 
the account into which the check is deposited, even though the check is 
physically received and indorsed first by another bank.
    (p) Electronic payment means a wire transfer or an ACH credit 
transfer.
    (q) Forward collection means the process by which a bank sends a 
check on a cash basis to a collecting bank for settlement or to the 
paying bank for payment.
    (r) Local check means a check payable by or at a local paying bank, 
or a check payable by a nonbank payor and payable through a local paying 
bank.
    (s) Local paying bank means a paying bank that is located in the 
same check-processing region as the physical location of the branch, 
contractual branch, or proprietary ATM of the depositary bank in which 
that check was deposited.
    (t) Merger transaction means--
    (1) A merger or consolidation of two or more banks; or
    (2) The transfer of substantially all of the assets of one or more 
banks or branches to another bank in consideration of the assumption by 
the acquiring bank of substantially all of the liabilities of the 
transferring banks, including the deposit liabilities.
    (u) Noncash item means an item that would otherwise be a check, 
except that--
    (1) A passbook, certificate, or other document is attached;
    (2) It is accompanied by special instructions, such as a request for 
special advice of payment or dishonor;
    (3) It consists of more than a single thickness of paper, except a 
check that qualifies for handling by automated check processing 
equipment; or

[[Page 649]]

    (4) It has not been preprinted or post-encoded in magnetic ink with 
the routing number of the paying bank.
    (v) Nonlocal check means a check payable by, through, or at a 
nonlocal paying bank.
    (w) Nonlocal paying bank means a paying bank that is not a local 
paying bank with respect to the depositary bank.
    (x) Nonproprietary ATM means an ATM that is not a proprietary ATM.
    (y) [Reserved]
    (z) Paying bank means--
    (1) The bank by which a check is payable, unless the check is 
payable at another bank and is sent to the other bank for payment or 
collection;
    (2) The bank at which a check is payable and to which it is sent for 
payment or collection;
    (3) The Federal Reserve Bank or Federal Home Loan Bank by which a 
check is payable;
    (4) The bank through which a check is payable and to which it is 
sent for payment or collection, if the check is not payable by a bank; 
or
    (5) The state or unit of general local government on which a check 
is drawn and to which it is sent for payment or collection.

For purposes of subparts C and D, and in connection therewith, subpart 
A, paying bank includes the bank through which a check is payable and to 
which the check is sent for payment or collection, regardless of whether 
the check is payable by another bank, and the bank whose routing number 
appears on a check in fractional or magnetic form and to which the check 
is sent for payment or collection.

    Note: For purposes of subpart D of this part and, in connection 
therewith, this subpart A, paying bank also includes the Treasury of the 
United States or the United States Postal Service for a check that is 
payable by that entity and that is sent to that entity for payment or 
collection.

    (aa) Proprietary ATM means an ATM that is--
    (1) Owned or operated by, or operated exclusively for, the 
depositary bank;
    (2) Located on the premises (including the outside wall) of the 
depositary bank; or
    (3) Located within 50 feet of the premises of the depositary bank, 
and not identified as being owned or operated by another entity.
    If more than one bank meets the owned or operated criterion of 
paragraph (aa)(1) of this section, the ATM is considered proprietary to 
the bank that operates it.
    (bb) Qualified returned check means a returned check that is 
prepared for automated return to the depositary bank by placing the 
check in a carrier envelope or placing a strip on the check and encoding 
the strip or envelope in magnetic ink. A qualified returned check need 
not contain other elements of a check drawn on the depositary bank, such 
as the name of the depositary bank.
    (cc) Returning bank means a bank (other than the paying or 
depositary bank) handling a returned check or notice in lieu of return. 
A returning bank is also a collecting bank for purposes of UCC 4-202(b).
    (dd) Routing number means--
    (1) The number printed on the face of a check in fractional form on 
in nine-digit form; or
    (2) The number in a bank's indorsement in fractional or nine-digit 
form.
    (ee) Similarly situated bank means a bank of similar size, located 
in the same community, and with similar check handling activities as the 
paying bank or returning bank.
    (ff) State means a state, the District of Columbia, Puerto Rico, or 
the U.S. Virgin Islands. For purposes of subpart D of this part and, in 
connection therewith, this subpart A, state also means Guam, American 
Samoa, the Trust Territory of the Pacific Islands, the Northern Mariana 
Islands, and any other territory of the United States.
    (gg) Teller's check means a check provided to a customer of a bank 
or acquired from a bank for remittance purposes, that is drawn by the 
bank, and drawn on another bank or payable through or at a bank.
    (hh) Traveler's check means an instrument for the payment of money 
that--
    (1) Is drawn on or payable through or at a bank;
    (2) Is designated on its face by the term traveler's check or by any 
substantially similar term or is commonly known and marketed as a 
traveler's

[[Page 650]]

check by a corporation or bank that is an issuer of traveler's checks;
    (3) Provides for a specimen signature of the purchaser to be 
completed at the time of purchase; and
    (4) Provides for a countersignature of the purchaser to be completed 
at the time of negotiation.
    (ii) Uniform Commercial Code, Code, or U.C.C. means the Uniform 
Commercial Code as adopted in a state.
    (jj) United States means the states, including the District of 
Columbia, the U.S. Virgin Islands, and Puerto Rico.
    (kk) Unit of general local government means any city, county, 
parish, town, township, village, or other general purpose political 
subdivision of a state. The term does not include special purpose units 
of government, such as school districts or water districts.
    (ll) Wire transfer means an unconditional order to a bank to pay a 
fixed or determinable amount of money to a beneficiary upon receipt or 
on a day stated in the order, that is transmitted by electronic or other 
means through Fedwire, the Clearing House Interbank Payments System, 
other similar network, between banks, or on the books of a bank. Wire 
transfer does not include an electronic fund transfer as defined in 
section 903(6) of the Electronic Fund Transfer Act (15 U.S.C. 1693a(6)).
    (mm) Fedwire has the same meaning as that set forth in Sec. 
210.26(e) of this chapter.
    (nn) Good faith means honesty in fact and observance of reasonable 
commercial standards of fair dealing.
    (oo) Interest compensation means an amount of money calculated at 
the average of the Federal Funds rates published by the Federal Reserve 
Bank of New York for each of the days for which interest compensation 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 last preceding day for which there is a published rate.
    (pp) Contractual branch, with respect to a bank, means a branch of 
another bank that accepts a deposit on behalf of the first bank.
    (qq) Claimant bank means a bank that submits a claim for a recredit 
for a substitute check to an indemnifying bank under Sec. 229.55.
    (rr) Collecting bank means any bank handling a check for forward 
collection, except the paying bank.
    (ss) Consumer means a natural person who--
    (1) With respect to a check handled for forward collection, draws 
the check on a consumer account; or
    (2) With respect to a check handled for return, deposits the check 
into or cashes the check against a consumer account.
    (tt) Customer means a person having an account with a bank.
    (uu) Indemnifying bank means a bank that provides an indemnity under 
Sec. 229.53 with respect to a substitute check.
    (vv) Magnetic ink character recognition line and MICR line mean the 
numbers, which may include the routing number, account number, check 
number, check amount, and other information, that are printed near the 
bottom of a check in magnetic ink in accordance with American National 
Standard Specifications for Placement and Location of MICR Printing, 
X9.13 (hereinafter ANS X9.13) for an original check and American 
National Standard Specifications for an Image Replacement Document--IRD, 
X9.100-140 (hereinafter ANS X9.100-140) for a substitute check (unless 
the Board by rule or order determines that different standards apply).
    (ww) Original check means the first paper check issued with respect 
to a particular payment transaction.
    (xx) Paper or electronic representation of a substitute check means 
any copy of or information related to a substitute check that a bank 
handles for forward collection or return, charges to a customer's 
account, or provides to a person as a record of a check payment made by 
the person.
    (yy) Person means a natural person, corporation, unincorporated 
company, partnership, government unit or instrumentality, trust, or any 
other entity or organization.
    (zz) Reconverting bank means--
    (1) The bank that creates a substitute check; or
    (2) With respect to a substitute check that was created by a person 
that is not a bank, the first bank that transfers, presents, or returns 
that substitute check or, in lieu thereof, the

[[Page 651]]

first paper or electronic representation of that substitute check.
    (aaa) Substitute check means a paper reproduction of an original 
check that--
    (1) Contains an image of the front and back of the original check;
    (2) Bears a MICR line that, except as provided under ANS X9.100-140 
(unless the Board by rule or order determines that a different standard 
applies), contains all the information appearing on the MICR line of the 
original check at the time that the original check was issued and any 
additional information that was encoded on the original check's MICR 
line before an image of the original check was captured;
    (3) Conforms in paper stock, dimension, and otherwise with ANS 
X9.100-140 (unless the Board by rule or order determines that a 
different standard applies); and
    (4) Is suitable for automated processing in the same manner as the 
original check.
    (bbb) Sufficient copy and copy. (1) A sufficient copy is a copy of 
an original check that accurately represents all of the information on 
the front and back of the original check as of the time the original 
check was truncated or is otherwise sufficient to determine whether or 
not a claim is valid.
    (2) A copy of an original check means any paper reproduction of an 
original check, including a paper printout of an electronic image of the 
original check, a photocopy of the original check, or a substitute 
check.
    (ccc) Transfer and consideration. The terms transfer and 
consideration have the meanings set forth in the Uniform Commercial Code 
and in addition, for purposes of subpart D--
    (1) The term transfer with respect to a substitute check or a paper 
or electronic representation of a substitute check means delivery of the 
substitute check or other representation of the substitute check by a 
bank to a person other than a bank; and
    (2) A bank that transfers a substitute check or a paper or 
electronic representation of a substitute check directly to a person 
other than a bank has received consideration for the substitute check or 
other paper or electronic representation of the substitute check if it 
has charged, or has the right to charge, the person's account or 
otherwise has received value for the original check, a substitute check, 
or a representation of the original check or substitute check.
    (ddd) Truncate means to remove an original check from the forward 
collection or return process and send to a recipient, in lieu of such 
original check, a substitute check or, by agreement, information 
relating to the original check (including data taken from the MICR line 
of the original check or an electronic image of the original check), 
whether with or without the subsequent delivery of the original check.
    (eee) Truncating bank means--
    (1) The bank that truncates the original check; or
    (2) If a person other than a bank truncates the original check, the 
first bank that transfers, presents, or returns, in lieu of such 
original check, a substitute check or, by agreement with the recipient, 
information relating to the original check (including data taken from 
the MICR line of the original check or an electronic image of the 
original check), whether with or without the subsequent delivery of the 
original check.
    (fff) Remotely created check means a check that is not created by 
the paying bank and that does not bear a signature applied, or purported 
to be applied, by the person on whose account the check is drawn. For 
purposes of this definition, ``account'' means an account as defined in 
paragraph (a) of this section as well as a credit or other arrangement 
that allows a person to draw checks that are payable by, through, or at 
a bank.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 53 
FR 44324, Nov. 2, 1988; Reg. CC, 54 FR 13850, Apr. 6, 1989; 57 FR 46972, 
Oct. 14, 1992; 58 FR 2, Jan. 4, 1993; 60 FR 51670, Oct. 3, 1995; 62 FR 
13809, Mar. 24, 1997; 69 FR 47309, 47310, Aug. 4, 2004; 70 FR 71225, 
Nov. 28, 2005]



Sec. 229.3  Administrative enforcement.

    (a) Enforcement agencies. Compliance with this part is enforced 
under--
    (1) Section 8 of the Federal Deposit Insurance Act (12 U.S.C. 1818 
et seq.) in the case of--

[[Page 652]]

    (i) National banks, and Federal branches and Federal agencies of 
foreign banks, by the Office of the Comptroller of the Currency;
    (ii) Member banks of the Federal Reserve System (other than national 
banks), and offices, branches, and agencies of foreign banks located in 
the United States (other than Federal branches, Federal agencies, and 
insured State branches of foreign banks), by the Board; and
    (iii) Banks insured by the Federal Deposit Insurance Corporation 
(other than members of the Federal Reserve System) and insured State 
branches of foreign banks, by the Board of Directors of the Federal 
Deposit Insurance Corporation;
    (2) Section 8 of the Federal Deposit Insurance Act, by the Director 
of the Office of Thrift Supervision in the case of savings associations 
the deposits of which are insured by the Federal Deposit Insurance 
Corporation; and
    (3) The Federal Credit Union Act (12 U.S.C. 1751 et seq.) by the 
National Credit Union Administration Board with respect to any federal 
credit union or credit union insured by the National Credit Union Share 
Insurance Fund.

The terms used in paragraph (a)(1) of this section that are not defined 
in this part or otherwise defined in section 3(s) of the Federal Deposit 
Insurance Act (12 U.S.C. 1813(s)) shall have the meaning given to them 
in section 1(b) of the International Banking Act of 1978 (12 U.S.C. 
3101).
    (b) Additional powers. (1) For the purposes of the exercise by any 
agency referred to in paragraph (a) of this section of its powers under 
any statute referred to in that paragraph, a violation of any 
requirement imposed under the EFA Act is deemed to be a violation of a 
requirement imposed under that statute.
    (2) In addition to its powers under any provision of law 
specifically referred to in paragraph (a) of this section, each of the 
agencies referred to in that paragraph may exercise, for purposes of 
enforcing compliance with any requirement imposed under this part, any 
other authority conferred on it by law.
    (c) Enforcement by the Board. (1) Except to the extent that 
enforcement of the requirements imposed under this part is specifically 
committed to some other government agency, the Board shall enforce such 
requirements.
    (2) If the Board determines that--
    (i) Any bank that is not a bank described in paragraph (a) of this 
section; or
    (ii) Any other person subject to the authority of the Board under 
the EFA Act and this part,

has failed to comply with any requirement imposed by this part, the 
Board may issue an order prohibiting any bank, any Federal Reserve Bank, 
or any other person subject to the authority of the Board from engaging 
in any activity or transaction that directly or indirectly involves such 
noncomplying bank or person (including any activity or transaction 
involving the receipt, payment, collection, and clearing of checks, and 
any related function of the payment system with respect to checks).

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 55 FR 21855, May 30, 
1990; 57 FR 36600, Aug. 14, 1992; 69 FR 47310, Aug. 4, 2004]



  Subpart B_Availability of Funds and Disclosure of Funds Availability 
                                Policies



Sec. 229.10  Next-day availability.

    (a) Cash deposits. (1) A bank shall make funds deposited in an 
account by cash available for withdrawal not later than the business day 
after the banking day on which the cash is deposited, if the deposit is 
made in person to an employee of the depositary bank.
    (2) A bank shall make funds deposited in an account by cash 
available for withdrawal not later than the second business day after 
the banking day on which the cash is deposited, if the deposit is not 
made in person to an employee of the depositary bank.
    (b) Electronic payments--(1) In general. A bank shall make funds 
received for deposit in an account by an electronic payment available 
for withdrawal not later than the business day after the banking day on 
which the bank received the electronic payment.

[[Page 653]]

    (2) When an electronic payment is received. An electronic payment is 
received when the bank receiving the payment has received both--
    (i) Payment in actually and finally collected funds; and
    (ii) Information on the account and amount to be credited.
    A bank receives an electronic payment only to the extent that the 
bank has received payment in actually and finally collected funds.
    (c) Certain check deposits--(1) General rule. A depositary bank 
shall make funds deposited in an account by check available for 
withdrawal not later than the business day after the banking day on 
which the funds are deposited, in the case of--
    (i) A check drawn on the Treasury of the United States and deposited 
in an account held by a payee of the check;
    (ii) A U.S. Postal Service money order deposited--
    (A) In an account held by a payee of the money order; and
    (B) In person to an employee of the depositary bank.
    (iii) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank and deposited--
    (A) In an account held by a payee of the check; and
    (B) In person to an employee of the depositary bank;
    (iv) A check drawn by a state or a unit of general local government 
and deposited--
    (A) In an account held by a payee of the check;
    (B) In a depositary bank located in the state that issued the check, 
or the same state as the unit of general local government that issued 
the check;
    (C) In person to an employee of the depositary bank; and
    (D) With a special deposit slip or deposit envelope, if such slip or 
envelope is required by the depositary bank under paragraph (c)(3) of 
this section.
    (v) A cashier's, certified, or teller's check deposited--
    (A) In an account held by a payee of the check;
    (B) In person to an employee of the depositary bank; and
    (C) With a special deposit slip or deposit envelope, if such slip or 
envelope is required by the depositary bank under paragraph (c)(3) of 
this section.
    (vi) A check deposited in a branch of the depositary bank and drawn 
on the same or another branch of the same bank if both branches are 
located in the same state or the same check processing region; and,
    (vii) The lesser of--
    (A) $100, or
    (B) The aggregate amount deposited on any one banking day to all 
accounts of the customer by check or checks not subject to next-day 
availability under paragraphs (c)(1) (i) through (vi) of this section.
    (2) Checks not deposited in person. A depositary bank shall make 
funds deposited in an account by check or checks available for 
withdrawal not later than the second business day after the banking day 
on which funds are deposited, in the case of a check deposit described 
in and that meets the requirements of paragraphs (c)(1) (ii), (iii), 
(iv), and (v), of this section, except that it is not deposited in 
person to an employee of the depositary bank.
    (3) Special deposit slip. (i) As a condition to making the funds 
available for withdrawal in accordance with this section, a depositary 
bank may require that a state or local government check or a cashier's, 
certified, or teller's check be deposited with a special deposit slip or 
deposit envelope that identifies the type of check.
    (ii) If a depositary bank requires the use of a special deposit slip 
or deposit envelope, the bank must either provide the special deposit 
slip or deposit envelope to its customers or inform its customers how 
the slip or envelope may be prepared or obtained and make the slip or 
envelope reasonably available.



Sec. 229.11  [Reserved]



Sec. 229.12  Availability schedule.

    (a) Effective date. The availability schedule contained in this 
section is effective September 1, 1990.
    (b) Local checks and certain other checks. Except as provided in 
paragraphs (d), (e), and (f) of this section, a depository bank shall 
make funds deposited in an account by a check available for withdrawal 
not later than the second business day following the

[[Page 654]]

banking day on which funds are deposited, in the case of--
    (1) A local check;
    (2) A check drawn on the Treasury of the United States that is not 
governed by the availability requirements of Sec. 229.10(c);
    (3) A U.S. Postal Service money order that is not governed by the 
availability requirements of Sec. 229.10(c); and
    (4) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank; a check drawn by a state or unit of general local government; or a 
cashier's, certified, or teller's check; if any check referred to in 
this paragraph (b)(4) is a local check that is not governed by the 
availability requirements of Sec. 229.10(c).
    (c) Nonlocal checks--(1) In general. Except as provided in 
paragraphs (d), (e), and (f) of this section, a depositary bank shall 
make funds deposited in an account by a check available for withdrawal 
not later than the fifth business day following the banking day on which 
funds are deposited, in the case of--
    (i) A nonlocal check; and
    (ii) A check drawn on a Federal Reserve Bank or Federal Home Loan 
Bank; a check drawn by a state or unit of general local government; a 
cashier's, certified, or teller's check; or a check deposited in a 
branch of the depositary bank and drawn on the same or another branch of 
the same bank, if any check referred to in this paragraph (c)(1)(ii) is 
a nonlocal check that is not governed by the availability requirements 
of Sec. 229.10(c).
    (2) Nonlocal checks specified in appendix B-2 to this part must be 
made available for withdrawal not later than the times prescribed in 
that appendix.
    (d) Time period adjustment for withdrawal by cash or similar means. 
A depositary bank may extend by one business day the time that funds 
deposited in an account by one or more checks subject to paragraphs (b), 
(c), or (f) of this section are available for withdrawal by cash or 
similar means. Similar means include electronic payment, issuance of a 
cashier's or teller's check, or certification of a check, or other 
irrevocable commitment to pay, but do not include the granting of credit 
to a bank, a Federal Reserve Bank, or a Federal Home Loan Bank that 
presents a check to the depositary bank for payment. A depositary bank 
shall, however, make $400 of these funds available for withdrawal by 
cash or similar means not later than 5:00 p.m. on the business day on 
which the funds are available under paragraphs (b), (c), or (f) of this 
section. This $400 is in addition to the $100 available under Sec. 
229.10(c)(1)(vii).
    (e) Extension of schedule for certain deposits in Alaska, Hawaii, 
Puerto Rico, and the U.S. Virgin Islands. The depositary bank may extend 
the time periods set forth in this section by one business day in the 
case of any deposit, other than a deposit described in Sec. 229.10, 
that is--
    (1) Deposited in an account at a branch of a depositary bank if the 
branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin 
Islands; and
    (2) Deposited by a check drawn on or payable at or through a paying 
bank not located in the same state as the depositary bank.
    (f) Deposits at nonproprietary ATMs. A depositary bank shall make 
funds deposited in an account at a nonproprietary ATM by cash or check 
available for withdrawal not later than the fifth business day following 
the banking day on which the funds are deposited.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 55 FR 50818, Dec. 11, 
1990; 56 FR 7801, Feb. 26, 1991; 56 FR 66343, Dec. 23, 1991; 57 FR 
36601, Aug. 14, 1992; 60 FR 51670, Oct. 3, 1995]



Sec. 229.13  Exceptions.

    (a) New accounts. For purposes of this paragraph, checks subject to 
Sec. 229.10(c)(1)(v) include traveler's checks.
    (1) A deposit in a new account--
    (i) Is subject to the requirements of Sec. 229.10 (a) and (b) to 
make funds from deposits by cash and electronic payments available for 
withdrawal on the business day following the banking day of deposit or 
receipt;
    (ii) Is subject to the requirements of Sec. 229.10(c)(1) (i) 
through (v) and Sec. 229.10(c)(2) only with respect to the first $5,000 
of funds deposited on any one banking day; but the amount of the deposit 
in excess of $5,000 shall be available for withdrawal not later than

[[Page 655]]

the ninth business day following the banking day on which funds are 
deposited; and
    (iii) Is not subject to the availability requirements of Sec. Sec. 
229.10(c)(1)(vi) and (vii) and 229.12.
    (2) An account is considered a new account during the first 30 
calendar days after the account is established. An account is not 
considered a new account if each customer on the account has had, within 
30 calendar days before the account is established, another account at 
the depositary bank for at least 30 calendar days.
    (b) Large deposits. Sections 229.10(c) and 229.12 do not apply to 
the aggregate amount of deposits by one or more checks to the extent 
that the aggregate amount is in excess of $5,000 on any one banking. 
day. For customers that have multiple accounts at a depositary bank, the 
bank may apply this exception to the aggregate deposits to all accounts 
held by the customer, even if the customer is not the sole holder of the 
accounts and not all of the holders of the accounts are the same.
    (c) Redeposited checks. Sections 229.10(c) and 229.12 do not apply 
to a check that has been returned unpaid and redeposited by the customer 
or the depositary bank. This exception does not apply--
    (1) To a check that has been returned due to a missing indorsement 
and redeposited after the missing indorsement has been obtained, if the 
reason for return indication on the check states that it was returned 
due to a missing indorsement; or
    (2) To a check that has been returned because it was post dated, if 
the reason for return indicated on the check states that it was returned 
because it was post dated, and if the check is no longer postdated when 
redeposited.
    (d) Repeated overdrafts. If any account or combination of accounts 
of a depositary bank's customer has been repeatedly overdrawn, then for 
a period of six months after the last such overdraft, Sec. Sec. 
229.10(c) and 229.12 do not apply to any of the accounts. A depositary 
bank may consider a customer's account to be repeatedly overdrawn if--
    (1) On six or more banking days within the preceding six months, the 
account balance is negative, or the account balance would have become 
negative if checks or other charges to the account had been paid; or
    (2) On two or more banking days within the preceding six months, the 
account balance is negative, or the account balance would have become 
negative, in the amount of $5,000 or more, if checks or other charges to 
the account had been paid.
    (e) Reasonable cause to doubt collectibility--(1) In general. 
Sections 229.10(c) and 229.12 do not apply to a check deposited in an 
account at a depositary bank if the depositary bank has reasonable cause 
to believe that the check is uncollectible from the paying bank. 
Reasonable cause to believe a check is uncollectible requires the 
existence of facts that would cause a well-grounded belief in the mind 
of a reasonable person. Such belief shall not be based on the fact that 
the check is of a particular class or is deposited by a particular class 
of persons. The reason for the bank's belief that the check is 
uncollectible shall be included in the notice required under paragraph 
(g) of this section.
    (2) Overdraft and returned check fees. A depositary bank that 
extends the time when funds will be available for withdrawal as 
described in paragraph (e)(1) of this section, and does not furnish the 
depositor with written notice at the time of deposit shall not assess 
any fees for any subsequent overdrafts (including use of a line of 
credit) or return of checks of other debits to the account, if--
    (i) The overdraft or return of the check would not have occurred 
except for the fact that the deposited funds were delayed under 
paragraph (e)(1) of this section; and
    (ii) The deposited check was paid by the paying bank.

Notwithstanding the foregoing, the depositary bank may assess an 
overdraft or returned check fee if it includes a notice concerning 
overdraft and returned check fees with the notice of exception required 
in paragraph (g) of this section and, when required, refunds any such 
fees upon the request of the customer. The notice must state that the 
customer may be entitled to a refund of overdraft or returned check

[[Page 656]]

fees that are assessed if the check subject to the exception is paid and 
how to obtain a refund.
    (f) Emergency conditions. Sections 229.10(c) and 229.12 do not apply 
to funds deposited by check in a depositary bank in the case of--
    (1) An interruption of communications or computer or other equipment 
facilities;
    (2) A suspension of payments by another bank;
    (3) A war; or
    (4) An emergency condition beyond the control of the depositary 
bank,

if the depositary bank exercises such diligence as the circumstances 
require.
    (g) Notice of exception--(1) In general. Subject to paragraphs 
(g)(2) and (g)(3) of this section, when a depositary bank extends the 
time when funds will be available for withdrawal based on the 
application of an exception contained in paragraphs (b) through (e) of 
this section, it must provide the depositor with a written notice.
    (i) The notice shall include the following information--
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account;
    (B) The date of the deposit;
    (C) The amount of the deposit that is being delayed;
    (D) The reason the exception was invoked; and
    (E) The time period within which the funds will be available for 
withdrawal.
    (ii) Timing of notice. The notice shall be provided to the depositor 
at the time of the deposit, unless the deposit is not made in person to 
an employee of the depositary bank, or, if the facts upon which a 
determination to invoke one of the exceptions in paragraphs (b) through 
(e) of this section to delay a deposit only become known to the 
depositary bank after the time of the deposit. If the notice is not 
given at the time of the deposit, the depositary bank shall mail or 
deliver the notice to the customer as soon as practicable, but no later 
than the first business day following the day the facts become known to 
the depositary bank, or the deposit is made, whichever is later.
    (2) One-time exception notice. In lieu of providing notice pursuant 
to paragraph (g)(1) of this section, a depositary bank that extends the 
time when the funds deposited in a nonconsumer account will be available 
for withdrawal based on an exception contained in paragraph (b) or (c) 
of this section may provide a single notice to the customer that 
includes the following information--
    (i) The reason(s) the exception may be invoked; and
    (ii) The time period within which deposits subject to the exception 
generally will be available for withdrawal.

This one-time notice shall be provided only if each type of exception 
cited in the notice will be invoked for most check deposits in the 
account to which the exception could apply. This notice shall be 
provided at or prior to the time notice must be provided under paragraph 
(g)(1)(ii) of this section.
    (3) Notice of repeated overdrafts exception. In lieu of providing 
notice pursuant to paragraph (g)(1) of this section, a depositary bank 
that extends the time when funds deposited in an account will be 
available for withdrawal based on the exception contained in paragraph 
(d) of this section may provide a notice to the customer for each time 
period during which the exception will be in effect. The notice shall 
include the following information--
    (i) The account number of the customer;
    (ii) The fact that the availability of funds deposited in the 
customer's account will be delayed because the repeated overdrafts 
exception will be invoked;
    (iii) The time period within which deposits subject to the exception 
generally will be available for withdrawal; and
    (iv) The time period during which the exception will apply.

This notice shall be provided at or prior to the time notice must be 
provided under paragraph (g)(1)(ii) of this section and only if the 
exception cited in the notice will be invoked for most check deposits in 
the account.
    (4) Emergency conditions exception notice. When a depositary bank 
extends the time when funds will be available for withdrawal based on 
the application of the emergency conditions exception contained in 
paragraph (f) of this section, it must provide the depositor with notice 
in a reasonable

[[Page 657]]

form and within a reasonable time given the circumstances. The notice 
shall include the reason the exception was invoked and the time period 
within which funds shall be made available for withdrawal, unless the 
depositary bank, in good faith, does not know at the time the notice is 
given the duration of the emergency and, consequently, when the funds 
must be made available. The depositary bank is not required to provide a 
notice if the funds subject to the exception become available before the 
notice must be sent.
    (5) Record retention. A depositary bank shall retain a record, in 
accordance with Sec. 229.21(g), of each notice provided pursuant to its 
application of the reasonable cause exception under paragraph (e) of 
this section, together with a brief statement of the facts giving rise 
to the bank's reason to doubt the collectibility of the check.
    (h) Availability of deposits subject to exceptions. (1) If an 
exception contained in paragraphs (b) through (f) of this section 
applies, the depositary bank may extend the time periods established 
under Sec. Sec. 229.10(c) and 229.12 by a reasonable period of time.
    (2) If a depositary bank invokes an exception contained in 
paragraphs (b) through (e) of this section with respect to a check 
described in Sec. 229.10(c)(1) (i) through (v) or Sec. 229.10(c)(2), 
it shall make the funds available for withdrawal not later than a 
reasonable period after the day the funds would have been required to be 
made available had the check been subject to 229.12.
    (3) If a depositary bank invokes an exception under paragraph (f) of 
this section based on an emergency condition, the depositary bank shall 
make the funds available for withdrawal not later than a reasonable 
period after the emergency has ceased or the period established in 
Sec. Sec. 229.10(c) and 229.12, whichever is later.
    (4) For the purposes of this section, a ``reasonable period'' is an 
extension of up to one business day for checks described in Sec. 
229.10(c)(1)(vi), five business days for checks described in Sec. 
229.12(b) (1) through (4), and six business days for checks described in 
Sec. 229.12(c) (1) and (2) or Sec. 229.12(f). A longer extension may 
be reasonable, but the bank has the burden of so establishing.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989; Reg. CC, 55 FR 21855, May 30, 1990; 57 FR 3279, Jan. 29, 1992; 57 
FR 36598, Aug. 14, 1992; 60 FR 51671, Oct. 3, 1995; Reg. CC, 62 FR 
13809, Mar. 24, 1997; 69 FR 47310, Aug. 4, 2004]



Sec. 229.14  Payment of interest.

    (a) In general. A depositary bank shall begin to accrue interest or 
dividends on funds deposited in an interest-bearing account not later 
than the business day on which the depositary bank receives credit for 
the funds. For the purposes of this section, the depositary bank may--
    (1) Rely on the availability schedule of its Federal Reserve Bank, 
Federal Home Loan Bank, or correspondent bank to determine the time 
credit is actually received; and
    (2) Accrue interest or dividends on funds deposited in interest-
bearing accounts by checks that the depositary bank sends to paying 
banks or subsequent collecting banks for payment or collection based on 
the availability of funds the depositary bank receives from the paying 
or collecting banks.
    (b) Special rule for credit unions. Paragraph (a) of this section 
does not apply to any account at a bank described in Sec. 229.2(e)(4), 
if the bank--
    (1) Begins the accrual of interest or dividends at a later date than 
the date described in paragraph (a) of this section with respect to all 
funds, including cash, deposited in the account; and
    (2) Provides notice of its interest or dividend payment policy in 
the manner required under Sec. 229.16(d).
    (c) Exception for checks returned unpaid. This subpart does not 
require a bank to pay interest or dividends on funds deposited by a 
check that is returned unpaid.



Sec. 229.15  General disclosure requirements.

    (a) Form of disclosures. A bank shall make the disclosures required 
by this subpart clearly and conspicuously in writing. Disclosures, other 
than those posted at locations where employees accept consumer deposits 
and ATMs and the notice on preprinted deposit

[[Page 658]]

slips, must be in a form that the customer may keep. The disclosures 
shall be grouped together and shall not contain any information not 
related to the disclosures required by this subpart. If contained in a 
document that sets forth other account terms, the disclosures shall be 
highlighted within the document by, for example, use of a separate 
heading.
    (b) Uniform reference to day of availability. In its disclosure, a 
bank shall describe funds as being available for withdrawal on ``the --
-------- business day after'' the day of deposit. In this calculation, 
the first business day is the business day following the banking day the 
deposit was received, and the last business day is the day on which the 
funds are made available.
    (c) Multiple accounts and multiple account holders. A bank need not 
give multiple disclosures to a customer that holds multiple accounts if 
the accounts are subject to the same availability policies. Similarly, a 
bank need not give separate disclosures to each customer on a jointly 
held account.
    (d) Dormant or inactive accounts. A bank need not give availability 
disclosures to a customer that holds a dormant or inactive account.



Sec. 229.16  Specific availability policy disclosure.

    (a) General. To meet the requirements of a specific availability 
policy disclosure under Sec. Sec. 229.17 and 229.18(d), a bank shall 
provide a disclosure describing the bank's policy as to when funds 
deposited in an account are available for withdrawal. The disclosure 
must reflect the policy followed by the bank in most cases. A bank may 
impose longer delays on a case-by-case basis or by invoking one of the 
exceptions in Sec. 229.l3, provided this is reflected in the 
disclosure.
    (b) Content of specific availability policy disclosure. The specific 
availability policy disclosure shall contain the following, as 
applicable--
    (1) A summary of the bank's availability policy;
    (2) A description of any categories of deposits or checks used by 
the bank when it delays availability (such as local or nonlocal checks); 
how to determine the category to which a particular deposit or check 
belongs; and when each category will be available for withdrawal 
(including a description of the bank's business days and when a deposit 
is considered received);\1\
---------------------------------------------------------------------------

    \1\ A bank that distinguishes in its disclosure between local and 
nonlocal checks based on the routing number on the check must disclose 
that certain checks, such as some credit union share drafts that are 
payable by one bank but payable through another bank, will be treated as 
local or nonlocal checks based upon the location of the bank by which 
they are payable and not on the basis of the location of the bank whose 
routing number appears on the check. A bank that makes funds from 
nonlocal checks available for withdrawal within the time periods 
required for local checks under Sec. Sec. 229.12 and 229.13 is not 
required to provide this disclosure on payable-through checks to its 
customers. The statement concerning payable-through checks must describe 
how the customer can determine whether these checks will be treated as 
local or nonlocal, or state that special rules apply to such checks and 
that the customer may ask about the availability of these checks.
---------------------------------------------------------------------------

    (3) A description of any of the exceptions in Sec. 229.13 that may 
be invoked by the bank, including the time following a deposit that 
funds generally will be available for withdrawal and a statement that 
the bank will notify the customer if the bank invokes one of the 
exceptions;
    (4) A description, as specified in paragraph (c)(1) of this section, 
of any case-by-case policy of delaying availability that may result in 
deposited funds being available for withdrawal later than the time 
periods stated in the bank's availability policy; and
    (5) A description of how the customer can differentiate between a 
proprietary and a nonproprietary ATM, if the bank makes funds from 
deposits at nonproprietary ATMs available for withdrawal later than 
funds from deposits at proprietary ATMs.
    (c) Longer delays on a case-by-case basis--(1) Notice in specific 
policy disclosure. A bank that has a policy of making deposited funds 
available for withdrawal sooner than required by this subpart may extend 
the time when funds are available up to the time periods allowed under 
this subpart on a case-by-case basis, provided the bank includes the 
following in its specific policy disclosure--

[[Page 659]]

    (i) A statement that the time when deposited funds are available for 
withdrawal may be extended in some cases, and the latest time following 
a deposit that funds will be available for withdrawal;
    (ii) A statement that the bank will notify the customer if funds 
deposited in the customer's account will not be available for withdrawal 
until later than the time periods stated in the bank's availability 
policy; and
    (iii) A statement that customers should ask if they need to be sure 
about when a particular deposit will be available for withdrawal.
    (2) Notice at time of case-by-case delay--(i) In general. When a 
depositary bank extends the time when funds will be available for 
withdrawal on a case-by-case basis, it must provide the depositor with a 
written notice. The notice shall include the following information--
    (A) A number or code, which need not exceed four digits, that 
identifies the customer's account.
    (B) The date of the deposit;
    (C) The amount of the deposit that is being delayed; and
    (D) The day the funds will be available for withdrawal.
    (ii) Timing of notice. The notice shall be provided to the depositor 
at the time of the deposit, unless the deposit is not made in person to 
an employee of the depositary bank or the decision to extend the time 
when the deposited funds will be available is made after the time of the 
deposit. If notice is not given at the time of the deposit, the 
depositary bank shall mail or deliver the notice to the customer not 
later than the first business day following the banking day the deposit 
is made.
    (3) Overdraft and returned check fees. A depositary bank that 
extends the time when funds will be available for withdrawal on a case-
by-case basis and does not furnish the depositor with written notice at 
the time of deposit shall not assess any fees for any subsequent 
overdrafts (including use of a line of credit) or return of checks or 
other debits to the account, if--
    (i) The overdraft or return of the check or other debit would not 
have occurred except for the fact that the deposited funds were delayed 
under paragraph (c)(1) of this section; and
    (ii) The deposited check was paid by the paying bank.
    Notwithstanding the foregoing, the depositary bank may assess an 
overdraft or returned check fee if it includes a notice concerning 
overdraft and returned check fees with the notice required in paragraph 
(c)(2) of this section and, when required, refunds any such fees upon 
the request of the customer. The notice must state that the customer may 
be entitled to a refund of overdraft or returned check fees that are 
assessed if the check subject to the delay is paid and how to obtain a 
refund.
    (d) Credit union notice of interest payment policy. If a bank 
described in Sec. 229.2(e)(4) begins to accrue interest or dividends on 
all deposits made in an interest-bearing account, including cash 
deposits, at a later time than the day specified in Sec. 229.14(a), the 
bank's specific policy disclosures shall contain an explanation of when 
interest or dividends on deposited funds begin to accrue.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 53 
FR 44324, Nov. 2, 1988; Reg. CC, 54 FR 13850, Apr. 6, 1989; 60 FR 51671, 
Oct. 3, 1995; Reg. CC, 62 FR 13810, Mar. 24, 1997; 69 FR 47311, Aug. 4, 
2004]



Sec. 229.17  Initial disclosures.

    Before opening a new account, a bank shall provide a potential 
customer with the applicable specific availability policy disclosure 
described in Sec. 229.16.

[Reg. CC, 60 FR 51671, Oct. 3, 1995]



Sec. 229.18  Additional disclosure requirements.

    (a) Deposit slips. A bank shall include on all preprinted deposit 
slips furnished to its customers a notice that deposits may not be 
available for immediate withdrawal.
    (b) Locations where employees accept consumer deposits. A bank shall 
post in a conspicuous place in each location where its employees receive 
deposits to consumer accounts a notice that sets forth the time periods 
applicable to the availability of funds deposited in a consumer account.
    (c) Automated teller machines. (1) A depositary bank shall post or 
provide a

[[Page 660]]

notice at each ATM location that funds deposited in the ATM may not be 
available for immediate withdrawal.
    (2) A depositary bank that operates an off-premises ATM from which 
deposits are removed not more than two times each week, as described in 
Sec. 229.19(a)(4), shall disclose at or on the ATM the days on which 
deposits made at the ATM will be considered received.
    (d) Upon request. A bank shall provide to any person, upon oral or 
written request, a notice containing the applicable specific 
availability policy disclosure described in Sec. 229.l6.
    (e) Changes in policy. A bank shall send a notice to holders of 
consumer accounts at least 30 days before implementing a change to the 
bank's availability policy regarding such accounts, except that a change 
that expedites the availability of funds may be disclosed not later than 
30 days after implementation.



Sec. 229.19  Miscellaneous.

    (a) When funds are considered deposited. For the purposes of this 
subpart--
    (1) Funds deposited at a staffed facility, ATM, or contractual 
branch are considered deposited when they are received at the staffed 
facility, ATM, or contractual branch;
    (2) Funds mailed to the depositary bank are considered deposited on 
the day they are received by the depositary bank;
    (3) Funds deposited to a night depository, lock box, or similar 
facility are considered deposited on the day on which the deposit is 
removed from such facility and is available for processing by the 
depositary bank;
    (4) Funds deposited at an ATM that is not on, or within 50 feet of, 
the premises of the depositary bank are considered deposited on the day 
the funds are removed from the ATM, if funds normally are removed from 
the ATM not more than two times each week; and
    (5) Funds may be considered deposited on the next banking day, in 
the case of funds that are deposited--
    (i) On a day that is not a banking day for the depositary bank; or
    (ii) After a cut-off hour set by the depositary bank for the receipt 
of deposits of 2:00 p.m. or later, or, for the receipt of deposits at 
ATMs, contractual branches, or off-premise facilities, of 12:00 noon or 
later. Different cut-off hours later than these times may be established 
for the receipt of different types of deposits, or receipt of deposits 
at different locations.
    (b) Availability at start of business day. Except as otherwise 
provided in Sec. 229.12(d), if any provision of this subpart requires 
that funds be made available for withdrawal on any business day, the 
funds shall be available for withdrawal by the later of:
    (1) 9:00 a.m. (local time of the depositary bank); or
    (2) The time the depositary bank's teller facilities (including 
ATMs) are available for customer account withdrawals.
    (c) Effect on policies of depositary bank. This part does not--
    (1) Prohibit a depositary bank from making funds available to a 
customer for withdrawal in a shorter period of time than the time 
required by this subpart;
    (2) Affect a depositary bank's right--
    (i) To accept or reject a check for deposit;
    (ii) To revoke any settlement made by the depositary bank with 
respect to a check accepted by the bank for deposit, to charge back the 
customer's account for the amount of a check based on the return of the 
check or receipt of a notice of nonpayment of the check, or to claim a 
refund of such credit; and
    (iii) To charge back funds made available to its customer for an 
electronic payment for which the bank has not received payment in 
actually and finally collected funds;
    (3) Require a depositary bank to open or otherwise to make its 
facilities available for customer transactions on a given business day; 
or
    (4) Supersede any policy of a depositary bank that limits the amount 
of cash a customer may withdraw from its account on any one day, if that 
policy--
    (i) Is not dependent on the time the funds have been deposited in 
the account, as long as the funds have been on deposit for the time 
period specified in Sec. Sec. 229.10, 229.12, or 229.13; and

[[Page 661]]

    (ii) In the case of withdrawals made in person to an employee of the 
depositary bank--
    (A) Is applied without discrimination to all customers of the bank; 
and
    (B) Is related to security, operating, or bonding requirements of 
the depositary bank.
    (d) Use of calculated availability. A depositary bank may provide 
availability to its nonconsumer accounts based on a sample of checks 
that represents the average composition of the customer's deposits, if 
the terms for availability based on the sample are equivalent to or more 
prompt than the availability requirements of this subpart.
    (e) Holds on other funds. (1) A depositary bank that receives a 
check for deposit in an account may not place a hold on any funds of the 
customer at the bank, where--
    (i) The amount of funds that are held exceeds the amount of the 
check; or
    (ii) The funds are not made available for withdrawal within the 
times specified in Sec. Sec. 229.10, 229.12, and 229.13.
    (2) A depositary bank that cashes a check for a customer over the 
counter, other than a check drawn on the depositary bank, may not place 
a hold on funds in an account of the customer at the bank, if--
    (i) The amount of funds that are held exceeds the amount of the 
check; or
    (ii) The funds are not made available for withdrawal within the 
times specified in Sec. Sec. 229.10, 229.12, and 229.13.
    (f) Employee training and compliance. Each bank shall establish 
procedures to ensure that the bank complies with the requirements of 
this subpart, and shall provide each employee who performs duties 
subject to the requirements of this subpart with a statement of the 
procedures applicable to that employee.
    (g) Effect of merger transaction--(1) In general. For purposes of 
this subpart, except for the purposes of the new accounts exception of 
Sec. 229.13(a), and when funds are considered deposited under Sec. 
229.19(a), two or more banks that have engaged in a merger transaction 
may be considered to be separate banks for a period of one year 
following the consummation of the merger transaction.
    (2) Merger transactions on or after July 1, 1998, and before March 
1, 2000. If banks have consummated a merger transaction on or after July 
1, 1998, and before March 1, 2000, the merged banks may be considered 
separate banks until March 1, 2001.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended by 54 FR 13850, Apr. 6, 
1989; 60 FR 51671, Oct. 3, 1995; 62 FR 13810, Mar. 24, 1997; 64 FR 
14577, Mar. 26, 1999]



Sec. 229.20  Relation to state law.

    (a) In general. Any provision of a law or regulation of any state in 
effect on or before September 1, 1989, that requires funds deposited in 
an account at a bank chartered by the state to be made available for 
withdrawal in a shorter time than the time provided in subpart B, and, 
in connection therewith, subpart A, shall--
    (1) Supersede the provisions of the EFA Act and subpart B, and, in 
connection therewith, subpart A, to the extent the provisions relate to 
the time by which funds deposited or received for deposit in an account 
are available for withdrawal; and
    (2) Apply to all federally insured banks located within the state.

No amendment to a state law or regulation governing the availability of 
funds that becomes effective after September 1, 1989, shall supersede 
the EFA Act and subpart B, and, in connection therewith, subpart A, but 
unamended provisions of state law shall remain in effect.
    (b) Preemption of inconsistent law. Except as provided in paragraph 
(a), the EFA Act and subpart B, and, in connection therewith, subpart A, 
supersede any provision of inconsistent state law.
    (c) Standards for preemption. A provision of a state law in effect 
on or before September 2, 1989, is not inconsistent with the EFA Act, or 
subpart B, or in connection therewith, subpart A, if it requires that 
funds shall be available in a shorter period of time than the time 
provided in this subpart. Inconsistency with the EFA Act and subpart B, 
and in connection therewith, subpart A, may exist when state law--
    (1) Permits a depositary bank to make funds deposited in an account 
by cash, electronic payment, or check

[[Page 662]]

available for withdrawal in a longer period of time than the maximum 
period of time permitted under subpart B, and, in connection therewith, 
subpart A; or
    (2) Provides for disclosures or notices concerning funds 
availability relating to accounts.
    (d) Preemption determinations. The Board may determine, upon the 
request of any state, bank, or other interested party, whether the EFA 
Act and subpart B, and, in connection therewith, subpart A, preempt 
provisions of state laws relating to the availability of funds.
    (e) Procedures for preemption determinations. A request for a 
preemption determination shall include the following--
    (1) A copy of the full text of the state law in question, including 
any implementing regulations or judicial interpretations of that law; 
and
    (2) A comparison of the provisions of state law with the 
corresponding provisions in the EFA Act and subparts A and B of this 
part, together with a discussion of the reasons why specific provisions 
of state law are either consistent or inconsistent with corresponding 
sections of the EFA Act and subparts A and B of this part.
    A request for a preemption determination shall be addressed to the 
Secretary, Board of Governors of the Federal Reserve System.

[53 FR 19433, May 27, 1988, as amended at 69 FR 47311, Aug. 4, 2004]



Sec. 229.21  Civil liability.

    (a) Civil liability. A bank that fails to comply with any 
requirement imposed under subpart B, and in connection therewith, 
subpart A, of this part or any provision of state law that supersedes 
any provision of subpart B, and in connection therewith, subpart A, with 
respect to any person is liable to that person in an amount equal to the 
sum of--
    (1) Any actual damage sustained by that person as a result of the 
failure;
    (2) Such additional amount as the court may allow, except that--
    (i) In the case of an individual action, liability under this 
paragraph shall not be less than $100 nor greater than $1,000; and
    (ii) In the case of a class action--
    (A) No minimum recovery shall be applicable to each member of the 
class; and
    (B) The total recovery under this paragraph in any class action or 
series of class actions arising out of the same failure to comply by the 
same depositary bank shall not be more than the lesser of $500,000 or 1 
percent of the net worth of the bank involved; and
    (3) In the case of a successful action to enforce the foregoing 
liability, the costs of the action, together with a reasonable 
attorney's fee as determined by the court.
    (b) Class action awards. In determining the amount of any award in 
any class action, the court shall consider, among other relevant 
factors--
    (1) The amount of any damages awarded;
    (2) The frequency and persistence of failures of compliance;
    (3) The resources of the bank;
    (4) The number of persons adversely affected; and
    (5) The extent to which the failure of compliance was intentional.
    (c) Bona fide errors--(1) General rule. A bank is not liable in any 
action brought under this section for a violation of this subpart if the 
bank demonstrates by a preponderance of the evidence that the violation 
was not intentional and resulted from a bona fide error, notwithstanding 
the maintenance of procedures reasonably adapted to avoid any such 
error.
    (2) Examples. Examples of a bona fide error include clerical, 
calculation, computer malfunction and programming, and printing errors, 
except that an error of legal judgment with respect to the bank's 
obligation under this subpart is not a bona fide error.
    (d) Jurisdiction. Any action under this section may be brought in 
any United States district court or in any other court of competent 
jurisdiction, and shall be brought within one year after the date of the 
occurrence of the violation involved.
    (e) Reliance on Board rulings. No provision of this subpart imposing 
any liability shall apply to any act done or omitted in good faith in 
conformity with any rule, regulation, or interpretation thereof by the 
Board, regardless

[[Page 663]]

of whether such rule, regulation, or interpretation is amended, 
rescinded, or determined by judicial or other authority to be invalid 
for any reason after the act or omission has occurred.
    (f) Exclusions. This section does not apply to claims that arise 
under subpart C of this part or to actions for wrongful dishonor.
    (g) Record retention. (1) A bank shall retain evidence of compliance 
with the requirements imposed by this subpart for not less than two 
years. Records may be stored by use of microfiche, microfilm, magnetic 
tape, or other methods capable of accurately retaining and reproducing 
information.
    (2) If a bank has actual notice that it is being investigated, or is 
subject to an enforcement proceeding by an agency charged with 
monitoring that bank's compliance with the EFA Act and this subpart, or 
has been served with notice of an action filed under this section, it 
shall retain the records pertaining to the action or proceeding pending 
final disposition of the matter, unless an earlier time is allowed by 
order of the agency or court.

[53 FR 19433, May 27, 1988, as amended at 69 FR 47311, Aug. 4, 2004]



                     Subpart C_Collection of Checks



Sec. 229.30  Paying bank's responsibility for return of checks.

    (a) Return of checks. If a paying bank determines not to pay a 
check, it shall return the check in an expeditious manner as provided in 
either paragraph (a)(1) or (a)(2) of this section.
    (1) Two-day/four-day test. A paying bank returns a check in an 
expeditious manner if it sends the returned check in a manner such that 
the check would normally be received by the depositary bank not later 
than 4:00 p.m. (local time of the depositary bank) of--
    (i) The second business day following the banking day on which the 
check was presented to the paying bank, if the paying bank is located in 
the same check processing region as the depositary bank; or
    (ii) The fourth business day following the banking day on which the 
check was presented to the paying bank, if the paying bank is not 
located in the same check processing region as the depositary bank.

If the last business day on which the paying bank may deliver a returned 
check to the depositary bank is not a banking day for the depositary 
bank, the paying bank meets the two-day/four-day test if the returned 
check is received by the depositary bank on or before the depositary 
bank's next banking day.
    (2) Forward collection test. A paying bank also returns a check in 
an expeditious manner if it sends the returned check in a manner that a 
similarly situated bank would normally handle a check--
    (i) Of similar amount as the returned check;
    (ii) Drawn on the depositary bank; and
    (iii) Deposited for forward collection in the similarly situated 
bank by noon on the banking day following the banking day on which the 
check was presented to the paying bank.

Subject to the requirement for expeditious return, a paying bank may 
send a returned check to the depositary bank, or to any other bank 
agreeing to handle the returned check expeditiously under Sec. 
229.31(a). A paying bank may convert a check to a qualified returned 
check. A qualified returned check shall be encoded in magnetic ink with 
the routing number of the depositary bank, the amount of the returned 
check, and a ``2'' in the case of an original check (or a ``5'' in the 
case of a substitute check) in position 44 of the qualified return MICR 
line as a return identifier. A qualified returned original check shall 
be encoded in accordance with ANS X9.13, and a qualified returned 
substitute check shall be encoded in accordance with ANS X9.100-140. 
This paragraph does not affect a paying bank's responsibility to return 
a check within the deadlines required by the U.C.C., Regulation J (12 
CFR part 210), or Sec. 229.30(c).
    (b) Unidentifiable depositary bank. A paying bank that is unable to 
identify the depositary bank with respect to a check may send the 
returned check to any bank that handled the check for forward collection 
even if that bank does not agree to handle the check expeditiously under 
Sec. 229.31(a). A paying

[[Page 664]]

bank sending a returned check under this paragraph to a bank that 
handled the check for forward collection must advise the bank to which 
the check is sent that the paying bank is unable to identify the 
depositary bank. The expeditious return requirements in Sec. 229.30(a) 
do not apply to the paying bank's return of a check under this 
paragraph.
    (c) Extension of deadline. The deadline for return or notice of 
nonpayment under the U.C.C. or Regulation J (12 CFR part 210), or Sec. 
229.36(f)(2) is extended to the time of dispatch of such return or 
notice of nonpayment where a paying bank uses a means of delivery that 
would ordinarily result in receipt by the bank to which it is sent--
    (1) On or before the receiving bank's next banking day following the 
otherwise applicable deadline by the earlier of the close of that 
banking day or a cutoff hour of 2 p.m. or later set by the receiving 
bank under U.C.C. 4-108, for all deadlines other than those described in 
paragraph (c)(2) of this section; this deadline is extended further if a 
paying bank uses a highly expeditious means of transportation, even if 
this means of transportation would ordinarily result in delivery after 
the receiving bank's next cutoff hour or banking day referred to above; 
or
    (2) Prior to the cut-off hour for the next processing cycle (if sent 
to a returning bank), or on the next banking day (if sent to the 
depositary bank), for a deadline falling on a Saturday that is a banking 
day (as defined in the applicable U.C.C.) for the paying bank.
    (d) Identification of returned check. A paying bank returning a 
check shall clearly indicate on the front of the check that it is a 
returned check and the reason for return. If the check is a substitute 
check, the paying bank shall place this information within the image of 
the original check that appears on the front of the substitute check.
    (e) Depositary bank without accounts. The expeditious return 
requirements of paragraph (a) of this section do not apply to checks 
deposited in a depositary bank that does not maintain accounts.
    (f) Notice in lieu of return. If a check is unavailable for return, 
the paying bank may send in its place a copy of the front and back of 
the returned check, or, if no such copy is available, a written notice 
of nonpayment containing the information specified in Sec. 229.33(b). 
The copy or notice shall clearly state that it constitutes a notice in 
lieu of return. A notice in lieu of return is considered a returned 
check subject to the expeditious return requirements of this section and 
to the other requirements of this subpart.
    (g) Reliance on routing number. A paying bank may return a returned 
check based on any routing number designating the depositary bank 
appearing on the returned check in the depositary bank's indorsement.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 
Reg. CC, 55 FR 21855, May 30, 1990; 57 FR 46972, Oct. 14, 1993; Reg. CC, 
62 FR 13810, Mar. 24, 1997; 69 FR 47311, Aug. 4, 2004]



Sec. 229.31  Returning bank's responsibility for return of checks.

    (a) Return of checks. A returning bank shall return a returned check 
in an expeditious manner as provided in either paragraph (a)(1) or 
(a)(2) of this section.
    (1) Two-day/four-day test. A returning bank returns a check in an 
expeditious manner if it sends the returned check in a manner such that 
the check would normally be received by the depositary bank not later 
than 4:00 p.m. (local time) of--
    (i) The second business day following the banking day on which the 
check was presented to the paying bank if the paying bank is located in 
the same check processing region as the depositary bank; or
    (ii) The fourth business day following the banking day on which the 
check was presented to the paying bank if the paying bank is not located 
in the same check processing region as the depositary bank.


If the last business day on which the returning bank may deliver a 
returned check to the depositary bank is not a banking day for the 
depositary bank, the returning bank meets this requirement if the 
returned check is received by the depositary bank on or before the 
depositary bank's next banking day.

[[Page 665]]

    (2) Forward collection test. A returning bank also returns a check 
in an expeditious manner if it sends the returned check in a manner that 
a similarly situated bank would normally handle a check--
    (i) Of similar amount as the returned check;
    (ii) Drawn on the depositary bank; and
    (iii) Received for forward collection by the similarly situated bank 
at the time the returning bank received the returned check, except that 
a returning bank may set a cut-off hour for the receipt of returned 
checks that is earlier than the similarly situated bank's cut-off hour 
for checks received for forward collection, if the cut-off hour is not 
earlier than 2:00 p.m.

Subject to the requirement for expeditious return, the returning bank 
may send the returned check to the depositary bank, or to any bank 
agreeing to handle the returned check expeditiously under Sec. 
229.31(a). The returning bank may convert the returned check to a 
qualified returned check. A qualified returned check shall be encoded in 
magnetic ink with the routing number of the depositary bank, the amount 
of the returned check, and a ``2'' in the case of an original check (or 
a ``5'' in the case of a substitute check) in position 44 of the 
qualified return MICR line as a return identifier. A qualified returned 
original check shall be encoded in accordance with ANS X9.13, and a 
qualified returned substitute check shall be encoded in accordance with 
ANS X9.100-140. The time for expeditious return under the forward 
collection test, and the deadline for return under the U.C.C. and 
Regulation J (12 CFR part 210), are extended by one business day if the 
returning bank converts a returned check to a qualified returned check. 
This extension does not apply to the two-day/four-day test specified in 
paragraph (a)(1) of this section or when a returning bank is returning a 
check directly to the depositary bank.
    (b) Unidentifiable depositary bank. A returning bank that is unable 
to identify the depositary bank with respect to a returned check may 
send the returned check to--
    (1) Any collecting bank that handled the check for forward 
collection if the returning bank was not a collecting bank with respect 
to the returned check; or
    (2) A prior collecting bank, if the returning bank was a collecting 
bank with respect to the returned check;

even if that collecting bank does not agree to handle the returned check 
expeditiously under Sec. 229.31(a). A returning bank sending a returned 
check under this paragraph must advise the bank to which the check is 
sent that the returning bank is unable to identify the depositary bank. 
The expeditious return requirements in paragraph (a) of this section do 
not apply to return of a check under this paragraph. A returning bank 
that receives a returned check from a paying bank under Sec. 229.30(b), 
or from a returning bank under this paragraph, but that is able to 
identify the depositary bank, must thereafter return the check 
expeditiously to the depositary bank.
    (c) Settlement. A returning bank shall settle with a bank sending a 
returned check to it for return by the same means that it settles or 
would settle with the sending bank for a check received for forward 
collection drawn on the depositary bank. This settlement is final when 
made.
    (d) Charges. A returning bank may impose a charge on a bank sending 
a returned check for handling the returned check.
    (e) Depositary bank without accounts. The expeditious return 
requirements of paragraph (a) of this section do not apply to checks 
deposited with a depositary bank that does not maintain accounts.
    (f) Notice in lieu of return. If a check is unavailable for return, 
the returning bank may send in its place a copy of the front and back of 
the returned check, or, if no copy is available, a written notice of 
nonpayment containing the information specified in Sec. 229.33(b). The 
copy or notice shall clearly state that it constitutes a notice in lieu 
of return. A notice in lieu of return is considered a returned check 
subject to the expeditious return requirements of this section and to 
the other requirements of this subpart.

[[Page 666]]

    (g) Reliance on routing number. A returning bank may return a 
returned check based on any routing number designating the depositary 
bank appearing on the returned check in the depositary bank's 
indorsement or in magnetic ink on a qualified returned check.

[53 FR 19433, May 27, 1988, as amended at 53 FR 31292, Aug. 18, 1988; 
Reg. CC, 54 FR 13850, Apr. 6, 1989; 69 FR 47311, Aug. 4, 2004]



Sec. 229.32  Depositary bank's responsibility for returned checks.

    (a) Acceptance of returned checks. A depositary bank shall accept 
returned checks and written notices of nonpayment
    (1) At a location at which presentment of checks for forward 
collection is requested by the depositary bank; and
    (2) (i) At a branch, head office, or other location consistent with 
the name and address of the bank in its indorsement on the check;
    (ii) If no address appears in the indorsement, at a branch or head 
office associated with the routing number of the bank in its indorsement 
on the check;
    (iii) If the address in the indorsement is not in the same check 
processing region as the address associated with the routing number of 
the bank in its indorsement on the check, at a location consistent with 
the address in the indorsement and at a branch or head office associated 
with the routing number in the bank's indorsement; or
    (iv) If no routing number or address appears in its indorsement on 
the check, at any branch or head office of the bank.

A depositary bank may require that returned checks be separated from 
forward collection checks.
    (b) Payment. A depositary bank shall pay the returning or paying 
bank returning the check to it for the amount of the check prior to the 
close of business on the banking day on which it received the check 
(``payment date'') by--
    (1) Debit to an account of the depositary bank on the books of the 
returning or paying bank;
    (2) Cash;
    (3) Wire transfer; or
    (4) Any other form of payment acceptable to the returning or paying 
bank;

provided that the proceeds of the payment are available to the returning 
or paying bank in cash or by credit to an account of the returning or 
paying bank on or as of the payment date. If the payment date is not a 
banking day for the returning or paying bank or the depositary bank is 
unable to make the payment on the payment date, payment shall be made by 
the next day that is a banking day for the returning or paying bank. 
These payments are final when made.
    (c) Misrouted returned checks and written notices of nonpayment. If 
a bank receives a returned check or written notice of nonpayment on the 
basis that it is the depositary bank, and the bank determines that it is 
not the depositary bank with respect to the check or notice, it shall 
either promptly send the returned check or notice to the depositary bank 
directly or by means of a returning bank agreeing to handle the returned 
check expeditiously under Sec. 229.31(a), or send the check or notice 
back to the bank from which it was received.
    (d) Charges. A depositary bank may not impose a charge for accepting 
and paying checks being returned to it.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989]



Sec. 229.33  Notice of nonpayment.

    (a) Requirement. If a paying bank determines not to pay a check in 
the amount of $2,500 or more, it shall provide notice of nonpayment such 
that the notice is received by the depositary bank by 4:00 p.m. (local 
time) on the second business day following the banking day on which the 
check was presented to the paying bank. If the day the paying bank is 
required to provide notice is not a banking day for the depositary bank, 
receipt of notice on the depositary bank's next banking day constitutes 
timely notice. Notice may be provided by any reasonable means, including 
the returned check, a writing (including a copy of the check), 
telephone, Fedwire, telex, or other form of telegraph.
    (b) Content of notice. Notice must include the--

[[Page 667]]

    (1) Name and routing number of the paying bank;
    (2) Name of the payee(s);
    (3) Amount;
    (4) Date of the indorsement of the depositary bank;
    (5) Account number of the customer(s) of the depositary bank;
    (6) Branch name or number of the depositary bank from its 
indorsement;
    (7) Trace number associated with the indorsement of the depositary 
bank; and
    (8) Reason for nonpayment.

The notice may include other information from the check that may be 
useful in identifying the check being returned and the customer, and, in 
the case of a written notice, must include the name and routing number 
of the depositary bank from its indorsement. If the paying bank is not 
sure of an item of information, it shall include the information 
required by this paragraph to the extent possible, and identify any item 
of information for which the bank is not sure of the accuracy.
    (c) Acceptance of notice. The depositary bank shall accept notices 
during its banking day--
    (1) Either at the telephone or telegraph number of its return check 
unit indicated in the indorsement, or, if no such number appears in the 
indorsement or if the number is illegible, at the general purpose 
telephone or telegraph number of its head office or the branch indicated 
in the indorsement; and
    (2) At any other number held out by the bank for receipt of notice 
of nonpayment, and, in the case of written notice, as specified in Sec. 
229.32(a).
    (d) Notification to customer. If the depositary bank receives a 
returned check or notice of nonpayment, it shall send or give notice to 
its customer of the facts by midnight of the banking day following the 
banking day on which it received the returned check or notice, or within 
a longer reasonable time.
    (e) Depositary bank without accounts. The requirements of this 
section do not apply to checks deposited in a depositary bank that does 
not maintain accounts.

[53 FR 19433, May 27, 1988, as amended at 69 FR 47311, Aug. 4, 2004]



Sec. 229.34  Warranties.

    (a) Warranties. Each paying bank or returning bank that transfers a 
returned check and receives a settlement or other consideration for it 
warrants to the transferee returning bank, to any subsequent returning 
bank, to the depositary bank, and to the owner of the check, that--
    (1) The paying bank, or in the case of a check payable by a bank and 
payable through another bank, the bank by which the check is payable, 
returned the check within its deadline under the U.C.C., Regulation J 
(12 CFR part 210), or Sec. 229.30(c) of this part;
    (2) It is authorized to return the check;
    (3) The check has not been materially altered; and
    (4) In the case of a notice in lieu of return, the original check 
has not and will not be returned.

These warranties are not made with respect to checks drawn on the 
Treasury of the United States, U.S. Postal Service money orders, or 
checks drawn on a state or a unit of general local government that are 
not payable through or at a bank.
    (b) Warranty of notice of nonpayment. Each paying bank that gives a 
notice of nonpayment warrants to the transferee bank, to any subsequent 
transferee bank, to the depositary bank, and to the owner of the check 
that--
    (1) The paying bank, or in the case of a check payable by a bank and 
payable through another bank, the bank by which the check is payable, 
returned or will return the check within its deadline under the U.C.C., 
Regulation J (12 CFR part 210), or Sec. 229.30(c) of this part;
    (2) It is authorized to send the notice; and
    (3) The check has not been materially altered.

These warranties are not made with respect to checks drawn on a state or 
a unit of general local government that are not payable through or at a 
bank.
    (c) Warranty of settlement amount, encoding, and offset. (1) Each 
bank that presents one or more checks to a paying bank and in return 
receives a settlement or other consideration warrants to the paying bank 
that the total amount of the checks presented is

[[Page 668]]

equal to the total amount of the settlement demanded by the presenting 
bank from the paying bank.
    (2) Each bank that transfers one or more checks or returned checks 
to a collecting, returning, or depositary bank and in return receives a 
settlement or other consideration warrants to the transferee bank that 
the accompanying information, if any, accurately indicates the total 
amount of the checks or returned checks transferred.
    (3) Each bank that presents or transfers a check or returned check 
warrants to any bank that subsequently handles it that, at the time of 
presentment or transfer, the information encoded after issue in magnetic 
ink on the check or returned check is correct. For purposes of this 
paragraph, the information encoded after issue on the check or returned 
check includes any information placed in the MICR line of a substitute 
check that represents that check or returned check.
    (4) If a bank settles with another bank for checks presented, or for 
returned checks for which it is the depositary bank, in amount exceeding 
the total amount of the checks, the settling bank may set off the excess 
settlement amount against subsequent settlements for checks presented, 
or for returned checks for which it is the depositary bank, that it 
receives from the other bank.
    (d) Transfer and presentment warranties with respect to a remotely 
created check. (1) A bank that transfers or presents a remotely created 
check and receives a settlement or other consideration warrants to the 
transferee bank, any subsequent collecting bank, and the paying bank 
that the person on whose account the remotely created check is drawn 
authorized the issuance of the check in the amount stated on the check 
and to the payee stated on the check. For purposes of this paragraph 
(d)(1), ``account'' includes an account as defined in Sec. 229.2(a) as 
well as a credit or other arrangement that allows a person to draw 
checks that are payable by, through, or at a bank.
    (2) If a paying bank asserts a claim for breach of warranty under 
paragraph (d)(1) of this section, the warranting bank may defend by 
proving that the customer of the paying bank is precluded under U.C.C. 
4-406, as applicable, from asserting against the paying bank the 
unauthorized issuance of the check.
    (e) Damages. Damages for breach of these warranties shall not exceed 
the consideration received by the bank that presents or transfers a 
check or returned check, plus interest compensation and expenses related 
to the check or returned check, if any.
    (f) Tender of defense. If a bank is sued for breach of a warranty 
under this section, it may give a prior bank in the collection or return 
chain written notice of the litigation, and the bank notified may then 
give similar notice to any other prior bank. If the notice states that 
the bank notified may come in and defend and that failure to do so will 
bind the bank notified in an action later brought by the bank giving the 
notice as to any determination of fact common to the two litigations, 
the bank notified is so bound unless after seasonable receipt of the 
notice the bank notified does come in and defend.
    (g) Notice of claim. Unless a claimant gives notice of a claim for 
breach of warranty under this section to the bank that made the warranty 
within 30 days after the claimant has reason to know of the breach and 
the identity of the warranting bank, the warranting bank is discharged 
to the extent of any loss caused by the delay in giving notice of the 
claim.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989; 57 FR 46972, Oct. 14, 1992; 62 FR 13810, Mar. 24, 1997; 69 FR 
47311, Aug. 4, 2004; 70 FR 71225, Nov. 28, 2005]



Sec. 229.35  Indorsements.

    (a) Indorsement standards. A bank (other than a paying bank) that 
handles a check during forward collection or a returned check shall 
indorse the check in a manner that permits a person to interpret the 
indorsement, in accordance with the indorsement standard set forth in 
appendix D of this part.
    (b) Liability of bank handling check. A bank that handles a check 
for forward collection or return is liable to any bank that subsequently 
handles the check to the extent that the subsequent bank does not 
receive payment for the check because of suspension of

[[Page 669]]

payments by another bank or otherwise. This paragraph applies whether or 
not a bank has placed its indorsement on the check. This liability is 
not affected by the failure of any bank to exercise ordinary care, but 
any bank failing to do so remains liable. A bank seeking recovery 
against a prior bank shall send notice to that prior bank reasonably 
promptly after it learns the facts entitling it to recover. A bank may 
recover from the bank with which it settled for the check by revoking 
the settlement, charging back any credit given to an account, or 
obtaining a refund. A bank may have the rights of a holder with respect 
to each check it handles.
    (c) Indorsement by a bank. After a check has been indorsed by a 
bank, only a bank may acquire the rights of a holder--
    (1) Until the check has been returned to the person initiating 
collection; or
    (2) Until the check has been specially indorsed by a bank to a 
person who is not a bank.
    (d) Indorsement for depositary bank. A depositary bank may arrange 
with another bank to apply the other bank's indorsement as the 
depositary bank indorsement, provided that any indorsement of the 
depositary bank on the check avoids the area reserved for the depositary 
bank indorsement as specified in appendix D. The other bank indorsing as 
depositary bank is considered the depositary bank for purposes of 
subpart C of this part.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 55 FR 21855, May 30, 
1990; 69 FR 47311, Aug. 4, 2004]



Sec. 229.36  Presentment and issuance of checks.

    (a) Payable through and payable at checks. A check payable at or 
through a paying bank is considered to be drawn on that bank for 
purposes of the expeditious return and notice of nonpayment requirements 
of this subpart.
    (b) Receipt at bank office or processing center. A check is 
considered received by the paying bank when it is received:
    (1) At a location to which delivery is requested by the paying bank;
    (2) At an address of the bank associated with the routing number on 
the check, whether in magnetic ink or in fractional form;
    (3) At any branch or head office, if the bank is identified on the 
check by name without address; or
    (4) At a branch, head office, or other location consistent with the 
name and address of the bank on the check if the bank is identified on 
the check by name and address.
    (c) [Reserved]
    (d) Liability of bank during forward collection. Settlements between 
banks for the forward collection of a check are final when made; 
however, a collecting bank handling a check for forward collection may 
be liable to a prior collecting bank, including the depositary bank, and 
the depositary bank's customer.
    (e) Issuance of payable-through checks. (1) A bank that arranges for 
checks payable by it to be payable through another bank shall require 
that the following information be printed conspicuously on the face of 
each check:
    (i) The name, location, and first four digits of the nine-digit 
routing number of the bank by which the check is payable; and
    (ii) The words ``payable through'' followed by the name of the 
payable-through bank.
    (2) A bank is responsible for damages under Sec. 229.38 to the 
extent that a check payable by it and not payable through another bank 
is labelled as provided in this section.
    (f) Same-day settlement. (1) A check is considered presented, and a 
paying bank must settle for or return the check pursuant to paragraph 
(f)(2) of this section, if a presenting bank delivers the check in 
accordance with reasonable delivery requirements established by the 
paying bank and demands payment under this paragraph (f)--
    (i) At a location designated by the paying bank for receipt of 
checks under this paragraph (f) that is in the check processing region 
consistent with the routing number encoded in magnetic ink on the check 
and at which the paying bank would be considered to have received the 
check under paragraph (b) of this section or, if no location is 
designated, at any location described in paragraph (b) of this section; 
and

[[Page 670]]

    (ii) By 8 a.m. on a business day (local time of the location 
described in paragraph (f)(1)(i) of this section).

    A paying bank may require that checks presented for settlement 
pursuant to this paragraph (f)(1) be separated from other forward-
collection checks or returned checks.
    (2) If presentment of a check meets the requirements of paragraph 
(f)(1) of this section, the paying bank is accountable to the presenting 
bank for the amount of the check unless, by the close of Fedwire on the 
business day it receives the check, it either:
    (i) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (ii) Returns the check.
    (3) Notwithstanding paragraph (f)(2) of this section, if a paying 
bank closes on a business day and receives presentment of a check on 
that day in accordance with paragraph (f)(1) of this section, the paying 
bank is accountable to the presenting bank for the amount of the check 
unless, by the close of Fedwire on its next banking day, it either:
    (i) Settles with the presenting bank for the amount of the check by 
credit to an account at a Federal Reserve Bank designated by the 
presenting bank; or
    (ii) Returns the check.


If the closing is voluntary, unless the paying bank settles for or 
returns the check in accordance with paragraph (f)(2) of this section, 
it shall pay interest compensation to the presenting bank for each day 
after the business day on which the check was presented until the paying 
bank settles for the check, including the day of settlement.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended by 54 FR 32047, Aug. 4, 
1989; 55 FR 21855, May 30, 1990; 57 FR 46972, Oct. 14, 1992; 60 FR 
51671, Oct. 3, 1995; 62 FR 13810, Mar. 24, 1997; 64 FR 59613, Nov. 3, 
1999]



Sec. 229.37  Variation by agreement.

    The effect of the provisions of subpart C may be varied by 
agreement, except that no agreement can disclaim the responsibility of a 
bank for its own lack of good faith or failure to exercise ordinary 
care, or can limit the measure of damages for such lack or failure; but 
the parties may determine by agreement the standards by which such 
responsibility is to be measured if such standards are not manifestly 
unreasonable.



Sec. 229.38  Liability.

    (a) Standard of care; liability; measure of damages. A bank shall 
exercise ordinary care and act in good faith in complying with the 
requirements of this subpart. A bank that fails to exercise ordinary 
care or act in good faith under this subpart may be liable to the 
depositary bank, the depositary bank's customer, the owner of a check, 
or another party to the check. The measure of damages for failure to 
exercise ordinary care is the amount of the loss incurred, up to the 
amount of the check, reduced by the amount of the loss that party would 
have incurred even if the bank had exercised ordinary care. A bank that 
fails to act in good faith under this subpart may be liable for other 
damages, if any, suffered by the party as a proximate consequence. 
Subject to a bank's duty to exercise ordinary care or act in good faith 
in choosing the means of return or notice of nonpayment, the bank is not 
liable for the insolvency, neglect, misconduct, mistake, or default of 
another bank or person, or for loss or destruction of a check or notice 
of nonpayment in transit or in the possession of others. This section 
does not affect a paying bank's liability to its customer under the 
U.C.C. or other law.
    (b) Paying bank's failure to make timely return. If a paying bank 
fails both to comply with Sec. 229.30(a) and to comply with the 
deadline for return under the U.C.C., Regulation J (12 CFR part 210), or 
Sec. 229.30(c) in connection with a single nonpayment of a check, the 
paying bank shall be liable under either Sec. 229.30(a) or such other 
provision, but not both.
    (c) Comparative negligence. If a person, including a bank, fails to 
exercise ordinary care or act in good faith under this subpart in 
indorsing a check (Sec. 229.35), accepting a returned check or notice 
of nonpayment (Sec. Sec. 229.32(a) and 229.33(c)), or otherwise, the 
damages incurred by that person under Sec. 229.38(a) shall be 
diminished in proportion to

[[Page 671]]

the amount of negligence or bad faith attributable to that person.
    (d) Responsibility for certain aspects of checks--(1) A paying bank, 
or in the case of a check payable through the paying bank and payable by 
another bank, the bank by which the check is payable, is responsible for 
damages under paragraph (a) of this section to the extent that the 
condition of the check when issued by it or its customer adversely 
affects the ability of a bank to indorse the check legibly in accordance 
with Sec. 229.35. A depositary bank is responsible for damages under 
paragraph (a) of this section to the extent that the condition of the 
back of a check arising after the issuance of the check and prior to 
acceptance of the check by it adversely affects the ability of a bank to 
indorse the check legibly in accordance with Sec. 229.35. A 
reconverting bank is responsible for damages under paragraph (a) of this 
section to the extent that the condition of the back of a substitute 
check transferred, presented, or returned by it--
    (i) Adversely affects the ability of a subsequent bank to indorse 
the check legibly in accordance with Sec. 229.35; or
    (ii) Causes an indorsement that previously was applied in accordance 
with Sec. 229.35 to become illegible.

    Note: Responsibility under this paragraph (d) shall be treated as 
negligence of the paying bank, depositary bank, or reconverting bank for 
purposes of paragraph (c) of this section.

    (2) Responsibility for payable through checks. In the case of a 
check that is payable by a bank and payable through a paying bank 
located in a different check processing region than the bank by which 
the check is payable, the bank by which the check is payable is 
responsible for damages under paragraph (a) of this section, to the 
extent that the check is not returned to the depositary bank through the 
payable through bank as quickly as the check would have been required to 
be returned under Sec. 229.30(a) had the bank by which the check is 
payable--
    (i) Received the check as paying bank on the day the payable through 
bank received the check; and
    (ii) Returned the check as paying bank in accordance with Sec. 
229.30(a)(1).

Responsibility under this paragraph shall be treated as negligence of 
the bank by which the check is payable for purposes of paragraph (c) of 
this section.
    (e) Timeliness of action. If a bank is delayed in acting beyond the 
time limits set forth in this subpart because of interruption of 
communication or computer facilities, suspension of payments by a bank, 
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.
    (f) Exclusion. Section 229.21 of this part and section 611 (a), (b), 
and (c) of the EFA Act (12 U.S.C. 4010 (a), (b), and (c)) do not apply 
to this subpart.
    (g) Jurisdiction. Any action under this subpart may be brought in 
any United States district court, or in any other court of competent 
jurisdiction, and shall be brought within one year after the date of the 
occurrence of the violation involved.
    (h) Reliance on Board rulings. No provision of this subpart imposing 
any liability shall apply to any act done or omitted in good faith in 
conformity with any rule, regulation, or interpretation thereof by the 
Board, regardless of whether the rule, regulation, or interpretation is 
amended, rescinded, or determined by judicial or other authority to be 
invalid for any reason after the act or omission has occurred.

[53 FR 19433, May 27, 1988, as amended by Reg. CC, 54 FR 13850, Apr. 6, 
1989; 54 FR 32047, Aug. 4, 1989; 69 FR 47311, Aug. 4, 2004]



Sec. 229.39  lnsolvency of bank.

    (a) Duty of receiver. A check or returned check in, or coming into, 
the possession of a paying, collecting, depositary, or returning bank 
that suspends payment, and which is not paid, shall be returned by the 
receiver, trustee, or agent in charge of the closed bank to the bank or 
customer that transferred the check to the closed bank.
    (b) Preference against paying or depositary bank. If a paying bank 
finally pays a check, or if a depositary bank becomes obligated to pay a 
returned check, and suspends payment without

[[Page 672]]

making a settlement for the check or returned check with the prior bank 
that is or becomes final, the prior bank has a preferred claim against 
the paying bank or the depositary bank.
    (c) Preference against collecting, paying, or returning bank. If a 
collecting, paying, or returning bank receives settlement from a 
subsequent bank for a check or returned check, which settlement is or 
becomes final, and suspends payments without making a settlement for the 
check with the prior bank, which is or becomes final, the prior bank has 
a preferred claim against the collecting or returning bank.
    (d) Preference against presenting bank. If a paying bank settles 
with a presenting bank for one or more checks, and if the presenting 
bank breaches a warranty specified in Sec. 229.34(c) (1) or (3) with 
respect to those checks and suspends payments before satisfying the 
paying bank's warranty claim, the paying bank has a preferred claim 
against the presenting bank for the amount of the warranty claim.
    (e) Finality of settlement. If a paying or depositary bank gives, or 
a collecting, paying, or returning bank gives or receives, a settlement 
for a check or returned check and thereafter suspends payment, the 
suspension does not prevent or interfere with the settlement becoming 
final if such finality occurs automatically upon the lapse of a certain 
time or the happening of certain events.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended at 57 FR 46973, Oct. 14, 
1992; Reg. CC, 62 FR 13810, Mar. 24, 1997]



Sec. 229.40  Effect of merger transaction.

    (a) In general. For purposes of this subpart, two or more banks that 
have engaged in a merger transaction may be considered to be separate 
banks for a period of one year following the consummation of the merger 
transaction.
    (b) Merger transactions on or after July 1, 1998, and before March 
1, 2000. If banks have consummated a merger transaction on or after July 
1, 1998, and before March 1, 2000, the merged banks may be considered 
separate banks until March 1, 2001.

[Reg. CC, 53 FR 19433, May 27, 1988, as amended at 64 FR 14577, Mar. 26, 
1999]



Sec. 229.41  Relation to State law.

    The provisions of this subpart supersede any inconsistent provisions 
of the U.C.C. as adopted in any state, or of any other state law, but 
only to the extent of the inconsistency.



Sec. 229.42  Exclusions.

    The expeditious-return (Sec. Sec. 229.30(a) and 229.31(a)), notice-
of-nonpayment (Sec. 229.33), and same-day settlement (Sec. 229.36(f)) 
requirements of this subpart do not apply to a check drawn upon the 
United States Treasury, to a U.S. Postal Service money order, or to a 
check drawn on a state or a unit of general local government that is not 
payable through or at a bank.

[Reg. CC, 62 FR 13810, Mar. 24, 1997]



Sec. 229.43  Checks payable in Guam, American Samoa, and the Northern Mariana 

Islands.

    (a) Definitions. The definitions in Sec. 229.2 apply to this 
section, unless otherwise noted. In addition, for the purposes of this 
section--
    (1) Pacific island bank means an office of an institution that would 
be a bank as defined in Sec. 229.2(e) but for the fact that the office 
is located in Guam, American Samoa, or the Northern Mariana Islands;
    (2) Pacific island check means a demand draft drawn on or payable 
through or at a Pacific island bank, which is not a check as defined in 
Sec. 229.2(k).
    (b) Rules applicable to Pacific island checks. To the extent a bank 
handles a Pacific island check as if it were a check defined in Sec. 
229.2(k), the bank is subject to the following sections of this part 
(and the word ``check'' in each such section is construed to include a 
Pacific island check)--
    (1) Sec. 229.31, except that the returning bank is not subject to 
the requirement to return a Pacific island check in an expeditious 
manner;
    (2) Sec. 229.32;
    (3) Sec. 229.34(c)(2), (c)(3), (d), (e), and (f);
    (4) Sec. 229.35; for purposes of Sec. 229.35(c), the Pacific 
island bank is deemed to be a bank;
    (5) Sec. 229.36(d);
    (6) Sec. 229.37;
    (7) Sec. 229.38(a) and (c) through (h);

[[Page 673]]

    (8) Sec. 229.39(a), (b), (c) and (e); and
    (9) Sec. Sec. 229.40 through 229.42.

[Reg. CC, 62 FR 13810, Mar. 24, 1997, as amended at 70 FR 71225, Nov. 
28, 2005]



                       Subpart D_Substitute Checks

    Authority: 12 U.S.C. 5001-5018.

    Source: 69 FR 47311, Aug. 4, 2004, unless otherwise noted.



Sec. 229.51  General provisions governing substitute checks.

    (a) Legal equivalence. A substitute check for which a bank has 
provided the warranties described in Sec. 229.52 is the legal 
equivalent of an original check for all persons and all purposes, 
including any provision of federal or state law, if the substitute 
check--
    (1) Accurately represents all of the information on the front and 
back of the original check as of the time the original check was 
truncated; and
    (2) Bears the legend, ``This is a legal copy of your check. You can 
use it the same way you would use the original check.''
    (b) Reconverting bank duties. A bank shall ensure that a substitute 
check for which it is the reconverting bank--
    (1) Bears all indorsements applied by parties that previously 
handled the check in any form (including the original check, a 
substitute check, or another paper or electronic representation of such 
original check or substitute check) for forward collection or return;
    (2) Identifies the reconverting bank in a manner that preserves any 
previous reconverting bank identifications, in accordance with ANS 
X9.100-140 and appendix D of this part; and
    (3) Identifies the bank that truncated the original check, in 
accordance with ANS X9.100-140 and appendix D of this part.
    (c) Applicable law. A substitute check that is the legal equivalent 
of an original check under paragraph (a) of this section shall be 
subject to any provision, including any provision relating to the 
protection of customers, of this part, the U.C.C., and any other 
applicable federal or state law as if such substitute check were the 
original check, to the extent such provision of law is not inconsistent 
with the Check 21 Act or this subpart.



Sec. 229.52  Substitute check warranties.

    (a) Content and provision of substitute check warranties. A bank 
that transfers, presents, or returns a substitute check (or a paper or 
electronic representation of a substitute check) for which it receives 
consideration warrants to the parties listed in paragraph (b) of this 
section that--
    (1) The substitute check meets the requirements for legal 
equivalence described in Sec. 229.51(a)(1)-(2); and
    (2) No depositary bank, drawee, drawer, or indorser will receive 
presentment or return of, or otherwise be charged for, the substitute 
check, the original check, or a paper or electronic representation of 
the substitute check or original check such that that person will be 
asked to make a payment based on a check that it already has paid.
    (b) Warranty recipients. A bank makes the warranties described in 
paragraph (a) of this section to the person to which the bank transfers, 
presents, or returns the substitute check or a paper or electronic 
representation of such substitute check and to any subsequent recipient, 
which could include a collecting or returning bank, the depositary bank, 
the drawer, the drawee, the payee, the depositor, and any indorser. 
These parties receive the warranties regardless of whether they received 
the substitute check or a paper or electronic representation of a 
substitute check.



Sec. 229.53  Substitute check indemnity.

    (a) Scope of indemnity. A bank that transfers, presents, or returns 
a substitute check or a paper or electronic representation of a 
substitute check for which it receives consideration shall indemnify the 
recipient and any subsequent recipient (including a collecting or 
returning bank, the depositary bank, the drawer, the drawee, the payee, 
the depositor, and any indorser) for any loss incurred by any recipient 
of a substitute check if that loss occurred due to the receipt of a 
substitute check instead of the original check.

[[Page 674]]

    (b) Indemnity amount--(1) In general. Unless otherwise indicated by 
paragraph (b)(2) or (b)(3) of this section, the amount of the indemnity 
under paragraph (a) of this section is as follows:
    (i) If the loss resulted from a breach of a substitute check 
warranty provided under Sec. 229.52, the amount of the indemnity shall 
be the amount of any loss (including interest, costs, reasonable 
attorney's fees, and other expenses of representation) proximately 
caused by the warranty breach.
    (ii) If the loss did not result from a breach of a substitute check 
warranty provided under Sec. 229.52, the amount of the indemnity shall 
be the sum of--
    (A) The amount of the loss, up to the amount of the substitute 
check; and
    (B) Interest and expenses (including costs and reasonable attorney's 
fees and other expenses of representation) related to the substitute 
check.
    (2) Comparative negligence. (i) If a loss described in paragraph (a) 
of this section results in whole or in part from the indemnified 
person's negligence or failure to act in good faith, then the indemnity 
amount described in paragraph (b)(1) of this section shall be reduced in 
proportion to the amount of negligence or bad faith attributable to the 
indemnified person.
    (ii) Nothing in this paragraph (b)(2) reduces the rights of a 
consumer or any other person under the U.C.C. or other applicable 
provision of state or federal law.
    (3) Effect of producing the original check or a sufficient copy--
    (i) If an indemnifying bank produces the original check or a 
sufficient copy, the indemnifying bank shall--
    (A) Be liable under this section only for losses that are incurred 
up to the time that the bank provides that original check or sufficient 
copy to the indemnified person; and
    (B) Have a right to the return of any funds it has paid under this 
section in excess of those losses.
    (ii) The production by the indemnifying bank of the original check 
or a sufficient copy under paragraph (b)(3)(i) of this section shall not 
absolve the indemnifying bank from any liability under any warranty that 
the bank has provided under Sec. 229.52 or other applicable law.
    (c) Subrogation of rights--(1) In general. An indemnifying bank 
shall be subrogated to the rights of the person that it indemnifies to 
the extent of the indemnity it has provided and may attempt to recover 
from another person based on a warranty or other claim.
    (2) Duty of indemnified person for subrogated claims. Each 
indemnified person shall have a duty to comply with all reasonable 
requests for assistance from an indemnifying bank in connection with any 
claim the indemnifying bank brings against a warrantor or other person 
related to a check that forms the basis for the indemnification.



Sec. 229.54  Expedited recredit for consumers.

    (a) Circumstances giving rise to a claim. A consumer may make a 
claim under this section for a recredit with respect to a substitute 
check if the consumer asserts in good faith that--
    (1) The bank holding the consumer's account charged that account for 
a substitute check that was provided to the consumer (although the 
consumer need not be in possession of that substitute check at the time 
he or she submits a claim);
    (2) The substitute check was not properly charged to the consumer 
account or the consumer has a warranty claim with respect to the 
substitute check;
    (3) The consumer suffered a resulting loss; and
    (4) Production of the original check or a sufficient copy is 
necessary to determine whether or not the substitute check in fact was 
improperly charged or whether the consumer's warranty claim is valid.
    (b) Procedures for making claims. A consumer shall make his or her 
claim for a recredit under this section with the bank that holds the 
consumer's account in accordance with the timing, content, and form 
requirements of this section.
    (1) Timing of claim. (i) The consumer shall submit his or her claim 
such that the bank receives the claim by the end of the 40th calendar 
day after the later of the calendar day on which the bank mailed or 
delivered, by a means agreed to by the consumer--

[[Page 675]]

    (A) The periodic account statement that contains information 
concerning the transaction giving rise to the claim; or
    (B) The substitute check giving rise to the claim.
    (ii) If the consumer cannot submit his or her claim by the time 
specified in paragraph (b)(1)(i) of this section because of extenuating 
circumstances, the bank shall extend the 40-calendar-day period by an 
additional reasonable amount of time.
    (iii) If a consumer makes a claim orally and the bank requires the 
claim to be in writing, the consumer's claim is timely if the oral claim 
was received within the time described in paragraphs (b)(1)(i)-(ii) of 
this section and the written claim was received within the time 
described in paragraph (b)(3)(ii) of this section.
    (2) Content of claim. (i) The consumer's claim shall include the 
following information:
    (A) A description of the consumer's claim, including the reason why 
the consumer believes his or her account was improperly charged for the 
substitute check or the nature of his or her warranty claim with respect 
to such check;
    (B) A statement that the consumer suffered a loss and an estimate of 
the amount of that loss;
    (C) The reason why production of the original check or a sufficient 
copy is necessary to determine whether or not the charge to the 
consumer's account was proper or the consumer's warranty claim is valid; 
and
    (D) Sufficient information to allow the bank to identify the 
substitute check and investigate the claim.
    (ii) If a consumer attempts to make a claim but fails to provide all 
the information in paragraph (b)(2)(i) of this section that is required 
to constitute a claim, the bank shall inform the consumer that the claim 
is not complete and identify the information that is missing.
    (3) Form and submission of claim; computation of time for bank 
action. The bank holding the account that is the subject of the 
consumer's claim may, in its discretion, require the consumer to submit 
the information required by this section in writing. A bank that 
requires a written submission--
    (i) May permit the consumer to submit the written claim 
electronically;
    (ii) Shall inform a consumer who submits a claim orally of the 
written claim requirement at the time of the oral claim and may require 
such consumer to submit the written claim such that the bank receives 
the written claim by the 10th business day after the banking day on 
which the bank received the oral claim; and
    (iii) Shall compute the time periods for acting on the consumer's 
claim described in paragraph (c) of this section from the date on which 
the bank received the written claim.
    (c) Action on claims. A bank that receives a claim that meets the 
requirements of paragraph (b) of this section shall act as follows:
    (1) Valid consumer claim. If the bank determines that the consumer's 
claim is valid, the bank shall--
    (i) Recredit the consumer's account for the amount of the consumer's 
loss, up to the amount of the substitute check, plus interest if the 
account is an interest-bearing account, no later than the end of the 
business day after the banking day on which the bank makes that 
determination; and
    (ii) Send to the consumer the notice required by paragraph (e)(1) of 
this section.
    (2) Invalid consumer claim. If a bank determines that the consumer's 
claim is not valid, the bank shall send to the consumer the notice 
described in paragraph (e)(2) of this section.
    (3) Recredit pending investigation. If the bank has not taken an 
action described in paragraph (c)(1) or (c)(2) of this section before 
the end of the 10th business day after the banking day on which the bank 
received the claim, the bank shall--
    (i) By the end of that business day--
    (A) Recredit the consumer's account for the amount of the consumer's 
loss, up to the lesser of the amount of the substitute check or $2,500, 
plus interest on that amount if the account is an interest-bearing 
account; and
    (B) Send to the consumer the notice required by paragraph (e)(1) of 
this section; and

[[Page 676]]

    (ii) Recredit the consumer's account for the remaining amount of the 
consumer's loss, if any, up to the amount of the substitute check, plus 
interest if the account is an interest-bearing account, no later than 
the end of the 45th calendar day after the banking day on which the bank 
received the claim and send to the consumer the notice required by 
paragraph (e)(1) of this section, unless the bank prior to that time has 
determined that the consumer's claim is or is not valid in accordance 
with paragraph (c)(1) or (c)(2) of this section.
    (4) Reversal of recredit. A bank may reverse a recredit that it has 
made to a consumer account under paragraph (c)(1) or (c)(3) of this 
section, plus interest that the bank has paid, if any, on that amount, 
if the bank--
    (i) Determines that the consumer's claim was not valid; and
    (ii) Notifies the consumer in accordance with paragraph (e)(3) of 
this section.
    (d) Availability of recredit--(1) Next-day availability. Except as 
provided in paragraph (d)(2) of this section, a bank shall make any 
amount that it recredits to a consumer account under this section 
available for withdrawal no later than the start of the business day 
after the banking day on which the bank provides the recredit.
    (2) Safeguard exceptions. A bank may delay availability to a 
consumer of a recredit provided under paragraph (c)(3)(i) of this 
section until the start of the earlier of the business day after the 
banking day on which the bank determines the consumer's claim is valid 
or the 45th calendar day after the banking day on which the bank 
received the oral or written claim, as required by paragraph (b) of this 
section, if--
    (i) The consumer submits the claim during the 30-calendar-day period 
beginning on the banking day on which the consumer account was 
established;
    (ii) Without regard to the charge that gave rise to the recredit 
claim--
    (A) On six or more business days during the six-month period ending 
on the calendar day on which the consumer submitted the claim, the 
balance in the consumer account was negative or would have become 
negative if checks or other charges to the account had been paid; or
    (B) On two or more business days during such six-month period, the 
balance in the consumer account was negative or would have become 
negative in the amount of $5,000 or more if checks or other charges to 
the account had been paid; or
    (iii) The bank has reasonable cause to believe that the claim is 
fraudulent, based on facts that would cause a well-grounded belief in 
the mind of a reasonable person that the claim is fraudulent. The fact 
that the check in question or the consumer is of a particular class may 
not be the basis for invoking this exception.
    (3) Overdraft fees. A bank that delays availability as permitted in 
paragraph (d)(2) of this section may not impose an overdraft fee with 
respect to drafts drawn by the consumer on such recredited funds until 
the fifth calendar day after the calendar day on which the bank sent the 
notice required by paragraph (e)(1) of this section.
    (e) Notices relating to consumer expedited recredit claims--(1) 
Notice of recredit. A bank that recredits a consumer account under 
paragraph (c) of this section shall send notice to the consumer of the 
recredit no later than the business day after the banking day on which 
the bank recredits the consumer account. This notice shall describe--
    (i) The amount of the recredit; and
    (ii) The date on which the recredited funds will be available for 
withdrawal.
    (2) Notice that the consumer's claim is not valid. If a bank 
determines that a substitute check for which a consumer made a claim 
under this section was in fact properly charged to the consumer account 
or that the consumer's warranty claim for that substitute check was not 
valid, the bank shall send notice to the consumer no later than the 
business day after the banking day on which the bank makes that 
determination. This notice shall--
    (i) Include the original check or a sufficient copy, except as 
provided in Sec. 229.58;
    (ii) Demonstrate to the consumer that the substitute check was 
properly charged or the consumer's warranty claim is not valid; and

[[Page 677]]

    (iii) Include the information or documents (in addition to the 
original check or sufficient copy), if any, on which the bank relied in 
making its determination or a statement that the consumer may request 
copies of such information or documents.
    (3) Notice of a reversal of recredit. A bank that reverses an amount 
it previously recredited to a consumer account shall send notice to the 
consumer no later than the business day after the banking day on which 
the bank made the reversal. This notice shall include the information 
listed in paragraph (e)(2) of this section and also describe--
    (i) The amount of the reversal, including both the amount of the 
recredit (including the interest component, if any) and the amount of 
interest paid on the recredited amount, if any, being reversed; and
    (ii) The date on which the bank made the reversal.
    (f) Other claims not affected. Providing a recredit in accordance 
with this section shall not absolve the bank from liability for a claim 
made under any other provision of law, such as a claim for wrongful 
dishonor of a check under the U.C.C., or from liability for additional 
damages, such as damages under Sec. 229.53 or Sec. 229.56 of this 
subpart or U.C.C. 4-402.



Sec. 229.55  Expedited recredit for banks.

    (a) Circumstances giving rise to a claim. A bank that has an 
indemnity claim under Sec. 229.53 with respect to a substitute check 
may make an expedited recredit claim against an indemnifying bank if--
    (1) The claimant bank or a bank that the claimant bank has 
indemnified--
    (i) Has received a claim for expedited recredit from a consumer 
under Sec. 229.54; or
    (ii) Would have been subject to such a claim if the consumer account 
had been charged for the substitute check;
    (2) The claimant bank is obligated to provide an expedited recredit 
with respect to such substitute check under Sec. 229.54 or otherwise 
has suffered a resulting loss; and
    (3) The production of the original check or a sufficient copy is 
necessary to determine the validity of the charge to the consumer 
account or the validity of any warranty claim connected with such 
substitute check.
    (b) Procedures for making claims. A claimant bank shall send its 
claim to the indemnifying bank, subject to the timing, content, and form 
requirements of this section.
    (1) Timing of claim. The claimant bank shall submit its claim such 
that the indemnifying bank receives the claim by the end of the 120th 
calendar day after the date of the transaction that gave rise to the 
claim.
    (2) Content of claim. The claimant bank's claim shall include the 
following information--
    (i) A description of the consumer's claim or the warranty claim 
related to the substitute check, including why the bank believes that 
the substitute check may not be properly charged to the consumer 
account;
    (ii) A statement that the claimant bank is obligated to recredit a 
consumer account under Sec. 229.54 or otherwise has suffered a loss and 
an estimate of the amount of that recredit or loss, including interest 
if applicable;
    (iii) The reason why production of the original check or a 
sufficient copy is necessary to determine the validity of the charge to 
the consumer account or the warranty claim; and
    (iv) Sufficient information to allow the indemnifying bank to 
identify the substitute check and investigate the claim.
    (3) Requirements relating to copies of substitute checks. If the 
information submitted by a claimant bank under paragraph (b)(2) of this 
section includes a copy of any substitute check, the claimant bank shall 
take reasonable steps to ensure that the copy cannot be mistaken for the 
legal equivalent of the check under Sec. 229.51(a) or sent or handled 
by any bank, including the indemnifying bank, for forward collection or 
return.
    (4) Form and submission of claim; computation of time. The 
indemnifying bank may, in its discretion, require the claimant bank to 
submit the information required by this section in writing, including a 
copy of the paper or electronic claim submitted by the consumer, if any. 
An indemnifying bank that requires a written submission--

[[Page 678]]

    (i) May permit the claimant bank to submit the written claim 
electronically;
    (ii) Shall inform a claimant bank that submits a claim orally of the 
written claim requirement at the time of the oral claim; and
    (iii) Shall compute the 10-day time period for acting on the claim 
described in paragraph (c) of this section from the date on which the 
bank received the written claim.
    (c) Action on claims. No later than the 10th business day after the 
banking day on which the indemnifying bank receives a claim that meets 
the requirements of paragraph (b) of this section, the indemnifying bank 
shall--
    (1) Recredit the claimant bank for the amount of the claim, up to 
the amount of the substitute check, plus interest if applicable;
    (2) Provide to the claimant bank the original check or a sufficient 
copy; or
    (3) Provide information to the claimant bank regarding why the 
indemnifying bank is not obligated to comply with paragraph (c)(1) or 
(c)(2) of this section.
    (d) Recredit does not abrogate other liabilities. Providing a 
recredit to a claimant bank under this section does not absolve the 
indemnifying bank from liability for claims brought under any other law 
or from additional damages under Sec. 229.53 or Sec. 229.56.
    (e) Indemnifying bank's right to a refund. (1) If a claimant bank 
reverses a recredit it previously made to a consumer account under Sec. 
229.54 or otherwise receives reimbursement for a substitute check that 
formed the basis of its claim under this section, the claimant bank 
shall provide a refund promptly to any indemnifying bank that previously 
advanced funds to the claimant bank. The amount of the refund to the 
indemnifying bank shall be the amount of the reversal or reimbursement 
obtained by the claimant bank, up to the amount previously advanced by 
the indemnifying bank.
    (2) If the indemnifying bank provides the claimant bank with the 
original check or a sufficient copy under paragraph (c)(2) of this 
section, Sec. 229.53(b)(3) governs the indemnifying bank's entitlement 
to repayment of any amount provided to the claimant bank that exceeds 
the amount of losses the claimant bank incurred up to that time.



Sec. 229.56  Liability.

    (a) Measure of damages--(1) In general. Except as provided in 
paragraph (a)(2) or (a)(3) of this section or Sec. 229.53, any person 
that breaches a warranty described in Sec. 229.52 or fails to comply 
with any requirement of this subpart with respect to any other person 
shall be liable to that person for an amount equal to the sum of--
    (i) The amount of the loss suffered by the person as a result of the 
breach or failure, up to the amount of the substitute check; and
    (ii) Interest and expenses (including costs and reasonable 
attorney's fees and other expenses of representation) related to the 
substitute check.
    (2) Offset of recredits. The amount of damages a person receives 
under paragraph (a)(1) of this section shall be reduced by any amount 
that the person receives and retains as a recredit under Sec. 229.54 or 
Sec. 229.55.
    (3) Comparative negligence. (i) If a person incurs damages that 
resulted in whole or in part from that person's negligence or failure to 
act in good faith, then the amount of any damages due to that person 
under paragraph (a)(1) of this section shall be reduced in proportion to 
the amount of negligence or bad faith attributable to that person.
    (ii) Nothing in this paragraph (a)(3) reduces the rights of a 
consumer or any other person under the U.C.C. or other applicable 
provision of federal or state law.
    (b) Timeliness of action. Delay by a bank beyond any time limits 
prescribed or permitted by this subpart is excused if the delay is 
caused by interruption of communication or computer facilities, 
suspension of payments by another bank, war, emergency conditions, 
failure of equipment, or other circumstances beyond the control of the 
bank and if the bank uses such diligence as the circumstances require.
    (c) Jurisdiction. A person may bring an action to enforce a claim 
under this subpart in any United States district court or in any other 
court of competent jurisdiction. Such claim shall be brought within one 
year of the date on

[[Page 679]]

which the person's cause of action accrues. For purposes of this 
paragraph, a cause of action accrues as of the date on which the injured 
person first learns, or by which such person reasonably should have 
learned, of the facts and circumstances giving rise to the cause of 
action, including the identity of the warranting or indemnifying bank 
against which the action is brought.
    (d) Notice of claims. Except as otherwise provided in this paragraph 
(d), unless a person gives notice of a claim under this section to the 
warranting or indemnifying bank within 30 calendar days after the person 
has reason to know of both the claim and the identity of the warranting 
or indemnifying bank, the warranting or indemnifying bank is discharged 
from liability in an action to enforce a claim under this subpart to the 
extent of any loss caused by the delay in giving notice of the claim. A 
timely recredit claim by a consumer under Sec. 229.54 constitutes 
timely notice under this paragraph.



Sec. 229.57  Consumer awareness.

    (a) General disclosure requirement and content. Each bank shall 
provide, in accordance with paragraph (b) of this section, a brief 
disclosure to each of its consumer customers that describes--
    (1) That a substitute check is the legal equivalent of an original 
check; and
    (2) The consumer recredit rights that apply when a consumer in good 
faith believes that a substitute check was not properly charged to his 
or her account.
    (b) Distribution--(1) Disclosure to consumers who receive paid 
checks with periodic account statements. A bank shall provide the 
disclosure described in paragraph (a) of this section to a consumer 
customer who receives paid original checks or paid substitute checks 
with his or her periodic account statement--
    (i) No later than the first regularly scheduled communication with 
the consumer after October 28, 2004, for each consumer who is a customer 
of the bank on that date; and
    (ii) At the time the customer relationship is initiated, for each 
customer relationship established after October 28, 2004.
    (2) Disclosure to consumers who receive substitute checks on an 
occasional basis--(i) The bank shall provide the disclosure described in 
paragraph (a) of this section to a consumer customer of the bank who 
requests an original check or a copy of a check and receives a 
substitute check. If feasible, the bank shall provide this disclosure at 
the time of the consumer's request; otherwise, the bank shall provide 
this disclosure no later than the time at which the bank provides a 
substitute check in response to the consumer's request.
    (ii) The bank shall provide the disclosure described in paragraph 
(a) of this section to a consumer customer of the bank who receives a 
returned substitute check, at the time the bank provides such substitute 
check.
    (3) Multiple account holders. A bank need not give separate 
disclosures to each customer on a jointly held account.



Sec. 229.58  Mode of delivery of information.

    A bank may deliver any notice or other information that it is 
required to provide under this subpart by United States mail or by any 
other means through which the recipient has agreed to receive account 
information. If a bank is required to provide an original check or a 
sufficient copy, the bank instead may provide an electronic image of the 
original check or sufficient copy if the recipient has agreed to receive 
that information electronically.



Sec. 229.59  Relation to other law.

    The Check 21 Act and this subpart supersede any provision of federal 
or state law, including the Uniform Commercial Code, that is 
inconsistent with the Check 21 Act or this subpart, but only to the 
extent of the inconsistency.



Sec. 229.60  Variation by agreement.

    Any provision of Sec. 229.55 may be varied by agreement of the 
banks involved. No other provision of this subpart may be varied by 
agreement by any person or persons.

[[Page 680]]



     Sec. Appendix A to Part 229--Routing Number Guide to Next-Day 

                  Availability Checks and Local Checks

    A. Each bank is assigned a routing number by an agent of the 
American Bankers Association. The routing number takes two forms: a 
fractional form and a nine-digit form. A paying bank generally is 
identified on the face of a check by its routing number in both the 
fractional form (which generally appears in the upper right-hand corner 
of the check) and the nine-digit form (which is printed in magnetic ink 
along the bottom of the check). Where a check is payable by one bank but 
payable through another bank, the routing number appearing on the check 
is that of the payable-through bank, not the payor bank.
    B. The first four digits of the nine-digit routing number (and the 
denominator of the fractional routing number) form the ``Federal Reserve 
routing symbol,'' and the first two digits of the routing number 
identify the Federal Reserve District in which the bank is located. 
Thus, 01 will be the first two digits of the routing number of a bank in 
the First Federal Reserve District (Boston), and 12 will be the first 
two digits of the routing number of a bank in the Twelfth District (San 
Francisco). Adding 2 to the first digit denotes a thrift institution. 
Thus, 21 identifies a thrift in the First District, and 32 denotes a 
thrift in the Twelfth District.
    C. Each Federal Reserve check-processing office is listed below, 
followed by the Federal Reserve routing symbols of the banks that are 
located within the check-processing region served by that office. 
Because some check-processing regions cross Federal Reserve District 
lines, there are some cases in which banks in different Federal Reserve 
Districts are located in the same check-processing region and therefore 
considered local to each other. For example, banks in Fairfield County, 
Connecticut are located in the Second District and have Second District 
routing symbols (0211 or 2211), but the head office of the Federal 
Reserve Bank of Philadelphia processes the checks of these banks. Thus, 
as indicated below, checks drawn on banks with 0211 or 2211 routing 
numbers would be local for banks served by the head office of the 
Federal Reserve Bank of Philadelphia.

                     Third Federal Reserve District

                 [Federal Reserve Bank of Philadelphia]

                               Head Office

0110\1\
0111
0112
0113
0114
0115
0116
0117
0118
0119
0210
0211
0212
0213
0214
0215
0216
0219
0260
0280
0310
0311
0312
0313
0319
0360
2110
2111
2112
2113
2114
2115
2116
2117
2118
2119
2210
2211
2212
2213
2214
2215
2216
2219
2260
2280
2310
2311
2312
2313
2319
2360
     
---------------------------------------------------------------------------

    \1\ The first two digits identify the bank's Federal Reserve 
District. For example, 01 identifies the First Federal Reserve District 
(Boston), and l2 identifies the Twelfth District (San Francisco). Adding 
2 to the first digit denotes a thrift institution. For example, 21 
identifies a thrift in the First District, and 32 denotes a thrift in 
the Twelfth District.
---------------------------------------------------------------------------

                     Fourth Federal Reserve District

                   [Federal Reserve Bank of Cleveland]

                               Head Office

0220
0223
0410
0412
0420
0421
0422
0423
0430
0432
0433
0434
0440
0441
0442
0515
0519
0720
0724
0740
0749
0813
0830
0839
0863
2220
2223
2410
2412
2420
2421
2422
2423
2430
2432
2433
2434
2440
2441
2442
2515
2519
2720
2724
2740
2749
2813
2830
2839
2863

[[Page 681]]



                     Fifth Federal Reserve District

                   [Federal Reserve Bank of Richmond]

                            Baltimore Branch

0510
0514
0520
0521
0522
0540
0550
0560
0570
2510
2514
2520
2521
2522
2540
2550
2560
2570

                            Charlotte Branch

0530
0531
0532
0539
2530
2531
2532
2539

                     Sixth Federal Reserve District

                    [Federal Reserve Bank of Atlanta]

                               Head Office

0610
0611
0612
0613
0620
0621
0622
0630
0631
0632
0640
0641
0642
0650
0651
0652
0653
0654
0655
0660
0670
0820
0829
0840
0841
0842
0843
2610
2611
2612
2613
2620
2621
2622
2630
2631
2632
2640
2641
2642
2650
2651
2652
2653
2654
2655
2660
2670
2820
2829
2840
2841
2842
2843

                    Seventh Federal Reserve District

                    [Federal Reserve Bank of Chicago]

                               Head Office

0710
0711
0712
0719
0750
0759
2710
2711
2712
2719
2750
2759

                            Des Moines Office

0730
0739
1040
1041
1049
2730
2739
3040
3041
3049

                     EIGHTH FEDERAL RESERVE DISTRICT

                   [Federal Reserve Bank of St. Louis]

                               Head Office

0810
0812
0815
0819
0865
2810
2812
2815
2819
2865

                     Ninth Federal Reserve District

                  [Federal Reserve Bank of Minneapolis]

                               Head Office

0910
0911
0912
0913
0914
0915
0918
0919
0960
2910
2911
2912
2913
2914
2915
2918
2919
2960

                     Tenth Federal Reserve District

                  [Federal Reserve Bank of Kansas City]

                              Denver Branch

0920
0921
0929
1020
1021
1022
1023
1070
1240
1241
1242
1243
2920
2921
2929
3020
3021
3022
3023
3070
3240
3241
3242
3243

                    Eleventh Federal Reserve District

                    [Federal Reserve Bank of Dallas]

                               Head Office

1010
1011
1012
1019
1030
1031
1039
1110
1111
1113
1119
1120
1122
1123
1130
1131
1140
1149
1163
3010

[[Page 682]]


3011
3012
3019
3030
3031
3039
3110
3111
3113
3119
3120
3122
3123
3130
3131
3140
3149
3163

                    Twelfth Federal Reserve District

                 [Federal Reserve Bank of San Francisco]

                           Los Angeles Branch

1210
1211
1212
1213
1220
1221
1222
1223
1224
3210
3211
3212
3213
3220
3221
3222
3223
3224

                             Seattle Branch

1230
1231
1232
1233
1250
1251
1252
3230
3231
3232
3233
3250
3251
3252

                          U.S. Treasury Checks

0000 0050 5
0000 0051 8

                           Postal Money Orders

0000 0119 3
0000 0800 2

                          Federal Reserve Banks

0110 0001 5
0111 0048 1
0210 0120 8
0212 0400 5
0213 0500 1
0220 0026 6
0310 0004 0
0410 0001 4
0420 0043 7
0430 0030 0
0440 0050 3
0510 0003 3
0519 0002 3
0520 0027 8
0530 0020 6
0539 0008 9
0610 0014 6
0620 0019 0
0630 0019 9
0640 0010 1
0650 0021 0
0660 0010 9
0710 0030 1
0711 0711 0
0720 0029 0
0730 0033 8
0740 0020 1
0750 0012 9
0810 0004 5
0820 0013 8
0830 0059 3
0840 0003 9
0910 0008 0
0920 0026 7
1010 0004 8
1020 0019 9
1030 0024 0
1040 0012 6
1110 0003 8
1120 0001 1
1130 0004 9
1140 0072 1
1210 0037 4
1220 0016 6
1230 0001 3
1240 0031 3
1250 0001 1

                         Federal Home Loan Banks

0110 0053 6
0212 0639 1
0260 0973 9
0410 0291 5
0420 0091 6
0430 0143 5
0430 1862 2
0610 0876 6
0710 0450 1
0730 0091 4
0740 0101 9
0810 0091 9
0910 0091 2
1010 0091 2
1011 0194 7
1110 1083 7
1119 1083 0
1210 0070 1
1240 0287 4
1250 0050 3

[53 FR 19433, May 27, 1988]

    Editorial Note: For Federal Register citations affecting appendix A 
to part 229, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and on GPO Access.

    Effective Date Note:  1. At 73 FR 70591, Nov. 21, 2008, appendix A 
to part 229 was amended by revising the Seventh District routing symbol 
list, effective Jan. 31, 2009. For the convenience of the user, the 
revised text is set forth as follows:



     Sec. Appendix A to Part 229--Routing Number Guide to Next-Day 

                  Availability Checks and Local Checks

                                * * * * *

                    Seventh Federal Reserve District

                    [Federal Reserve Bank of Chicago]

                               Head Office

0710
0711
0712
0719
0730
0739
0750
0759
1040
1041
1049
2710
2711
2712
2719
2730
2739
2750
2759
3040
3041
3049
    2. At 73 FR 77492, Dec. 19, 2008, appendix A to part 229 was amended 
by removing the headings and listings for the Eighth Federal Reserve 
District and revising the listings for the Sixth Federal Reserve 
District, effective Feb 21, 2009. For the convenience of the user, the 
revised text is set forth as follows:



     Sec. Appendix A to Part 229--Routing Number Guide to Next-Day 

                  Availability Checks and Local Checks

                                * * * * *

[[Page 683]]

                     Sixth Federal Reserve District

                    [Federal Reserve Bank of Atlanta]

                               Head office

0610
0611
0612
0613
0620
0621
0622
0630
0631
0632
0640
0641
0642
0650
0651
0652
0653
0654
0655
0660
0670
0810
0812
0815
0819
0820
0829
0840
0841
0842
0843
0865
2610
2611
2612
2613
2620
2621
2622
2630
2631
2632
2640
2641
2642
2650
2651
2652
2653
2654
2655
2660
2670
2810
2812
2815
2819
2820
2829
2840
2841
2842
2843
2865

                                * * * * *



                 Sec. Appendix B to Part 229 [Reserved]



  Sec. Appendix C to Part 229--Model Availability Policy Disclosures, 

   Clauses, and Notices; Model Substitute Check Policy Disclosure and 

                                 Notices

    This appendix contains model availability policy and substitute 
check policy disclosures, clauses, and notices to facilitate compliance 
with the disclosure and notice requirements of Regulation CC (12 CFR 
part 229). Although use of these models is not required, banks using 
them properly (with the exception of models C-22 through C-25) to make 
disclosures required by Regulation CC are deemed to be in compliance.

                  Model Availability Policy Disclosures

C-1 Next-day availability
C-2 Next-day availability and Sec. 229.13 exceptions
C-3 Next-day availability, case-by-case holds to statutory limits, and 
          Sec. 229.13 exceptions
C-4 Holds to statutory limits on all deposits (includes chart)
C-5 Holds to statutory limits on all deposits
C-5A Substitute check policy disclosure

                              Model Clauses

C-6 Holds on other funds (check cashing)
C-7 Holds on other funds (other account)
C-8 Appendix B availability (nonlocal checks)
C-9 Automated teller machine deposits (extended hold)
C-10 Cash withdrawal limitation
C-11 Credit union interest payment policy
C-11A Availability of Funds Deposited at Other Locations

                              Model Notices

C-12 Exception hold notice
C-13 Reasonable cause hold notice
C-14 One-time notice for large deposit and redeposited check exception 
          holds
C-15 One-time notice for repeated overdraft exception holds
C-16 Case-by-case hold notice
C-17 Notice at locations where employees accept consumer deposits
C-18 Notice at locations where employees accept consumer deposits (case-
          by-case holds)
C-19 Notice at automated teller machines
C-20 Notice at automated teller machines (delayed receipt)
C-21 Deposit slip notice
C-22 Expedited Recredit Claim, Valid Claim Refund Notice
C-23 Expedited Recredit Claim, Provisional Refund Notice
C-24 Expedited Recredit Claim, Denial Notice
C-25 Expedited Recredit Claim, Reversal Notice

                  Model Availability Policy Disclosures

                       C-1--Next-Day Availability

                     Your Ability To Withdraw Funds

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive your 
deposit. Electronic direct deposits will be available on the day we 
receive the deposit. Once the funds are available, you can withdraw them 
in cash and we will use them to pay checks that you have written.
    For determining the availability of your deposits, every day is a 
business day, except Saturdays, Sundays, and federal holidays. If you 
make a deposit before (time of day) on a business day that we are open, 
we will consider that day to be the day of your deposit. However, if you 
make a deposit after (time of

[[Page 684]]

day) or on a day we are not open, we will consider that the deposit was 
made on the next business day we are open.

         C-2--Next-day availability and Sec. 229.13 exceptions

                     Your Ability To Withdraw Funds

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive your 
deposit. Electronic direct deposits will be available on the day we 
receive the deposit. Once they are available, you can withdraw the funds 
in cash and we will use the funds to pay checks that you have written.
    For determining the availability of your deposits, every day is a 
business day, except Saturdays, Sundays, and federal holidays. If you 
make a deposit before (time of day) on a business day that we are open, 
we will consider that day to be the day of your deposit. However, if you 
make a deposit after (time of day) or on a day we are not open, we will 
consider that the deposit was made on the next business day we are open.

                         Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period under 
the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.
     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules for New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

C-3--Next-Day Availability, Case-by-Case Holds to Statutory Limits, and 
                         Sec. 229.13 Exceptions

                     Your Ability To Withdraw Funds

    Our policy is to make funds from your cash and check deposits 
available to you on the first business day after the day we receive your 
deposit. Electronic direct deposits will be available on the day we 
receive the deposit. Once they are available, you can withdraw the funds 
in cash and we will use the funds to pay checks that you have written.
    For determining the availability of your deposits, every day is a 
business day, except Saturdays, Sundays, and federal holidays. If you 
make a deposit before (time of day) on a business day that we are open, 
we will consider that day to be the day of your deposit. However, if you 
make a deposit after (time of day) or on a day we are not open, we will 
consider that the deposit was made on the next business day we are open.

                         Longer Delays May Apply

    In some cases, we will not make all of the funds that you deposit by 
check available to you on the first business day after the day of your 
deposit. Depending on the type of check that you deposit, funds may not 
be available until the fifth business day after the day of your deposit. 
The first $100 of your deposits, however, may be available on the first 
business day.
    If we are not going to make all of the funds from your deposit 
available on the first business day, we will notify you at the time you 
make your deposit. We will also tell you when the funds will be 
available. If your deposit is not made directly to one of our employees, 
or if we decide to take this action after you have left the premises, we 
will mail you the notice by the day after we receive your deposit.
    If you will need the funds from a deposit right away, you should ask 
us when the funds will be available.
    In addition, funds you deposit by check may be delayed for a longer 
period under the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.

[[Page 685]]

     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules for New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

     C-4--Holds to Statutory Limits On All Deposits (Includes Chart)

                     Your Ability To Withdraw Funds

    Our policy is to delay the availability of funds from your cash and 
check deposits. During the delay, you may not withdraw the funds in cash 
and we will not use the funds to pay checks that you have written.

                Determining the Availability of a Deposit

    The length of the delay is counted in business days from the day of 
your deposit. Every day is a business day except Saturdays, Sundays, and 
federal holidays. If you make a deposit before (time of day) on a 
business day that we are open, we will consider that day to be the day 
of your deposit. However, if you make a deposit after (time of day) or 
on a day we are not open, we will consider that the deposit was made on 
the next business day we are open.
    The length of the delay varies depending on the type of deposit and 
is explained below.

                          Same-Day Availability

    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit.

                          Next-Day Availability

    Funds from the following deposits are available on the first 
business day after the day of your deposit:
     U.S. Treasury checks that are payable to you.
     Wire transfers.
     Checks drawn on (bank name) [unless (any 
limitations related to branches in different states or check processing 
regions)].
    If you make the deposit in person to one of our employees, funds 
from the following deposits are also available on the first business day 
after the day of your deposit:
     Cash.
     State and local government checks that are 
payable to you [if you use a special deposit slip available from (where 
deposit slip may be obtained)].
     Cashier's, certified, and teller's checks that 
are payable to you [if you use a special deposit slip available from 
(where deposit slip may be obtained)].
     Federal Reserve Bank checks, Federal Home Loan 
Bank checks, and postal money orders, if these items are payable to you.
    If you do not make your deposit in person to one of our employees 
(for example, if you mail the deposit), funds from these deposits will 
be available on the second business day after the day we receive your 
deposit.

                          Other Check Deposits

    To find out when funds from other check deposits will be available, 
look at the first four digits of the routing number on the check:

[[Page 686]]

[GRAPHIC] [TIFF OMITTED] TR24MR97.000

    Some checks are marked ``payable through'' and have a four-or nine-
digit number nearby. For these checks, use this four-digit number (or 
the first four digits of the nine-digit number), not the routing number 
on the bottom of the check, to determine if these checks are local or 
nonlocal. Once you have determined the first four digits of the routing 
number (1234 in the examples above), the following chart will show you 
when funds from the check will be available:

----------------------------------------------------------------------------------------------------------------
   First four digits from routing                                  When funds are available if a deposit is made
               number                  When funds are available                     on a Monday
----------------------------------------------------------------------------------------------------------------
[local numbers]....................  $100 on the first business   Tuesday.
                                      day after the day of your
                                      deposit.
                                     Remaining funds on the       Wednesday.
                                      second business day after
                                      the day of your deposit.
All other numbers..................  $100 on the first business   Tuesday.
                                      day after the day of your
                                      deposit.
                                     Remaining funds on the       Monday of the following week.
                                      fifth business day after
                                      the day of your deposit.
----------------------------------------------------------------------------------------------------------------

    If you deposit both categories of checks, $100 from the checks will 
be available on the first business day after the day of your deposit, 
not $100 from each category of check.

                         Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period under 
the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.

[[Page 687]]

     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules for New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

             C-5--Holds to Statutory Limits on All Deposits

                     Your Ability To Withdraw Funds

    Our policy is to delay the availability of funds from your cash and 
check deposits. During the delay, you may not withdraw the funds in cash 
and we will not use the funds to pay checks that you have written.

                Determining the Availability Of A Deposit

    The length of the delay is counted in business days from the day of 
your deposit. Every day is a business day except Saturdays, Sundays, and 
federal holidays. If you make a deposit before (time of day) on a 
business day that we are open, we will consider that day to be the day 
of your deposit. However, if you make a deposit after (time of day) or 
on a day we are not open, we will consider that the deposit was made on 
the next business day we are open.
    The length of the delay varies depending on the type of deposit and 
is explained below.

                          Same-Day Availability

    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit.

                          Next-Day Availability

    Funds from the following deposits are available on the first 
business day after the day of your deposit:
     U.S. Treasury checks that are payable to you.
     Wire transfers.
     Checks drawn on (bank name) [unless (any 
limitations related to branches in different states or check processing 
regions)].
    If you make the deposit in person to one of our employees, funds 
from the following deposits are also available on the first business day 
after the day of your deposit:
     Cash.
     State and local government checks that are 
payable to you [if you use a special deposit slip available from (where 
deposit slip may be obtained)].
     Cashier's, certified, and teller's checks that 
are payable to you [if you use a special deposit slip available from 
(where deposit slip may be obtained)].
     Federal Reserve Bank checks, Federal Home Loan 
Bank checks, and postal money orders, if these items are payable to you.
    If you do not make your deposit in person to one of our employees 
(for example, if you mail the deposit), funds from these deposits will 
be available on the second business day after the day we receive your 
deposit.

                          Other Check Deposits

    The delay for other check deposits depends on whether the check is a 
local or a nonlocal check. To see whether a check is a local or a 
nonlocal check, look at the routing number on the check:

[[Page 688]]

[GRAPHIC] [TIFF OMITTED] TR17SE97.000

    If the first four digits of the routing number (1234 in the examples 
above) are (list of local numbers), then the check is a local check. 
Otherwise, the check is a nonlocal check. Some checks are marked 
``payable through'' and have a four- or nine-digit number nearby. For 
these checks, use the four-digit number (or the first four digits of the 
nine-digit number), not the routing number on the bottom of the check, 
to determine if these checks are local or nonlocal. Our policy is to 
make funds from local and nonlocal checks available as follows.
    1. Local checks. The first $100 from a deposit of local checks will 
be available on the first business day after the day of your deposit. 
The remaining funds will be available on the second business day after 
the day of your deposit.
    For example, if you deposit a local check of $700 on a Monday, $100 
of the deposit is available on Tuesday. The remaining $600 is available 
on Wednesday.
    2. Nonlocal checks. The first $100 from a deposit of nonlocal checks 
will be available on the first business day after the day of your 
deposit. The remaining funds will be available on the fifth business day 
after the day of your deposit.
    For example, if you deposit a $700 nonlocal check on a Monday, $100 
of the deposit is available on Tuesday. The remaining $600 is available 
on Monday of the following week.
    3. Local and nonlocal checks. If you deposit both categories of 
checks, $100 from the

[[Page 689]]

checks will be available on the first business day after the day of your 
deposit, not $100 from each category of check.

                         Longer Delays May Apply

    Funds you deposit by check may be delayed for a longer period under 
the following circumstances:
     We believe a check you deposit will not be paid.
     You deposit checks totaling more than $5,000 on 
any one day.
     You redeposit a check that has been returned 
unpaid.
     You have overdrawn your account repeatedly in the 
last six months.
     There is an emergency, such as failure of 
computer or communications equipment.
    We will notify you if we delay your ability to withdraw funds for 
any of these reasons, and we will tell you when the funds will be 
available. They will generally be available no later than the (number) 
business day after the day of your deposit.

                     Special Rules For New Accounts

    If you are a new customer, the following special rules will apply 
during the first 30 days your account is open.
    Funds from electronic direct deposits to your account will be 
available on the day we receive the deposit. Funds from deposits of 
cash, wire transfers, and the first $5,000 of a day's total deposits of 
cashier's, certified, teller's, traveler's, and federal, state and local 
government checks will be available on the first business day after the 
day of your deposit if the deposit meets certain conditions. For 
example, the checks must be payable to you (and you may have to use a 
special deposit slip). The excess over $5,000 will be available on the 
ninth business day after the day of your deposit. If your deposit of 
these checks (other than a U.S. Treasury check) is not made in person to 
one of our employees, the first $5,000 will not be available until the 
second business day after the day of your deposit.
    Funds from all other check deposits will be available on the 
(number) business day after the day of your deposit.

                C-5A--Substitute Check Policy Disclosure

  Substitute Checks and Your Rights--[Important Information About Your 
                            Checking Account]

                    Substitute Checks and Your Rights

                       What Is a Substitute Check?

    To make check processing faster, federal law permits banks to 
replace original checks with ``substitute checks.'' These checks are 
similar in size to original checks with a slightly reduced image of the 
front and back of the original check. The front of a substitute check 
states: ``This is a legal copy of your check. You can use it the same 
way you would use the original check.'' You may use a substitute check 
as proof of payment just like the original check.
    Some or all of the checks that you receive back from us may be 
substitute checks. This notice describes rights you have when you 
receive substitute checks from us. The rights in this notice do not 
apply to original checks or to electronic debits to your account. 
However, you have rights under other law with respect to those 
transactions.

             What Are My Rights Regarding Substitute Checks?

    In certain cases, federal law provides a special procedure that 
allows you to request a refund for losses you suffer if a substitute 
check is posted to your account (for example, if you think that we 
withdrew the wrong amount from your account or that we withdrew money 
from your account more than once for the same check). The losses you may 
attempt to recover under this procedure may include the amount that was 
withdrawn from your account and fees that were charged as a result of 
the withdrawal (for example, bounced check fees).
    The amount of your refund under this procedure is limited to the 
amount of your loss or the amount of the substitute check, whichever is 
less. You also are entitled to interest on the amount of your refund if 
your account is an interest-bearing account. If your loss exceeds the 
amount of the substitute check, you may be able to recover additional 
amounts under other law.
    If you use this procedure, you may receive up to (amount, not lower 
than $2,500) of your refund (plus interest if your account earns 
interest) within (number of days, not more than 10) business days after 
we received your claim and the remainder of your refund (plus interest 
if your account earns interest) not later than (number of days, not more 
than 45) calendar days after we received your claim.
    We may reverse the refund (including any interest on the refund) if 
we later are able to demonstrate that the substitute check was correctly 
posted to your account.

                   How Do I Make a Claim for a Refund?

    If you believe that you have suffered a loss relating to a 
substitute check that you received and that was posted to your account, 
please contact us at (contact information, for example phone number, 
mailing address, e-mail address). You must contact us within (number of 
days, not less than 40) calendar days of the date that we mailed (or 
otherwise delivered by a means to which you agreed) the substitute check 
in question or the account statement showing that the substitute check 
was posted to your account, whichever is later. We will extend this time 
period if you

[[Page 690]]

were not able to make a timely claim because of extraordinary 
circumstances.
    Your claim must include--
     A description of why you have suffered a loss 
(for example, you think the amount withdrawn was incorrect);
     An estimate of the amount of your loss;
     An explanation of why the substitute check you 
received is insufficient to confirm that you suffered a loss; and
     A copy of the substitute check [and/or] the 
following information to help us identify the substitute check: 
(identifying information, for example the check number, the name of the 
person to whom you wrote the check, the amount of the check).

                              Model Clauses

                C-6--Holds on Other Funds (Check Cashing)

    If we cash a check for you that is drawn on another bank, we may 
withhold the availability of a corresponding amount of funds that are 
already in your account. Those funds will be available at the time funds 
from the check we cashed would have been available if you had deposited 
it.

                C-7--Holds on Other Funds (Other Account)

    If we accept for deposit a check that is drawn on another bank, we 
may make funds from the deposit available for withdrawal immediately but 
delay your availability to withdraw a corresponding amount of funds that 
you have on deposit in another account with us. The funds in the other 
account would then not be available for withdrawal until the time 
periods that are described elsewhere in this disclosure for the type of 
check that you deposited.

             C-8--Appendix B Availability (Nonlocal Checks)

    3. Certain other checks. We can process nonlocal checks drawn on 
financial institutions in certain areas faster than usual. Therefore, 
funds from deposits of checks drawn on institutions in those areas will 
be available to you more quickly. Call us if you would like a list of 
the routing numbers for these institutions.

         C-9--Automated Teller Machine Deposits (Extended Hold)

                  Deposits at Automated Teller Machines

    Funds from any deposits (cash or checks) made at automated teller 
machines (ATMs) we do not own or operate will not be available until the 
fifth business day after the day of your deposit. This rule does not 
apply at ATMs that we own or operate.
    (A list of our ATMs is enclosed. or A list of ATMs where you can 
make deposits but that are not owned or operated by us is enclosed. or 
All ATMs that we own or operate are identified as our machines.)

                    C-10--Cash Withdrawal Limitation

                       Cash Withdrawal Limitation

    We place certain limitations on withdrawals in cash. In general, 
$100 of a deposit is available for withdrawal in cash on the first 
business day after the day of deposit. In addition, a total of $400 of 
other funds becoming available on a given day is available for 
withdrawal in cash at or after (time no later than 5:00 p.m.) on that 
day. Any remaining funds will be available for withdrawal in cash on the 
following business day.

               C-11--Credit Union Interest Payment Policy

                         Interest Payment Policy

    If we receive a deposit to your account on or before the tenth of 
the month, you begin earning interest on the deposit (whether it was a 
deposit of cash or checks) as of the first day of that month. If we 
receive the deposit after the tenth of the month, you begin earning 
interest on the deposit as of the first of the following month. For 
example, a deposit made on June 7 earns interest from June l, while a 
deposit made on June 17 earns interest from July 1.

        C-11A--Availability of Funds Deposited at Other Locations

                       Deposits at Other Locations

    This availability policy only applies to funds deposited at 
(location). Please inquire for information about the availability of 
funds deposited at other locations.

                              Model Notices

                       C-12--Exception Hold Notice

                             Notice of Hold

Account number: (number)
Date of deposit: (date)

    We are delaying the availability of (amount being held) from this 
deposit. These funds will be available on the (number) business day 
after the day of your deposit.
    We are taking this action because:

--A check you deposited was previously returned unpaid.
--You have overdrawn your account repeatedly in the last six months.
--The checks you deposited on this day exceed $5,000.
--An emergency, such as failure of computer or communications equipment, 
has occurred.
--We believe a check you deposited will not be paid for the following 
reasons [*]:

________________________________________________________________________

________________________________________________________________________


[[Page 691]]

________________________________________________________________________
________________________________________________________________________


[*If you did not receive this notice at the time you made the deposit 
and the check you deposited is paid, we will refund to you any fees for 
overdrafts or returned checks that result solely from the additional 
delay that we are imposing. To obtain a refund of such fees, 
(description of procedure for obtaining refund).]

                   C-13--Reasonable Cause Hold Notice

                             Notice of Hold

Account number: (number)
Date of deposit: (date)

    We are delaying the availability of the funds you deposited by the 
following check: (description of check, such as amount and drawer.)
    These funds will be available on the (number) business day after the 
day of your deposit. The reason for the delay is explained below:

--We received notice that the check is being returned unpaid.
--We have confidential information that indicates that the check may not 
be paid.
--The check is drawn on an account with repeated overdrafts.
--We are unable to verify the endorsement of a joint payee.
--Some information on the check is not consistent with other information 
on the check.
--There are erasures or other apparent alterations on the check.
--The routing number of the paying bank is not a current routing number.
--The check is postdated or has a stale date.
--Information from the paying bank indicates that the check may not be 
paid.
--We have been notified that the check has been lost or damaged in 
collection.
--Other:

________________________________________________________________________

    [If you did not receive this notice at the time you made the deposit 
and the check you deposited is paid, we will refund to you any fees for 
overdrafts or returned checks that result solely from the additional 
delay that we are imposing. To obtain a refund of such fees, 
(description of procedure for obtaining refund).]

C-14--One-Time Notice for Large Deposit and Redeposited Check Exception 
                                  Holds

                             Notice of Hold

    If you deposit into your account:
     Checks totaling more than $5,000 on any one day, 
the first $5,000 deposited on any one banking day will be available to 
you according to our general policy. The amount in excess of $5,000 will 
generally be available on the (number) business day after the day of 
deposit for checks drawn on (bank name), the (number) business day after 
the day of deposit for local checks and (number) business day after the 
day of deposit for nonlocal checks. If checks (not drawn on us) that 
otherwise would receive next-day availability exceed $5,000, the excess 
will be treated as either local or nonlocal checks depending on the 
location of the paying bank. If your check deposit, exceeding $5,000 on 
any one day, is a mix of local checks, nonlocal checks, checks drawn on 
(bank name), or checks that generally receive next-day availability, the 
excess will be calculated by first adding together the (type of check), 
then the (type of check), then the (type of check), then the (type of 
check).
     A check that has been returned unpaid, the funds 
will generally be available on the (number) business day after the day 
of deposit for checks drawn on (bank name), the (number) business day 
after the day of deposit for local checks and the (number) business day 
after the day of deposit for nonlocal checks. Checks (not drawn on us) 
that otherwise would receive next-day availability will be treated as 
either local or nonlocal checks depending on the location of the paying 
bank.

       C-15--One-Time Notice for Repeated Overdraft Exception Hold

                             Notice of Hold

Account Number: (number) Date of Notice: (date)

    We are delaying the availability of checks deposited into your 
account due to repeated overdrafts of your account. For the next six 
months, deposits will generally be available on the (number) business 
day after the day of your deposit for checks drawn on (bank name), the 
(number) business day after the day of your deposit for local checks, 
and the (number) business day after the day of deposit for nonlocal 
checks. Checks (not drawn on us) that otherwise would have received 
next-day availability will be treated as either local or nonlocal checks 
depending on the location of the paying bank.

                     C-16--Case-by-Case Hold Notice

                             Notice of Hold

Account number: (number)
Date of deposit: (date)

    We are delaying the availability of (amount being held) from this 
deposit. These funds will be available on the (number) business day 
after the day of your deposit [(subject to our cash withdrawal 
limitation policy)].
    [If you did not receive this notice at the time you made the deposit 
and the check you deposited is paid, we will refund to you any fees for 
overdrafts or returned checks that result solely from the additional 
delay

[[Page 692]]

that we are imposing. To obtain a refund of such fees, (description of 
procedure for obtaining refund).]

   C-17--Notice at locations where employees accept consumer deposits

                        FUNDS AVAILABILITY POLICY

------------------------------------------------------------------------
                                             When funds can be withdrawn
          Description of deposit                  by cash or check
------------------------------------------------------------------------
Direct deposits...........................  The day we receive the
                                             deposit
Cash, wire transfers, cashier's,            The first business day after
 certified, teller's, or government          the day of deposit.
 checks, checks on (bank name) [unless
 (any limitation reIated to branches in
 different check processing regions)], and
 the first $100 of a day's deposits of
 other checks.
Local checks..............................  The second business day
                                             after the day of deposit.
Nonlocal checks...........................  The fifth business day after
                                             the day of deposit.
------------------------------------------------------------------------

   C-18--Notice at locations where employees accept consumer deposits 
                          (case-by-case holds)

                        FUNDS AVAILABILITY POLICY

    Our general policy is to allow you to withdraw funds deposited in 
your account on the (number) business day after the day we receive your 
deposit. Funds from electronic direct deposits will be available on the 
day we receive the deposit. In some cases, we may delay your ability to 
withdraw funds beyond the (number) business day. Then, the funds will 
generally be available by the fifth business day after the day of 
deposit.

                C-19--Notice at Automated Teller Machines

                        AVAILABILITY OF DEPOSITS

    Funds from deposits may not be available for immediate withdrawal. 
Please refer to your institution's rules governing funds availability 
for details.

       C-20--Notice at Automated Teller Machines (Delayed Receipt)

                                 NOTICE

    Deposits at this ATM between (day) and (day) will not be considered 
received until (day). The availability of funds from the deposit may be 
delayed as a result.

                        C-21--Deposit Slip Notice

    Deposits may not be available for immediate withdrawal.

        C-22--Expedited Recredit Claim, Valid Claim Refund Notice

                    Notice of Valid Claim and Refund

    We have determined that your substitute check claim is valid. We are 
refunding (amount) [of which [(amount) represents fees] [and] [(amount) 
represents accrued interest]] to your account. You may withdraw these 
funds as of (date). [This refund is the amount in excess of the $2,500 
[plus interest] that we credited to your account on (date).]

        C-23--Expedited Recredit Claim, Provisional Refund Notice

                      Notice of Provisional Refund

    In response to your substitute check claim, we are refunding 
(amount) [of which [(amount) represents fees] [and] [(amount) represents 
accrued interest]] to your account, while we complete our investigation 
of your claim. You may withdraw these funds as of (date). [Unless we 
determine that your claim is not valid, we will credit the remaining 
amount of your refund to your account no later than the 45th calendar 
day after we received your claim.]
    If, based on our investigation, we determine that your claim is not 
valid, we will reverse the refund by withdrawing the amount of the 
refund [plus interest that we have paid you on that amount] from your 
account. We will notify you within one day of any such reversal.

              C-24--Expedited Recredit Claim, Denial Notice

                             Denial of Claim

    Based on our review, we are denying your substitute check claim. As 
the enclosed (type of document, for example original check or 
sufficient) shows, (describe reason for denial, for example the check 
was properly posted, the signature is authentic, there was no warranty 
breach).
    [We have also enclosed a copy of the other information we used to 
make our decision.] [Upon your request, we will send you a copy of the 
other information that we used to make our decision.]

             C-25--Expedited Recredit Claim, Reversal Notice

                           Reversal of Refund

    In response to your substitute check claim, we provided a refund of 
(amount) by crediting your account on (date(s)). We now have determined 
that your substitute check claim was not valid. As the enclosed (type of 
document, for example original check or sufficient copy) shows, 
(describe reason for reversal, for example the check was properly 
posted, the signature is authentic, there was no warranty breach). As a 
result, we have reversed the refund to your

[[Page 693]]

account [plus interest that we have paid you on that amount] by 
withdrawing (amount) from your account on (date).
    [We have also enclosed a copy of the other information we used to 
make our decision.] [Upon your request, we will send you a copy of the 
information we used to make our decision.]

[53 FR 19433, May 27, 1988, as amended at 53 FR 31293, Aug. 18, 1988; 
Reg. CC, 55 FR 21855, May 30, 1990; 55 FR 50818, Dec. 11, 1990; 56 FR 
7802, Feb. 26, 1991; 57 FR 3280, Jan. 29, 1992; 60 FR 51671, Oct. 3, 
1995; 62 FR 13811, Mar. 24, 1997; 62 FR 48752, Sept. 17, 1997; 69 FR 
47315, 47316, Aug. 4, 2004]



      Sec. Appendix D to Part 229--Indorsement, Reconverting Bank 

      Identification, and Truncating Bank Identification Standards

    (1) The depositary bank shall indorse an original check or 
substitute check according to the following specifications:
    (i) The indorsement shall contain--
    (A) The bank's nine-digit routing number, set off by an arrow at 
each end of the number and pointing toward the number, and, if the 
depositary bank is a reconverting bank with respect to the check, an 
asterisk outside the arrow at each end of the routing number to identify 
the bank as a reconverting bank;
    (B) The indorsement date; and
    (C) The bank's name or location, if the depositary bank applies the 
indorsement physically.
    (ii) The indorsement also may contain--
    (A) A branch identification;
    (B) A trace or sequence number;
    (C) A telephone number for receipt of notification of large-dollar 
returned checks; and
    (D) Other information, provided that the inclusion of such 
information does not interfere with the readability of the indorsement.
    (iii) The indorsement, if applied to an existing paper check, shall 
be placed on the back of the check so that the routing number is wholly 
contained in the area 3.0 inches from the leading edge of the check to 
1.5 inches from the trailing edge of the check.\31\
---------------------------------------------------------------------------

    \31\ The leading edge is definded as the right side of the check 
looking at it from the front. The trailing edge is defined as the left 
side of the check looking at it from the front. See American National 
Standards Specifications for the Placement and Location of MICR 
Printing, X9.13.
---------------------------------------------------------------------------

    (iv) When printing its depositary bank indorsement (or a depositary 
bank indorsement that previously was applied electronically) onto a 
substitute check at the time that the substitute check is created, a 
reconverting bank shall place the indorsement on the back of the check 
between 1.88 and 2.74 inches from the leading edge of the check. The 
reconverting bank may omit the depositary bank's name and location from 
the indorsement.
    (2) Each subsequent collecting bank or returning bank indorser shall 
protect the identifiability and legibility of the depositary bank 
indorsement by indorsing an original check or substitute check according 
to the following specifications:
    (i) The indorsement shall contain only--
    (A) The bank's nine-digit routing number (without arrows) and, if 
the collecting bank or returning bank is a reconverting bank with 
respect to the check, an asterisk at each end of the number to identify 
the bank as a reconverting bank;
    (B) The indorsement date, and
    (C) An optional trace or sequence number.
    (ii) The indorsement, if applied to an existing paper check, shall 
be placed on the back of the check from 0.0 inches to 3.0 inches from 
the leading edge of the check.
    (iii) When printing its collecting bank or returning bank 
indorsement (or a collecting bank or returning bank indorsement that 
previously was applied electronically) onto a substitute check at the 
time that the substitute check is created, a reconverting bank shall 
place the indorsement on the back of the check between 0.25 and 2.50 
inches from the trailing edge of the check.
    (3) A reconverting bank shall comply with the following 
specifications when creating a substitute check:
    (i) If it is a depositary bank, collecting bank, or returning bank 
with respect to the substitute check, the reconverting bank shall place 
its own indorsement onto the back of the check as specified in this 
appendix.
    (ii) A reconverting bank that also is the paying bank with respect 
to the substitute check shall so identify itself by placing on the back 
of the check, between 0.25 and 2.50 inches from the trailing edge of the 
check, its nine-digit routing number (without arrows) and an asterisk at 
each end of the number.
    (iii) The reconverting bank shall place on the front of the check, 
outside the image of the original check, its nine-digit routing number 
(without arrows) and an asterisk at each end of the number, in 
accordance with ANS X9.100-140.
    (iv) The reconverting bank shall place on the front of the check, 
outside the image of the original check, the truncating bank's nine-
digit routing number (without arrows) and a bracket at each end of the 
number, in accordance with ANS X9.100-140.
    (4) Any indorsement, reconverting bank identification, or truncating 
bank identification placed on an original check or substitute check 
shall be printed in black ink.

[69 FR 47316, Aug. 4, 2004]

[[Page 694]]



                 Sec. Appendix E to Part 229--Commentary

                             I. Introduction

                              A. Background

    1. The Board interpretations, which are labeled ``Commentary'' and 
follow each section of Regulation CC (12 CFR Part 229), provide 
background material to explain the Board's intent in adopting a 
particular part of the regulation; the Commentary also provides examples 
to aid in understanding how a particular requirement is to work. Under 
section 611(e) of the Expedited Funds Availability Act (12 U.S.C. 
4010(e)), no provision of section 611 imposing any liability shall apply 
to any act done or omitted in good faith conformity with any rule, 
regulation, or interpretation thereof by the Board of Governors of the 
Federal Reserve System, notwithstanding the fact that after such act or 
omission has occurred, such rule, regulation, or interpretation is 
amended, rescinded, or determined by judicial or other authority to be 
invalid for any reason. The Commentary is an ``interpretation'' of a 
regulation by the Board within the meaning of section 611.

                      II. Section 229.2 Definitions

                              A. Background

    1. Section 229.2 defines the terms used in the regulation. For the 
most part, terms are defined as they are in section 602 of the Expedited 
Funds Availability Act (12 U.S.C. 4001). The Board has made a number of 
changes for the sake of clarity, to conform the terminology to that 
which is familiar to the banking industry, to define terms that are not 
defined in the EFA Act, and to carry out the purposes of the EFA Act. 
The Board also has incorporated by reference the definitions of the 
Uniform Commercial Code where appropriate. Some of Regulation CC's 
definitions are self-explanatory and therefore are not discussed in this 
Commentary.

                           B. 229.2(a) Account

    1. The EFA Act defines account to mean ``a demand deposit account or 
similar transaction account at a depository institution.'' The 
regulation defines account, for purposes other than subpart D, in terms 
of the definition of ``transaction account'' in the Board's Regulation D 
(12 CFR part 204). This definition of account, however, excludes certain 
deposits, such as nondocumentary obligations (see 12 CFR 
204.2(a)(1)(vii)), that are covered under the definition of 
``transaction account'' in Regulation D. The definition applies to 
accounts with general third party payment powers but does not cover time 
deposits or savings deposits, including money market deposit accounts, 
even though they may have limited third party payment powers. The Board 
believes that it is appropriate to exclude these accounts because of the 
reference to demand deposits in the EFA Act, which suggests that the EFA 
Act is intended to apply only to accounts that permit unlimited third 
party transfers.
    2. The term account also differs from the definition of transaction 
account in Regulation D because the term account refers to accounts held 
at banks. Under Subparts A and C, the term bank includes not only any 
depository institution, as defined in the EFA Act, but also any person 
engaged in the business of banking, such as a Federal Reserve Bank, a 
Federal Home Loan Bank, or a private banker that is not subject to 
Regulation D. Thus, accounts at these institutions benefit from the 
expeditious return requirements of Subpart C.
    3. Interbank deposits, including accounts of offices of domestic 
banks or foreign banks located outside the United States, and direct and 
indirect accounts of the United States Treasury (including Treasury 
General Accounts and Treasury Tax and Loan deposits) are exempt from 
subpart B and, in connection therewith, subpart A. However, interbank 
deposits are included as accounts for purposes of subparts C and D and, 
in connection therewith, subpart A.
    4. The Check 21 Act defines account to mean any deposit account at a 
bank. Therefore, for purposes of subpart D and, in connection therewith, 
subpart A, account means any deposit, as that term is defined by Sec. 
204.2(a)(1)(i) of Regulation D, at a bank. Many deposits that are not 
accounts for purposes of the other subparts of Regulation CC, such as 
savings deposits, are accounts for purposes of subpart D.

                C. 229.2(b) Automated Clearinghouse (ACH)

    1. The Board has defined automated clearinghouse as a facility that 
processes debit and credit transfers under rules established by a 
Federal Reserve Bank operating circular governing automated 
clearinghouse items or the rules of an ACH association. ACH credit 
transfers are included in the definition of electronic payment.
    2. The reference to ``debit and credit transfers'' does not refer to 
the corresponding debit and credit entries that are part of the same 
transaction, but to different kinds of ACH payments. In an ACH credit 
transfer, the originator orders that its account be debited and another 
account credited. In an ACH debit transfer, the originator, with prior 
authorization, orders another account to be debited and the originator's 
account to be credited.
    3. A facility that handles only wire transfers (defined elsewhere) 
is not an ACH.

               D. 229.2(c) Automated Teller Machine (ATM)

    1. ATM is not defined in the EFA Act. The regulation defines an ATM 
as an electronic

[[Page 695]]

device at which a natural person may make deposits to an account by cash 
or check and perform other account transactions. Point-of-sale 
terminals, machines that only dispense cash, night depositories, and 
lobby deposit boxes are not ATMs within the meaning of the definition, 
either because they do not accept deposits of cash or checks (e.g., 
point-of-sale terminals and cash dispensers) or because they only accept 
deposits (e.g., night depositories and lobby boxes) and cannot perform 
other transactions. A lobby deposit box or similar receptacle in which 
written payment orders or deposits may be placed is not an ATM.
    2. A facility may be an ATM within this definition even if it is a 
branch under state or federal law, although an ATM is not a branch as 
that term is used in this regulation.

                  E. 229.2(d) Available for Withdrawal

    1. Under this definition, when funds become available for 
withdrawal, the funds may be put to all uses for which the customer may 
use actually and finally collected funds in the customer's account under 
the customer's account agreement with the bank. Examples of such uses 
include payment of checks drawn on the account, certification of checks, 
electronic payments, and cash withdrawals. Funds are available for these 
uses notwithstanding provisions of other law that may restrict the use 
of uncollected funds (e.g., 18 U.S.C. 1004; 12 U.S.C. 331).
    2. If a bank makes funds available to a customer for a specific 
purpose (such as paying checks that would otherwise overdraw the 
customer's account and be returned for insufficient funds) before the 
funds must be made available under the bank's policy or this regulation, 
it may nevertheless apply a hold consistent with this regulation to 
those funds for other purposes (such as cash withdrawals). For purposes 
of this regulation, funds are considered available for withdrawal even 
though they are being held by the bank to satisfy an obligation of the 
customer other than the customer's potential liability for the return of 
the check. For example, a bank does not violate its obligations under 
this subpart by holding funds to satisfy a garnishment, tax levy, or 
court order restricting disbursements from the account; or to satisfy 
the customer's liability arising from the certification of a check, sale 
of a cashier's or teller's check, guaranty or acceptance of a check, or 
similar transaction to be debited from the customer's account.

                            F. 229.2(e) Bank

    1. The EFA Act uses the term depository institution, which it 
defines by reference to section 19(b)(1)(A)(i) through (vi) of the 
Federal Reserve Act (12 U.S.C. 461(b)(1)(A)(i) through (vi)). This 
regulation uses the term bank, a term that conforms to the usage the 
Board has previously adopted in Regulation J. Bank is also used in 
Articles 4 and 4A of the Uniform Commercial Code.
    2. Bank is defined to include depository institutions, such as 
commercial banks, savings banks, savings and loan associations, and 
credit unions as defined in the EFA Act, and U.S. branches and agencies 
of foreign banks. For purposes of Subpart B, the term does not include 
corporations organized under section 25A of the Federal Reserve Act, 12 
U.S.C. 611-631 (Edge corporations) or corporations having an agreement 
or undertaking with the Board under section 25 of the Federal Reserve 
Act, 12 U.S.C. 601-604a (agreement corporations). For purposes of 
Subparts C and D, and in connection therewith, Subpart A, any Federal 
Reserve Bank, Federal Home Loan Bank, or any other person engaged in the 
business of banking is regarded as a bank. The phrase ``any other person 
engaged in the business of banking'' is derived from U.C.C. 1-201(4), 
and is intended to cover entities that handle checks for collection and 
payment, such as Edge and agreement corporations, commercial lending 
companies under 12 U.S.C. 3101, certain industrial banks, and private 
bankers, so that virtually all checks will be covered by the same rules 
for forward collection and return, even though they may not be covered 
by the requirements of Subpart B. For the purposes of Subparts C and D, 
and in connection therewith, Subpart A, the term also may include a 
state or a unit of general local government to the extent that it pays 
warrants or other drafts drawn directly on the state or local government 
itself, and the warrants or other drafts are sent to the state or local 
government for payment or collection.
    3. Unless otherwise specified, the term bank includes all of a 
bank's offices in the United States. The regulation does not cover 
foreign offices of U.S. banks.
    4. For purposes of subpart D and, in connection therewith, subpart 
A, the term bank also includes the Treasury of the United States and the 
United States Postal Service to the extent that they act as paying banks 
because the Check 21 Act includes these two entities in the definition 
of the term bank to the extent that they act as payors.

              G. 229.2(f) Banking Day and (g) Business Day

    1. The EFA Act defines business day as any day excluding Saturdays, 
Sundays, and legal holidays. Legal holiday, however, is not defined, and 
the variety of local holidays, together with the practice of some banks 
to close midweek, makes the EFA Act's definition difficult to apply. The 
Board believes that two kinds of business days are relevant. First, when 
determining the day when funds are deposited or when a bank must perform

[[Page 696]]

certain actions (such as returning a check), the focus should be on a 
day that the bank is actually open for business. Second, when counting 
days for purposes of determining when funds must be available under the 
regulation or when notice of nonpayment must be received by the 
depositary bank, there would be confusion and uncertainty in trying to 
follow the schedule of a particular bank, and there is less need to 
identify a day when a particular bank is open. Most banks that act as 
intermediaries (large correspondents and Federal Reserve Banks) follow 
the same holiday schedule. Accordingly, the regulation has two 
definitions: Business day generally follows the standard Federal Reserve 
Bank holiday schedule (which is followed by most large banks), and 
banking day is defined to mean that part of a business day on which a 
bank is open for substantially all of its banking activities.
    2. The definition of banking day corresponds to the definition of 
banking day in U.C.C. 4-104(a)(3), except that a banking day is defined 
in terms of a business day. Thus, if a bank is open on Saturday, 
Saturday might be a banking day for purposes of the U.C.C., but it would 
not be a banking day for purposes of Regulation CC because Saturday is 
never a business day under the regulation.
    3. The definition of banking day is phrased in terms of when ``an 
office of a bank is open'' to indicate that a bank may observe a banking 
day on a per-branch basis. A deposit made at an ATM or off-premise 
facility (such as a remote depository or a lock box) is considered made 
at the branch holding the account into which the deposit is made for the 
purpose of determining the day of deposit. All other deposits are 
considered made at the branch at which the deposit is received. For 
example, under Sec. 229.19(a)(1), funds deposited at an ATM are 
considered deposited at the time they are received at the ATM. On a 
calendar day that is a banking day for the branch or other location of 
the depositary bank at which the account is maintained, a deposit 
received at an ATM before the ATM's cut-off hour is considered deposited 
on that banking day, and a deposit received at an ATM after the ATM's 
cut-off hour is considered deposited on the next banking day of the 
branch or other location where the account is maintained. On a calendar 
day that is not a banking day for the account-holding location, all ATM 
deposits are considered deposited on that location's next banking day. 
This rule for determining the day of deposit also would apply to a 
deposit to an off-premise facility, such as a night depository or lock 
box, which is considered deposited when removed from the facility and 
available for processing under Sec. 229.19(a)(3). If an unstaffed 
facility, such as a night depository or lock box, is on branch premises, 
the day of deposit is determined by the banking day at the branch at 
which the deposit is received, whether or not it is the branch at which 
the account is maintained.

                            H. 229.2(h) Cash

    1. Cash means U.S. coins and currency. The phrase in the EFA Act 
``including Federal Reserve notes'' has been deleted as unnecessary. 
(See 31 U.S.C. 5103.)

                       I. 229.2(i) Cashier's Check

    1. The regulation adds to the second item in the EFA Act's 
definition of cashier's check the phrase, ``on behalf of the bank as 
drawer,'' to clarify that the term cashier's check is intended to cover 
only checks that a bank draws on itself. The definition of cashier's 
check includes checks provided to a customer of the bank in connection 
with customer deposit account activity, such as account disbursements 
and interest payments. The definition also includes checks acquired from 
a bank by noncustomers for remittance purposes, such as certain loan 
disbursement checks. Cashier's checks provided to customers or others 
are often labeled as ``cashier's check,'' ``officer's check,'' or 
``official check.'' The definition excludes checks that a bank draws on 
itself for other purposes, such as to pay employees and vendors, and 
checks issued by the bank in connection with a payment service, such as 
a payroll or a bill-paying service. Cashier's checks generally are sold 
by banks to substitute the bank's credit for the customer's credit and 
thereby enhance the collectibility of the checks. A check issued in 
connection with a payment service generally is provided as a convenience 
to the customer rather than as a guarantee of the check's 
collectibility. In addition, such checks are often more difficult to 
distinguish from other types of checks than are cashier's checks as 
defined by this regulation.

                       J. 229.2(j) Certified Check

    1. The EFA Act defines a certified check as one to which a bank has 
certified that the drawer's signature is genuine and that the bank has 
set aside funds to pay the check. Under the Uniform Commercial Code, 
certification of a check means the bank's signed agreement that it will 
honor the check as presented (U.C.C. 3-409). The regulation defines 
certified check to include both the EFA Act's and U.C.C.'s definitions.

                            K. 229.2(k) Check

    1. Check is defined in section 602(7) of the EFA Act as a negotiable 
demand draft drawn on or payable through an office of a depository 
institution located in the United States, excluding noncash items. The 
regulation includes six categories of instruments within the definition 
of check.
    2. The first category is negotiable demand drafts drawn on, or 
payable through or at, an

[[Page 697]]

office of a bank. As the definition of bank includes only offices 
located in the United States, this category is limited to checks drawn 
on, or payable through or at, a banking office located in the United 
States.
    3. The EFA Act treats drafts payable through a bank as checks, even 
though under the U.C.C. the payable-through bank is a collecting bank to 
make presentment and generally is not authorized to make payment (U.C.C. 
4-106(a)). The EFA Act does not expressly address items that are payable 
at a bank. This regulation treats both payable-through and payable-at 
demand drafts as checks. The Board believes that treating demand drafts 
payable at a bank as checks will not have a substantial effect on the 
operations of payable-at banks--by far the largest proportion of 
payable-at items are not negotiable demand drafts, but time items, such 
as commercial paper, bonds, notes, bankers' acceptances, and securities. 
These time items are not covered by the requirements of the EFA Act or 
this regulation. (The treatment of payable-through drafts is discussed 
in greater detail in connection with the definitions of local check and 
paying bank.)
    4. The second category is checks drawn on Federal Reserve Banks and 
Federal Home Loan Banks. Principal and interest payments on federal debt 
instruments often are paid with checks drawn on a Federal Reserve Bank 
as fiscal agent of the United States, and these fiscal agency checks are 
indistinguishable from other checks drawn on Federal Reserve Banks. (See 
31 CFR Part 355.) Federal Reserve Bank checks also are used by some 
banks as substitutes for cashier's or teller's checks. Similarly, 
savings and loan associations often use checks drawn on Federal Home 
Loan Banks as teller's checks. The definition of check includes checks 
drawn on Federal Home Loan Banks and Federal Reserve Banks because in 
many cases they are the functional equivalent of Treasury checks or 
teller's checks.
    5. The third and fourth categories of instrument included in the 
definition of check refer to government checks. The EFA Act refers to 
checks drawn on the U.S. Treasury, even though these instruments are not 
drawn on or payable through an office of a depository institution, and 
checks drawn by state and local governments. The EFA Act also gives the 
Board authority to define functionally equivalent instruments as 
depository checks.\1\ Thus, the EFA Act is intended to apply to 
instruments other than those that meet the strict definition of check in 
section 602(7) of the EFA Act. Checks and warrants drawn by states and 
local governments often are used for the purposes of making unemployment 
compensation payments and other payments that are important to the 
recipients. Consequently, the Board has expressly defined check to 
include drafts drawn on the U.S. Treasury and drafts or warrants drawn 
by a state or a unit of general local government on itself.
---------------------------------------------------------------------------

    \1\ Section 602(11) of the EFA Act (12 U.S.C. 4001(11)) defines 
``depository check'' as ``any cashier's check, certified check, teller's 
check, and any other functionally equivalent instrument as determined by 
the Board.''
---------------------------------------------------------------------------

    6. The fifth category of instrument included in the definition of 
check is U.S. Postal Service money orders. These instruments are defined 
as checks because they often are used as a substitute for checks by 
consumers, even though money orders are not negotiable under Postal 
Service regulations. The Board has not provided specific rules for other 
types of money orders; these instruments generally are drawn on or 
payable through or payable at banks and are treated as checks on that 
basis.
    7. The sixth and final category of instrument included in the 
definition of check is traveler's checks drawn on or payable through or 
at a bank. Traveler's check is defined in paragraph (hh) of this 
section.
    8. Finally, for the purposes of Subparts C and D, and in connection 
therewith, Subpart A, the definition of check includes nonnegotiable 
demand drafts because these instruments are often handled as cash items 
in the forward collection process.
    9. A substitute check as defined in Sec. 229.2(aaa) is a check for 
purposes of Regulation CC and the U.C.C., even if that substitute check 
does not meet the requirements for legal equivalence set forth in Sec. 
229.51(a).
    10. The definition of check does not include an instrument payable 
in a foreign currency (i.e., other than in United States money as 
defined in 31 U.S.C. 5101) or a credit card draft (i.e., a sales draft 
used by a merchant or a draft generated by a bank as a result of a cash 
advance), or an ACH debit transfer. The definition of check includes a 
check that a bank may supply to a customer as a means of accessing a 
credit line without the use of a credit card.

                         L. 229.2(l) [Reserved]

                   M. 229.2(m) Check Processing Region

    1. The EFA Act defines this term as ``the geographic area served by 
a Federal Reserve bank check processing center or such larger area as 
the Board may prescribe by regulations.'' The Board has defined check 
processing region as the territory served by one of the Federal Reserve 
head offices, branches, or regional check processing centers. Appendix A 
includes a list of routing numbers arranged by Federal Reserve Bank 
office. The definition of check processing region is key to determining 
whether a check is considered local or nonlocal.

[[Page 698]]

                      N. 229.2(n) Consumer Account

    1. Consumer account is defined as an account used primarily for 
personal, family, or household purposes. An account that does not meet 
the definition of consumer account is a nonconsumer account. A clearing 
account maintained at a bank directly by a brokerage firm is not a 
consumer account, even if the account is used to pay checks drawn by 
consumers using the funds in that account. The bank's relationship is 
with the brokerage firm, and the account is used by the brokerage firm 
to facilitate the clearing of its customers' checks. Because for 
purposes of Regulation CC the term account includes only deposit 
accounts, a consumer's revolving credit relationship or other line of 
credit with a bank is not a consumer account, even if the consumer draws 
on such credit lines by using a check. Both consumer and nonconsumer 
accounts are subject to the requirements of this regulation, including 
the requirement that funds be made available according to specific 
schedules and that the bank make specified disclosures of its 
availability policies. Section 229.18(b) (notices at branch locations) 
and Sec. 229.18(e) (notice of changes in policy) apply only to consumer 
accounts. Section 229.13(g)(2) (one-time exception notice) and Sec. 
229.19(d) (use of calculated availability) apply only to nonconsumer 
accounts.

                       O. 229.2(o) Depositary Bank

    1. The regulation uses the term depositary bank rather than the term 
receiving depository institution. Receiving depository institution is a 
term unique to the EFA Act, while depositary bank is the term used in 
Article 4 of the U.C.C. and Regulation J.
    2. A depositary bank includes the bank in which the check is first 
deposited. If a foreign office of a U.S. or foreign bank sends checks to 
its U.S. correspondent bank for forward collection, the U.S. 
correspondent is the depositary bank because foreign offices of banks 
are not included in the definition of bank.
    3. If a customer deposits a check in its account at a bank, the 
customer's bank is the depositary bank with respect to the check. For 
example, if a person deposits a check into an account at a 
nonproprietary ATM, the bank holding the account into which the check is 
deposited is the depositary bank even though another bank may service 
the nonproprietary ATM and send the check for collection. (Under Sec. 
229.35 the depositary bank may agree with the bank servicing the 
nonproprietary ATM to have the servicing bank place its own indorsement 
on the check as the depositary bank. For the purposes of Subpart C, the 
bank applying its indorsement as the depositary bank indorsement on the 
check is the depositary bank.)
    4. For purposes of Subpart B, a bank may act as both the depositary 
bank and the paying bank with respect to a check, if the check is 
payable by the bank in which it was deposited, or if the check is 
payable by a nonbank payor and payable through or at the bank in which 
it was deposited. A bank also is considered a depositary bank with 
respect to checks it receives as payee. For example, a bank is a 
depositary bank with respect to checks it receives for loan repayment, 
even though these checks are not deposited in an account at the bank. 
Because these checks would not be ``deposited to accounts,'' they would 
not be subject to the availability or disclosure requirements of Subpart 
B.

                     P. 229.2(p) Electronic Payment

    1. Electronic payment is defined to mean a wire transfer as defined 
in Sec. 229.2(11) or an ACH credit transfer. The EFA Act requires that 
funds deposited by wire transfer be made available for withdrawal on the 
business day following deposit but expressly leaves the definition of 
the term wire transfer to the Board. Because ACH credit transfers 
frequently involve important consumer payments, such as wages, the 
regulation requires that funds deposited by ACH credit transfers be 
available for withdrawal on the business day following deposit.
    2. ACH debit transfers, even though they may be transmitted 
electronically, are not defined as electronic payments because the 
receiver of an ACH debit transfer has the right to return the transfer, 
which would reverse the credit given to the originator. Thus, ACH debit 
transfers are more like checks than wire transfers. Further, bank 
customers that receive funds by originating ACH debit transfers are 
primarily large corporations, which generally would be able to negotiate 
with their banks for prompt availability.
    3. A point-of-sale transaction would not be considered an electronic 
payment unless the transaction was effected by means of an ACH credit 
transfer or wire transfer.

                     Q. 229.2(q) Forward Collection

    1. Forward collection is defined to mean the process by which a bank 
sends a check to the paying bank for collection, including sending the 
check to an intermediary collecting bank for settlement, as 
distinguished from the process by which the check is returned unpaid. 
Noncash collections are not included in the term forward collection.

                         R. 229.2(r) Local Check

    1. Local check is defined as a check payable by or at a local paying 
bank, or, in the case of nonbank payors, payable through a local paying 
bank. A check payable by a local bank but payable through a nonlocal

[[Page 699]]

bank is a local check. Conversely, a check payable through a local bank 
but payable by a nonlocal bank is a nonlocal check. Where two banks are 
named on a check and neither is designated as a payable-through bank, 
the check is considered payable by either bank and may be considered 
local or nonlocal depending on the bank to which it is sent for payment. 
Generally, the depositary bank may rely on the routing number to 
determine whether a check is local or nonlocal. Appendix A includes a 
list of routing numbers arranged by Federal Reserve Bank Office to 
assist persons in determining whether or not such a check is local. If, 
however, a check is payable by one bank but payable through another 
bank, the routing number appearing on the check will be that of the 
payable-through bank, not the paying bank. Many credit union share 
drafts and certain other checks payable by banks are payable through 
other banks. In such cases, the routing number cannot be relied on to 
determine whether the check is local or nonlocal. For payable-through 
checks that meet the labeling requirements of Sec. 229.36(e), the 
depositary bank may rely on the four-digit routing symbol of the paying 
bank that is printed on the face of the check as required by that 
section, e.g., in the title plate, but not on the first four digits of 
the payable-through bank's routing number printed in magnetic ink in the 
MICR line or in fractional form, to determine whether the check is local 
or nonlocal.

                      S. 229.2(s) Local Paying Bank

    1. ``Local paying bank'' is defined as a paying bank located in the 
same check-processing region as the branch, contractual branch, or 
proprietary ATM of the depositary bank. For example, a check deposited 
at a contractual branch would be deemed local or nonlocal based on the 
location of the contractual branch with respect to the location of the 
paying bank.
    Examples.
    a. If a check that is payable by a bank that is located in the same 
check processing region as the depositary bank is payable through a bank 
located in another check processing region, the check is considered 
local or nonlocal depending on the location of the bank by which it is 
payable even if the check is sent to the nonlocal bank for collection.
    b. The location of the depositary bank is determined by the physical 
location of the branch or proprietary ATM at which a check is deposited, 
regardless of whether the deposit is made in person, by mail, or 
otherwise. For example, if a branch of the depositary bank located in 
one check-processing region sends a check that was deposited at that 
branch to the depositary bank's central facility in another check-
processing region, and the central facility is in the same check-
processing region as the paying bank, the check is still considered 
nonlocal. (See the commentary to the definition of ``paying bank.'')
    c. If a person deposits a check to an account by mailing or 
otherwise sending the check to a facility or office that is not a bank, 
the check is considered local or nonlocal depending on the location of 
the bank whose indorsement appears on the check as the depositary bank.

                     T. 229.2(t) Merger Transaction

    1. Merger transaction is a term used in Subparts B and C in 
connection with transition rules for merged banks. It encompasses 
mergers, consolidations, and purchase/assumption transactions of the 
type that usually must be approved under the Bank Merger Act (12 U.S.C. 
1828(c)) or similar statutes; it does not encompass acquisitions of a 
bank under the Bank Holding Company Act (12 U.S.C. 1842) where an 
acquired bank maintains its separate corporate existence.
    2. Regulation CC adopts a one-year transition period for banks that 
are party to a merger transaction during which the merged banks will 
continue to be treated as separate entities. (See Sec. Sec. 229.19(g) 
and 229.40.)

                        U. 229.2(u) Noncash Item

    1. The EFA Act defines the term check to exclude noncash items, and 
defines noncash items to include checks to which another document is 
attached, checks accompanied by special instructions, or any similar 
item classified as a noncash item in the Board's regulation. To qualify 
as a noncash item, an item must be handled as such and may not be 
handled as a cash item by the depositary bank.
    2. The regulation's definition of noncash item also includes checks 
that consist of more than a single thickness of paper (except checks 
that qualify for handling by automated check processing equipment, e.g. 
those placed in carrier envelopes) and checks that have not been 
preprinted or post-encoded in magnetic ink with the paying bank's 
routing number, as well as checks with documents attached or accompanied 
by special instructions. (In the context of this definition, paying bank 
refers to the paying bank as defined for purposes of Subpart C.)
    3. A check that has been preprinted or post-encoded with a routing 
number that has been retired (e.g., because of a merger) for at least 
three years is a noncash item unless the current number is added for 
processing purposes by placing the check in an encoded carrier envelope 
or adding a strip to the check.
    4. Checks that are accompanied by special instructions are also 
noncash items. For example, a person concerned about whether a check 
will be paid may request the depositary bank to send a check for 
collection as a

[[Page 700]]

noncash item with an instruction to the paying bank to notify the 
depositary bank promptly when the check is paid or dishonored.
    5. For purposes of forward collection, a copy of a check is neither 
a check nor a noncash item, but may be treated as either. For purposes 
of return, a copy is generally a notice in lieu of return. (See 
Sec. Sec. 229.30(f) and 229.31(f).)

                         V. 229.2(v) [Reserved]

                         W. 229.2(w) [Reserved]

                         X. 229.2(x) [Reserved]

                         Y. 229.2(y) [Reserved]

                         Z. 229.2(z) Paying Bank

    1. The regulation uses this term in lieu of the EFA Act's 
``originating depository institution.'' For purposes of all subparts of 
Regulation CC, the term paying bank includes the bank by which a check 
is payable, the payable-at bank to which a check is sent, or, if the 
check is payable by a nonbank payor, the bank through which the check is 
payable and to which it is sent for payment or collection. For purposes 
of subparts C and D, the term paying bank also includes the payable-
through bank and the bank whose routing number appears on the check, 
regardless of whether the check is payable by a different bank, provided 
that the check is sent for payment or collection to the payable through 
bank or the bank whose routing number appears on the check.
    2. Under Sec. Sec. 229.30 and 229.36(a), a bank designated as a 
payable-through bank or payable-at bank and to which the check is sent 
for payment or collection is responsible for the expedited return of 
checks and notice of nonpayment requirements of Subpart C. The payable-
through or payable-at bank may contract with the payor with respect to 
its liability in discharging these responsibilities. The Board believes 
that the EFA Act makes a clear connection between availability and the 
time it takes for checks to be cleared and returned. Allowing the 
payable-through bank additional time to forward checks to the payor and 
await return or pay instructions from the payor would delay the return 
of these checks, increasing the risks to depositary banks. Subpart C 
places on payable-through and payable-at banks the requirements of 
expeditious return based on the time the payable-through or payable-at 
bank received the check for forward collection.
    3. If a check is sent for forward collection based on the routing 
number, the bank associated with the routing number is a paying bank for 
the purposes of Subparts C and D requirements, including notice of 
nonpayment, even if the check is not drawn by a customer of that bank or 
the check is fraudulent.
    4. The phrase ``and to which [the check] is sent for payment or 
collection'' includes sending not only the physical check, but 
information regarding the check under a truncation arrangement.
    5. Federal Reserve Banks and Federal Home Loan Banks are also paying 
banks under all subparts of the regulation with respect to checks 
payable by them, even though such banks are not defined as banks for 
purposes of Subpart B.
    6. In accordance with the Check 21 Act, for purposes of subpart D 
and, in connection therewith, subpart A, paying bank includes the 
Treasury of the United States or the United States Postal Service with 
respect to a check payable by that entity and sent to that entity for 
payment or collection, even though the Treasury and Postal Service are 
not defined as banks for purposes of subparts B and C. Because the 
Federal Reserve Banks act as fiscal agents for the Treasury and the U.S. 
Postal Service and in that capacity are designated as presentment 
locations for Treasury checks and U.S. Postal Service money orders, a 
Treasury check or U.S. Postal Service money order presented to a Federal 
Reserve Bank is considered to be presented to the Treasury or U.S. 
Postal Service, respectively.

                      AA. 229.2(aa) Proprietary ATM

    1. All deposits at nonproprietary ATMs are treated as deposits of 
nonlocal checks, and deposits at proprietary ATMs generally are treated 
as deposits at banking offices. The Conference Report on the EFA Act 
indicates that the special availability rules for deposits received 
through nonproprietary ATMs are provided because ``nonproprietary ATMs 
today do not distinguish among check deposits or between check and cash 
deposits'' (H.R. Rep. No. 261, 100th Cong., 1st Sess. at 179 (1987)). 
Thus, a deposit of any combination of cash and checks at a 
nonproprietary ATM may be treated as if it were a deposit of nonlocal 
checks, because the depositary bank does not know the makeup of the 
deposit and consequently is unable to place different holds on cash, 
local check, and nonlocal check deposits made at the ATM.
    2. A colloquy between Senators Proxmire and Dodd during the floor 
debate on the Competitive Equality Banking Act (133 Cong. Rec. S11289 
(Aug. 4, 1987)) indicates that whether a bank operates the ATM is the 
primary criterion in determining whether the ATM is proprietary to that 
bank. Because a bank should be capable of ascertaining the composition 
of deposits made to an ATM operated by that bank, an exception to the 
availability schedules is not warranted for these deposits. If more than 
one bank meets the ``owns or operates'' criterion, the ATM is

[[Page 701]]

considered proprietary to the bank that operates it. For the purpose of 
this definition, the bank that operates an ATM is the bank that puts 
checks deposited into the ATM into the forward collection stream. An ATM 
owned by one or more banks, but operated by a nonbank servicer, is 
considered proprietary to the bank or banks that own it.
    3. The EFA Act also includes location as a factor in determining 
whether an ATM that is either owned or operated by a bank is proprietary 
to that bank. The definition of proprietary ATM includes an ATM located 
on the premises of the bank, either inside the branch or on its outside 
wall, regardless of whether the ATM is owned or operated by that bank. 
Because the EFA Act also defines a proprietary ATM as one that is ``in 
close proximity'' to the bank, the regulation defines an ATM located 
within 50 feet of a bank to be proprietary to that bank unless it is 
identified as being owned or operated by another entity. The Board 
believes that the statutory proximity test was designed to apply to 
situations where it would appear to the depositor that the ATM is run by 
his or her bank, because of the proximity of the ATM to the bank. The 
Board believes that an ATM located within 50 feet of a banking office 
would be presumed proprietary to that bank unless it is clearly 
identified as being owned or operated by another entity.

                 BB. 229.2(bb) Qualified Returned Check

    1. Subpart C requires the paying bank and returning bank(s) to 
return checks in an expeditious manner. The banks may meet this 
responsibility by returning a check to the depositary bank by the same 
general means used for forward collection of a check from the depositary 
bank to the paying bank. One way to speed the return process is to 
prepare the returned check for automated processing. Qualified returned 
checks are identified by placing a ``2'' in the case of an original 
check (or a ``5'' in the case of a substitute check) in position 44 of 
the qualified return MICR line as a return identifier in accordance with 
American National Standard Specifications for Placement and Location of 
MICR Printing, X9.13 (hereinafter ``ANS X9.13'') for original checks or 
American National Standard Specifications for an Image Replacement 
Document--IRD, X9.100-140 (hereinafter ``ANS X9.100-140'') for 
substitute checks.
    2. Generally, under the standard of care imposed by Sec. 229.38, a 
paying or returning bank would be liable for any damages incurred due to 
misencoding of the routing number, the amount of the check, or return 
identifier on a qualified returned check unless the error was due to 
problems with the depositary bank's indorsement. (See also discussion of 
Sec. 229.38(c).) A qualified returned check that contains an encoding 
error would still be a qualified returned check for purposes of the 
regulation.
    3. A qualified returned check need not contain the elements of a 
check drawn on the depositary bank, such as the name of the depositary 
bank. Because indorsements and other information on carrier envelopes or 
strips will not appear on a returned check itself, banks will wish to 
retain carrier envelopes and/or microfilm or other records of carrier 
envelopes or strips with their check records.

                      CC. 229.2(cc) Returning Bank

    1. Returning bank is defined to mean any bank (excluding the paying 
bank and the depositary bank) handling a returned check. A returning 
bank may or may not be a bank that handled the returned check in the 
forward collection process. A returning bank includes a bank that agrees 
to handle a returned check for expeditious return to the depositary bank 
under Sec. 229.31(a). A returning bank is also a collecting bank for 
the purpose of a collecting bank's duty to exercise ordinary care under 
U.C.C. 4-202(b) and is analogous to a collecting bank for purposes of 
final settlement. (See Commentary to Sec. 229.35(b).)

                      DD. 229.2(dd) Routing Number

    1. Each bank is assigned a routing number by an agent of the 
American Bankers Association. The routing number takes two forms--a 
fractional form and a nine-digit form. A paying bank is identified by 
both the fractional form routing number (which normally appears in the 
upper right hand corner of the check) and the nine-digit form. The nine-
digit routing number of the paying bank generally is printed in magnetic 
ink near the bottom of the check (the MICR strip; see ANSI X9.13-1983). 
Subpart C requires depositary banks and subsequent collecting banks to 
place their routing numbers in nine-digit form in their indorsements.

                        EE. 229.2(ee) [Reserved]

                        FF. 229.2(ff) [Reserved]

                      GG. 229.2(gg) Teller's Check

    1. Teller's check is defined in the EFA Act to mean a check issued 
by a depository institution and drawn on another depository institution. 
The definition in the regulation includes not only checks drawn by a 
bank on another bank, but also checks payable through or at a bank. This 
would include checks drawn on a nonbank, as long as the check is payable 
through or at a bank. The definition does not include checks that are 
drawn by a nonbank on a nonbank even if payable through or at a bank. 
The definition includes checks provided to a customer of

[[Page 702]]

the bank in connection with customer deposit account activity, such as 
account disbursements and interest payments. The definition also 
includes checks acquired from a bank by a noncustomer for remittance 
purposes, such as certain loan disbursement checks. The definition 
excludes checks used by the bank to pay employees or vendors and checks 
issued by the bank in connection with a payment service, such as a 
payroll or a bill-paying service. Teller's checks generally are sold by 
banks to substitute the bank's credit for the customer's credit and 
thereby enhance the collectibility of the checks. A check issued in 
connection with a payment service generally is provided as a convenience 
to the customer rather than as a guarantee of the check's 
collectibility. In addition, such checks are often more difficult to 
distinguish from other types of checks than are teller's checks as 
defined by this regulation.

                     HH. 229.2(hh) Traveler's Check

    1. The EFA Act and regulation require that traveler's checks be 
treated as cashier's, teller's, or certified checks when a new depositor 
opens an account. (See Sec. 229.13(a); 12 U.S.C. 4003(a)(1)(C).) The 
EFA Act does not define traveler's check.
    2. One element of the definition states that a traveler's check is 
``drawn on or payable through or at a bank.'' Sometimes traveler's 
checks that are not issued by banks do not have any words on them 
identifying a bank as drawee or paying agent, but instead bear unique 
routing numbers with an 8000 prefix that identifies a bank as paying 
agent.
    3. Because a traveler's check is payable by, at, or through a bank, 
it is also a check for purposes of this regulation. When not subject to 
the next-day availability requirement for new accounts, a traveler's 
check should be treated as a local or nonlocal check depending on the 
location of the paying bank. The depositary bank may rely on the 
designation of the paying bank by the routing number to determine 
whether local or nonlocal treatment is required.

                  II. 229.2(ii) Uniform Commercial Code

    1. Uniform Commercial Code is defined as the version of the Code 
adopted by the individual states. For purposes of uniform citation, all 
citations to the U.C.C. in this part refer to the Official Text as 
approved by the American Law Institute and the National Conference of 
Commissioners on Uniform State Laws.

                        JJ. 229.2(jj) [Reserved]

             KK. 229.2(kk) Unit of General Local Government

    1. Unit of general local government is defined to include a city, 
county, parish, town, township, village, or other general purpose 
political subdivision of a state. The term does not include special 
purpose units, such as school districts, water districts, or Indian 
nations.

                       LL. 229.2(ll) Wire Transfer

    1. The EFA Act delegates to the Board the authority to define the 
term wire transfer. The regulation defines wire transfer as an 
unconditional order to a bank to pay a fixed or determinable amount of 
money to a beneficiary, upon receipt or on a day stated in the order, 
that is transmitted by electronic or other means over certain networks 
or on the books of banks and that is used primarily to transfer funds 
between commercial accounts. ``Unconditional'' means that no condition, 
such as presentation of documents, must be met before the bank receiving 
the order is to make payment. A wire transfer may be transmitted by 
electronic or other means. ``Electronic means'' include computer-to-
computer links, on-line terminals, telegrams (including TWX, TELEX, or 
similar methods of communication), telephone calls, or other similar 
methods. Fedwire (the Federal Reserve's wire transfer network), CHIPS 
(Clearing House Interbank Payments System, operated by the New York 
Clearing House), and book transfers among banks or within one bank are 
covered by this definition. Credits for credit and debit card 
transactions are not wire transfers. The term wire transfer excludes 
electronic fund transfers as that term is defined by the Electronic Fund 
Transfer Act.

                        MM. 229.2(mm) [Reserved]

                        NN. 229.2(nn) Good Faith

    1. This definition of good faith derives from U.C.C. 3-103(a)(4).

                   OO. 229.2(oo) Interest Compensation

    1. This calculation of interest compensation derives from U.C.C. 4A-
506(b). (See Sec. Sec. 229.34(e) and 229.36(f).)

                    PP. 229.2(pp) Contractual Branch

    1. When one bank arranges for another bank to accept deposits on its 
behalf, the second bank is a contractual branch of the first bank. For 
further discussion of contractual branch deposits and related 
disclosures, see Sec. Sec. 229.2(s) and 229.19(a) of the regulation and 
the commentary to Sec. Sec. 229.2(s), 229.10(c), 229.14(a), 229.16(a), 
229.18(b), and 229.19(a).

[[Page 703]]

                        QQ. 229.2(qq) [Reserved]

                        RR. 229.2(rr) [Reserved]

                        SS. 229.2(ss) [Reserved]

                        TT. 229.2(tt) [Reserved]

                        UU. 229.2(uu) [Reserved]

                         VV. 229.2(vv) MICR Line

    1. Information in the MICR line of a check must be printed in 
accordance with ANS X9.13 for original checks and ANS X9.100-140 for 
substitute checks. These standards could vary the requirements for 
printing the MICR line, such as by indicating circumstances under which 
the use of magnetic ink is not required.

                      WW. 229.2(ww) Original Check

    1. The definition of original check distinguishes the first paper 
check signed or otherwise authorized by the drawer to effect a 
particular payment transaction from a substitute check or other paper or 
electronic representation that is derived from an original check or 
substitute check. There is only one original check for any particular 
payment transaction. However, multiple substitute checks could be 
created to represent that original check at various points in the check 
collection and return process.

 XX. 229.2(xx) Paper or Electronic Representation of a Substitute Check

    1. Receipt of a paper or electronic representation of a substitute 
check does not trigger indemnity or expedited recredit rights, although 
the recipient nonetheless could have a warranty claim or a claim under 
other check law with respect to that document or the underlying payment 
transaction. A paper or electronic representation of a substitute check 
would include a representation of a substitute check that was drawn on 
an account, as well as a representation of a substitute traveler's 
check, credit card check, or other item that meets the substitute check 
definition. The following examples illustrate the scope of the 
definition.

                                Examples.

    a. A bank receives electronic presentment of a substitute check that 
has been converted to electronic form and charges the customer's account 
for that electronic item. The periodic account statement that the bank 
provides to the customer includes information about the electronically-
presented substitute check in a line-item list describing all the checks 
the bank charged to the customer's account during the previous month. 
The electronic file that the bank received for presentment and charged 
to the customer's account would be an electronic representation of a 
substitute check, and the line-item appearing on the customer's account 
statement would be a paper representation of a substitute check.
    b. A paying bank receives and settles for a substitute check and 
then realizes that its settlement was for the wrong amount. The paying 
bank sends an adjustment request to the presenting bank to correct the 
error. The adjustment request is not a paper or electronic 
representation of a substitute check under the definition because it is 
not being handled for collection or return as a check. Rather, it is a 
separate request that is related to a check. As a result, no substitute 
check warranty, indemnity, or expedited recredit rights attach to the 
adjustment.

                        YY. 229.2(yy) [Reserved]

                     ZZ. 229.2(zz) Reconverting Bank

    1. A substitute check is ``created'' when and where a paper 
reproduction of an original check that meets the requirements of Sec. 
229.2(aaa) is physically printed. A bank is a reconverting bank if it 
creates a substitute check directly or if another person by agreement 
creates a substitute check on the bank's behalf. A bank also is a 
reconverting bank if it is the first bank that receives a substitute 
check created by a nonbank and transfers, presents, or returns that 
substitute check or, in lieu thereof, the first paper or electronic 
representation of such substitute check.

                                Examples.

    a. Bank A, by agreement, sends an electronic check file for 
collection to Bank B. Bank B chooses to use that file to print a 
substitute check that meets the requirements of Sec. 229.2(aaa). Bank B 
is the reconverting bank as of the time it prints the substitute check.
    b. Company A, which is not a bank, by agreement receives check 
information electronically from Bank A. Bank A becomes the reconverting 
bank when Company A prints a substitute check on behalf of Bank A in 
accordance with that agreement.
    c. A depositary bank's customer, which is a nonbank business, 
receives a check for payment, truncates that original check, and creates 
a substitute check to deposit with its bank. The depositary bank 
receives that substitute check from its customer and is the first bank 
to handle the substitute check. The depositary bank becomes the 
reconverting bank as of the time that it transfers or presents the 
substitute check (or in lieu thereof the first paper or electronic 
representation of the substitute check) for forward collection.
    d. A bank is the payable-through bank for checks that are drawn on a 
nonbank payor, which is the bank's customer. When the customer decides 
not to pay a check that is payable through the bank, the customer 
creates

[[Page 704]]

a substitute check for purposes of return. The payable-through bank 
becomes the reconverting bank when it returns the substitute check (or 
in lieu thereof the first paper or electronic representation of the 
substitute check) to a returning bank or the depositary bank.
    e. A paying bank returns a substitute check to the depositary bank, 
which in turn gives that substitute check back to its nonbank customer. 
That customer then redeposits the substitute check for collection at a 
different bank. Because the substitute check was already transferred by 
a bank, the second depositary bank does not become a reconverting bank 
when it transfers or presents that substitute check for collection.
    2. In some cases there will be one or more banks between the 
truncating bank and the reconverting bank.

                                Example.

    A depositary bank truncates the original check and sends an 
electronic representation of the original check for collection to an 
intermediary bank. The intermediary bank sends the electronic 
representation of the original check to the presenting bank, which 
creates a substitute check to present to the paying bank. The presenting 
bank is the reconverting bank.
    3. A check could move from electronic form to substitute check form 
several times during the collection and return process. It therefore is 
possible that there could be multiple substitute checks, and thus 
multiple reconverting banks, with respect to the same underlying 
payment.

                    AAA. 229.2(aaa) Substitute Check

    1. ``A paper reproduction of an original check'' could include a 
reproduction created directly from the original check or a reproduction 
of the original check that is created from some other source that 
contains an image of the original check, such as an electronic 
representation of an original check or substitute check, or a previous 
substitute check.
    2. Because a substitute check must be a piece of paper, an 
electronic file or electronic check image that has not yet been printed 
in accordance with the substitute check definition is not a substitute 
check.
    3. Because a substitute check must be a representation of a check, a 
paper reproduction of something that is not a check cannot be a 
substitute check. For example, a savings bond or a check drawn on a non-
U.S. branch of a foreign bank cannot be reconverted to a substitute 
check.
    4. As described in Sec. 229.51(b) and the commentary thereto, a 
reconverting bank is required to ensure that a substitute check contains 
all indorsements applied by previous parties that handled the check in 
any form. Therefore, the image of the original check that appears on the 
back of a substitute check would include indorsements that were 
physically applied to the original check before an image of the original 
check was captured. An indorsement that was applied physically to the 
original check after an image of the original check was captured would 
be conveyed as an electronic indorsement (see paragraph 3 of the 
commentary to Sec. 229.35(a)). The back of the substitute check would 
contain a physical representation of any indorsements that were applied 
electronically to the check after an image of the check was captured but 
before creation of the substitute check.

                                Example.

    Bank A, which is the depositary bank, captures an image of an 
original check, indorses it electronically and, by agreement, transmits 
to Bank B an electronic image of the check accompanied by the electronic 
indorsement. Bank B then creates a substitute check to send to Bank C. 
The back of the substitute check created by Bank B must contain a 
representation of the indorsement previously applied electronically by 
Bank A and Bank B's own indorsement. (For more information on 
indorsement requirements, see Sec. 229.35, appendix D, and the 
commentary thereto.)
    5. Some substitute checks will not be created directly from the 
original check, but rather will be created from a previous substitute 
check. The back of a subsequent substitute check will contain an image 
of the full length of the back of the previous substitute check. ANS 
X9.100-140 requires preservation of the full length of the back of the 
previous substitute check in order to preserve previous indorsements and 
reconverting bank identifications. By contrast, the front of a 
subsequent substitute check will not contain an image of the entire 
previous substitute check. Rather, the image field of the subsequent 
substitute check will contain the image of the front of the original 
check that appeared on the previous substitute check at the time the 
previous substitute check was converted to electronic form. The portions 
of the front of the subsequent substitute check other than the image 
field will contain information applied by the subsequent reconverting 
bank, such as its reconverting bank identification, the MICR line, the 
legal equivalence legend, and optional security information.

                                Examples.

    a. The back of a subsequent substitute check would contain the 
following indorsements, all of which would be preserved through the 
image of the back of the previous substitute check: (1) The indorsements 
that were applied physically to

[[Page 705]]

the original check before an image of the original check was captured; 
(2) a physical representation of indorsements that were applied 
electronically to the original check after an image of the original 
check was captured but before creation of the first substitute check; 
and (3) indorsements that were applied physically to the previous 
substitute check. In addition, the reconverting bank for the subsequent 
substitute check must overlay onto the back of that substitute check a 
physical representation of any indorsements that were applied 
electronically after the previous substitute check was converted to 
electronic form but before creation of the subsequent substitute check.
    b. Because information could have been physically added to the image 
of the front of the original check that appeared on the previous 
substitute check, the original check image that appears on the front of 
a subsequent substitute check could contain information in addition to 
that which appeared on the original check at the time it was truncated.
    6. The MICR line applied to a substitute check must contain 
information in all fields of the MICR line that were encoded on the 
original check at any time before an image of the original check was 
captured. This includes all the MICR-line information that was 
preprinted on the original check, plus any additional information that 
was added to the MICR line before the image of the original check was 
captured (for example, the amount of the check). The information in each 
field of the substitute check's MICR line must be the same information 
as in the corresponding field of the MICR line of the original check, 
except as provided by ANS X9.100-140 (unless the Board by rule or order 
determines that a different standard applies). Industry standards may 
not, however, vary the requirement that a substitute check at the time 
of its creation must bear a full-field MICR line.
    7. ANS X9.100-140, provides that a substitute check must have a 
``4'' in position 44 and that a qualified returned substitute check must 
have a ``4'' in position 44 of the forward-collection MICR line as well 
as a ``5'' in position 44 of the qualified return MICR line. The ``4'' 
and ``5'' indicate that the document is a substitute check so that the 
size of the check image remains constant throughout the collection and 
return process, regardless of the number of substitute checks created 
that represent the same original check (see also Sec. Sec. 229.30(a)(2) 
and 229.31(a)(2) and the commentary thereto regarding requirements for 
qualified returned substitute checks). An original check generally has a 
blank position 44 for forward collection. Because a reconverting bank 
must encode position 44 of a substitute check's forward collection MICR 
line with a ``4,'' the reconverting bank must vary any character that 
appeared in position 44 of the forward-collection MICR line of the 
original check. A bank that misencodes or fails to encode position 44 at 
the time it attempts to create a substitute check has failed to create a 
substitute check. A bank that receives a properly-encoded substitute 
check may further encode that item but does so subject to the encoding 
warranties in Regulation CC and the U.C.C.
    8. A substitute check's MICR line could contain information in 
addition to the information required at the time the substitute check is 
created. For example, if the amount field of the original check was not 
encoded and the substitute check therefore did not, when created, have 
an encoded amount field, the MICR line of the substitute check later 
could be amount-encoded.
    9. A bank may receive a substitute check that contains a MICR-line 
variation but nonetheless meets the MICR-line replication requirements 
of Sec. 229.2(aaa)(2) because that variation is permitted by ANS 
X9.100-140. If such a substitute check contains a MICR-line error, a 
bank that receives it may, but is not required to, repair that error. 
Such a repair must be made in accordance with ANS X9.100-140 for 
repairing a MICR line, which generally allows a bank to correct an error 
by applying a strip that may or may not contain information in all 
fields encoded on the check's MICR line. A bank's repair of a MICR-line 
error on a substitute check is subject to the encoding warranties in 
Regulation CC and the U.C.C.
    10. A substitute check must conform to all the generally applicable 
industry standards for substitute checks set forth in ANS X9.100-140, 
which incorporates other industry standards by reference. Thus, multiple 
substitute check images contained on the same page of an account 
statement are not substitute checks.

                BBB. 229.2(bbb) Sufficient Copy and Copy

    1. A copy must be a paper reproduction of a check. An electronic 
image therefore is not a copy or a sufficient copy. However, if a 
customer has agreed to receive such information electronically, a bank 
that is required to provide an original check or sufficient copy may 
satisfy that requirement by providing an electronic image in accordance 
with Sec. 229.58 and the commentary thereto.
    2. A bank under Sec. 229.53(b)(3) may limit its liability for an 
indemnity claim and under Sec. Sec. 229.54(e)(2) and 229.55(c)(2) may 
respond to an expedited recredit claim by providing the claimant with a 
copy of a check that accurately represents all of the information on the 
front and back of the original check as of the time the original check 
was truncated or that otherwise is sufficient to determine the validity 
of the claim against the bank.

[[Page 706]]

                                Examples.

    a. A copy of an original check that accurately represents all the 
information on the front and back of the original check as of the time 
of truncation would constitute a sufficient copy if that copy resolved 
the claim. For example, if resolution of the claim required accurate 
payment and indorsement information, an accurate copy of the front and 
back of a legible original check (including but not limited to a 
substitute check) would be a sufficient copy.
    b. A copy of the original check that does not accurately represent 
all the information on both the front and back of the original check 
also could be a sufficient copy if such copy contained all the 
information necessary to determine the validity of the relevant claim. 
For instance, if a consumer received a substitute check that contained a 
blurry image of a legible original check, the consumer might seek an 
expedited recredit because his or her account was charged for $1,000, 
but he or she believed that the check was written for only $100. If the 
amount that appeared on the front of the original check was legible, an 
accurate copy of only the front of the original check that showed the 
amount of the check would be sufficient to determine whether or not the 
consumer's claim regarding the amount of the check was valid.

               CCC. 229.2(ccc) Transfer and Consideration

    1. Under Sec. Sec. 229.52 and 229.53, a bank is responsible for the 
warranties and indemnity when it transfers, presents, or returns a 
substitute check (or a paper or electronic representation thereof) for 
consideration. Drawers and other nonbank persons that receive checks 
from a bank are not transferees that receive consideration as those 
terms are defined in the U.C.C. However, the Check 21 Act clearly 
contemplates that such nonbank persons that receive substitute checks 
(or representations thereof) from a bank will receive the warranties and 
indemnity from all previous banks that handled the check. To ensure that 
these parties are covered by the substitute check warranties and 
indemnity in the manner contemplated by the Check 21 Act, Sec. 
229.2(ccc) incorporates the U.C.C. definitions of the term transfer and 
consideration by reference and expands those definitions to cover a 
broader range of situations. Delivering a check to a nonbank that is 
acting on behalf of a bank (such as a third-party check processor or 
presentment point) is a transfer of the check to that bank.

                                Examples.

    a. A paying bank pays a substitute check and then provides that paid 
substitute check (or a representation thereof) to a drawer with a 
periodic statement. Under the expanded definitions, the paying bank 
thereby transfers the substitute check (or representation thereof) to 
the drawer for consideration and makes the substitute check warranties 
described in Sec. 229.52. A drawer that suffers a loss due to receipt 
of a substitute check may have warranty, indemnity, and, if the drawer 
is a consumer, expedited recredit rights under the Check 21 Act and 
subpart D. A drawer that suffers a loss due to receipt of a paper or 
electronic representation of a substitute check would receive the 
substitute check warranties but would not have indemnity or expedited 
recredit rights.
    b. The expanded definitions also operate such that a paying bank 
that pays an original check (or a representation thereof) and then 
creates a substitute check to provide to the drawer with a periodic 
statement transfers the substitute check for consideration and thereby 
provides the warranties and indemnity.
    c. The expanded definitions ensure that a bank that receives a 
returned check in any form and then provides a substitute check to the 
depositor gives the substitute check warranties and indemnity to the 
depositor.
    d. The expanded definitions apply to substitute checks representing 
original checks that are not drawn on deposit accounts, such as checks 
used to access a credit card or a home equity line of credit.

                        DDD. 229.2(ddd) Truncate

    1. Truncate means to remove the original check from the forward 
collection or return process and to send in lieu of the original check 
either a substitute check or, by agreement, information relating to the 
original check. Truncation does not include removal of a substitute 
check from the check collection or return process.

                     EEE. 229.2(eee) Truncating Bank

    1. A bank is a truncating bank if it truncates an original check or 
if it is the first bank to transfer, present, or return another form of 
an original check that was truncated by a person that is not a bank.

                                Example.

    a. A bank's customer that is a nonbank business receives a check for 
payment and deposits either a substitute check or an electronic 
representation of the original check with its depositary bank instead of 
the original check. That depositary bank is the truncating bank when it 
transfers, presents, or returns the substitute check or electronic 
representation in lieu of the original check. That bank also would be 
the reconverting bank if it were the first bank to transfer, present, or 
return a substitute check that it received from (or created from the 
information given by) its nonbank customer (see Sec. 229.2(yy) and the 
commentary thereto).

[[Page 707]]

    2. A truncating bank does not make the subpart D warranties and 
indemnity unless it also is the reconverting bank. Therefore, a bank 
that truncates the original check and sends an electronic file to a 
collecting bank does not provide subpart D protections to the recipient 
of that electronic item. However, a recipient of an electronic item may 
protect itself against losses associated with that item by agreement 
with the truncating bank.

                 FFF. 229.2(fff) Remotely Created Check

    1. A check authorized by a consumer over the telephone that is not 
created by the paying bank and bears a legend on the signature line, 
such as ``Authorized by Drawer,'' is an example of a remotely created 
check. A check that bears the signature applied, or purported to be 
applied, by the person on whose account the check is drawn is not a 
remotely created check. A typical forged check, such as a stolen 
personal check fraudulently signed by a person other than the drawer, is 
not covered by the definition of a remotely created check.
    2. The term signature as used in this definition has the meaning set 
forth at U.C.C. 3-401. The term ``applied by'' refers to the physical 
act of placing the signature on the check.
    3. The definition of a ``remotely created check'' differs from the 
definition of a ``remotely created consumer item'' under the U.C.C. A 
``remotely created check'' may be drawn on an account held by a 
consumer, corporation, unincorporated company, partnership, government 
unit or instrumentality, trust, or any other entity or organization. A 
``remotely created consumer item'' under the U.C.C., however, must be 
drawn on a consumer account.
    4. Under Regulation CC (12 CFR part 229), the term ``check'' 
includes a negotiable demand draft drawn on or payable through or at an 
office of a bank. In the case of a ``payable through'' or ``payable at'' 
check, the signature of the person on whose account the check is drawn 
would include the signature of the payor institution or the signatures 
of the customers who are authorized to draw checks on that account, 
depending on the arrangements between the ``payable through'' or 
``payable at'' bank, the payor institution, and the customers.
    5. The definition of a remotely created check includes a remotely 
created check that has been reconverted to a substitute check.

        III. Section 229.3 Administrative Enforcement [Reserved]

                IV. Section 229.10 Next-Day Availability

                    A. Business Days and Banking Days

    1. This section, as well as other provisions of this subpart 
governing the availability of funds, provides that funds must be made 
available for withdrawal not later than a specified number of business 
days following the banking day on which the funds are deposited. Thus, a 
deposit is considered made only on a banking day, i.e., a day that the 
bank is open to the public for carrying on substantially all of its 
banking functions. For example, if a deposit is made at an ATM on a 
Saturday, Sunday, or other day on which the bank is closed to the 
public, the deposit is considered received on that bank's next banking 
day.
    2. Nevertheless, business days are used to determine the number of 
days following the banking day of deposit that funds must be available 
for withdrawal. For example, if a deposit of a local check were made on 
a Monday, the availability schedule requires that funds be available for 
withdrawal on the second business day after deposit. Therefore, funds 
must be made available on Wednesday regardless of whether the bank was 
closed on Tuesday for other than a standard legal holiday as specified 
in the definition of business day.

                       B. 229.10(a) Cash Deposits

    1. This paragraph implements the EFA Act's requirement for next-day 
availability for cash deposits to accounts at a depositary bank 
``staffed by individuals employed by such institution.'' \2\ Under this 
paragraph, cash deposited in an account at a staffed teller station on a 
Monday must become available for withdrawal by the start of business on 
Tuesday. It must become available for withdrawal by the start of 
business on Wednesday if it is deposited by mail, at a proprietary ATM, 
or by other means other than at a staffed teller station.
---------------------------------------------------------------------------

    \2\ Nothing in the EFA Act or this regulation affects terms of 
account arrangements, such as negotiable order of withdrawal accounts, 
which may require prior notice of withdrawal. (See 12 CFR 204.2(e)(2).)
---------------------------------------------------------------------------

                    C. 229.10(b) Electronic Payments

    1. The EFA Act provides next-day availability for funds received for 
deposit by wire transfer. The regulation uses the term electronic 
payment, rather than wire transfer, to include both wire transfers and 
ACH credit transfers under the next-day availability requirement. (See 
discussion of definitions of automated clearinghouse, electronic 
payment, and wire transfer in Sec. 229.2.)

[[Page 708]]

    2. The EFA Act requires that funds received by wire transfer be 
available for withdrawal not later than the business day following the 
day a wire transfer is received. This paragraph clarifies what 
constitutes receipt of an electronic payment. For the purposes of this 
paragraph, a bank receives an electronic payment when the bank receives 
both payment in finally collected funds and the payment instructions 
indicating the customer accounts to be credited and the amount to be 
credited to each account. For example, in the case of Fedwire, the bank 
receives finally collected funds at the time the payment is made. (See 
12 CFR 210.31.) Finally collected funds generally are received for an 
ACH credit transfer when they are posted to the receiving bank's account 
on the settlement day. In certain cases, the bank receiving ACH credit 
payments will not receive the specific payment instructions indicating 
which accounts to credit until after settlement day. In these cases, the 
payments are not considered received until the information on the 
account and amount to be credited is received.
    3. This paragraph also establishes the extent to which an electronic 
payment is considered made. Thus, if a participant on a private network 
fails to settle and the receiving bank receives finally settled funds 
representing only a partial amount of the payment, it must make only the 
amount that it actually received available for withdrawal.
    4. The availability requirements of this regulation do not preempt 
or invalidate other rules, regulations, or agreements which require 
funds to be made available on a more prompt basis. For example, the 
next-day availability requirement for ACH credits in this section does 
not preempt ACH association rules and Treasury regulations (31 CFR part 
210), which provide that the proceeds of these credit payments be 
available to the recipient for withdrawal on the day the bank receives 
the funds.

                   D. 229.10(c) Certain Check Deposits

    1. The EFA Act generally requires that funds be made available on 
the business day following the banking day of deposit for Treasury 
checks, state and local government checks, cashier's checks, certified 
checks, teller's checks, and ``on us'' checks, under specified 
conditions. (Treasury checks are checks drawn on the Treasury of the 
United States and have a routing number beginning with the digits 
``0000.'') This section also requires next-day availability for 
additional types of checks not addressed in the EFA Act. Checks drawn on 
a Federal Reserve Bank or a Federal Home Loan Bank and U.S. Postal 
Service money orders also must be made available on the first business 
day following the day of deposit under specified conditions. For the 
purposes of this section, all checks drawn on a Federal Reserve Bank or 
a Federal Home Loan Bank that contain in the MICR line a routing number 
that is listed in appendix A are subject to the next-day availability 
requirement if they are deposited in an account held by a payee of the 
check and in person to an employee of the depositary bank, regardless of 
the purposes for which the checks were issued. For all new accounts, 
even if the new account exception is not invoked, traveler's checks must 
be included in the $5,000 aggregation of checks deposited on any one 
banking day that are subject to the next-day availability requirement. 
(See Sec. 229.13(a).)
    2. Deposit in Account of Payee. One statutory condition to receipt 
of next-day availability of Treasury checks, state and local government 
checks, cashier's checks, certified checks, and teller's checks is that 
the check must be ``endorsed only by the person to whom it was issued.'' 
The EFA Act could be interpreted to include a check that has been 
indorsed in blank and deposited into an account of a third party that is 
not named as payee. The Board believes that such a check presents 
greater risks than a check deposited by the payee and that Congress did 
not intend to require next-day availability for such checks. The 
regulation, therefore, provides that funds must be available on the 
business day following deposit only if the check is deposited in an 
account held by a payee of the check. For the purposes of this section, 
payee does not include transferees other than named payees. The 
regulation also applies this condition to Postal Service money orders 
and checks drawn on Federal Reserve Banks and Federal Home Loan Banks.
    3. Deposits Made to an Employee of the Depositary Bank.
    a. In most cases, next-day availability of the proceeds of checks 
subject to this section is conditioned on the deposit of these checks in 
person to an employee of the depositary bank. If the deposit is not made 
to an employee of the depositary bank on the premises of such bank, the 
proceeds of the deposit must be made available for withdrawal by the 
start of business on the second business day after deposit, under 
paragraph (c)(2) of this section. For example, second-day availability 
rather than next-day availability would be allowed for deposits of 
checks subject to this section made at a proprietary ATM, night 
depository, through the mail or a lock box, or at a teller station 
staffed by a person who is not an employee of the depositary bank. 
Second-day availability also may be allowed for deposits picked up by an 
employee of the depositary bank at the customer's premises; such 
deposits would be considered made upon receipt at the branch or other 
location of the depositary bank. Employees of a contractual branch would 
not be considered employees of the depositary bank for the purposes of 
this regulation,

[[Page 709]]

and deposits at contractual branches would be treated the same as 
deposits to a proprietary ATM for the purposes of this regulation. (See 
also, Commentary to Sec. 229.19(a).)
    b. In the case of Treasury checks, the EFA Act and regulation do not 
condition the receipt of next-day availability to deposits at staffed 
teller stations. Therefore, Treasury checks deposited at a proprietary 
ATM must be accorded next-day availability, if the check is deposited to 
an account of a payee of the check.
    4. ``On Us'' Checks. The EFA Act and regulation require next-day 
availability for ``on us'' checks, i.e., checks deposited in a branch of 
the depositary bank and drawn on the same or another branch of the same 
bank, if both branches are located in the same state or check processing 
region. Thus, checks deposited in one branch of a bank and drawn on 
another branch of the same bank must receive next-day availability even 
if the branch on which the checks are drawn is located in another check 
processing region but in the same state as the branch in which the check 
is deposited. For the purposes of this requirement, deposits at 
facilities that are not located on the premises of a brick-and-mortar 
branch of the bank, such as off-premise ATMs and remote depositories, 
are not considered deposits made at branches of the depositary bank.
    5. First $100.
    a. The EFA Act and regulation also require that up to $100 of the 
aggregate deposit by check or checks not subject to next-day 
availability on any one banking day be made available on the next 
business day. For example, if $70 were deposited in an account by 
check(s) on a Monday, the entire $70 must be available for withdrawal at 
the start of business on Tuesday. If $200 were deposited by check(s) on 
a Monday, this section requires that $100 of the funds be available for 
withdrawal at the start of business on Tuesday. The portion of the 
customer's deposit to which the $100 must be applied is at the 
discretion of the depositary bank, as long as it is not applied to any 
checks subject to next-day availability. The $100 next-day availability 
rule does not apply to deposits at nonproprietary ATMs.
    b. The $100 that must be made available under this rule is in 
addition to the amount that must be made available for withdrawal on the 
business day after deposit under other provisions of this section. For 
example, if a customer deposits a $1,000 Treasury check, and a $1,000 
local check in its account on Monday, $1,100 must be made available for 
withdrawal on Tuesday--the proceeds of the $1,000 Treasury check, as 
well as the first $100 of the local check.
    c. A depositary bank may aggregate all local and nonlocal check 
deposits made by the customer on a given banking day for the purposes of 
the $100 next-day availability rule. Thus, if a customer has two 
accounts at the depositary bank, and on a particular banking day makes 
deposits to each account, $100 of the total deposited to the two 
accounts must be made available on the business day after deposit. Banks 
may aggregate deposits to individual and joint accounts for the purposes 
of this provision.
    d. If the customer deposits a $500 local check, and gets $100 cash 
back at the time of deposit, the bank need not make an additional $100 
available for withdrawal on the following day. Similarly, if the 
customer depositing the local check has a negative book balance, or 
negative available balance in its account at the time of deposit, the 
$100 that must be available on the next business day may be made 
available by applying the $100 to the negative balance, rather than 
making the $100 available for withdrawal by cash or check on the 
following day.
    6. Special Deposit Slips.
    a. Under the EFA Act, a depositary bank may require the use of a 
special deposit slip as a condition to providing next-day availability 
for certain types of checks. This condition was included in the EFA Act 
because many banks determine the availability of their customers' check 
deposits in an automated manner by reading the MICR-encoded routing 
number on the deposited checks. Using these procedures, a bank can 
determine whether a check is a local or nonlocal check, a check drawn on 
the Treasury, a Federal Reserve Bank, a Federal Home Loan Bank, or a 
branch of the depositary bank, or a U.S. Postal Service money order. 
Appendix A includes the routing numbers of certain categories of checks 
that are subject to next-day availability. The bank cannot require a 
special deposit slip for these checks.
    b. A bank cannot distinguish whether the check is a state or local 
government check, cashier's check, certified check, or teller's check by 
reading the MICR-encoded routing number, because these checks bear the 
same routing number as other checks drawn on the same bank that are not 
accorded next-day availability. Therefore, a bank may require a special 
deposit slip for these checks.
    c. The regulation specifies that if a bank decides to require the 
use of a special deposit slip (or a special deposit envelope in the case 
of a deposit at an ATM or other unstaffed facility) as a condition to 
granting next-day availability under paragraphs (c)(1)(iv) or (c)(1)(v) 
of this section or second-day availability under paragraph (c)(2) of 
this section, and if the deposit slip that must be used is different 
from the bank's regular deposit slips, the bank must either provide the 
special slips to its customers or inform its customers how such slips 
may be obtained and make the slips reasonably available to the 
customers.
    d. A bank may meet this requirement by providing customers with an 
order form for

[[Page 710]]

the special deposit slips and allowing sufficient time for the customer 
to order and receive the slips before this condition is imposed. If a 
bank provides deposit slips in its branches for use by its customers, it 
also must provide the special deposit slips in the branches. If special 
deposit envelopes are required for deposits at an ATM, the bank must 
provide such envelopes at the ATM.
    e. Generally, a teller is not required to advise depositors of the 
availability of special deposit slips merely because checks requiring 
special deposit slips for next-day availability are deposited without 
such slips. If a bank provides the special deposit slips only upon the 
request of a depositor, however, the teller must advise the depositor of 
the availability of the special deposit slips, or the bank must post a 
notice advising customers that the slips are available upon request. 
Such notice need not be posted at each teller window, but the notice 
must be posted in a place where consumers seeking to make deposits are 
likely to see it before making their deposits. For example, the notice 
might be posted at the point where the line forms for teller service in 
the lobby. The notice is not required at any drive-through teller 
windows nor is it required at night depository locations, or at 
locations where consumer deposits are not accepted. If a bank prepares a 
deposit for a depositor, it must use a special deposit slip where 
appropriate. A bank may require the customer to segregate the checks 
subject to next-day availability for which special deposit slips could 
be required, and to indicate on a regular deposit slip that such checks 
are being deposited, if the bank so instructs its customers in its 
initial disclosure.

                      V. Section 229.11 [Reserved]

                VI. Section 229.12 Availability Schedule

                       A. 229.12(a) Effective Date

    1. The availability schedule set forth in this section supersedes 
the temporary schedule that was effective September 1, 1988, through 
August 31, 1990.

           B. 229.12(b) Local Checks and Certain Other Checks

    1. Local checks must be made available for withdrawal not later than 
the second business day following the banking day on which the checks 
were deposited.
    2. In addition, the proceeds of Treasury checks and U.S. Postal 
Service money orders not subject to next-day (or second-day) 
availability under Sec. 229.10(c), checks drawn on Federal Reserve 
Banks and Federal Home Loan Banks, checks drawn by a state or unit of 
general local government, cashier's checks, certified checks, and 
teller's checks not subject to next-day (or second-day) availability 
under Sec. 229.10(c) and payable in the same check processing region as 
the depositary bank, must be made available for withdrawal by the second 
business day following deposit.
    3. Exceptions are made for withdrawals by cash or similar means and 
for deposits in banks located outside the 48 contiguous states. Thus, 
the proceeds of a local check deposited on a Monday generally must be 
made available for withdrawal on Wednesday.

                      C. 229.12(c) Nonlocal Checks

    1. Nonlocal checks must be made available for withdrawal not later 
than the fifth business day following deposit, i.e., proceeds of a 
nonlocal check deposited on a Monday must be made available for 
withdrawal on the following Monday. In addition, a check described in 
Sec. 229.10(c) that does not meet the conditions for next-day 
availability (or second-day availability) is treated as a nonlocal 
check, if the check is drawn on or payable through or at a nonlocal 
paying bank. Adjustments are made to the schedule for withdrawals by 
cash or similar means and deposits in banks located outside the 48 
contiguous states.
    2. Reduction in Schedules.
    a. Section 603(d)(1) of the EFA Act (12 U.S.C. 4002(d)(1)) requires 
the Board to reduce the statutory schedules for any category of checks 
where most of those checks would be returned in a shorter period of time 
than provided in the schedules. The conferees indicated that ``if the 
new system makes it possible for two-thirds of the items of a category 
of checks to meet this test in a shorter period of time, then the 
Federal Reserve must shorten the schedules accordingly.'' H.R. Rep. No. 
261, 100th Cong., 1st Sess. at 179 (1987).
    b. Reduced schedules are provided for certain nonlocal checks where 
significant improvements can be made to the EFA Act's schedules due to 
transportation arrangements or proximity between the check processing 
regions of the depositary bank and the paying bank, allowing for faster 
collection and return. Appendix B sets forth the specific reduction of 
schedules applicable to banks located in certain check processing 
regions.
    c. A reduction in schedules may apply even in those cases where the 
determination that the check is nonlocal cannot be made based on the 
routing number on the check. For example, a nonlocal credit union 
payable-through share draft may be subject to a reduction in schedules 
if the routing number of the payable-through bank that appears on the 
draft is included in appendix B, even though the determination that the 
payable-through share draft is nonlocal is based on the location of the 
credit union and not the routing number on the draft.

[[Page 711]]

 D. 229.12(d) Time Period Adjustment for Withdrawal by Cash or Similar 
                                  Means

    1. The EFA Act provides an adjustment to the availability rules for 
cash withdrawals. Funds from local and nonlocal checks need not be 
available for cash withdrawal until 5:00 p.m. on the day specified in 
the schedule. At 5:00 p.m., $400 of the deposit must be made available 
for cash withdrawal. This $400 is in addition to the first $100 of a 
day's deposit, which must be made available for withdrawal at the start 
of business on the first business day following the banking day of 
deposit. If the proceeds of local and nonlocal checks become available 
for withdrawal on the same business day, the $400 withdrawal limitation 
applies to the aggregate amount of the funds that became available for 
withdrawal on that day. The remainder of the funds must be available for 
cash withdrawal at the start of business on the business day following 
the business day specified in the schedule.
    2. The EFA Act recognizes that the $400 that must be provided on the 
day specified in the schedule may exceed a bank's daily ATM cash 
withdrawal limit, and explicitly provides that the EFA Act does not 
supersede the bank's policy in this regard. The Board believes that the 
rationale for accommodating a bank's ATM withdrawal limit also applies 
to other cash withdrawal limits established by that bank. Section 
229.19(c)(4) of the regulation addresses the relation between a bank's 
cash withdrawal limit (for over-the-counter cash withdrawals as well as 
ATM cash withdrawals) and the requirements of this subpart.
    3. The Board believes that the Congress included this special cash 
withdrawal rule to provide a depositary bank with additional time to 
learn of the nonpayment of a check before it must make funds available 
to its customer. If a customer deposits a local check on a Monday, and 
that check is returned by the paying bank, the depositary bank may not 
receive the returned check until Thursday, the day after funds for a 
local check ordinarily must be made available for withdrawal. The intent 
of the special cash withdrawal rule is to minimize this risk to the 
depositary bank. For this rule to minimize the depositary bank's risk, 
it must apply not only to cash withdrawals, but also to withdrawals by 
other means that result in an irrevocable debit to the customer's 
account or commitment to pay by the bank on the customer's behalf during 
the day. Thus, the cash withdrawal rule also includes withdrawals by 
electronic payment, issuance of a cashier's or teller's check, 
certification of a check, or other irrevocable commitment to pay, such 
as authorization of an on-line point-of-sale debit. The rule also would 
apply to checks presented over the counter for payment on the day of 
presentment by the depositor or another person. Such checks could not be 
dishonored for insufficient funds if an amount sufficient to cover the 
check had became available for cash withdrawal under this rule; however, 
payment of such checks would be subject to the bank's cut-off hour 
established under U.C.C. 4-108. The cash withdrawal rule does not apply 
to checks and other provisional debits presented to the bank for payment 
that the bank has the right to return.

   E. 229.12(e) Extension of Schedule for Certain Deposits in Alaska, 
            Hawaii, Puerto Rico, and the U.S. Virgin Islands

    1. The EFA Act and regulation provide an extension of the 
availability schedules for check deposits at a branch of a bank if the 
branch is located in Alaska, Hawaii, Puerto Rico, or the U.S. Virgin 
Islands. The schedules for local checks, nonlocal checks (including 
nonlocal checks subject to the reduced schedules of appendix B), and 
deposits at nonproprietary ATMs are extended by one business day for 
checks deposited to accounts in banks located in these jurisdictions 
that are drawn on or payable at or through a paying bank not located in 
the same jurisdiction as the depositary bank. For example, a check 
deposited in a bank in Hawaii and drawn on a San Francisco paying bank 
must be made available for withdrawal not later than the third business 
day following deposit. This extension does not apply to deposits that 
must be made available for withdrawal on the next business day.
    2. The Congress did not provide this extension of the schedules to 
checks drawn on a paying bank located in Alaska, Hawaii, Puerto Rico, or 
the U.S. Virgin Islands and deposited in an account at a depositary bank 
in the 48 contiguous states. Therefore, a check deposited in a San 
Francisco bank drawn on a Hawaii paying bank must be made available for 
withdrawal not later than the second rather than the third business day 
following deposit.

              F. 229.12(f) Deposits at Nonproprietary ATMs

    1. The EFA Act and regulation provide a special rule for deposits 
made at nonproprietary ATMs. This paragraph does not apply to deposits 
made at proprietary ATMs. All deposits at a nonproprietary ATM must be 
made available for withdrawal by the fifth business day following the 
banking day of deposit. For example, a deposit made at a nonproprietary 
ATM on a Monday, including any deposit by cash or checks that would 
otherwise be subject to next-day (or second-day) availability, must be 
made available for withdrawal not later than Monday of the following 
week. The provisions of Sec. 229.10(c)(1)(vii) requiring a depositary 
bank

[[Page 712]]

to make up to $100 of an aggregate daily deposit available for 
withdrawal on the first business day after the banking day of deposit do 
not apply to deposits at a nonproprietary ATM.

                     VII. Section 229.13 Exceptions

                             A. Introduction

    1. While certain safeguard exceptions (such as those for new 
accounts and checks the bank has reasonable cause to believe are 
uncollectible) are established in the EFA Act, the Congress gave the 
Board the discretion to determine whether certain other exceptions 
should be included in its regulations. Specifically, the EFA Act gives 
the Board the authority to establish exceptions to the schedules for 
large or redeposited checks and for accounts that have been repeatedly 
overdrawn. These exceptions apply to local and nonlocal checks as well 
as to checks that must otherwise be accorded next-day (or second-day) 
availability under Sec. 229.10(c).
    2. Many checks will not be returned to the depositary bank by the 
time funds must be made available for withdrawal under the next-day (or 
second-day), local, and nonlocal schedules. In order to reduce risk to 
depositary banks, the Board has exercised its statutory authority to 
adopt these exceptions to the schedules in the regulation to allow the 
depositary bank to extend the time within which it is required to make 
funds available.
    3. The EFA Act also gives the Board the authority to suspend the 
schedules for any classification of checks, if the schedules result in 
an unacceptable level of fraud losses. The Board will adopt regulations 
or issue orders to implement this statutory authority if and when 
circumstances requiring its implementation arise.

                        B. 229.13(a) New Accounts

    1. Definition of New Account.
    a. The EFA Act provides an exception to the availability schedule 
for new accounts. An account is defined as a new account during the 
first 30 calendar days after the account is opened. An account is opened 
when the first deposit is made to the account. An account is not 
considered a new account, however, if each customer on the account has a 
transaction account relationship with the depositary bank, including a 
dormant account, that is at least 30 calendar days old or if each 
customer has had an established transaction account with the depositary 
bank within the 30 calendar days prior to opening the second account.
    b. The following are examples of what constitutes, and does not 
constitute, a new account:
    i. If the customer has an established account with a bank and opens 
a second account with the bank, the second account is not subject to the 
new account exception.
    ii. If a customer's account were closed and another account opened 
as a successor to the original account (due, for example, to the theft 
of checks or a debit card used to access the original account), the 
successor account is not subject to the new account exception, assuming 
the previous account relationship is at least 30 days old. Similarly, if 
a customer closes an established account and opens a separate account 
within 30 days, the new account is not subject to the new account 
exception.
    iii. If a customer has a savings deposit or other deposit that is 
not an account (as that term is defined in Sec. 229.2(a)) at the bank, 
and opens an account, the account is subject to the new account 
exception.
    iv. If a person that is authorized to sign on a corporate account 
(but has no other relationship with the bank) opens a personal account, 
the personal account is subject to the new account exception.
    v. If a customer has an established joint account at a bank, and 
subsequently opens an individual account with that bank, the individual 
account is not subject to the new account exception.
    vi. If two customers that each have an established individual 
account with the bank open a joint account, the joint account is not 
subject to the new account exception. If one of the customers on the 
account has no current or recent established account relationship with 
the bank, however, the joint account is subject to the new account 
exception, even if the other individual on the account has an 
established account relationship with the bank.
    2. Rules Applicable to New Accounts.
    a. During the new account exception period, the schedules for local 
and nonlocal checks do not apply, and, unlike the other exceptions 
provided in this section, the regulation provides no maximum time frames 
within which the proceeds of these deposits must be made available for 
withdrawal. Maximum times within which funds must be available for 
withdrawal during the new account period are provided, however, for 
certain other deposits. Deposits received by cash and electronic 
payments must be made available for withdrawal in accordance with Sec. 
229.10.
    b. Special rules also apply to deposits of Treasury checks, U.S. 
Postal Service money orders, checks drawn on Federal Reserve Banks and 
Federal Home Loan Banks, state and local government checks, cashier's 
checks, certified checks, teller's checks, and, for the purposes of the 
new account exception only, traveler's checks. The first $5,000 of funds 
deposited to a new account on any one banking day by these check 
deposits must be made available for withdrawal in accordance with Sec. 
229.10(c). Thus, the first $5,000

[[Page 713]]

of the proceeds of these check deposits must be made available on the 
first business day following deposit, if the deposit is made in person 
to an employee of the depositary bank and the other conditions of next-
day availability are met. Funds must be made available on the second 
business day after deposit for deposits that are not made over the 
counter, in accordance with Sec. 229.10(c)(2). (Proceeds of Treasury 
check deposits must be made available on the first business day after 
deposit, even if the check is not deposited in person to an employee of 
the depositary bank.) Funds in excess of the first $5,000 deposited by 
these types of checks on a banking day must be available for withdrawal 
not later than the ninth business day following the banking day of 
deposit. The requirements of Sec. 229.10(c)(1)(vi) and (vii) that ``on 
us'' checks and the first $100 of a day's deposit be made available for 
withdrawal on the next business day do not apply during the new account 
period.
    3. Representation by Customer. The depositary bank may rely on the 
representation of the customer that the customer has no established 
account relationship with the bank, and has not had any such account 
relationship within the past 30 days, to determine whether an account is 
subject to the new account exception.

                       C. 229.13(b) Large Deposits

    1. Under the large deposit exception, a depositary bank may extend 
the hold placed on check deposits to the extent that the amount of the 
aggregate deposit on any banking day exceeds $5,000. This exception 
applies to local and nonlocal checks, as well as to checks that 
otherwise would be made available on the next (or second) business day 
after the day of deposit under Sec. 229.10(c). Although the first 
$5,000 of a day's deposit is subject to the availability otherwise 
provided for checks, the amount in excess of $5,000 may be held for an 
additional period of time as provided in Sec. 229.13(h). When the large 
deposit exception is applied to deposits composed of a mix of checks 
that would otherwise be subject to differing availability schedules, the 
depositary bank has the discretion to choose the portion of the deposit 
to which it applies the exception. Deposits by cash or electronic 
payment are not subject to this exception for large deposits.
    2. The following example illustrates the operation of the large 
deposit exception. If a customer deposits $2,000 in cash and a $9,000 
local check on a Monday, $2,100 (the proceeds of the cash deposit and 
$100 from the local check deposit) must be made available for withdrawal 
on Tuesday. An additional $4,900 of the proceeds of the local check must 
be available for withdrawal on Wednesday in accordance with the local 
schedule, and the remaining $4,000 may be held for an additional period 
of time under the large deposit exception.
    3. Where a customer has multiple accounts with a depositary bank, 
the bank may apply the large deposit exception to the aggregate deposits 
to all of the customer's accounts, even if the customer is not the sole 
holder of the accounts and not all of the holders of the customer's 
accounts are the same. Thus, a depositary bank may aggregate the 
deposits made to two individual accounts in the same name, to an 
individual and a joint account with one common name, or to two joint 
accounts with at least one common name for the purpose of applying the 
large deposit exception. Aggregation of deposits to multiple accounts is 
permitted because the Board believes that the risk to the depositary 
bank associated with large deposits is similar regardless of how the 
deposits are allocated among the customer's accounts.

                     D. 229.13(c) Redeposited Checks

    1. The EFA Act gives the Board the authority to promulgate an 
exception to the schedule for checks that have been returned unpaid and 
redeposited. Section 229.13(c) provides such an exception for checks 
that have been returned unpaid and redeposited by the customer or the 
depositary bank. This exception applies to local and nonlocal checks, as 
well as to checks that would otherwise be made available on the next (or 
second) business day after the day of deposit under Sec. 229.10(c).
    2. This exception addresses the increased risk to the depositary 
bank that checks that have been returned once will be uncollectible when 
they are presented to the paying bank a second time. The Board, however, 
does not believe that this increased risk is present for checks that 
have been returned due to a missing indorsement. Thus, the exception 
does not apply to checks returned unpaid due to missing indorsements and 
redeposited after the missing indorsement has been obtained, if the 
reason for return indicated on the check (see Sec. 229.30(d)) states 
that it was returned due to a missing indorsement. For the same reason, 
this exception does not apply to a check returned because it was 
postdated (future dated), if the reason for return indicated on the 
check states that it was returned because it was postdated, and if it is 
no longer postdated when redeposited.
    3. To determine when funds must be made available for withdrawal, 
the banking day on which the check is redeposited is considered to be 
the day of deposit. A depositary bank that made $100 of a check 
available for withdrawal under Sec. 229.10(c)(1)(vii) can charge back 
the full amount of the check, including the $100, if the check is 
returned unpaid, and the $100 need not be made available again if the 
check is redeposited.

[[Page 714]]

                    E. 229.13(d) Repeated Overdrafts

    1. The EFA Act gives the Board the authority to establish an 
exception for ``deposit accounts which have been overdrawn repeatedly.'' 
This paragraph provides two tests to determine what constitutes repeated 
overdrafts. Under the first test, a customer's accounts are considered 
repeatedly overdrawn if, on six banking days within the preceding six 
months, the available balance in any account held by the customer is 
negative, or the balance would have become negative if checks or other 
charges to the account had been paid, rather than returned. This test 
can be met based on separate occurrences (e.g., checks that are returned 
for insufficient funds on six different days), or based on one 
occurrence (e.g., a negative balance that remains on the customer's 
account for six banking days). If the bank dishonors a check that 
otherwise would have created a negative balance, however, the incident 
is considered an overdraft only on that day.
    2. The second test addresses substantial overdrafts. Such overdrafts 
increase the risk to the depositary bank of dealing with the repeated 
overdrafter. Under this test, a customer incurs repeated overdrafts if, 
on two banking days within the preceding six months, the available 
balance in any account held by the customer is negative in an amount of 
$5,000 or more, or would have become negative in an amount of $5,000 or 
more if checks or other charges to the account had been paid.
    3. The exception relates not only to overdrafts caused by checks 
drawn on the account, but also overdrafts caused by other debit charges 
(e.g. ACH debits, point-of-sale transactions, returned checks, account 
fees, etc.). If the potential debit is in excess of available funds, the 
exception applies regardless of whether the items were paid or returned 
unpaid. An overdraft resulting from an error on the part of the 
depositary bank, or from the imposition of overdraft charges for which 
the customer is entitled to a refund under Sec. Sec. 229.13(e) or 
229.16(c), cannot be considered in determining whether the customer is a 
repeated overdrafter. The exception excludes accounts with overdraft 
lines of credit, unless the credit line has been exceeded or would have 
been exceeded if the checks or other charges to the account had been 
paid.
    4. This exception applies to local and nonlocal checks, as well as 
to checks that otherwise would be made available on the next (or second) 
business day after the day of deposit under Sec. 229.10(c). When a bank 
places or extends a hold under this exception, it need not make the 
first $100 of a deposit available for withdrawal on the next business 
day, as otherwise would be required by Sec. 229.10(c)(1)(vii).

          F. 229.13(e) Reasonable Cause To Doubt Collectibility

    1. In the case of certain check deposits, if the bank has reasonable 
cause to believe the check is uncollectible, it may extend the time 
funds must be made available for withdrawal. This exception applies to 
local and nonlocal checks, as well as to checks that would otherwise be 
made available on the next (or second) business day after the day of 
deposit under Sec. 229.10(c). When a bank places or extends a hold 
under this exception, it need not make the first $100 of a deposit 
available for withdrawal on the next business day, as otherwise would be 
required by Sec. 229.10(c)(1)(vii). If the reasonable cause exception 
is invoked, the bank must include in the notice to its customer, 
required by Sec. 229.13(g), the reason that the bank believes that the 
check is uncollectible.
    2. The following are several examples of circumstances under which 
the reasonable cause exception may be invoked:
    a. If a bank received a notice from the paying bank that a check was 
not paid and is being returned to the depositary bank, the depositary 
bank could place a hold on the check or extend a hold previously placed 
on that check, and notify the customer that the bank had received notice 
that the check is being returned. The exception could be invoked even if 
the notice were incomplete, if the bank had reasonable cause to believe 
that the notice applied to that particular check.
    b. The depositary bank may have received information from the paying 
bank, prior to the presentment of the check, that gives the bank 
reasonable cause to believe that the check is uncollectible. For 
example, the paying bank may have indicated that payment has been 
stopped on the check, or that the drawer's account does not currently 
have sufficient funds to honor the check. Such information may provide 
sufficient basis to invoke this exception. In these cases, the 
depositary bank could invoke the exception and disclose as the reason 
the exception is being invoked the fact that information from the paying 
bank indicates that the check may not be paid.
    c. The fact that a check is deposited more than six months after the 
date on the check (i.e. a stale check) is a reasonable indication that 
the check may be uncollectible, because under U.C.C. 4-404 a bank has no 
duty to its customer to pay a check that is more than six months old. 
Similarly, if a check being deposited is postdated (future dated), the 
bank may have a reasonable cause to believe the check is uncollectible, 
because the check may not be properly payable under U.C.C. 4-401. The 
bank, in its notice, should specify that the check is stale-dated or 
postdated.
    d. There are reasons that may cause a bank to believe that a check 
is uncollectible that

[[Page 715]]

are based on confidential information. For example, a bank could 
conclude that a check being deposited is uncollectible based on its 
reasonable belief that the depositor is engaging in kiting activity. 
Reasonable belief as to the insolvency or pending insolvency of the 
drawer of the check or the drawee bank and that the checks will not be 
paid also may justify invoking this exception. In these cases, the bank 
may indicate, as the reason it is invoking the exception, that the bank 
has confidential information that indicates that the check might not be 
paid.
    3. The Board has included a reasonable cause exception notice as a 
model notice in appendix C (C-13). The model notice includes several 
reasons for which this exception may be invoked. The Board does not 
intend to provide a comprehensive list of reasons for which this 
exception may be invoked; another reason that does not appear on the 
model notice may be used as the basis for extending a hold, if the 
reason satisfies the conditions for invoking this exception. A 
depositary bank may invoke the reasonable cause exception based on a 
combination of factors that give rise to a reasonable cause to doubt the 
collectibility of a check. In these cases, the bank should disclose the 
primary reasons for which the exception was invoked in accordance with 
paragraph (g) of this section.
    4. The regulation provides that the determination that a check is 
uncollectible shall not be based on a class of checks or persons. For 
example, a depositary bank cannot invoke this exception simply because 
the check is drawn on a paying bank in a rural area and the depositary 
bank knows it will not have the opportunity to learn of nonpayment of 
that check before funds must be made available under the availability 
schedules. Similarly, a depositary bank cannot invoke the reasonable 
cause exception based on the race or national origin of the depositor.
    5. If a depositary bank invokes this exception with respect to a 
particular check and does not provide a written notice to the depositor 
at the time of deposit, the depositary bank may not assess any overdraft 
fee (such as an ``NSF'' charge) or charge interest for use of overdraft 
credit, if the check is paid by the paying bank and these charges would 
not have occurred had the exception not been invoked. A bank may assess 
an overdraft fee under these circumstances, however, if it provides 
notice to the customer, in the notice of exception required by paragraph 
(g) of this section, that the fee may be subject to refund, and refunds 
the charges upon the request of the customer. The notice must state that 
the customer may be entitled to a refund of any overdraft fees that are 
assessed if the check being held is paid, and indicate where such 
requests for a refund of overdraft fees should be directed.

                    G. 229.13(f) Emergency Conditions

    1. Certain emergency conditions may arise that delay the collection 
or return of checks, or delay the processing and updating of customer 
accounts. In the circumstances specified in this paragraph, the 
depositary bank may extend the holds that are placed on deposits of 
checks that are affected by such delays, if the bank exercises such 
diligence as the circumstances require. For example, if a bank learns 
that a check has been delayed in the process of collection due to severe 
weather conditions or other causes beyond its control, an emergency 
condition covered by this section may exist and the bank may place a 
hold on the check to reflect the delay. This exception applies to local 
and nonlocal checks, as well as checks that would otherwise be made 
available on the next (or second) business day after the day of deposit 
under Sec. 229.10(c). When a bank places or extends a hold under this 
exception, it need not make the first $100 of a deposit available for 
withdrawal on the next business day, as otherwise would be required by 
Sec. 229.10(c)(1)(vii). In cases where the emergency conditions 
exception does not apply, as in the case of deposits of cash or 
electronic payments under Sec. 229.10 (a) and (b), the depositary bank 
may not be liable for a delay in making funds available for withdrawal 
if the delay is due to a bona fide error such as an unavoidable computer 
malfunction.

                    H. 229.13(g) Notice of Exception

    1. In general.
    a. If a depositary bank invokes any of the safeguard exceptions to 
the schedules listed above, other than the new account or emergency 
conditions exception, and extends the hold on a deposit beyond the time 
periods permitted in Sec. Sec. 229.10(c) and 229.12, it must provide a 
notice to its customer. Except in the cases described in paragraphs 
(g)(2) and (g)(3) of this section, notices must be given each time an 
exception hold is invoked and must state the customer's account number, 
the date of deposit, the reason the exception was invoked, and the time 
period within which funds will be available for withdrawal. For a 
customer that is not a consumer, a depositary bank satisfies the 
written-notice requirement by sending an electronic notice that displays 
the text and is in a form that the customer may keep, if the customer 
agrees to such means of notice. Information is in a form that the 
customer may keep if, for example, it can be downloaded or printed. For 
a customer who is a consumer, a depositary bank satisfies the written-
notice requirement by sending an electronic notice in compliance with 
the requirements of the Electronic Signatures in Global and National 
Commerce Act (12 U.S.C. 7001 et seq.), which

[[Page 716]]

include obtaining the consumer's affirmative consent to such means of 
notice.
    b. With respect to paragraph (g)(1), the requirement that the notice 
state the time period within which the funds shall be made available may 
be satisfied if the notice identifies the date the deposit is received 
and information sufficient to indicate when funds will be available and 
the amounts that will be available at those times. For example, for a 
deposit involving more than one check, the bank need not provide a 
notice that discloses when funds from each individual check in the 
deposit will be available for withdrawal; instead, the bank may provide 
a total dollar amount for each of the time periods when funds will be 
available, or provide the customer with an explanation of how to 
determine the amount of the deposit that will be held and when the funds 
will be available for deposit. Appendix C (C-12) contains a model 
notice.
    c. For deposits made in person to an employee of the depositary 
bank, the notice generally must be given to the person making the 
deposit, i.e., the ``depositor'', at the time of deposit. The depositor 
need not be the customer holding the account. For other deposits, such 
as deposits received at an ATM, lobby deposit box, night depository, or 
through the mail, notice must be mailed to the customer not later than 
the close of the business day following the banking day on which the 
deposit was made.
    d. Notice to the customer also may be provided at a later time, if 
the facts upon which the determination to invoke the exception do not 
become known to the depositary bank until after notice would otherwise 
have to be given. In these cases, the bank must mail the notice to the 
customer as soon as practicable, but not later than the business day 
following the day the facts become known. A bank is deemed to have 
knowledge when the facts are brought to the attention of the person or 
persons in the bank responsible for making the determination, or when 
the facts would have been brought to their attention if the bank had 
exercised due diligence.
    e. In those cases described in paragraphs (g)(2) and (g)(3), the 
depositary bank need not provide a notice every time an exception hold 
is applied to a deposit. When paragraph (g)(2) or (g)(3) requires 
disclosure of the time period within which deposits subject to the 
exception generally will be available for withdrawal, the requirement 
may be satisfied if the one-time notice states when ``on us,'' local, 
and nonlocal checks will be available for withdrawal if an exception is 
invoked.
    2. One-time exception notice.
    a. Under paragraph (g)(2), if a nonconsumer account (see Commentary 
to Sec. 229.2(n)) is subject to the large deposit or redeposited check 
exception, the depositary bank may give its customer a single notice at 
or prior to the time notice must be provided under paragraph (g)(1). 
Notices provided under paragraph (g)(2) must contain the reason the 
exception may be invoked and the time period within which deposits 
subject to the exception will be available for withdrawal (see Model 
Notice C-14). A depositary bank may provide a one-time notice to a 
nonconsumer customer under paragraph (g)(2) only if each exception cited 
in the notice (the large deposit and/or the redeposited check exception) 
will be invoked for most check deposits to the customer's account to 
which the exception could apply. A one-time notice may state that the 
depositary bank will apply exception holds to certain subsets of 
deposits to which the large deposit or redeposited check exception may 
apply, and the notice should identify such subsets. For example, the 
depositary bank may apply the redeposited check exception only to checks 
that were redeposited automatically by the depositary bank in accordance 
with an agreement with the customer, rather than to all redeposited 
checks. In lieu of sending the one-time notice, a depositary bank may 
send individual hold notices for each deposit subject to the large 
deposit or redeposited check exception in accordance with Sec. 
229.13(g)(1) (see Model Notice C-12).
    b. In the case of a deposit of multiple checks, the depositary bank 
has the discretion to place an exception hold on any combination of 
checks in excess of $5,000. The notice should enable a customer to 
determine the availability of the deposit in the case of a deposit of 
multiple checks. For example, if a customer deposits a $5,000 local 
check and a $5,000 nonlocal check, under the large deposit exception, 
the depositary bank may make funds available in the amount of (1) $100 
on the first business day after deposit, $4,900 on the second business 
day after deposit (local check), and $5,000 on the eleventh business day 
after deposit (nonlocal check with 6-day exception hold), or (2) $100 on 
the first business day after deposit, $4,900 on the fifth business day 
after deposit (nonlocal check), and $5,000 on the seventh business day 
after deposit (local check with 5-day exception hold). The notice should 
reflect the bank's priorities in placing exception holds on next-day (or 
second-day), local, and nonlocal checks.
    3. Notice of repeated overdraft exception. Under paragraph (g)(3), 
if an account is subject to the repeated overdraft exception, the 
depositary bank may provide one notice to its customer for each time 
period during which the exception will apply. Notices sent pursuant to 
paragraph (g)(3) must state the customer's account number, the fact the 
exception was invoked under the repeated overdraft exception, the time 
period within which deposits subject to the exception will be made 
available for withdrawal, and the time period during which the exception 
will

[[Page 717]]

apply (see Model Notice C-15). A depositary bank may provide a one-time 
notice to a customer under paragraph (g)(3) only if the repeated 
overdraft exception will be invoked for most check deposits to the 
customer's account.
    4. Emergency conditions exception notice.
    a. If an account is subject to the emergency conditions exception 
under Sec. 229.13(f), the depositary bank must provide notice in a 
reasonable form within a reasonable time, depending on the 
circumstances. For example, a depositary bank may learn of a weather 
emergency or a power outage that affects the paying bank's operations. 
Under these circumstances, it likely would be reasonable for the 
depositary bank to provide an emergency conditions exception notice in 
the same manner and within the same time as required for other exception 
notices. On the other hand, if a depositary bank experiences a weather 
or power outage emergency that affects its own operations, it may be 
reasonable for the depositary bank to provide a general notice to all 
depositors via postings at branches and ATMs, or through newspaper, 
television, or radio notices.
    b. If the depositary bank extends the hold placed on a deposit due 
to an emergency condition, the bank need not provide a notice if the 
funds would be available for withdrawal before the notice must be sent. 
For example, if on the last day of a hold period the depositary bank 
experiences a computer failure and customer accounts cannot be updated 
in a timely fashion to reflect the funds as available balances, notices 
are not required if the funds are made available before the notices must 
be sent.
    5. Record retention. A depositary bank must retain a record of each 
notice of a reasonable cause exception for a period of two years, or 
such longer time as provided in the record retention requirements of 
Sec. 229.21. This record must contain a brief description of the facts 
on which the depositary bank based its judgment that there was 
reasonable cause to doubt the collectibility of a check. In many cases, 
such as where the exception was invoked on the basis of a notice of 
nonpayment received, the record requirement may be met by retaining a 
copy of the notice sent to the customer. In other cases, such as where 
the exception was invoked on the basis of confidential information, a 
further description to the facts, such as insolvency of drawer, should 
be included in the record.

       I. 229.13(h) Availability of Deposits Subject to Exceptions

    1. If a depositary bank invokes any exception other than the new 
account exception, the bank may extend the time within which funds must 
be made available under the schedule by a reasonable period of time. 
This provision establishes that an extension of up to one business day 
for ``on us'' checks, five business days for local checks, and six 
business days for nonlocal checks and checks deposited in a 
nonproprietary ATM is reasonable. Under certain circumstances, however, 
a longer extension of the schedules may be reasonable. In these cases, 
the burden is placed on the depositary bank to establish that a longer 
period is reasonable.
    2. For example, assume a bank extended the hold on a local check 
deposit by five business days based on its reasonable cause to believe 
that the check is uncollectible. If, on the day before the extended hold 
is scheduled to expire, the bank receives a notification from the paying 
bank that the check is being returned unpaid, the bank may determine 
that a longer hold is warranted, if it decides not to charge back the 
customer's account based on the notification. If the bank decides to 
extend the hold, the bank must send a second notice, in accordance with 
paragraph (g) of this section, indicating the new date that the funds 
will be available for withdrawal.
    3. With respect to Treasury checks, U.S. Postal Service money 
orders, checks drawn on Federal Reserve Banks or Federal Home Loan 
Banks, state and local government checks, cashier's checks, certified 
checks, and teller's checks subject to the next-day (or second-day) 
availability requirement, the depositary bank may extend the time funds 
must be made available for withdrawal under the large deposit, 
redeposited check, repeated overdraft, or reasonable cause exception by 
a reasonable period beyond the delay that would have been permitted 
under the regulation had the checks not been subject to the next-day (or 
second-day) availability requirement. The additional hold is added to 
the local or nonlocal schedule that would apply based on the location of 
the paying bank.
    4. One business day for ``on us'' checks, five business days for 
local checks, and six business days for nonlocal checks or checks 
deposited in a nonproprietary ATM, in addition to the time period 
provided in the schedule, should provide adequate time for the 
depositary bank to learn of the nonpayment of virtually all checks that 
are returned. For example, if a customer deposits a $7,000 cashier's 
check drawn on a nonlocal bank, and the depositary bank applies the 
large deposit exception to that check, $5,000 must be available for 
withdrawal on the first business day after the day of deposit and the 
remaining $2,000 must be available for withdrawal on the eleventh 
business day following the day of deposit (six business days added to 
the five-day schedule for nonlocal checks), unless the depositary bank 
establishes that a longer hold is reasonable.
    5. In the case of the application of the emergency conditions 
exception, the depositary bank may extend the hold placed on a check by 
not more than a reasonable period

[[Page 718]]

following the end of the emergency or the time funds must be available 
for withdrawal under Sec. Sec. 229.10(c) or 229.12, whichever is later.
    6. This provision does not apply to holds imposed under the new 
account exception. Under that exception, the maximum time period within 
which funds must be made available for withdrawal is specified for 
deposits that generally must be accorded next-day availability under 
Sec. 229.10. This subpart does not specify the maximum time period 
within which the proceeds of local and nonlocal checks must be made 
available for withdrawal during the new account period.

                VIII. Section 229.14 Payment of Interest

                         A. 229.14(a) In General

    1. This section requires that a depositary bank begin accruing 
interest on interest-bearing accounts not later than the day on which 
the depositary bank receives credit for the funds deposited.\3\ A 
depositary bank generally receives credit on checks within one or two 
days following deposit. A bank receives credit on a cash deposit, an 
electronic payment, and the deposit of a check that is drawn on the 
depositary bank itself on the day the cash, electronic payment, or check 
is received. In the case of a deposit at a nonproprietary ATM, credit 
generally is received on the day the bank that operates the ATM credits 
the depositary bank for the amount of the deposit. In the case of a 
deposit at a contractual branch, credit is received on the day the 
depositary bank receives credit for the amount of the deposit, which may 
be different from the day the contractual branch receives credit for the 
deposit.
---------------------------------------------------------------------------

    \3\ This section implements section 606 of the EFA Act (12 U.S.C. 
4005). The EFA Act keys the requirement to pay interest to the time the 
depositary bank receives provisional credit for a check. Provisional 
credit is a term used in the U.C.C. that is derived from the Code's 
concept of provisional settlement. (See U.C.C. 4-214 and 4-215.) 
Provisional credit is credit that is subject to charge-back if the check 
is returned unpaid; once the check is finally paid, the right to charge 
back expires and the provisional credit becomes final. Under Subpart C, 
a paying bank no longer has an automatic right to charge back credits 
given in settlement of a check, and the concept of provisional 
settlement is no longer useful and has been eliminated by the 
regulation. Accordingly, this section uses the term credit rather than 
provisional credit, and this section applies regardless of whether a 
credit would be provisional or final under the U.C.C. Credit does not 
include a bookkeeping entry (sometimes referred to as deferred credit) 
that does not represent funds actually available for the bank's use.
---------------------------------------------------------------------------

    2. Because account includes only transaction accounts, other 
interest-bearing accounts of the depositary bank, such as money market 
deposit accounts, savings deposits, and time deposits, are not subject 
to this requirement; however, a bank may accrue interest on such 
deposits in the same way that it accrues interest under this paragraph 
for simplicity of operation. The Board intends the term interest to 
refer to payments to or for the account of any customer as compensation 
for the use of funds, but to exclude the absorption of expenses incident 
to providing a normal banking function or a bank's forbearance from 
charging a fee in connection with such a service. (See 12 CFR 217.2(d).) 
Thus, earnings credits often applied to corporate accounts are not 
interest payments for the purposes of this section.
    3. It may be difficult for a depositary bank to track which day the 
depositary bank receives credit for specific checks in order to accrue 
interest properly on the account to which the check is deposited. This 
difficulty may be pronounced if the bank uses different means of 
collecting checks based on the time of day the check is received, the 
dollar amount of the check, and/or the paying bank to which it must be 
sent. Thus, for the purpose of the interest accrual requirement, a bank 
may rely on an availability schedule from its Federal Reserve Bank, 
Federal Home Loan Bank, or correspondent to determine when the 
depositary bank receives credit. If availability is delayed beyond that 
specified in the availability schedule, a bank may charge back interest 
erroneously accrued or paid on the basis of that schedule.
    4. This paragraph also permits a depositary bank to accrue interest 
on checks deposited to all of its interest-bearing accounts based on 
when the bank receives credit on all checks sent for payment or 
collection. For example, if a bank receives credit on 20 percent of the 
funds deposited in the bank by check as of the business day of deposit 
(e.g., ``on us'' checks), 70 percent as of the business day following 
deposit, and 10 percent on the second business day following deposit, 
the bank can apply these percentages to determine the day interest must 
begin to accrue on check deposits to all interest-bearing accounts, 
regardless of when the bank received credit on the funds deposited in 
any particular account. Thus, a bank may begin accruing interest on a 
uniform basis for all interest-bearing accounts, without the need to 
track the type of check deposited to each account.
    5. This section is not intended to limit a policy of a depositary 
bank that provides that interest accrues only on balances that exceed a 
specified amount, or on the minimum balance maintained in the account

[[Page 719]]

during a given period, provided that the balance is determined based on 
the date that the depositary bank receives credit for the funds. This 
section also is not intended to limit any policy providing that interest 
accrues sooner than required by this paragraph.

               B. 229.14(b) Special Rule for Credit Unions

    1. This provision implements a requirement in section 606(b) of the 
EFA Act, and provides an exemption from the payment-of-interest 
requirements for credit unions that do not begin to accrue interest or 
dividends on their customer accounts until a later date than the day the 
credit union receives credit for those deposits, including cash 
deposits. These credit unions are exempt from the payment-of-interest 
requirements, as long as they provide notice of their interest accrual 
policies in accordance with Sec. 229.16(d). For example, if a credit 
union has a policy of computing interest on all deposits received by the 
10th of the month from the first of that month, and on all deposits 
received after the 10th of the month from the first of the next month, 
that policy is not superseded by this regulation, if the credit union 
provides proper disclosure of this policy to its customers.
    2. The EFA Act limits this exemption to credit unions; other types 
of banks must comply with the payment-of-interest requirements. In 
addition, credit unions that compute interest from the day of deposit or 
day of credit should not change their existing practices in order to 
avoid compliance with the requirement that interest accrue from the day 
the credit union receives credit.

            C. 229.14(c) Exception for Checks Returned Unpaid

    1. This provision is based on section 606(c) of the EFA Act (12 
U.S.C. 4005(c)) and provides that interest need not be paid on funds 
deposited in an interest-bearing account by check that has been returned 
unpaid, regardless of the reason for return.

           IX. Section 229.15 General Disclosure Requirements

                    A. 229.15(a) Form of Disclosures

    1. This paragraph sets forth the general requirements for the 
disclosures required under Subpart B. All of the disclosures must be 
given in a clear and conspicuous manner, must be in writing, and, in 
most cases, must be in a form the customer may keep. A disclosure is in 
a form that the customer may keep if, for example, it can be downloaded 
or printed. For a customer that is not a consumer, a depositary bank 
satisfies the written-disclosure requirement by sending an electronic 
disclosure that displays the text and is in a form that the customer may 
keep, if the customer agrees to such means of disclosure. For a customer 
who is a consumer, a depositary bank satisfies the written-notice 
requirement by sending an electronic notice in compliance with the 
requirements of the Electronic Signatures in Global and National 
Commerce Act (12 U.S.C. 7001 et seq.), which include obtaining the 
consumer's affirmative consent to such means of notice. Disclosures 
posted at locations where employees accept consumer deposits, at ATMs, 
and on preprinted deposit slips need not be in a form that the customer 
may keep. Appendix C of the regulation contains model forms, clauses, 
and notices to assist banks in preparing disclosures.
    2. Disclosures concerning availability must be grouped together and 
may not contain any information that is not related to the disclosures 
required by this subpart. Therefore, banks may not intersperse the 
required disclosures with other account disclosures, and may not include 
other account information that is not related to their availability 
policy within the text of the required disclosures. Banks may, however, 
include information that is related to their availability policies. For 
example, a bank may inform its customers that, even when the bank has 
already made funds available for withdrawal, the customer is responsible 
for any problem with the deposit, such as the return of a deposited 
check.
    3. The regulation does not require that the disclosures be 
segregated from other account terms and conditions. For example, banks 
may include the disclosure of their specific availability policy in a 
booklet or pamphlet that sets out all of the terms and conditions of the 
bank's accounts. The required disclosures must, however, be grouped 
together and highlighted or identified in some manner, for example, by 
use of a separate heading for the disclosures, such as ``When Deposits 
are Available for Withdrawal.''
    4. A bank may, by agreement or at the consumer's request, provide 
any disclosure or notice required by subpart B in a language other than 
English, provided that the bank makes a complete disclosure available in 
English at the customer's request.

          B. 229.15(b) Uniform Reference to Day of Availability

    1. This paragraph requires banks to disclose in a uniform manner 
when deposited funds will be available for withdrawal. Banks must 
disclose when deposited funds are available for withdrawal by stating 
the business day on which the customer may begin to withdraw funds. The 
business day funds will be available must be disclosed as ``the --------
-------- business day after'' the day of deposit, or substantially 
similar language. The business day of availability is determined by 
counting the number of business

[[Page 720]]

days starting with the business day following the banking day on which 
the deposit is received, as determined under Sec. 229.19(a), and ending 
with the business day on which the customer may begin to withdraw funds. 
For example, a bank that imposes delays of four intervening business 
days for nonlocal checks must describe those checks as being available 
on ``the fifth business day after'' the day of the deposit.

       C. 229.15(c) Multiple Accounts and Multiple Account Holders

    1. This paragraph clarifies that banks need not provide multiple 
disclosures under the regulation. A single disclosure to a customer that 
holds multiple accounts, or a single disclosure to one of the account 
holders of a jointly held account, satisfies the disclosure requirements 
of the regulation.

                D. 229.15(d) Dormant or Inactive Accounts

    1. This paragraph makes clear that banks need not provide disclosure 
of their specific availability policies to customers that hold accounts 
that are either dormant or inactive. The determination that certain 
accounts are dormant or inactive must be made by the bank. If a bank 
considers an account dormant or inactive for purposes other than this 
regulation and no longer provides statements and other mailings to an 
account for this reason, such an account is considered dormant or 
inactive for purposes of this regulation.

        X. Section 229.16 Specific Availability Policy Disclosure

                          A. 229.16(a) General

    1. This section describes the information that must be disclosed by 
banks to comply with Sec. Sec. 229.17 and 229.18(d), which require that 
banks furnish notices of their specific policy regarding availability of 
deposited funds. The disclosure provided by a bank must reflect the 
availability policy followed by the bank in most cases, even though a 
bank may in some cases make funds available sooner or impose a longer 
delay.
    2. The disclosure must reflect the policy and practice of the bank 
regarding availability as to most accounts and most deposits into those 
accounts. In disclosing the availability policy that it follows in most 
cases, a bank may provide a single disclosure that reflects one policy 
to all its transaction account customers, even though some of its 
customers may receive faster availability than that reflected in the 
policy disclosure. Thus, a bank need not disclose to some customers that 
they receive faster availability than indicated in the disclosure. If, 
however, a bank has a policy of imposing delays in availability on any 
customers longer than those specified in its disclosure, those customers 
must receive disclosures that reflect the longer applicable availability 
periods. A bank may establish different availability policies for 
different groups of customers, such as customers in a particular 
geographic area or customers of a particular branch. For purposes of 
providing a specific availability policy, the bank may allocate 
customers among groups through good faith use of a reasonable method. A 
bank may also establish different availability policies for deposits at 
different locations, such as deposits at a contractual branch.
    3. A bank may disclose that funds are available for withdrawal on a 
given day notwithstanding the fact that the bank uses the funds to pay 
checks received before that day. For example, a bank may disclose that 
its policy is to make funds available from deposits of local checks on 
the second business day following the day of deposit, even though it may 
use the deposited funds to pay checks prior to the second business day; 
the funds used to pay checks in this example are not available for 
withdrawal until the second business day after deposit because the funds 
are not available for all uses until the second business day. (See the 
definition of available for withdrawal in Sec. 229.2(d).)

           B. 229.16(b) Content of Specific Policy Disclosure

    1. This paragraph sets forth the items that must be included, as 
applicable, in a bank's specific availability policy disclosure. The 
information that must be disclosed by a particular bank will vary 
considerably depending upon the bank's availability policy. For example, 
a bank that makes deposited funds available for withdrawal on the 
business day following the day of deposit need simply disclose that 
deposited funds will be available for withdrawal on the first business 
day after the day of deposit, the bank's business days, and when 
deposits are considered received.
    2. On the other hand, a bank that has a policy of routinely delaying 
on a blanket basis the time when deposited funds are available for 
withdrawal would have a more detailed disclosure. Such blanket hold 
policies might be for the maximum time allowed under the federal law or 
might be for shorter periods. These banks must disclose the types of 
deposits that will be subject to delays, how the customer can determine 
the type of deposit being made, and the day that funds from each type of 
deposit will be available for withdrawal.
    3. Some banks may have a combination of next-day availability and 
blanket delays. For example, a bank may provide next-day availability 
for all deposits except for one or two categories, such as deposits at 
nonproprietary ATMs and nonlocal personal checks over a specified dollar 
amount. The bank would describe the categories that are subject to 
delays in availability and tell the

[[Page 721]]

customer when each category would be available for withdrawal, and state 
that other deposits will be available for withdrawal on the first 
business day after the day of deposit. Similarly, a bank that provides 
availability on the second business day for most of its deposits would 
need to identify the categories of deposits which, under the regulation, 
are subject to next-day availability and state that all other deposits 
will be available on the second business day.
    4. Because many banks' availability policies may be complex, a bank 
must give a brief summary of its policy at the beginning of the 
disclosure. In addition, the bank must describe any circumstances when 
actual availability may be longer than the schedules disclosed. Such 
circumstances would arise, for example, when the bank invokes one of the 
exceptions set forth in Sec. 229.13 of the regulation, or when the bank 
delays or extends the time when deposited funds are available for 
withdrawal up to the time periods allowed by the regulation on a case-
by-case basis. Also, a bank that must make certain checks available 
faster under appendix B (reduction of schedules for certain nonlocal 
checks) must state that some check deposits will be available for 
withdrawal sooner because of special rules and that a list of the 
pertinent routing numbers is available upon request.
    5. Generally, a bank that distinguishes in its disclosure between 
local and nonlocal checks based on the routing number on the check must 
disclose to its customers that certain checks, such as some credit union 
payable-through drafts, will be treated as local or nonlocal based on 
the location of the bank by which they are payable (e.g., the credit 
union), and not on the basis of the location of the bank whose routing 
number appears on the check. A bank is not required to provide this 
disclosure, however, if it makes the proceeds of both local and nonlocal 
checks available for withdrawal within the time periods required for 
local checks in Sec. Sec. 229.12 and 229.13.
    6. The business day cut-off time used by the bank must be disclosed 
and if some locations have different cut-off times the bank must note 
this in the disclosure and state the earliest time that might apply. A 
bank need not list all of the different cut-off times that might apply. 
If a bank does not have a cut-off time prior to its closing time, the 
bank need not disclose a cut-off time.
    7. A bank taking advantage of the extended time period for making 
deposits at nonproprietary ATMs available for withdrawal under Sec. 
229.12(f) must explain this in the initial disclosure. In addition, the 
bank must provide a list (on or with the initial disclosure) of either 
the bank's proprietary ATMs or those ATMs that are nonproprietary at 
which customers may make deposits. As an alternative to providing such a 
list, the bank may label all of its proprietary ATMs with the bank's 
name and state in the initial disclosure that this has been done. 
Similarly, a bank taking advantage of the cash withdrawal limitations of 
Sec. 229.12(d), or the provision in Sec. 229.19(e) allowing holds to 
be placed on other deposits when a deposit is made or a check is cashed, 
must explain this in the initial disclosure.
    8. A bank that provides availability based on when the bank 
generally receives credit for deposited checks need not disclose the 
time when a check drawn on a specific bank will be available for 
withdrawal. Instead, the bank may disclose the categories of deposits 
that must be available on the first business day after the day of 
deposit (deposits subject to Sec. 229.10) and state the other 
categories of deposits and the time periods that will be applicable to 
those deposits. For example, a bank might disclose the four-digit 
Federal Reserve routing symbol for local checks and indicate that such 
checks as well as certain nonlocal checks will be available for 
withdrawal on the first or second business day following the day of 
deposit, depending on the location of the particular bank on which the 
check is drawn, and disclose that funds from all other checks will be 
available on the second or third business day. The bank must also 
disclose that the customer may request a copy of the bank's detailed 
schedule that would enable the customer to determine the availability of 
any check and must provide such schedule upon request. A change in the 
bank's detailed schedule would not trigger the change in policy 
disclosure requirement of Sec. 229.18(e).

           C. 229.16(c) Longer Delays on a Case-by-Case Basis

    1. Notice in specific policy disclosure.
    a. Banks that make deposited funds available for withdrawal sooner 
than required by the regulation--for example, providing their customers 
with immediate or next-day availability for deposited funds--and delay 
the time when funds are available for withdrawal only from time to time 
determined on a case-by-case basis, must provide notice of this in their 
specific availability policy disclosure. This paragraph outlines the 
requirements for that notice.
    b. In addition to stating what their specific availability policy is 
in most cases, banks that may delay or extend the time when deposits are 
available on a case-by-case basis must: state that from time to time 
funds may be available for withdrawal later than the time periods in 
their specific policy disclosure, disclose the latest time that a 
customer may have to wait for deposited funds to be available for 
withdrawal when a case-by-case hold is placed, state that customers will 
be notified when availability of a deposit is delayed on a case-by-case 
basis, and advise customers to ask if they need to be

[[Page 722]]

sure of the availability of a particular deposit.
    c. A bank that imposes delays on a case-by-case basis is still 
subject to the availability requirements of this regulation. If the bank 
imposes a delay on a particular deposit that is not longer than the 
availability required by Sec. 229.12 for local and nonlocal checks, the 
reason for the delay need not be based on the exceptions provided in 
Sec. 229.13. If the delay exceeds the time periods permitted under 
Sec. 229.12, however, then it must be based on an exception provided in 
Sec. 229.13, and the bank must comply with the Sec. 229.13 notice 
requirements. A bank that imposes delays on a case-by-case basis may 
avail itself of the one-time notice provisions in Sec. 229.13(g)(2) and 
(3) for deposits to which those provisions apply.
    2. Notice at time of case-by-case delay.
    a. In addition to including the disclosures required by paragraph 
(c)(1) of this section in their specific availability policy disclosure, 
banks that delay or extend the time period when funds are available for 
withdrawal on a case-by-case basis must give customers a notice when 
availability of funds from a particular deposit will be delayed or 
extended beyond the time when deposited funds are generally available 
for withdrawal. The notice must state that a delay is being imposed and 
indicate when the funds will be available. In addition, the notice must 
include the account number, the date of the deposit, and the amount of 
the deposit being delayed.
    b. If notice of the delay was not given at the time the deposit was 
made and the bank assesses overdraft or returned check fees on accounts 
when a case-by-case hold has been placed, the case-by-case hold notice 
provided to the customer must include a notice concerning overdraft or 
returned check fees. The notice must state that the customer may be 
entitled to a refund of any overdraft or returned check fees that result 
from the deposited funds not being available if the check that was 
deposited was in fact paid by the payor bank, and explain how to request 
a refund of any fees. (See Sec. 229.16(c)(3).)
    c. The requirement that the case-by-case hold notice state the day 
that funds will be made available for withdrawal may be met by stating 
the date or the number of business days after deposit that the funds 
will be made available. This requirement is satisfied if the notice 
provides information sufficient to indicate when funds will be available 
and the amounts that will be available at those times. For example, for 
a deposit involving more than one check, the bank need not provide a 
notice that discloses when funds from each individual item in the 
deposit will be available for withdrawal. Instead, the bank may provide 
a total dollar amount for each of the time periods when funds will be 
available, or provide the customer with an explanation of how to 
determine the amount of the deposit that will be held and when the held 
funds will be available for withdrawal.
    d. For deposits made in person to an employee of the depositary 
bank, the notice generally must be given at the time of the deposit. The 
notice at the time of the deposit must be given to the person making the 
deposit, that is, the ``depositor.'' The depositor need not be the 
customer holding the account. For other deposits, such as deposits 
received at an ATM, lobby deposit box, night depository, through the 
mail, or by armored car, notice must be mailed to the customer not later 
than the close of the business day following the banking day on which 
the deposit was made. Notice to the customer also may be provided not 
later than the close of the business day following the banking day on 
which the deposit was made if the decision to delay availability is made 
after the time of the deposit.
    3. Overdraft and returned check fees. If a depositary bank delays or 
extends the time when funds from a deposited check are available for 
withdrawal on a case-by-case basis and does not provide a written notice 
to its depositor at the time of deposit, the depositary bank may not 
assess any overdraft or returned check fees (such as an insufficient 
funds charge) or charge interest for use of an overdraft line of credit, 
if the deposited check is paid by the paying bank and these fees would 
not have occurred had the additional case-by-case delay not been 
imposed. A bank may assess an overdraft or returned check fee under 
these circumstances, however, if it provides notice to the customer in 
the notice required by paragraph (c)(2) of this section that the fee may 
be subject to refund, and refunds the fee upon the request of the 
customer when required to do so. The notice must state that the customer 
may be entitled to a refund of any overdraft or returned check fees that 
are assessed if the deposited check is paid, and indicate where such 
requests for a refund of overdraft fees should be directed. Paragraph 
(c)(3) applies when a bank provides a case-by-case notice in accordance 
with paragraph (c)(2) and does not apply if the bank has provided an 
exception hold notice in accordance with Sec. 229.13.

       D. 229.16(d) Credit Union Notice of Interest Payment Policy

    1. This paragraph sets forth the special disclosure requirement for 
credit unions that delay accrual of interest or dividends for all cash 
and check deposits beyond the date of receiving provisional credit for 
checks being deposited. (The interest payment requirement is set forth 
in Sec. 229.14(a).) Such credit unions are required to describe their 
policy with respect to accrual of interest or dividends on deposits in 
their specific availability policy disclosure.

[[Page 723]]

                 XI. Section 229.17 Initial Disclosures

    A. This paragraph requires banks to provide a notice of their 
availability policy to all potential customers prior to opening an 
account. The requirement of a notice prior to opening an account 
requires banks to provide disclosures prior to accepting a deposit to 
open an account. Disclosures must be given at the time the bank accepts 
an initial deposit regardless of whether the bank has opened the account 
yet for the customer. If a bank, however, receives a written request by 
mail from a person asking that an account be opened and the request 
includes an initial deposit, the bank may open the account with the 
deposit, provided the bank mails the required disclosures to the 
customer not later than the business day following the banking day on 
which the bank receives the deposit. Similarly, if a bank receives a 
telephone request from a customer asking that an account be opened with 
a transfer from a separate account of the customer's at the bank, the 
disclosure may be mailed not later than the business day following the 
banking day of the request.

         XII. Section 229.18 Additional Disclosure Requirements

                       A. 229.18(a) Deposit Slips

    1. This paragraph requires banks to include a notice on all 
preprinted deposit slips. The deposit slip notice need only state, 
somewhere on the front of the deposit slip, that deposits may not be 
available for immediate withdrawal. The notice is required only on 
preprinted deposit slips--those printed with the customer's account 
number and name and furnished by the bank in response to a customer's 
order to the bank. A bank need not include the notice on deposit slips 
that are not preprinted and supplied to the customer--such as counter 
deposit slips--or on those special deposit slips provided to the 
customer under Sec. 229.10(c). A bank is not responsible for ensuring 
that the notice appear on deposit slips that the customer does not 
obtain from or through the bank. This paragraph applies to preprinted 
deposit slips furnished to customers on or after September 1, 1988.

     B. 229.18(b) Locations Where Employees Accept Consumer Deposits

    1. This paragraph describes the statutory requirement that a bank 
post in each location where its employees accept consumer deposits a 
notice of its availability policy pertaining to consumer accounts. The 
notice that is required must specifically state the availability periods 
for the various deposits that may be made to consumer accounts. The 
notice need not be posted at each teller window, but the notice must be 
posted in a place where consumers seeking to make deposits are likely to 
see it before making their deposits. For example, the notice might be 
posted at the point where the line forms for teller service in the 
lobby. The notice is not required at any drive-through teller windows 
nor is it required at night depository locations, or at locations where 
consumer deposits are not accepted. A bank that acts as a contractual 
branch at a particular location must include the availability policy 
that applies to its own customers but need not include the policy that 
applies to the customers of the bank for which it is acting as a 
contractual branch.

                 C. 229.18(c) Automated Teller Machines

    1. This paragraph sets forth the required notices for ATMs. 
Paragraph (c)(1) provides that the depositary bank is responsible for 
posting a notice on all ATMs at which deposits can be made to accounts 
at the depositary bank. The depositary bank may arrange for a third 
party, such as the owner or operator of the ATM, to post the notice and 
indemnify the depositary bank from liability if the depositary bank is 
liable under Sec. 229.21 for the owner or operator failing to provide 
the required notice.
    2. The notice may be posted on a sign, shown on the screen, or 
included on deposit envelopes provided at the ATM. This disclosure must 
be given before the customer has made the deposit. Therefore, a notice 
provided on the customer's deposit receipt or appearing on the ATM's 
screen after the customer has made the deposit would not satisfy this 
requirement.
    3. Paragraph (c)(2) requires a depositary bank that operates an off-
premise ATM from which deposits are removed not more than two times a 
week to make a disclosure of this fact on the off-premise ATM. The 
notice must disclose to the customer the days on which deposits made at 
the ATM will be considered received.

                        D. 229.18(d) Upon Request

    1. This paragraph requires banks to provide written notice of their 
specific availability policy to any person upon that person's oral or 
written request. The notice must be sent within a reasonable period of 
time following receipt of the request.

                     E. 229.18(e) Changes in Policy

    1. This paragraph requires banks to send notices to their customers 
when the banks change their availability policies with regard to 
consumer accounts. A notice may be given in any form as long as it is 
clear and conspicuous. If the bank gives notice of a change by sending 
the customer a complete new availability disclosure, the bank must 
direct the customer to the changed terms in the disclosure by use of a 
letter or insert, or

[[Page 724]]

by highlighting the changed terms in the disclosure.
    2. Generally, a bank must send a notice at least 30 calendar days 
before implementing any change in its availability policy. If the change 
results in faster availability of deposits--for example, if the bank 
changes its availability for nonlocal checks from the fifth business day 
after deposit to the fourth business day after deposit--the bank need 
not send advance notice. The bank must, however, send notice of the 
change no later than 30 calendar days after the change is implemented. A 
bank is not required to give a notice when there is a change in appendix 
B (reduction of schedules for certain nonlocal checks).
    3. A bank that has provided its customers with a list of ATMs under 
Sec. 229.16(b)(5) shall provide its customers with an updated list of 
ATMs once a year if there are changes in the list of ATMs previously 
disclosed to the customers.

                   XIII. Section 229.19 Miscellaneous

            A. 229.19(a) When Funds Are Considered Deposited

    1. The time funds must be made available for withdrawal under this 
subpart is determined by the day the deposit is made. This paragraph 
provides rules to determine the day funds are considered deposited in 
various circumstances.
    2. Staffed facilities and ATMs. Funds received at a staffed teller 
station or ATM are considered deposited when received by the teller or 
placed in the ATM. Funds received at a contractual branch are considered 
deposited when received by a teller at the contractual branch or 
deposited into a proprietary ATM of the contractual branch. (See also, 
Commentary to Sec. 229.10(c) on deposits made to an employee of the 
depositary bank.) Funds deposited to a deposit box in a bank lobby that 
is accessible to customers only during regular business hours generally 
are considered deposited when placed in the lobby box; a bank may, 
however, treat deposits to lobby boxes the same as deposits to night 
depositories (as provided in Sec. 229.19(a)(3)), provided a notice 
appears on the lobby box informing the customer when such funds will be 
considered deposited.
    3. Mail. Funds mailed to the depositary bank are considered 
deposited on the banking day they are received by the depositary bank. 
The funds are received by the depositary bank at the time the mail is 
delivered to the bank, even if it is initially delivered to a mail room, 
rather than the check processing area.
    4. Other facilities.
    a. In addition to deposits at staffed facilities, at ATMs, and by 
mail, funds may be deposited at a facility such as a night depository or 
a lock box. A night depository is a receptacle for receipt of deposits, 
typically used by corporate depositors when the branch is closed. Funds 
deposited at a night depository are considered deposited on the banking 
day the deposit is removed, and the contents of the deposit are 
accessible to the depositary bank for processing. For example, some 
businesses deposit their funds in a locked bag at the night depository 
late in the evening, and return to the bank the following day to open 
the bag. Other depositors may have an agreement with their bank that the 
deposit bag must be opened under the dual control of the bank and the 
depositor. In these cases, the funds are considered deposited when the 
customer returns to the bank and opens the deposit bag.
    b. A lock box is a post office box used by a corporation for the 
collection of bill payments or other check receipts. The depositary bank 
generally assumes the responsibility for collecting the mail from the 
lock box, processing the checks, and crediting the corporation for the 
amount of the deposit. Funds deposited through a lock box arrangement 
are considered deposited on the day the deposit is removed from the lock 
box and are accessible to the depositary bank for processing.
    5. Certain off-premise ATMs. A special provision is made for certain 
off-premise ATMs that are not serviced daily. Funds deposited at such an 
ATM are considered deposited on the day they are removed from the ATM, 
if the ATM is not serviced more than two times each week. This provision 
is intended to address the practices of some banks of servicing certain 
remote ATMs infrequently. If a depositary bank applies this provision 
with respect to an ATM, a notice must be posted at the ATM informing 
depositors that funds deposited at the ATM may not be considered 
deposited until a future day, in accordance with Sec. 229.18.
    6. Banking day of deposit.
    a. This paragraph also provides that a deposit received on a day 
that the depositary bank is closed, or after the bank's cut-off hour, 
may be considered made on the next banking day. Generally, for purposes 
of the availability schedules of this subpart, a bank may establish a 
cut-off hour of 2 p.m. or later for receipt of deposits at its head 
office or branch offices. For receipt of deposits at ATMs, contractual 
branches, or other off-premise facilities, such as night depositories or 
lock boxes, the depositary bank may establish a cut-off hour of 12:00 
noon or later (either local time of the branch or other location of the 
depositary bank at which the account is maintained or local time of the 
ATM, contractual branch, or other off-premise facility). The depositary 
bank must use the same timing method for establishing the cut-off hour 
for all ATMs, contractual branches, and other off-premise facilities 
used by its customers. The choice of cut-off

[[Page 725]]

hour must be reflected in the bank's internal procedures, and the bank 
must inform its customers of the cut-off hour upon request. This earlier 
cut-off for ATM, contractual branch, or other off-premise deposits is 
intended to provide greater flexibility in the servicing of these 
facilities.
    b. Different cut-off hours may be established for different types of 
deposits. For example, a bank may establish a 2 p.m. cut-off for the 
receipt of check deposits, but a later cut-off for the receipt of wire 
transfers. Different cut-off hours also may be established for deposits 
received at different locations. For example, a different cut-off may be 
established for ATM deposits than for over-the-counter deposits, or for 
different teller stations at the same branch. With the exception of the 
12 noon cut-off for deposits at ATMs and off-premise facilities, no cut-
off hour for receipt of deposits for purposes of this subpart can be 
established earlier than 2 p.m.
    c. A bank is not required to remain open until 2 p.m. If a bank 
closes before 2 p.m., deposits received after the closing may be 
considered deposited on the next banking day. Further, as Sec. 229.2(f) 
defines the term banking day as the portion of a business day on which a 
bank is open to the public for substantially all of its banking 
functions, a day, or a portion of a day, is not necessarily a banking 
day merely because the bank is open for only limited functions, such as 
keeping drive-in or walk-up teller windows open, when the rest of the 
bank is closed to the public. For example, a banking office that usually 
provides a full range of banking services may close at 12 noon but leave 
a drive-in teller window open for the limited purpose of receiving 
deposits and making cash withdrawals. Under those circumstances, the 
bank is considered closed and may consider deposits received after 12 
noon as having been received on the next banking day. The fact that a 
bank may reopen for substantially all of its banking functions after 2 
p.m., or that it continues its back office operations throughout the 
day, would not affect this result. A bank may not, however, close 
individual teller stations and reopen them for next-day's business 
before 2 p.m. during a banking day.

           B. 229.19(b) Availability at Start of Business Day

    1. If funds must be made available for withdrawal on a business day, 
the funds must be available for withdrawal by the later of 9 a.m. or the 
time the depositary bank's teller facilities, including ATMs, are 
available for customer account withdrawals, except under the special 
rule for cash withdrawals set forth in Sec. 229.12(d). Thus, if a bank 
has no ATMs and its branch facilities are available for customer 
transactions beginning at 10 a.m., funds must be available for customer 
withdrawal beginning at 10 a.m. If the bank has ATMs that are available 
24 hours a day, rather than establishing 12:01 a.m. as the start of the 
business day, this paragraph sets 9 a.m. as the start of the day with 
respect to ATM withdrawals. The Board believes that this rule provides 
banks with sufficient time to update their accounting systems to reflect 
the available funds in customer accounts for that day.
    2. The start of business is determined by the local time of the 
branch or other location of the depositary bank at which the account is 
maintained. For example, if funds in a customer's account at a west 
coast bank are first made available for withdrawal at the start of 
business on a given day, and the customer attempts to withdraw the funds 
at an east coast ATM, the depositary bank is not required to make the 
funds available until 9 a.m. west coast time (12 noon east coast time).

           C. 229.19(c) Effect on Policies of Depositary Bank

    1. This subpart establishes the maximum hold that may be placed on 
customer deposits. A depositary bank may provide availability to its 
customers in a shorter time than prescribed in this subpart. A 
depositary bank also may adopt different funds availability policies for 
different segments of its customer base, as long as each policy meets 
the schedules in the regulation. For example, a bank may differentiate 
between its corporate and consumer customers, or may adopt different 
policies for its consumer customers based on whether a customer has an 
overdraft line of credit associated with the account.
    2. This regulation does not affect a depositary bank's right to 
accept or reject a check for deposit, to charge back the customer's 
account based on a returned check or notice of nonpayment, or to claim a 
refund for any credit provided to the customer. For example, even if a 
check is returned or a notice of nonpayment is received after the time 
by which funds must be made available for withdrawal in accordance with 
this regulation, the depositary bank may charge back the customer's 
account for the full amount of the check. (See Sec. 229.33(d) and 
Commentary.)
    3. Nothing in the regulation requires a depositary bank to have 
facilities open for customers to make withdrawals at specified times or 
on specified days. For example, even though the special cash withdrawal 
rule set forth in Sec. 229.12(d) states that a bank must make up to 
$400 available for cash withdrawals no later than 5 p.m. on specific 
business days, if a bank does not participate in an ATM system and does 
not have any teller windows open at or after 5 p.m., the bank need not 
join an ATM system or keep

[[Page 726]]

offices open. In this case, the bank complies with this rule if the 
funds that are required to be available for cash withdrawal at 5 p.m. on 
a particular day are available for withdrawal at the start of business 
on the following day. Similarly, if a depositary bank is closed for 
customer transactions, including ATMs, on a day funds must be made 
available for withdrawal, the regulation does not require the bank to 
open.
    4. The special cash withdrawal rule in the EFA Act recognizes that 
the $400 that must be made available for cash withdrawal by 5 p.m. on 
the day specified in the schedule may exceed a bank's daily ATM cash 
withdrawal limit and explicitly provides that the EFA Act does not 
supersede a bank's policy in this regard. As a result, if a bank has a 
policy of limiting cash withdrawals from automated teller machines to 
$250 per day, the regulation would not require that the bank dispense 
$400 of the proceeds of the customer's deposit that must be made 
available for cash withdrawal on that day.
    5. Even though the EFA Act clearly provides that the bank's ATM 
withdrawal limit is not superseded by the federal availability rules on 
the day funds must first be made available, the EFA Act does not 
specifically permit banks to limit cash withdrawals at ATMs on 
subsequent days when the entire amount of the deposit must be made 
available for withdrawal. The Board believes that the rationale behind 
the EFA Act's provision that a bank's ATM withdrawal limit is not 
superseded by the requirement that funds be made available for cash 
withdrawal applies on subsequent days. Nothing in the regulation 
prohibits a depositary bank from establishing ATM cash withdrawal limits 
that vary among customers of the bank, as long as the limit is not 
dependent on the length of time funds have been in the customer's 
account (provided that the permissible hold has expired).
    6. Some small banks, particularly credit unions, due to lack of 
secure facilities, keep no cash on their premises and hence offer no 
cash withdrawal capability to their customers. Other banks limit the 
amount of cash on their premises due to bonding requirements or cost 
factors, and consequently reserve the right to limit the amount of cash 
each customer can withdraw over-the-counter on a given day. For example, 
some banks require advance notice for large cash withdrawals in order to 
limit the amount of cash needed to be maintained on hand at any time.
    7. Nothing in the regulation is intended to prohibit a bank from 
limiting the amount of cash that may be withdrawn at a staffed teller 
station if the bank has a policy limiting the amount of cash that may be 
withdrawn, and if that policy is applied equally to all customers of the 
bank, is based on security, operating, or bonding requirements, and is 
not dependent on the length of time the funds have been in the 
customer's account (as long as the permissible hold has expired). The 
regulation, however, does not authorize such policies if they are 
otherwise prohibited by statutory, regulatory, or common law.

               D. 229.19(d) Use of Calculated Availability

    1. A depositary bank may provide availability to its nonconsumer 
accounts on a calculated availability basis. Under calculated 
availability, a specified percentage of funds from check deposits may be 
made available to the customer on the next business day, with the 
remaining percentage deferred until subsequent days. The determination 
of the percentage of deposited funds that will be made available each 
day is based on the customer's typical deposit mix as determined by a 
sample of the customer's deposits. Use of calculated availability is 
permitted only if, on average, the availability terms that result from 
the sample are equivalent to or more prompt than the requirements of 
this subpart.

                    E. 229.19(e) Holds on Other Funds

    1. Section 607(d) of the EFA Act (12 U.S.C. 4006(d)) provides that 
once funds are available for withdrawal under the EFA Act, such funds 
shall not be frozen solely due to the subsequent deposit of additional 
checks that are not yet available for withdrawal. This provision of the 
EFA Act is designed to prevent evasion of the EFA Act's availability 
requirements.
    2. This paragraph clarifies that if a customer deposits a check in 
an account (as defined in Sec. 229.2(a)), the bank may not place a hold 
on any of the customer's funds so that the funds that are held exceed 
the amount of the check deposited or the total amount of funds held are 
not made available for withdrawal within the times required in this 
subpart. For example, if a bank places a hold on funds in a customer's 
non transaction account, rather than a transaction account, for deposits 
made to the customer's transaction account, the bank may place such a 
hold only to the extent that the funds held do not exceed the amount of 
the deposit and the length of the hold does not exceed the time periods 
permitted by this regulation.
    3. These restrictions also apply to holds placed on funds in a 
customer's account (as defined in Sec. 229.2(a)) if a customer cashes a 
check at a bank (other than a check drawn on that bank) over the 
counter. The regulation does not prohibit holds that may be placed on 
other funds of the customer for checks cashed over the counter, to the 
extent that the transaction does not involve a deposit to an account. A 
bank may not, however, place a hold on any account when an ``on us'' 
check is cashed over the counter. ``On us'' checks are considered 
finally paid

[[Page 727]]

when cashed (see U.C.C. 4-215(a)(1)). When a customer cashes a check 
over the counter and the bank places a hold on an account of the 
customer, the bank must give whatever notice would have been required 
under Sec. Sec. 229.13 or 229.16 had the check been deposited in the 
account.

              F. 229.19(f) Employee Training and Compliance

    1. The EFA Act requires banks to take such actions as may be 
necessary to inform fully each employee that performs duties subject to 
the EFA Act of the requirements of the EFA Act, and to establish and 
maintain procedures reasonably designed to assure and monitor employee 
compliance with such requirements.
    2. This paragraph requires a bank to establish procedures to ensure 
compliance with these requirements and provide these procedures to the 
employees responsible for carrying them out.

                G. 229.19(g) Effect of Merger Transaction

    1. After banks merge, there is often a period of adjustment before 
their operations are consolidated. This paragraph accommodates this 
adjustment period by allowing merged banks to be treated as separate 
banks for purposes of this subpart for a period of up to one year after 
consummation of the merger transaction, except that a customer of any 
bank that is a party to the transaction that has an established account 
with that bank may not be treated as a new account holder for any other 
party to the transaction for purposes of the new account exception of 
Sec. 229.13(a), and a deposit in any branch of the merged bank is 
considered deposited in the bank for purposes of the availability 
schedules in accordance with Sec. 229.19(a).
    2. This rule affects the status of the combined entity in several 
areas. For example, this rule would affect when an ATM is a proprietary 
ATM (Sec. 229.2(aa) and Sec. 229.12(b)) and when a check is considered 
drawn on a branch of the depositary bank (Sec. 229.10(c)(1)(vi)).
    3. Merger transaction is defined in Sec. 229.2(t).

                XIV. Section 229.20 Relation to State Law

                         A. 229.20(a) In General

    1. Several states have enacted laws that govern when banks in those 
states must make funds available to their customers. The EFA Act 
provides that any state law in effect on September 1, 1989, that 
provides that funds be made available in a shorter period of time than 
provided in this regulation, will supersede the time periods in the EFA 
Act and the regulation. The Conference Report on the EFA Act clarifies 
this provision by stating that any state law enacted on or before 
September 1, 1989, may supersede federal law to the extent that the law 
relates to the time funds must be made available for withdrawal. H.R. 
Rep. No. 261, 100th Cong. 1st Sess. at 182 (1987).
    2. Thus, if a state had wished to adopt a law governing funds 
availability, it had to have made that law effective on or before 
September 1, 1989. Laws adopted after that date do not supersede federal 
law, even if they provide for shorter availability periods than are 
provided under federal law. If a state that had a law governing funds 
availability in effect before September 1, 1989, amended its law after 
that date, the amendment would not supersede federal law, but an 
amendment deleting a state requirement would be effective.
    3. If a state provides for a shorter hold for a certain category of 
checks than is provided for under federal law, that state requirement 
will supersede the federal provision. For example, most state laws base 
some hold periods on whether the check being deposited is drawn on an 
in-state or out-of-state bank. If a state contains more than one check 
processing region, the state's hold period for in-state checks may be 
shorter than the federal maximum hold period for nonlocal checks. Thus, 
the state schedule would supersede the federal schedule to the extent 
that it applies to in-state, nonlocal checks.
    4. The EFA Act also provides that any state law that provides for 
availability in a shorter period of time than required by federal law is 
applicable to all federally insured institutions in that state, 
including federally chartered institutions. If a state law provides 
shorter availability only for deposits in accounts in certain categories 
of banks, such as commercial banks, the superseding state law continues 
to apply only to those categories of banks, rather than to all federally 
insured banks in the state.

               B. 229.20(b) Preemption of Inconsistent Law

    1. This paragraph reflects the statutory provision that other 
provisions of state law that are inconsistent with federal law are 
preempted. Preemption does not require a determination by the Board to 
be effective.

                  C. 229.20(c) Standards for Preemption

    1. This section describes the standards the Board uses in making 
determinations on whether federal law will preempt state laws governing 
funds availability. A provision of state law is considered inconsistent 
with federal law if it permits a depositary bank to make funds available 
to a customer in a longer period of time than the maximum period 
permitted by the EFA Act and this regulation. For example, a state law 
that permits a hold of four business days or longer for local checks 
permits a hold that is longer

[[Page 728]]

than that permitted under the EFA Act and this regulation, and therefore 
is inconsistent and preempted. State availability schedules that provide 
for availability in a shorter period of time than required under 
Regulation CC supersede the federal schedule.
    2. Under a state law, some categories of deposits could be available 
for withdrawal sooner or later than the time required by this subpart, 
depending on the composition of the deposit. For example, the EFA Act 
and this regulation (Sec. 229.10(c)(1)(vii)) require next-day 
availability for the first $100 of the aggregate deposit of local or 
nonlocal checks on any day, and a state law could require next-day 
availability for any check of $100 or less that is deposited. Under the 
EFA Act and this regulation, if either one $150 check or three $50 
checks are deposited on a given day, $100 must be made available for 
withdrawal on the next business day, and $50 must be made available in 
accordance with the local or nonlocal schedule. Under the state law, 
however, the two deposits would be subject to different availability 
rules. In the first case, none of the proceeds of the deposit would be 
subject to next-day availability; in the second case, the entire 
proceeds of the deposit would be subject to next-day availability. In 
this example, because the state law would, in some situations, permit a 
hold longer than the maximum permitted by the EFA Act, this provision of 
state law is inconsistent and preempted in its entirety.
    3. In addition to the differences between state and federal 
availability schedules, a number of state laws contain exceptions to the 
state availability schedules that are different from those provided 
under the EFA Act and this regulation. The state exceptions continue to 
apply only in those cases where the state schedule is shorter than or 
equal to the federal schedule, and then only up to the limit permitted 
by the Regulation CC schedule. Where a deposit is subject to a state 
exception under a state schedule that is not preempted by Regulation CC 
and is also subject to a federal exception, the hold on the deposit 
cannot exceed the hold permissible under the federal exception in 
accordance with Regulation CC. In such cases, only one exception notice 
is required, in accordance with Sec. 229.13(g). This notice need only 
include the applicable federal exception as the reason the exception was 
invoked. For those categories of checks for which the state schedule is 
preempted by the federal schedule, only the federal exceptions may be 
used.
    4. State laws that provide maximum availability periods for 
categories of deposits that are not covered by the EFA Act would not be 
preempted. Thus, state funds availability laws that apply to funds in 
time and savings deposits are not affected by the EFA Act or this 
regulation. In addition, the availability schedules of several states 
apply to ``items'' deposited to an account. The term items may encompass 
deposits, such as nonnegotiable instruments, that are not subject to the 
Regulation CC availability schedules. Deposits that are not covered by 
Regulation CC continue to be subject to the state availability 
schedules. State laws that provide maximum availability periods for 
categories of institutions that are not covered by the EFA Act also 
would not be preempted. For example, a state law that governs money 
market mutual funds would not be affected by the EFA Act or this 
regulation.
    5. Generally, state rules governing the disclosure or notice of 
availability policies applicable to accounts also are preempted, if they 
are different from the federal rules. Nevertheless, a state law 
requiring disclosure of funds availability policies that apply to 
deposits other than ``accounts,'' such as savings or time deposits, are 
not inconsistent with the EFA Act and this subpart. Banks in these 
states would have to follow the state disclosure rules for these 
deposits.

                 D. 229.20(d) Preemption Determinations

    1. The Board may issue preemption determinations upon the request of 
an interested party in a state. The determinations will relate only to 
the provisions of Subparts A and B; generally the Board will not issue 
individual preemption determinations regarding the relation of state 
U.C.C. provisions to the requirements of Subpart C.

          E. 229.20(e) Procedures for Preemption Determinations

    1. This provision sets forth the information that must be included 
in a request by an interested party for a preemption determination by 
the Board.

                   XV. Section 229.21 Civil Liability

                      A. 229.21(a) Civil Liability

    1. This paragraph sets forth the statutory penalties for failure to 
comply with the requirements of this subpart. These penalties apply to 
provisions of state law that supersede provisions of this regulation, 
such as requirements that funds deposited in accounts at banks be made 
available more promptly than required by this regulation, but they do 
not apply to other provisions of state law. (See Commentary to Sec. 
229.20.)

                    B. 229.21(b) Class Action Awards

    1. This paragraph sets forth the provision in the EFA Act concerning 
the factors that should be considered by the court in establishing the 
amount of a class action award.

                      C. 229.21(c) Bona Fide Errors

    1. A bank is shielded from liability under this section for a 
violation of a requirement of this subpart if it can demonstrate, by a

[[Page 729]]

preponderance of the evidence, that the violation resulted from a bona 
fide error and that it maintains procedures designed to avoid such 
errors. For example, a bank may make a bona fide error if it fails to 
give next-day availability on a check drawn on the Treasury because the 
bank's computer system malfunctions in a way that prevents the bank from 
updating its customer's account; or if it fails to identify whether a 
payable-through check is a local or nonlocal check despite procedures 
designed to make this determination accurately.

                        D. 229.21(d) Jurisdiction

    1. The EFA Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions for 
violations of this subpart.

                 E. 229.21(e) Reliance on Board Rulings

    1. This provision shields banks from civil liability if they act in 
good faith in reliance on any rule, regulation, model form, notice, or 
clause (if the disclosure actually corresponds to the bank's 
availability policy), or interpretation of the Board, even if it were 
subsequently determined to be invalid. Banks may rely on this 
Commentary, which is issued as an official Board interpretation, as well 
as on the regulation itself.

                         F. 229.21(f) Exclusions

    1. This provision clarifies that liability under this section does 
not apply to violations of the requirements of Subpart C of this 
regulation, or to actions for wrongful dishonor of a check by a paying 
bank's customer.

                      G. 229.21(g) Record Retention

    1. Banks must keep records to show compliance with the requirements 
of this subpart for at least two years. This record retention period is 
extended in the case of civil actions and enforcement proceedings. 
Generally, a bank is not required to retain records showing that it 
actually has given disclosures or notices required by this subpart to 
each customer, but it must retain evidence demonstrating that its 
procedures reasonably ensure the customers' receipt of the required 
disclosures and notices. A bank must, however, retain a copy of each 
notice provided pursuant to its use of the reasonable cause exception 
under Sec. 229.13(g) as well as a brief description of the facts giving 
rise to the availability of that exception.

  XVI. Section 229.30 Paying Bank's Responsibility for Return of Checks

                      A. 229.30(a) Return of Checks

    1. This section requires a paying bank (which, for purposes of 
Subpart C, may include a payable-through and payable-at bank; see Sec. 
229.2(z)) that determines not to pay a check to return the check 
expeditiously. Generally, a check is returned expeditiously if the 
return process is as fast as the forward collection process. This 
paragraph provides two standards for expeditious return, the ``two-day/
four-day'' test, and the ``forward collection'' test.
    2. Under the ``two-day/four-day'' test, if a check is returned such 
that it would normally be received by the depositary bank two business 
days after presentment where both the paying and depositary banks are 
located in the same check processing region or four business days after 
presentment where the paying and depositary banks are not located in the 
same check processing region, the check is considered returned 
expeditiously. In certain limited cases, however, these times are 
shorter than the time it would normally take a forward collection check 
deposited in the paying bank and payable by the depositary bank to be 
collected. Therefore, the Board has included a ``forward collection'' 
test, whereby a check is nonetheless considered to be returned 
expeditiously if the paying bank uses transportation methods and banks 
for return comparable to those used for forward collection checks, even 
if the check is not received by the depositary banks within the two-day 
or four-day period.
    3. Two-day/four-day test.
    a. Under the first test, a paying bank must return the check so that 
the check would normally be received by the depositary bank within 
specified times, depending on whether or not the paying and depositary 
banks are located in the same check processing region.
    b. Where both banks are located in the same check processing region, 
a check is returned expeditiously if it is returned to the depositary 
bank by 4:00 p.m. (local time of the depositary bank) of the second 
business day after the banking day on which the check was presented to 
the paying bank. For example, a check presented on Monday to a paying 
bank must be returned to a depositary bank located in the same check 
processing region by 4 p.m. on Wednesday. For a paying bank that is 
located in a different check processing region than the depositary bank, 
the deadline to complete return is 4 p.m. (local time of the depositary 
bank) of the fourth business day after the banking day on which the 
check was presented to the paying bank. For example, a check presented 
to such a paying bank on Monday must be returned to the depositary bank 
by 4:00 p.m. on Friday.
    c. This two-day/four-day test does not necessarily require actual 
receipt of the check by the depositary bank within these times. Rather, 
the paying bank must send the check so that the check would normally be 
received by the depositary bank within the specified time. Thus, the 
paying bank is not

[[Page 730]]

responsible for unforeseeable delays in the return of the check, such as 
transportation delays.
    d. Often, returned checks will be delivered to the depositary bank 
together with forward collection checks. Where the last day on which a 
check could be delivered to a depositary bank under this two-day/four-
day test is not a banking day for the depositary bank, a returning bank 
might not schedule delivery of forward collection checks to the 
depositary bank on that day. Further, the depositary bank may not 
process checks on that day. Consequently, if the last day of the time 
limit is not a banking day for the depositary bank, the check may be 
delivered to the depositary bank before the close of the depositary 
bank's next banking day and the return will still be considered 
expeditious. Ordinarily, this extension of time will allow the returned 
checks to be delivered with the next shipment of forward collection 
checks destined for the depositary bank.
    e. The times specified in this two-day/four-day test are based on 
estimated forward collection times, but take into account the particular 
difficulties that may be encountered in handling returned checks. It is 
anticipated that the normal process for forward collection of a check 
coupled with these return requirements will frequently result in the 
return of checks before the proceeds of nonlocal checks, other than 
those covered by Sec. 229.10(c), must be made available for withdrawal.
    f. Under this two-day/four-day test, no particular means of 
returning checks is required, thus providing flexibility to paying banks 
in selecting means of return. The Board anticipates that paying banks 
will often use returning banks (see Sec. 229.31) as their agents to 
return checks to depositary banks. A paying bank may rely on the 
availability schedule of the returning bank it uses in determining 
whether the returned check would ``normally'' be returned within the 
required time under this two-day/four-day test, unless the paying bank 
has reason to believe that these schedules do not reflect the actual 
time for return of a check.
    4. Forward collection test.
    a. Under the second, ``forward collection,'' test, a paying bank 
returns a check expeditiously if it returns a check by means as swift as 
the means similarly situated banks would use for the forward collection 
of a check drawn on the depositary bank.
    b. Generally, the paying bank would satisfy the ``forward 
collection'' test if it uses a transportation method and collection path 
for return comparable to that used for forward collection, provided that 
the returning bank selected to process the return agrees to handle the 
returned check under the standards for expeditious return for returning 
banks under Sec. 229.31(a). This test allows many paying banks a simple 
means of expeditious return of checks and takes into account the longer 
time for return that will be required by banks that do not have ready 
access to direct courier transportation.
    c. The paying bank's normal method of sending a check for forward 
collection would not be expeditious, however, if it is materially slower 
than that of other banks of similar size and with similar check handling 
activity in its community.
    d. Under the ``forward collection'' test, a paying bank must handle, 
route, and transport a returned check in a manner designed to be at 
least as fast as a similarly situated bank would collect a forward 
collection check (1) of similar amount, (2) drawn on the depositary 
bank, and (3) received for deposit by a branch of the paying bank or a 
similarly situated bank by noon on the banking day following the banking 
day of presentment of the returned check.
    e. This test refers to similarly situated banks to indicate a 
general community standard. In the case of a paying bank (other than a 
Federal Reserve Bank), a similarly situated bank is a bank of similar 
asset size, in the same community, and with similar check handling 
activity as the paying bank. (See Sec. 229.2(ee).) A paying bank has 
similar check handling activity to other banks that handle similar 
volumes of checks for collection.
    f. Under the forward collection test, banks that use means of 
handling returned checks that are less efficient than the means used by 
similarly situated banks must improve their procedures. On the other 
hand, a bank with highly efficient means of collecting checks drawn on a 
particular bank, such as a direct presentment of checks to a bank in a 
remote community, is not required to use that means for returned checks, 
i.e. direct return, if similarly situated banks do not present checks 
directly to that depositary bank.
    5. Examples.
    a. If a check is presented to a paying bank on Monday and the 
depositary bank and the paying bank are participants in the same 
clearinghouse, the paying bank should arrange to have the returned check 
received by the depositary bank by Wednesday. This would be the same day 
the paying bank would deliver a forward collection check to the 
depositary bank if the paying bank received the deposit by noon on 
Tuesday.
    b. i. If a check is presented to a paying bank on Monday and the 
paying bank would normally collect checks drawn on the depositary bank 
by sending them to a correspondent or a Federal Reserve Bank by courier, 
the paying bank could send the returned check to its correspondent or 
Federal Reserve Bank, provided that the correspondent has agreed to 
handle returned checks expeditiously under Sec. 229.31(a). (All

[[Page 731]]

Federal Reserve Banks agree to handle returned checks expeditiously.)
    ii. The paying bank must deliver the returned check to the 
correspondent or Federal Reserve Bank by the correspondent's or Federal 
Reserve Bank's appropriate cut-off hour. The appropriate cut-off hour is 
the cut-off hour for returned checks that corresponds to the cut-off 
hour for forward collection checks drawn on the depositary bank that 
would normally be used by the paying bank or a similarly situated bank. 
A returned check cut-off hour corresponds to a forward collection cut-
off hour if it provides for the same or faster availability for checks 
destined for the same depositary banks.
    iii. In this example, delivery to the correspondent or a Federal 
Reserve Bank by the appropriate cut-off hour satisfies the paying bank's 
duty, even if use of the correspondent or Federal Reserve Bank is not 
the most expeditious means of returning the check. Thus, a paying bank 
may send a local returned check to a correspondent instead of a Federal 
Reserve Bank, even if the correspondent then sends the returned check to 
a Federal Reserve Bank the following day as a qualified returned check. 
Where the paying bank delivers forward collection checks by courier to 
the correspondent or the Federal Reserve Bank, mailing returned checks 
to the correspondent or Federal Reserve Bank would not satisfy the 
forward collection test.
    iv. If a paying bank ordinarily mails its forward collection checks 
to its correspondent or Federal Reserve Bank in order to avoid the costs 
of a courier delivery, but similarly situated banks use a courier to 
deliver forward collection checks to their correspondent or Federal 
Reserve Bank, the paying bank must send its returned checks by courier 
to meet the forward collection test.
    c. If a paying bank normally sends its forward collection checks 
directly to the depositary bank, which is located in another community, 
but similarly situated banks send forward collection checks drawn on the 
depositary bank to a correspondent or a Federal Reserve Bank, the paying 
bank would not have to send returned checks directly to the depositary 
bank, but could send them to a correspondent or a Federal Reserve Bank.
    d. The dollar amount of the returned check has a bearing on how it 
must be returned. If the paying bank and similarly situated banks 
present large-dollar checks drawn on the depositary bank directly to the 
depositary bank, but use a Federal Reserve Bank or a correspondent to 
collect small-dollar checks, generally the paying bank would be required 
to send its large-dollar returns directly to the depositary bank (or 
through a returning bank, if the checks are returned as quickly), but 
could use a Federal Reserve Bank or a correspondent for its small-dollar 
returns.
    6. Choice of returning bank. In meeting the requirements of the 
forward collection test, the paying bank is responsible for its own 
actions, but not for those of the depositary bank or returning banks. 
(This is analogous to the responsibility of collecting banks under 
U.C.C. 4-202(c).) For example, if the paying bank starts the return of 
the check in a timely manner but return is delayed by a returning bank 
(including delay to create a qualified returned check), generally the 
paying bank has met its requirements. (See Sec. 229.38.) If, however, 
the paying bank selects a returning bank that the paying bank should 
know is not capable of meeting its return requirements, the paying bank 
will not have met its obligation of exercising ordinary care in 
selecting intermediaries to return the check. The paying bank is free to 
use a method of return, other than its method of forward collection, as 
long as the alternate method results in delivery of the returned check 
to the depositary bank as quickly as the forward collection of a check 
drawn on the depositary bank or, where the returning bank takes a day to 
create a qualified returned check under Sec. 229.31(a), one day later 
than the forward collection time. If a paying bank returns a check on 
its banking day of receipt without settling for the check, as permitted 
under U.C.C. 4-302(a), and receives settlement for the returned check 
from a returning bank, it must promptly pay the amount of the check to 
the collecting bank from which it received the check.
    7. Qualified returned checks. Although paying banks may wish to 
prepare qualified returned checks because they will be handled at a 
lower cost by returning banks, the one business day extension provided 
to returning banks is not available to paying banks because of the 
longer time that a paying bank has to dispatch the check. Normally, 
paying banks will be able to convert a check to a qualified returned 
check at any time after the determination is made to return the check 
until late in the day following presentment, while a returning bank may 
receive returned checks late on one day and be expected to dispatch them 
early the next morning. A check that is converted to a qualified 
returned check must be encoded in accordance with ANS X9.13 for original 
checks or ANS X9.100-140 for substitute checks.
    8. Routing of returned checks.
    a. In effect, under either test, the paying bank acts as an agent or 
subagent of the depositary bank in selecting a means of return. Under 
Sec. 229.30(a), a paying bank is authorized to route the returned check 
in a variety of ways:
    i. It may send the returned check directly to the depositary bank by 
courier or other means of delivery, bypassing returning banks; or

[[Page 732]]

    ii. It may send the returned check to any returning bank agreeing to 
handle the returned check for expeditious return to the depositary bank 
under Sec. 229.31(a), regardless of whether or not the returning bank 
handled the check for forward collection.
    b. If the paying bank elects to return the check directly to the 
depositary bank, it is not necessarily required to return the check to 
the branch of first deposit. The check may be returned to the depositary 
bank at any location permitted under Sec. 229.32(a).
    9. Midnight deadline.
    a. Except for the extension permitted by Sec. 229.30(c), discussed 
below, this section does not relieve a paying bank from the requirement 
for timely return (i.e., midnight deadline) under U.C.C. 4-301 and 4-
302, which continue to apply. Under U.C.C. 4-302, a paying bank is 
``accountable'' for the amount of a demand item, other than a 
documentary draft, if it does not pay or return the item or send notice 
of dishonor by its midnight deadline. Under U.C.C. 3-418(c) and 4-
215(a), late return constitutes payment and would be final in favor of a 
holder in due course or a person who has in good faith changed his 
position in reliance on the payment. Thus, retaining this requirement 
gives the paying bank an additional incentive to make a prompt return.
    b. The expeditious return requirement applies to a paying bank that 
determines not to pay a check. This requirement applies to a payable-
through or a payable-at bank that is defined as a paying bank (see Sec. 
229.2(z)) and that returns a check. This requirement begins when the 
payable-through or payable-at bank receives the check during forward 
collection, not when the payor returns the check to the payable-through 
or payable-at bank. Nevertheless, a check sent for payment or collection 
to a payable-through or payable-at bank is not considered to be drawn on 
that bank for purposes of the midnight deadline provision of U.C.C. 4-
301. (See discussion of Sec. 229.36(a).)
    c. The liability section of this subpart (Sec. 229.38) provides 
that a paying bank is not subject to both ``accountability'' for missing 
the midnight deadline under the U.C.C. and liability for missing the 
timeliness requirements of this regulation. Also, a paying bank is not 
responsible for failure to make expeditious return to a party that has 
breached a presentment warranty under U.C.C. 4-208, notwithstanding that 
the paying bank has returned the check. (See Commentary to Sec. 
229.33(a).)
    10. U.C.C. provisions affected. This paragraph directly affects the 
following provisions of the U.C.C., and may affect other sections or 
provisions:
    a. Section 4-301(d), in that instead of returning a check through a 
clearinghouse or to the presenting bank, a paying bank may send a 
returned check to the depositary bank or to a returning bank.
    b. Section 4-301(a), in that time limits specified in that section 
may be affected by the additional requirement to make an expeditious 
return and in that settlement for returned checks is made under Sec. 
229.31(c), not by revocation of settlement.

               B. 229.30(b) Unidentifiable Depositary Bank

    1. In some cases, a paying bank will be unable to identify the 
depositary bank through the use of ordinary care and good faith. The 
Board expects that these cases will be unusual as skilled return clerks 
will readily identify the depositary bank from the depositary bank 
indorsement required under Sec. 229.35 and appendix D. In cases where 
the paying bank is unable to identify the depositary bank, the paying 
bank may, in accordance with Sec. 229.30(a), send the returned check to 
a returning bank that agrees to handle the returned check for 
expeditious return to the depositary bank under Sec. 229.31(a). The 
returning bank may be better able to identify the depositary bank.
    2. In the alternative, the paying bank may send the check back up 
the path used for forward collection of the check. The presenting bank 
and prior collecting banks normally will be able to trace the collection 
path of the check through the use of their internal records in 
conjunction with the indorsements on the returned check. In these 
limited cases, the paying bank may send such a returned check to any 
bank that handled the check for forward collection, even if that bank 
does not agree to handle the returned check for expeditious return to 
the depositary bank under Sec. 229.31(a). A paying bank returning a 
check under this paragraph to a bank that has not agreed to handle the 
check expeditiously must advise that bank that it is unable to identify 
the depositary bank. This advice must be conspicuous, such as a stamp on 
each check for which the depositary bank is unknown if such checks are 
commingled with other returned checks, or, if such checks are sent in a 
separate cash letter, by one notice on the cash letter. This information 
will warn the bank that this check will require special research and 
handling in accordance with Sec. 229.31(b). The returned check may not 
be prepared for automated return. The return of a check to a bank that 
handled the check for forward collection is consistent with Sec. 
229.35(b), which requires a bank handling a check to take up the check 
it is has not been paid.
    3. The sending of a check to a bank that handled the check for 
forward collection under this paragraph is not subject to the 
requirements for expeditious return by the paying bank. Often, the 
paying bank will not have courier or other expeditious means of

[[Page 733]]

transportation to the collecting or presenting bank. Although the lack 
of a requirement of expeditious return will create risks for the 
depositary bank, in many cases the inability to identify the depositary 
bank will be due to the depositary bank's, or a collecting bank's, 
failure to use the indorsement required by Sec. 229.35(a) and appendix 
D. If the depositary bank failed to use the proper indorsement, it 
should bear the risks of less than expeditious return. Similarly, where 
the inability to identify the depositary bank is due to indorsements or 
other information placed on the back of the check by the depositary 
bank's customer or other prior indorser, the depositary bank should bear 
the risk that it cannot charge a returned check back to that customer. 
Where the inability to identify the depositary bank is due to subsequent 
indorsements of collecting banks, these collecting banks may be liable 
for a loss incurred by the depositary bank due to less than expeditious 
return of a check; those banks therefore have an incentive to return 
checks sent to them under this paragraph quickly.
    4. This paragraph does not relieve a paying bank from the liability 
for the lack of expeditious return in cases where the paying bank is 
itself responsible for the inability to identify the depositary bank, 
such as when the paying bank's customer has used a check with printing 
or other material on the back in the area reserved for the depositary 
bank's indorsement, making the indorsement unreadable. (See Sec. 
229.38(d).)
    5. A paying bank's return under this paragraph is also subject to 
its midnight deadline under U.C.C. 4-301, Regulation J (if the check is 
returned through a Federal Reserve Bank), and the exception provided in 
Sec. 229.30(c). A paying bank also may send a check to a prior 
collecting bank to make a claim against that bank under Sec. 229.35(b) 
where the depositary bank is insolvent or in other cases as provided in 
Sec. 229.35(b). Finally, a paying bank may make a claim against a prior 
collecting bank based on a breach of warranty under U.C.C. 4-208.

                   C. 229.30(c) Extension of Deadline

    1. This paragraph permits extension of the deadlines for returning a 
check for which the paying bank previously has settled (generally 
midnight of the banking day following the banking day on which the check 
is received by the paying bank) and for returning a check without 
settling for it (generally midnight of the banking day on which the 
check is received by the paying bank, or such other time provided by 
Sec. 210.9 of Regulation J (12 CFR part 210) or Sec. 229.36(f)(2) of 
this part), but not of the duty of expeditious return, in two 
circumstances:
    a. A paying bank may have a courier that leaves after midnight (or 
after any other applicable deadline) to deliver its forward-collection 
checks. This paragraph removes the constraint of the midnight deadline 
for returned checks if the returned check reaches the receiving bank on 
or before the receiving bank's next banking day following the otherwise 
applicable deadline by the earlier of the close of that banking day or a 
cutoff hour of 2 p.m. or later set by the receiving bank under U.C.C. 4-
108. The extension also applies if the check reaches the bank to which 
it is sent later than the time described in the previous sentence if 
highly expeditious means of transportation are used. For example, a West 
Coast paying bank may use this further extension to ship a returned 
check by air courier directly to an East Coast returning bank even if 
the check arrives after the returning bank's cutoff hour. This paragraph 
applies to the extension of all midnight deadlines except Saturday 
midnight deadlines (see paragraph XVI.C.1.b of this appendix).
    b. A paying bank may observe a banking day, as defined in the 
applicable U.C.C., on a Saturday, which is not a business day and 
therefore not a banking day under Regulation CC. In such a case, the 
U.C.C. deadline for returning checks received and settled for on Friday, 
or for returning checks received on Saturday without settling for them, 
might require the bank to return the checks by midnight Saturday. 
However, the bank may not have couriers leaving on Saturday to carry 
returned checks, and even if it did, the returning or depositary bank to 
which the returned checks were sent might not be open until Sunday night 
or Monday morning to receive and process the checks. This paragraph 
extends the midnight deadline if the returned checks reach the returning 
bank by a cut-off hour (usually on Sunday night or Monday morning) that 
permits processing during its next processing cycle or reach the 
depositary bank by the cut-off hour on its next banking day following 
the Saturday midnight deadline. This paragraph applies exclusively to 
the extension of Saturday midnight deadlines.
    2. The time limits that are extended in each case are the paying 
bank's midnight deadline for returning a check for which it has already 
settled and the paying bank's deadline for returning a check without 
settling for it in U.C.C. 4-301 and 4-302, Sec. Sec. 210.9 and 210.12 
of Regulation J (12 CFR 210.9 and 210.12), and Sec. 229.36(f)(2) of 
this part. As these extensions are designed to speed (Sec. 
229.30(c)(1)), or at least not slow (Sec. 229.30(c)(2)), the overall 
return of checks, no modification or extension of the expeditious return 
requirements in Sec. 229.30(a) is required.
    3. The paying bank satisfies its midnight or other return deadline 
by dispatching returned checks to another bank by courier, including a 
courier under contract with the

[[Page 734]]

paying bank, prior to expiration of the deadline.
    4. This paragraph directly affects U.C.C. 4-301 and 4-302 and 
Sec. Sec. 210.9 and 210.12 of Regulation J (12 CFR 210.9 and 210.12) to 
the extent that this paragraph applies by its terms, and may affect 
other provisions.

              D. 229.30(d) Identification of Returned Check

    1. The reason for the return must be clearly indicated. A check is 
identified as a returned check if the front of that check indicates the 
reason for return, even though it does not specifically state that the 
check is a returned check. A reason such as ``Refer to Maker'' is 
permissible in appropriate cases. If the returned check is a substitute 
check, the reason for return must be placed within the image of the 
original check that appears on the front of the substitute check so that 
the information is retained on any subsequent substitute check. If the 
paying bank places the returned check in a carrier envelope, the carrier 
envelope should indicate that it is a returned check but need not repeat 
the reason for return stated on the check if it in fact appears on the 
check.

              E. 229.30(e) Depositary Bank Without Accounts

    1. Subpart B of this regulation applies only to ``checks'' deposited 
in transaction-type ``accounts.'' Thus, a depositary bank with only time 
or savings accounts need not comply with the availability requirements 
of Subpart B. Collecting banks will not have couriers delivering checks 
to these banks as paying banks, because no checks are drawn on them. 
Consequently, the costs of using a courier or other expedited means to 
deliver returned checks directly to such a depositary bank may not be 
justified. Thus, the expedited return requirement of Sec. 229.30(a) and 
the notice of nonpayment requirement of Sec. 229.33 do not apply to 
checks being returned to banks that do not hold accounts. The paying 
bank's midnight deadline in U.C.C. 4-301 and 4-302 and Sec. 210.12 of 
Regulation J (12 CFR 210.12) would continue to apply to these checks. 
Returning banks also would be required to act on such checks within 
their midnight deadline. Further, in order to avoid complicating the 
process of returning checks generally, banks without accounts are 
required to use the standard indorsement, and their checks are returned 
by returning banks and paid for by the depositary bank under the same 
rules as checks deposited in other banks, with the exception of the 
expeditious return and notice of nonpayment requirements of Sec. Sec. 
229.30(a), 229.31(a), and 229.33.
    2. The expeditious return requirements also apply to a check 
deposited in a bank that is not a depository institution. Federal 
Reserve Banks, Federal Home Loan Banks, private bankers, and possibly 
certain industrial banks are not depository institutions within the 
meaning of the EFA Act, and therefore are not subject to the expedited 
availability and disclosure requirements of Subpart B. These banks do, 
however, maintain accounts as defined in Sec. 229.2(a), and a paying 
bank returning a check to one of these banks would be required to return 
the check to the depositary bank, in accordance with the requirements of 
this section.

                  F. 229.30(f) Notice in Lieu of Return

    1. A check that is lost or otherwise unavailable for return may be 
returned by sending a legible copy of both sides of the check or, if 
such a copy is not available to the paying bank, a written notice of 
nonpayment containing the information specified in Sec. 229.33(b). The 
copy or written notice must clearly indicate it is a notice in lieu of 
return and must be handled in the same manner as other returned checks. 
Notice by telephone, telegraph, or other electronic transmission, other 
than a legible facsimile or similar image transmission of both sides of 
the check, does not satisfy the requirements for a notice in lieu of 
return. The requirement for a writing and the indication that the notice 
is a substitute for the returned check is necessary so that the 
returning and depositary banks are informed that the notice carries 
value. Notice in lieu of return is permitted only when a bank does not 
have and cannot obtain possession of the check or must retain possession 
of the check for protest. A check is not unavailable for return if it is 
merely difficult to retrieve from a filing system or from storage by a 
keeper of checks in a truncation system. A notice in lieu of return may 
be used by a bank handling a returned check that has been lost or 
destroyed, including when the original returned check has been charged 
back as lost or destroyed as provided in Sec. 229.35(b). A bank using a 
notice in lieu of return gives a warranty under Sec. 229.34(a)(4) that 
the original check has not been and will not be returned.
    2. The requirement of this paragraph supersedes the requirement of 
U.C.C. 4-301(a) as to the form and information required of a notice of 
dishonor or nonpayment. Reference in the regulation and this commentary 
to a returned check includes a notice in lieu of return unless the 
context indicates otherwise.
    3. The notice in lieu of return is subject to the provisions of 
Sec. 229.30 and is treated like a returned check for settlement 
purposes. If the original check is over $2,500, the notice of nonpayment 
under Sec. 229.33 is still required, but may be satisfied by the notice 
in lieu of return if the notice in lieu meets the time and information 
requirements of Sec. 229.33.
    4. If not all of the information required by Sec. 229.33(b) is 
available, the paying bank may make a claim against any prior bank 
handling the check as provided in Sec. 229.35(b).

[[Page 735]]

                 G. 229.30(g) Reliance on Routing Number

    1. Although Sec. 229.35 and appendix D require that the depositary 
bank indorsement contain its nine-digit routing number, it is possible 
that a returned check will bear the routing number of the depositary 
bank in fractional, nine-digit, or other form. This paragraph permits a 
paying bank to rely on the routing number of the depositary bank as it 
appears on the check (in the depositary bank's indorsement) when it is 
received by the paying bank.
    2. If there are inconsistent routing numbers, the paying bank may 
rely on any routing number designating the depositary bank. The paying 
bank is not required to resolve the inconsistency prior to processing 
the check. The paying bank remains subject to the requirement to act in 
good faith and use ordinary care under Sec. 229.38(a).

   XVII. Section 229.31 Returning Bank's Responsibility for Return of 
                                 Checks

                      A. 229.31(a) Return of Checks

    1. The standards for return of checks established by this section 
are similar to those for paying banks in Sec. 229.30(a). This section 
requires a returning bank to return a returned check expeditiously if it 
agrees to handle the returned check for expeditious return under this 
paragraph. In effect, the returning bank is an agent or subagent of the 
paying bank and a subagent of the depositary bank for the purposes of 
returning the check.
    2. A returning bank agrees to handle a returned check for 
expeditious return to the depositary bank if it:
    a. Publishes or distributes availability schedules for the return of 
returned checks and accepts the returned check for return;
    b. Handles a returned check for return that it did not handle for 
forward collection; or
    c. Otherwise agrees to handle a returned check for expeditious 
return.
    3. Two-day/four-day test. As in the case of a paying bank, a 
returning bank's return of a returned check is expeditious if it meets 
either of two tests. Under the ``two-day/four-day'' test, the check must 
be returned so that it would normally be received by the depositary bank 
by 4:00 p.m. either two or four business days after the check was 
presented to the paying bank, depending on whether or not the paying 
bank is located in the same check processing region as the depositary 
bank. This is the same test as the two-day/four-day test applicable to 
paying banks. (See Commentary to Sec. 229.30(a).) While a returning 
bank will not have first hand knowledge of the day on which a check was 
presented to the paying bank, returning banks may, by agreement, 
allocate with paying banks liability for late return based on the delays 
caused by each. In effect, the two-day/four day test protects all paying 
and returning banks that return checks from claims that they failed to 
return a check expeditiously, where the check is returned within the 
specified time following presentment to the paying bank, or a later time 
as would result from unforeseen delays.
    4. Forward collection test.
    a. The ``forward collection'' test is similar to the forward 
collection test for paying banks. Under this test, a returning bank must 
handle a returned check in the same manner that a similarly situated 
collecting bank would handle a check of similar size drawn on the 
depositary bank for forward collection. A similarly situated bank is a 
bank (other than a Federal Reserve Bank) that is of similar asset size 
and check handling activity in the same community. A bank has similar 
check handling activity if it handles a similar volume of checks for 
forward collection as the forward collection volume of the returning 
bank.
    b. Under the forward collection test, a returning bank must accept 
returned checks, including both qualified and other returned checks 
(``raw returns''), at approximately the same times and process them 
according to the same general schedules as checks handled for forward 
collection. Thus, a returning bank generally must process even raw 
returns on an overnight basis, unless its time limit is extended by one 
day to convert a raw return to a qualified returned check.
    5. Cut-off hours. A returning bank may establish earlier cut-off 
hours for receipt of returned checks than for receipt of forward 
collection checks, but the cut-off hour for returned checks may not be 
earlier than 2:00 p.m. The returning bank also may set different sorting 
requirements for returned checks than those applicable to other checks. 
Thus, a returning bank may allow itself more processing time for returns 
than for forward collection checks. All returned checks received by a 
cut-off hour for returned checks must be processed and dispatched by the 
returning bank by the time that it would dispatch forward collection 
checks received at a corresponding forward collection cut-off hour that 
provides for the same or faster availability for checks destined for the 
same depositary banks.
    6. Examples.
    a. If a returning bank receives a returned check by its cut-off hour 
for returned checks on Monday and the depositary bank and the returning 
bank are participants in the same clearinghouse, the returning bank 
should arrange to have the returned check received by the depositary 
bank by Tuesday. This would be the same day that it would deliver a 
forward collection check drawn on the depositary bank and received by 
the returning bank at a corresponding forward collection cut-off hour on 
Monday.
    b. i. If a returning bank receives a returned check, and the 
returning bank normally

[[Page 736]]

would collect a forward collection check drawn on the depositary bank by 
sending the forward collection check to a correspondent or a Federal 
Reserve Bank by courier, the returning bank could send the returned 
check in the same manner if the correspondent has agreed to handle 
returned checks expeditiously under Sec. 229.31(a). The returning bank 
would have to deliver the check by the correspondent's or Federal 
Reserve Bank's cut-off hour for returned checks that corresponds to its 
cut-off hour for forward collection checks drawn on the depositary bank. 
A returning bank may take a day to convert a check to a qualified 
returned check. Where the forward collection checks are delivered by 
courier, mailing the returned checks would not meet the duty established 
by this section for returning banks.
    ii. A returning bank must return a check to the depositary bank by 
courier or other means as fast as a courier, if similarly situated 
returning banks use couriers to deliver their forward collection checks 
to the depositary bank.
    iii. For some depositary banks, no community practice exists as to 
delivery of checks. For example, a credit union whose customers use 
payable-through drafts normally does not have checks presented to it 
because the drafts are normally sent to the payable-through bank for 
collection. In these circumstances, the community standard is 
established by taking into account the dollar volume of the checks being 
sent to the depositary bank and the location of the depositary bank, and 
determining whether similarly situated banks normally would deliver 
forward collection checks to the depositary bank, taking into account 
the particular risks associated with returned checks. Where the 
community standard does not require courier delivery, other means of 
delivery, including mail, are acceptable.
    7. Qualified returned checks.
    a. The expeditious return requirement for a returning bank in this 
regulation is more stringent in many cases than the duty of a collecting 
bank to exercise ordinary care under U.C.C. 4-202 in returning a check. 
A returning bank is under a duty to act as expeditiously in returning a 
check as it would in the forward collection of a check. Notwithstanding 
its duty of expeditious return, its midnight deadline under U.C.C. 4-202 
and Sec. 210.12(a) of Regulation J (12 CFR 210.12(a)), under the 
forward collection test, a returning bank may take an extra day to 
qualify a returned check. A qualified returned check will be handled by 
subsequent returning banks more efficiently than a raw return. This 
paragraph gives a returning bank an extra business day beyond the time 
that would otherwise be required to return the returned check to convert 
a returned check to a qualified returned check. The qualified returned 
check must include the routing number of the depositary bank, the amount 
of the check, and a return identifier encoded on the check in magnetic 
ink. A check that is converted to a qualified returned check must be 
encoded in accordance with ANS X9.13 for original checks or ANS X9.100-
140 for substitute checks.
    b. If the returning bank is sending the returned check directly to 
the depositary bank, this extra day is not available because preparing a 
qualified returned check will not expedite handling by other banks. If 
the returning bank makes an encoding error in creating a qualified 
returned check, it may be liable under Sec. 229.38 for losses caused by 
any negligence or under Sec. 229.34(c)(3) for breach of an encoding 
warranty. The returning bank would not lose the one-day extension 
available to it for creating a qualified returned check because of an 
encoding error.
    8. Routing of returned check.
    a. Under Sec. 229.31(a), the returning bank is authorized to route 
the returned check in a variety of ways:
    i. It may send the returned check directly to the depositary bank by 
courier or other expeditious means of delivery; or
    ii. It may send the returned check to any returning bank agreeing to 
handle the returned check for expeditious return to the depositary bank 
under this section regardless of whether or not the returning bank 
handled the check for forward collection.
    b. If the returning bank elects to send the returned check directly 
to the depositary bank, it is not required to send the check to the 
branch of the depositary bank that first handled the check. The returned 
check may be sent to the depositary bank at any location permitted under 
Sec. 229.32(a).
    9. Responsibilities of returning bank. In meeting the requirements 
of this section, the returning bank is responsible for its own actions, 
but not those of the paying bank, other returning banks, or the 
depositary bank. (See U.C.C. 4-202(c) regarding the responsibility of 
collecting banks.) For example, if the paying bank has delayed the start 
of the return process, but the returning bank acts in a timely manner, 
the returning bank may satisfy the requirements of this section even if 
the delayed return results in a loss to the depositary bank. (See Sec. 
229.38.) A returning bank must handle a notice in lieu of return as 
expeditiously as a returned check.
    10. U.C.C. sections affected. This paragraph directly affects the 
following provisions of the U.C.C., and may affect other sections or 
provisions:
    a. Section 4-202(b), in that time limits required by that section 
may be affected by the additional requirement to make an expeditious 
return.
    b. Section 4-214(a), in that settlement for returned checks is made 
under Sec. 229.31(c) and not by charge-back of provisional credit, and

[[Page 737]]

in that the time limits may be affected by the additional requirement to 
make an expeditious return.

               B. 229.31(b) Unidentifiable Depositary Bank

    1. This section is similar to Sec. 229.30(b), but applies to 
returning banks instead of paying banks. In some cases a returning bank 
will be unable to identify the depositary bank with respect to a check. 
Returning banks agreeing to handle checks for return to depositary banks 
under Sec. 229.31(a) are expected to be expert in identifying 
depositary bank indorsements. In the limited cases where the returning 
bank cannot identify the depositary bank, the returning bank may send 
the returned check to a returning bank that agrees to handle the 
returned check for expeditious return under Sec. 229.31(a), or it may 
send the returned check to a bank that handled the check for forward 
collection, even if that bank does not agree to handle the returned 
check expeditiously under Sec. 229.31(a).
    2. If the returning bank itself handled the check for forward 
collection, it may send the returned check to a collecting bank that was 
prior to it in the forward collection process, which will be better able 
to identify the depositary bank. If there are no prior collecting banks, 
the returning bank must research the collection of the check and 
identify the depositary bank. As in the case of paying banks under Sec. 
229.30(b), a returning bank's sending of a check to a bank that handled 
the check for forward collection under Sec. 229.31(b) is not subject to 
the expeditious return requirements of Sec. 229.31(a).
    3. The returning bank's return of a check under this paragraph is 
subject to the midnight deadline under U.C.C. 4-202(b). (See definition 
of returning bank in Sec. 229.2(cc).)
    4. Where a returning bank receives a check that it does not agree to 
handle expeditiously under Sec. 229.31(a), such as a check sent to it 
under Sec. 229.30(b), but the returning bank is able to identify the 
depositary bank, the returning bank must thereafter return the check 
expeditiously to the depositary bank. The returning bank returns a check 
expeditiously under this paragraph if it returns the check by the same 
means it would use to return a check drawn on it to the depositary bank 
or by other reasonably prompt means.
    5. As in the case of a paying bank returning a check under Sec. 
229.30(b), a returning bank returning a check under this paragraph to a 
bank that has not agreed to handle the check expeditiously must advise 
that bank that it is unable to identify the depositary bank. This advice 
must be conspicuous, such as a stamp on each check for which the 
depositary bank is unknown if such checks are commingled with other 
returned checks, or, if such checks are sent in a separate cash letter, 
by one notice on the cash letter. The returned check may not be prepared 
for automated return.

                         C. 229.31(c) Settlement

    1. Under the U.C.C., a collecting bank receives settlement for a 
check when it is presented to the paying bank. The paying bank may 
recover the settlement when the paying bank returns the check to the 
presenting bank. Under this regulation, however, the paying bank may 
return the check directly to the depositary bank or through returning 
banks that did not handle the check for forward collection. On these 
more efficient return paths, the paying bank does not recover the 
settlement made to the presenting bank. Thus, this paragraph requires 
the returning bank to settle for a returned check (either with the 
paying bank or another returning bank) in the same way that it would 
settle for a similar check for forward collection. To achieve 
uniformity, this paragraph applies even if the returning bank handled 
the check for forward collection.
    2. Any returning bank, including one that handled the check for 
forward collection, may provide availability for returned checks 
pursuant to an availability schedule as it does for forward collection 
checks. These settlements by returning banks, as well as settlements 
between banks made during the forward collection of a check, are 
considered final when made subject to any deferment of availability. 
(See Sec. 229.36(d) and Commentary to Sec. 229.35(b).)
    3. A returning bank may vary the settlement method it uses by 
agreement with paying banks or other returning banks. Special rules 
apply in the case of insolvency of banks. (See Sec. 229.39.) If payment 
cannot be obtained from a depositary or returning bank because of its 
insolvency or otherwise, recovery can be had by returning, paying, and 
collecting banks from prior banks on this basis of the liability of 
prior banks under Sec. 229.35(b).
    4. This paragraph affects U.C.C. 4-214(a) in that a paying or 
collecting bank does not ordinarily have a right to charge back against 
the bank from which it received the returned check, although it is 
entitled to settlement if it returns the returned check to that bank, 
and may affect other sections or provisions. Under Sec. 229.36(d), a 
bank collecting a check remains liable to prior collecting banks and the 
depositary bank's customer under the U.C.C.

                          D. 229.31(d) Charges

    1. This paragraph permits any returning bank, even one that handled 
the check for forward collection, to impose a fee on the paying bank or 
other returning bank for its service in handling a returned check. Where 
a claim is made under Sec. 229.35(b), the bank on which the claim is 
made is not authorized by this paragraph to impose a charge for taking 
up a check. This paragraph preempts state laws to the extent that these 
laws prevent

[[Page 738]]

returning banks from charging fees for handling returned checks.

              E. 229.31(e) Depositary Bank Without Accounts

    1. This paragraph is similar to Sec. 229.30(e) and relieves a 
returning bank of its obligation to make expeditious return to a 
depositary bank that does not maintain any accounts. (See the Commentary 
to Sec. 229.30(e).)

                  F. 229.31(f) Notice in Lieu of Return

    1. This paragraph is similar to Sec. 229.30(f) and authorizes a 
returning bank to originate a notice in lieu of return if the returned 
check is unavailable for return. Notice in lieu of return is permitted 
only when a bank does not have and cannot obtain possession of the check 
or must retain possession of the check for protest. A check is not 
unavailable for return if it is merely difficult to retrieve from a 
filing system or from storage by a keeper of checks in a truncation 
system. (See the Commentary to Sec. 229.30(f).)

                 G. 229.31(g) Reliance on Routing Number

    1. This paragraph is similar to Sec. 229.30(g) and permits a 
returning bank to rely on routing numbers appearing on a returned check 
such as routing numbers in the depositary bank's indorsement or on 
qualified returned checks. (See the Commentary to Sec. 229.30(g).)

  XVIII. Section 229.32 Depositary Bank's Responsibility for Returned 
                                 Checks

               A. 229.32(a) Acceptance of Returned Checks

    1. This regulation seeks to encourage direct returns by paying and 
returning banks and may result in a number of banks sending checks to 
depositary banks with no preexisting arrangements as to where the 
returned checks should be delivered. This paragraph states where the 
depositary bank is required to accept returned checks and written 
notices of nonpayment under Sec. 229.33. (These locations differ from 
locations at which a depositary bank must accept electronic notices.) It 
is derived from U.C.C. 3-111, which specifies that presentment for 
payment may be made at the place specified in the instrument or, if 
there is none, at the place of business of the party to pay. In the case 
of returned checks, the depositary bank does not print the check and can 
only specify the place of ``payment'' of the returned check in its 
indorsement.
    2. The paragraph specifies four locations at which the depositary 
bank must accept returned checks:
    a. The depositary bank must accept returned checks at any location 
at which it requests presentment of forward collection checks such as a 
processing center. A depositary bank does not request presentment of 
forward collection checks at a branch of the bank merely by paying 
checks presented over the counter.
    b. i. If the depositary bank indorsement states the name and address 
of the depositary bank, it must accept returned checks at the branch, 
head office, or other location, such as a processing center, indicated 
by the address. If the address is too general to identify a particular 
location, then the depositary bank must accept returned checks at any 
branch or head office consistent with the address. If, for example, the 
address is ``New York, New York,'' each branch in New York City must 
accept returned checks.
    ii. If no address appears in the depositary bank's indorsement, the 
depositary bank must accept returned checks at any branch or head office 
associated with the depositary bank's routing number. The offices 
associated with the routing number of a bank are found in American 
Bankers Association Key to Routing Numbers, published by an agent of the 
American Bankers Association, which lists a city and state address for 
each routing number.
    iii. The depositary bank must accept returned checks at the address 
in its indorsement and at an address associated with its routing number 
in the indorsement if the written address in the indorsement and the 
address associated with the routing number in the indorsement are not in 
the same check processing region. Under Sec. Sec. 229.30(g) and 
229.31(g), a paying or returning bank may rely on the depositary bank's 
routing number in its indorsement in handling returned checks and is not 
required to send returned checks to an address in the depositary bank's 
indorsement that is not in the same check processing region as the 
address associated with the routing number in the indorsement.
    iv. If no routing number or address appears in its indorsement, the 
depositary bank must accept a returned check at any branch or head 
office of the bank. The indorsement requirement of Sec. 229.35 and 
appendix D requires that the indorsement contain a routing number, a 
name, and a location. Consequently, this provision, as well as paragraph 
(a)(2)(ii) of this section, only applies where the depositary bank has 
failed to comply with the indorsement requirement.
    3. For ease of processing, a depositary bank may require that 
returning or paying banks returning checks to it separate returned 
checks from forward collection checks being presented.
    4. Under Sec. 229.33(d), a depositary bank receiving a returned 
check or notice of nonpayment must send notice to its customer by its 
midnight deadline or within a longer reasonable time.

[[Page 739]]

                          B. 229.32(b) Payment

    1. As discussed in the commentary to Sec. 229.31(c), under this 
regulation a paying or returning bank does not obtain credit for a 
returned check by charge-back but by, in effect, presenting the returned 
check to the depositary bank. This paragraph imposes an obligation to 
``pay'' a returned check that is similar to the obligation to pay a 
forward collection check by a paying bank, except that the depositary 
bank may not return a returned check for which it is the depositary 
bank. Also, certain means of payment, such as remittance drafts, may be 
used only with the agreement of the returning bank.
    2. The depositary bank must pay for a returned check by the close of 
the banking day on which it received the returned check. The day on 
which a returned check is received is determined pursuant to U.C.C. 4-
108, which permits the bank to establish a cut-off hour, generally not 
earlier than 2:00 p.m., and treat checks received after that hour as 
being received on the next banking day. If the depositary bank is unable 
to make payment to a returning or paying bank on the banking day that it 
receives the returned check, because the returning or paying bank is 
closed for a holiday or because the time when the depositary bank 
received the check is after the close of Fedwire, e.g., west coast banks 
with late cut-off hours, payment may be made on the next banking day of 
the bank receiving payment.
    3. Payment must be made so that the funds are available for use by 
the bank returning the check to the depositary bank on the day the check 
is received by the depositary bank. For example, a depositary bank meets 
this requirement if it sends a wire transfer of funds to the returning 
or paying bank on the day it receives the returned check, even if the 
returning or paying bank has closed for the day. A wire transfer should 
indicate the purpose of the payment.
    4. The depositary bank may use a net settlement arrangement to 
settle for a returned check. Banks with net settlement agreements could 
net the appropriate credits and debits for returned checks with the 
accounting entries for forward collection checks if they so desired. If, 
for purposes of establishing additional controls or for other reasons, 
the banks involved desired a separate settlement for returned checks, a 
separate net settlement agreement could be established.
    5. The bank sending the returned check to the depositary bank may 
agree to accept payment at a later date if, for example, it does not 
believe that the amount of the returned check or checks warrants the 
costs of same-day payment. Thus, a returning or paying bank may agree to 
accept payment through an ACH credit or debit transfer that settles the 
day after the returned check is received instead of a wire transfer that 
settles on the same day.
    6. This paragraph and this subpart do not affect the depositary 
bank's right to recover a provisional settlement with its nonbank 
customer for a check that is returned. (See also Sec. Sec. 
229.19(c)(2)(ii), 229.33(d) and 229.35(b).)

                 C. 229.32(c) Misrouted Returned Checks

    1. This paragraph permits a bank receiving a check on the basis that 
it is the depositary bank to send the misrouted returned check to the 
correct depositary bank, if it can identify the correct depositary bank, 
either directly or through a returning bank agreeing to handle the check 
expeditiously under Sec. 229.30(a). In these cases, the bank receiving 
the check is acting as a returning bank. Alternatively, the bank 
receiving the misrouted returned check must send the check back to the 
bank from which it was received. In either case the bank to which the 
returned check was misrouted could receive settlement for the check. The 
depositary bank would be required to pay for the returned check under 
Sec. 229.32(b), and any other bank to which the check is sent under 
this paragraph would be required to settle for the check as a returning 
bank under Sec. 229.31(c). If the check was originally received 
``free,'' that is, without a charge for the check, the bank incorrectly 
receiving the check would have to return the check, without a charge, to 
the bank from which it came. The bank to which the returned check was 
misrouted is required to act promptly but is not required to meet the 
expeditious return requirements of Sec. 229.31(a); however, it must act 
within its midnight deadline. This paragraph does not affect a bank's 
duties under Sec. 229.35(b).

                          D. 229.32(d) Charges

    1. This paragraph prohibits a depositary bank from charging the 
equivalent of a presentment fee for returned checks. A returning bank, 
however, may charge a fee for handling returned checks. If the returning 
bank receives a mixed cash letter of returned checks, which includes 
some checks for which the returning bank also is the depositary bank, 
the fee may be applied to all the returned checks in the cash letter. In 
the case of a sorted cash letter containing only returned checks for 
which the returning bank is the depositary bank, however, no fee may be 
charged.

                XIX. Section 229.33 Notice of Nonpayment

                        A. 229.33(a) Requirement

    1. Notice of nonpayment as required by this section and written 
notice in lieu of return as provided in Sec. Sec. 229.30(f) and 
229.31(f) serve different functions. The two kinds of notice, however, 
must meet the content requirements of this section. The paying bank

[[Page 740]]

must send a notice of nonpayment if it decides not to pay a check of 
$2,500 or more. A paying bank may rely on an amount encoded on the check 
in magnetic ink to determine whether the check is in the amount of 
$2,500 or more. The notice of nonpayment carries no value, and the check 
itself (or the notice in lieu of return) must be returned. The paying 
bank must ensure that the notice of nonpayment is received by the 
depositary bank by 4:00 p.m. local time on the second business day 
following presentment. A bank identified by routing number as the paying 
bank is considered the paying bank under this regulation and would be 
required to create a notice of nonpayment even though that bank 
determined that the check was not drawn by a customer of that bank. (See 
Commentary to the definition of paying bank in Sec. 229.2(z).)
    2. The paying bank should not send a notice of nonpayment until it 
has finally determined not to pay the check. Under Sec. 229.34(b), by 
sending the notice the paying bank warrants that it has returned or will 
return the check. If a paying bank sends a notice and subsequently 
decides to pay the check, the paying bank may mitigate its liability on 
this warranty by notifying the depositary bank that the check has been 
paid.
    3. Because the return of the check itself may serve as the required 
notice of nonpayment, in many cases no notice other than the return of 
the check will be necessary. For example, in many cases the return of a 
check through a clearinghouse to another participant of the 
clearinghouse will be made in time to meet the time requirements of this 
section. If the check normally will not be received by the depositary 
bank within the time limits for notice, the return of the check will not 
satisfy the notice requirement. In determining whether the returned 
check will satisfy the notice requirement, the paying bank may rely on 
the availability schedules of returning banks as the time that the 
returned check is expected to be delivered to the depositary bank, 
unless the paying bank has reason to know the availability schedules are 
inaccurate.
    4. Unless the returned check is used to satisfy the notice 
requirement, the requirement for notice is independent of and does not 
affect the requirements for timely and expeditious return of the check 
under Sec. 229.30 and the U.C.C. (See Sec. 229.30(a).) If a paying 
bank fails both to comply with this section and to comply with the 
requirements for timely and expeditious return under Sec. 229.30 and 
the U.C.C. and Regulation J (12 CFR part 210), the paying bank shall be 
liable under either this section or such other requirements, but not 
both. (See Sec. 229.38(b).) A paying bank is not responsible for 
failure to give notice of nonpayment to a party that has breached a 
presentment warranty under U.C.C. 4-208, notwithstanding that the paying 
bank may have returned the check. (See U.C.C. 4-208 and 4-302.)

                     B. 229.33(b) Content of Notices

    1. This paragraph provides that the notice must at a minimum contain 
eight elements which are specifically enumerated. In the case of written 
notices, the name and routing number of the depositary bank also are 
required.
    2. If the paying bank cannot identify the depositary bank from the 
check itself, it may wish to send the notice to the earliest collecting 
bank it can identify and indicate that the notice is not being sent to 
the depositary bank. The collecting bank may be able to identify the 
depositary bank and forward the notice, but is under no duty to do so. 
In addition, the collecting bank may actually be the depositary bank.
    3. A bank must identify an item of information if the bank is 
uncertain as to that item's accuracy. A bank may make this 
identification by setting the item off with question marks, asterisks, 
or other symbols designated for this purpose by generally applicable 
industry standards.

                    C. 229.33(c) Acceptance of Notice

    1. In the case of a written notice, the depositary bank is required 
to accept notices at the locations specified in Sec. 229.32(a). In the 
case of telephone notices, the bank may not refuse to accept notices at 
the telephone numbers identified in this section, but may transfer calls 
or use a recording device. Banks may vary by agreement the location and 
manner in which notices are received.

                  D. 229.33(d) Notification to Customer

    1. This paragraph requires a depositary bank to notify its customer 
of nonpayment upon receipt of a returned check or notice of nonpayment, 
regardless of the amount of the check or notice. This requirement is 
similar to the requirement under the U.C.C. as interpreted in Appliance 
Buyers Credit Corp. v. Prospect National Bank, 708 F.2d 290 (7th Cir. 
1983), that a depositary bank may be liable for damages incurred by its 
customer for its failure to give its customer timely advice that it has 
received a notice of nonpayment. Notice also must be given if a 
depositary bank receives a notice of recovery under Sec. 229.35(b). A 
bank that chooses to provide the notice required by Sec. 229.33(d) in 
writing may send the notice by e-mail or facsimile if the bank sends the 
notice to the e-mail address or facsimile number specified by the 
customer for that purpose. The notice to the customer required under 
this paragraph also may satisfy the notice requirement of Sec. 
229.13(g) if the depositary bank invokes the reasonable-cause exception 
of Sec. 229.13(e) due to the receipt of a notice of nonpayment,

[[Page 741]]

provided the notice meets all the requirements of Sec. 229.13(g).

                      XX. Section 229.34 Warranties

                 A. 229.34(a) Warranty of Returned Check

    1. This paragraph includes warranties that a returned check, 
including a notice in lieu of return, was returned by the paying bank, 
or in the case of a check payable by a bank and payable through another 
bank, the bank by which the check is payable, within the deadline under 
the U.C.C. (subject to any claims or defenses under the U.C.C., such as 
breach of a presentment warranty), Regulation J (12 CFR part 210), or 
Sec. 229.30(c); that the paying or returning bank is authorized to 
return the check; that the returned check has not been materially 
altered; and that, in the case of a notice in lieu of return, the 
original check has not been and will not be returned for payment. (See 
the Commentary to Sec. 229.30(f).) The warranty does not include a 
warranty that the bank complied with the expeditious return requirements 
of Sec. Sec. 229.30(a) and 229.31(a). These warranties do not apply to 
checks drawn on the United States Treasury, to U.S. Postal Service money 
orders, or to checks drawn on a state or a unit of general local 
government that are not payable through or at a bank. (See Sec. 
229.42.)

              B. 229.34(b) Warranty of Notice of Nonpayment

    1. This paragraph provides for warranties for notices of nonpayment. 
This warranty does not include a warranty that the notice is accurate 
and timely under Sec. 229.33. The requirements of Sec. 229.33 that are 
not covered by the warranty are subject to the liability provisions of 
Sec. 229.38. These warranties are designed to give the depositary bank 
more confidence in relying on notices of nonpayment. This paragraph 
imposes liability on a paying bank that gives notice of nonpayment and 
then subsequently returns the check. (See Commentary on Sec. 
229.33(a).)

    C. 229.34(c) Warranty of Settlement Amount, Encoding, and Offset

    1. Paragraph (c)(1) provides that a bank that presents and receives 
settlement for checks warrants to the paying bank that the settlement it 
demands (e.g., as noted on the cash letter) equals the total amount of 
the checks it presents. This paragraph gives the paying bank a warranty 
claim against the presenting bank for the amount of any excess 
settlement made on the basis of the amount demanded, plus expenses. If 
the amount demanded is understated, a paying bank discharges its 
settlement obligation under U.C.C. 4-301 by paying the amount demanded, 
but remains liable for the amount by which the demand is understated; 
the presenting bank is nevertheless liable for expenses in resolving the 
adjustment.
    2. When checks or returned checks are transferred to a collecting, 
returning, or depositary bank, the transferor bank is not required to 
demand settlement, as is required upon presentment to the paying bank. 
However, often the checks or returned checks will be accompanied by 
information (such as a cash letter listing) that will indicate the total 
of the checks or returned checks. Paragraph (c)(2) provides that if the 
transferor bank includes information indicating the total amount of 
checks or returned checks transferred, it warrants that the information 
is correct (i.e., equals the actual total of the items).
    3. Paragraph (c)(3) provides that a bank that presents or transfers 
a check or returned check warrants the accuracy of the magnetic ink 
encoding that was placed on the item after issue, and that exists at the 
time of presentment or transfer, to any bank that subsequently handles 
the check or returned check. Under U.C.C. 4-209(a), only the encoder (or 
the encoder and the depositary bank, if the encoder is a customer of the 
depositary bank) warrants the encoding accuracy, thus any claims on the 
warranty must be directed to the encoder. Paragraph (c)(3) expands on 
the U.C.C. by providing that all banks that transfer or present a check 
or returned check make the encoding warranty. In addition, under the 
U.C.C., the encoder makes the warranty to subsequent collecting banks 
and the paying bank, while paragraph (c)(3) provides that the warranty 
is made to banks in the return chain as well. Paragraph (c)(3) applies 
to all MICR-line encoding on a substitute check.
    4. A paying bank that settles for an overstated cash letter because 
of a misencoded check may make a warranty claim against the presenting 
bank under paragraph (c)(1) (which would require the paying bank to show 
that the check was part of the overstated cash letter) or an encoding 
warranty claim under paragraph (c)(3) against the presenting bank or any 
preceding bank that handled the misencoded check.
    5. Paragraph (c)(4) provides that a paying bank or a depositary bank 
may set off excess settlement paid to another bank against settlement 
owed to that bank for checks presented or returned checks received (for 
which it is the depositary bank) subsequent to the excess settlement.

            D. 229.34(d) Transfer and Presentment Warranties

    1. A bank that transfers or presents a remotely created check and 
receives a settlement or other consideration warrants that the person on 
whose account the check is drawn authorized the issuance of the check in 
the amount stated on the check and to the payee stated on the check. The 
warranties

[[Page 742]]

are given only by banks and only to subsequent banks in the collection 
chain. The warranties ultimately shift liability for the loss created by 
an unauthorized remotely created check to the depositary bank. The 
depositary bank cannot assert the transfer and presentment warranties 
against a depositor. However, a depositary bank may, by agreement, 
allocate liability for such an item to the depositor and also may have a 
claim under other laws against that person.
    2. The transfer and presentment warranties for remotely created 
checks supplement the Federal Trade Commission's Telemarketing Sales 
Rule, which requires telemarketers that submit checks for payment to 
obtain the customer's ``express verifiable authorization'' (the 
authorization may be either in writing or tape recorded and must be made 
available upon request to the customer's bank). 16 CFR 310.3(a)(3). The 
transfer and presentment warranties shift liability to the depositary 
bank only when the remotely created check is unauthorized, and would not 
apply when the customer initially authorizes a check but then 
experiences ``buyer's remorse'' and subsequently tries to revoke the 
authorization by asserting a claim against the paying bank under U.C.C. 
4-401. If the depositary bank suspects ``buyer's remorse,'' it may 
obtain from its customer the express verifiable authorization of the 
check by the paying bank's customer, required under the Federal Trade 
Commission's Telemarketing Sales Rule, and use that authorization as a 
defense to the warranty claim.
    3. The scope of the transfer and presentment warranties for remotely 
created checks differs from that of the corresponding U.C.C. warranty 
provisions in two respects. The U.C.C. warranties differ from the Sec. 
229.34(d) warranties in that they are given by any person, including a 
nonbank depositor, that transfers a remotely created check and not just 
to a bank, as is the case under Sec. 229.34(d). In addition, the U.C.C. 
warranties state that the person on whose account the item is drawn 
authorized the issuance of the item in the amount for which the item is 
drawn. The Sec. 229.34(d) warranties specifically cover the amount as 
well as the payee stated on the check. Neither the U.C.C. warranties, 
nor the Sec. 229.34(d) warranties apply to the date stated on the 
remotely created check.
    4. A bank making the Sec. 229.34(d) warranties may defend a claim 
asserting violation of the warranties by proving that the customer of 
the paying bank is precluded by U.C.C. 4-406 from making a claim against 
the paying bank. This may be the case, for example, if the customer 
failed to discover the unauthorized remotely created check in a timely 
manner.
    5. The transfer and presentment warranties for a remotely created 
check apply to a remotely created check that has been reconverted to a 
substitute check.

                          E. 229.34(d) Damages

    1. This paragraph adopts for the warranties in Sec. 229.34 (a), 
(b), and (c) the damages provided in U.C.C. 4-207(c) and 4A-506(b). (See 
definition of interest compensation in Sec. 229.2(oo).)

                     F. 229.34(e) Tender of Defense

    1. This paragraph adopts for this regulation the vouching-in 
provisions of U.C.C. 3-119.

                      G. 229.34(f) Notice of Claim

    1. This paragraph adopts the notice provisions of U.C.C. sections 4-
207(d) and 4-208(e). The time limit set forth in this paragraph applies 
to notices of claims for warranty breaches only. As provided in Sec. 
229.38(g), all actions under this section must be brought within one 
year after the date of the occurrence of the violation involved.

                    XXI. Section 229.35 Indorsements

                   A. 229.35(a) Indorsement Standards

    1. This section and appendix D require banks to use a standard form 
of indorsement when indorsing checks during the forward collection and 
return process. The standard provides for indorsements by all collecting 
and returning banks, plus a unique standard for depositary bank 
indorsements. It is designed to facilitate the identification of the 
depositary bank and the prompt return of checks. The regulation places a 
duty on banks to ensure that their indorsements can be interpreted by 
any person. The indorsement standard specifies the information each 
indorsement must contain and its location and ink color.
    2. Banks generally apply indorsements to a paper check in one of two 
ways: (1) banks print or ``spray'' indorsements onto a check when the 
check is processed through the banks'' automated check sorters 
(regardless of whether the checks are original checks or substitute 
checks), and (2) reconverting banks print or ``overlay'' previously 
applied electronic indorsements and their own indorsements and 
identifications onto a substitute check at the time that the substitute 
check is created. If a subsequent substitute check is created in the 
course of collection or return, that substitute check will contain, in 
its image of the back of the previous substitute check, reproductions of 
indorsements that were sprayed or overlaid onto the previous item. For 
purposes of the indorsement standard set forth in appendix D, a 
reproduction of a previously applied sprayed or overlaid indorsement 
contained within an image of a check does not constitute ``an 
indorsement that previously was applied electronically.'' To accommodate 
these two indorsement scenarios, the appendix includes two indorsement 
location specifications: one

[[Page 743]]

standard applies to banks spraying indorsements onto existing paper 
original checks and substitute checks, and another applies to 
reconverting banks overlaying indorsements that previously were applied 
electronically and their own indorsements onto substitute checks at the 
time the substitute checks are created.
    3. A bank might use check processing equipment that captures an 
image of a check prior to spraying an indorsement onto that item. If the 
bank truncates that item, it should ensure that it also applies an 
indorsement to the item electronically. A reconverting bank satisfies 
its obligation to preserve all previously applied indorsements by 
overlaying a bank's indorsement that previously was applied 
electronically onto a substitute check that the reconverting bank 
creates.
    4. The location of an indorsement applied to an original paper check 
in accordance with appendix D may shift if that check is truncated and 
later reconverted to a substitute check. If an indorsement applied to 
the original check in accordance with appendix D is overwritten by a 
subsequent indorsement applied to the substitute check in accordance 
with appendix D, then one or both of those indorsements could be 
rendered illegible. As explained in Sec. 229.38(d) and the commentary 
thereto, a reconverting bank is liable for losses associated with 
indorsements that are rendered illegible as a result of check 
substitution.
    5. To ensure that indorsements can be easily read and would remain 
legible after an image of a check is captured, the standard requires all 
indorsements applied to original checks and substitute checks to be 
printed in black ink as of January 1, 2006.
    6. The standard requires the depositary bank's indorsement to 
include (1) its nine-digit routing number set off by an arrow at each 
end of the routing number and, if the depositary bank is a reconverting 
bank with respect to the check, an asterisk outside the arrow at each 
end of the routing number to identify the bank as a reconverting bank; 
(2) the indorsement date; and (3) if the indorsement is applied 
physically, name or location information. The standard also permits but 
does not require the indorsement to include other identifying 
information. The standard requires a collecting bank's or returning 
bank's indorsement to include only (1) the bank's nine digit routing 
number (without arrows) and, if the collecting bank or returning bank is 
a reconverting bank with respect to the check, an asterisk at each end 
of the number to identify the bank as a reconverting bank, (2) the 
indorsement date, and (3) an optional trace or sequence number.
    7. Depositary banks should not include information that can be 
confused with required information. For example, a nine-digit zip code 
could be confused with the nine-digit routing number.
    8. A depositary bank may want to include an address in its 
indorsement in order to limit the number of locations at which it must 
receive returned checks. In instances where this address is not 
consistent with the routing number in the indorsement, the depositary 
bank is required to receive returned checks at a branch or head office 
consistent with the routing number. Banks should note, however, that 
Sec. 229.32 requires a depositary bank to receive returned checks at 
the location(s) at which it receives forward-collection checks.
    9. In addition to indorsing a substitute check in accordance with 
appendix D, a reconverting bank must identify itself and the truncating 
bank by applying its routing number and the routing number of the 
truncating bank to the front of the check in accordance with appendix D 
and ANS X9.100-140. Further, if the reconverting bank is the paying 
bank, it also must identify itself by applying its routing number to the 
back of the check in accordance with appendix D. In these instances, the 
reconverting bank and truncating bank routing numbers are for 
identification purposes only and are not indorsements or acceptances.
    10. Under the U.C.C., a specific guarantee of prior indorsement is 
not necessary. (See U.C.C. 4-207(a) and 4-208(a).) Use of guarantee 
language in indorsements, such as ``P.E.G.'' (``prior endorsements 
guaranteed''), may result in reducing the type size used in bank 
indorsements, thereby making them more difficult to read. Use of this 
language may make it more difficult for other banks to identify the 
depositary bank. Subsequent collecting bank indorsements may not include 
this language.
    11. If the bank maintaining the account into which a check is 
deposited agrees with another bank (a correspondent, ATM operator, or 
lock box operator) to have the other bank accept returns and notices of 
nonpayment for the bank of account, the indorsement placed on the check 
as the depositary bank indorsement may be the indorsement of the bank 
that acts as correspondent, ATM operator, or lock box operator as 
provided in paragraph (d) of this section.
    12. The backs of many checks bear pre-printed information or blacked 
out areas for various reasons. For example, some checks are printed with 
a carbon band across the back that allows the transfer of information 
from the check to a ledger with one writing. Also, contracts or loan 
agreements are printed on certain checks. Other checks that are mailed 
to recipients may contain areas on the back that are blacked out so that 
they may not be read through the mailer. On the deposit side, the payee 
of the check may

[[Page 744]]

place its indorsement or information identifying the drawer of the check 
in the area specified for the depositary bank indorsement, thus making 
the depositary bank indorsement unreadable.
    13. The indorsement standard does not prohibit the use of a carbon 
band or other printed or written matter on the backs of checks and does 
not require banks to avoid placing their indorsements in these areas. 
Nevertheless, checks will be handled more efficiently if depositary 
banks design indorsement stamps so that the nine-digit routing number 
avoids the carbon band area. Indorsing parties other than banks, e.g., 
corporations, will benefit from the faster return of checks if they 
protect the identifiability and legibility of the depositary bank 
indorsement by staying clear of the area reserved for the depositary 
bank indorsement.
    14. Section 229.38(d) allocates responsibility for loss resulting 
from a delay in return of a check due to indorsements that are 
unreadable because of material on the back of the check. The depositary 
bank is responsible for a loss resulting from a delay in return caused 
by the condition of the check arising after its issuance until its 
acceptance by the depositary bank that made the depositary bank's 
indorsement illegible. The paying bank is responsible for loss resulting 
from a delay in return caused by indorsements that are not readable 
because of other material on the back of the check at the time that it 
was issued. Depositary and paying banks may shift these risks to their 
customers by agreement.
    15. The standard does not require the paying bank to indorse the 
check; however, if a paying bank does indorse a check that is returned, 
it should follow the indorsement standard for collecting banks and 
returning banks. The standard requires collecting and returning banks to 
indorse the check for tracing purposes. With respect to the 
identification of a paying bank that is also a reconverting bank, see 
the commentary to Sec. 229.51(b)(2).

              B. 229.35(b) Liability of Bank Handling Check

    1. When a check is sent for forward collection, the collection 
process results in a chain of indorsements extending from the depositary 
bank through any subsequent collecting banks to the paying bank. This 
section extends the indorsement chain through the paying bank to the 
returning banks, and would permit each bank to recover from any prior 
indorser if the claimant bank does not receive payment for the check 
from a subsequent bank in the collection or return chain. For example, 
if a returning bank returned a check to an insolvent depositary bank, 
and did not receive the full amount of the check from the failed bank, 
the returning bank could obtain the unrecovered amount of the check from 
any bank prior to it in the collection and return chain including the 
paying bank. Because each bank in the collection and return chain could 
recover from a prior bank, any loss would fall on the first collecting 
bank that received the check from the depositary bank. To avoid circuity 
of actions, the returning bank could recover directly from the first 
collecting bank. Under the U.C.C., the first collecting bank might 
ultimately recover from the depositary bank's customer or from the other 
parties on the check.
    2. Where a check is returned through the same banks used for the 
forward collection of the check, priority during the forward collection 
process controls over priority in the return process for the purpose of 
determining prior and subsequent banks under this regulation.
    3. Where a returning bank is insolvent and fails to pay the paying 
bank or a prior returning bank for a returned check, Sec. 229.39(a) 
requires the receiver of the failed bank to return the check to the bank 
that transferred the check to the failed bank. That bank then either 
could continue the return to the depositary bank or recover based on 
this paragraph. Where the paying bank is insolvent, and fails to pay the 
collecting bank, the collecting bank also could recover from a prior 
collecting bank under this paragraph, and the bank from which it 
recovered could in turn recover from its prior collecting bank until the 
loss settled on the depositary bank (which could recover from its 
customer).
    4. A bank is not required to make a claim against an insolvent bank 
before exercising its right to recovery under this paragraph. Recovery 
may be made by charge-back or by other means. This right of recovery 
also is permitted even where nonpayment of the check is the result of 
the claiming bank's negligence such as failure to make expeditious 
return, but the claiming bank remains liable for its negligence under 
Sec. 229.38.
    5. This liability is imposed on a bank handling a check for 
collection or return regardless of whether the bank's indorsement 
appears on the check. Notice must be sent under this paragraph to a 
prior bank from which recovery is sought reasonably promptly after a 
bank learns that it did not receive payment from another bank, and 
learns the identity of the prior bank. Written notice reasonably 
identifying the check and the basis for recovery is sufficient if the 
check is not available. Receipt of notice by the bank against which the 
claim is made is not a precondition to recovery by charge-back or other 
means; however, a bank may be liable for negligence for failure to 
provide timely notice. A paying or returning bank also may recover from 
a prior collecting bank as provided in Sec. Sec. 229.30(b) and 
229.31(b). This provision is not a substitute for a paying or returning 
bank making expeditious return

[[Page 745]]

under Sec. Sec. 229.30(a) or 229.31(b). This paragraph does not affect 
a paying bank's accountability for a check under U.C.C. 4-215(a) and 4-
302. Nor does this paragraph affect a collecting bank's accountability 
under U.C.C. 4-213 and 4-215(d). A collecting bank becomes accountable 
upon receipt of final settlement as provided in the foregoing U.C.C. 
sections. The term final settlement in Sec. Sec. 229.31 (c), 229.32 
(b), and 229.36(d) is intended to be consistent with the use of the term 
final settlement in the U.C.C. (e.g., U.C.C. 4-213, 4-214, and 4-215). 
(See also Sec. 229.2(cc) and Commentary.)
    6. This paragraph also provides that a bank may have the rights of a 
holder based on the handling of the check for collection or return. A 
bank may become a holder or a holder in due course regardless of whether 
prior banks have complied with the indorsement standard in Sec. 
229.35(a) and appendix D.
    7. This paragraph affects the following provisions of the U.C.C., 
and may affect other provisions:
    a. Section 4-214(a), in that the right to recovery is not based on 
provisional settlement, and recovery may be had from any prior bank. 
Section 4-214(a) would continue to permit a depositary bank to recover a 
provisional settlement from its customer. (See Sec. 229.33(d).)
    b. Section 3-415 and related provisions (such as section 3-503), in 
that such provisions would not apply as between banks, or as between the 
depositary bank and its customer.

                    C. 229.35(c) Indorsement by Bank

    1. This section protects the rights of a customer depositing a check 
in a bank without requiring the words ``pay any bank,'' as required by 
the U.C.C. (See U.C.C. 4-201(b).) Use of this language in a depositary 
bank's indorsement will make it more difficult for other banks to 
identify the depositary bank. The indorsement standard in appendix D 
prohibits such material in subsequent collecting bank indorsements. The 
existence of a bank indorsement provides notice of the restrictive 
indorsement without any additional words.

              D. 229.35(d) Indorsement for Depositary Bank

    1. This section permits a depositary bank to arrange with another 
bank to indorse checks. This practice may occur when a correspondent 
indorses for a respondent, or when the bank servicing an ATM or lock box 
indorses for the bank maintaining the account in which the check is 
deposited--i.e., the depositary bank. If the indorsing bank applies the 
depositary bank's indorsement, checks will be returned to the depositary 
bank. If the indorsing bank does not apply the depositary bank's 
indorsement, by agreement with the depositary bank it may apply its own 
indorsement as the depositary bank indorsement. In that case, the 
depositary bank's own indorsement on the check (if any) should avoid the 
location reserved for the depositary bank. The actual depositary bank 
remains responsible for the availability and other requirements of 
Subpart B, but the bank indorsing as depositary bank is considered the 
depositary bank for purposes of Subpart C. The check will be returned, 
and notice of nonpayment will be given, to the bank indorsing as 
depositary bank.
    2. Because the depositary bank for Subpart B purposes will desire 
prompt notice of nonpayment, its arrangement with the indorsing bank 
should provide for prompt notice of nonpayment. The bank indorsing as 
depositary bank may require the depositary bank to agree to take up the 
check if the check is not paid even if the depositary bank's indorsement 
does not appear on the check and it did not handle the check. The 
arrangement between the banks may constitute an agreement varying the 
effect of provisions of Subpart C under Sec. 229.37.

         XXII. Section 229.36 Presentment and Issuance of Checks

           A. 229.36(a) Payable Through and Payable at Checks

    1. For purposes of Subpart C, the regulation defines a payable-
through or payable-at bank (which could be designated the collectible-
through or collectible-at bank) as a paying bank. The requirements of 
Sec. 229.30(a) and the notice of nonpayment requirements of Sec. 
229.33 are imposed on a payable-through or payable-at bank and are based 
on the time of receipt of the forward collection check by the payable-
through or payable-at bank. This provision is intended to speed the 
return of checks that are payable through or at a bank to the depositary 
bank.

        B. 229.36(b) Receipt at Bank Office or Processing Center

    1. This paragraph seeks to facilitate efficient presentment of 
checks to promote early return or notice of nonpayment to the depositary 
bank and clarifies the law as to the effect of presentment by routing 
number. This paragraph differs from Sec. 229.32(a) because presentment 
of checks differs from delivery of returned checks.
    2. The paragraph specifies four locations at which the paying bank 
must accept presentment of checks. Where the check is payable through a 
bank and the check is sent to that bank, the payable-through bank is the 
paying bank for purposes of this subpart, regardless of whether the 
paying bank must present the check to another bank or to a nonbank payor 
for payment.

[[Page 746]]

    a. Delivery of checks may be made, and presentment is considered to 
occur, at a location (including a processing center) requested by the 
paying bank. This is the way most checks are presented by banks today. 
This provision adopts the common law rule of a number of legal decisions 
that the processing center acts as the agent of the paying bank to 
accept presentment and to begin the time for processing of the check. 
(See also U.C.C. 4-204(c).) If a bank designates different locations for 
the presentment of forward collection checks bearing different routing 
numbers, for purposes of this paragraph it requests presentment of 
checks bearing a particular routing number only at the location 
designated for receipt of forward collection checks bearing that routing 
number.
    b. i. Delivery may be made at an office of the bank associated with 
the routing number on the check. The office associated with the routing 
number of a bank is found in American Bankers Association Key to Routing 
Numbers, published by an agent of the American Bankers Association, 
which lists a city and state address for each routing number. Checks 
generally are handled by collecting banks on the basis of the nine-digit 
routing number encoded in magnetic ink (or on the basis of the 
fractional form routing number if the magnetic ink characters are 
obliterated) on the check, rather than the printed name or address. The 
definition of a paying bank in Sec. 229.2(z) includes a bank designated 
by routing number, whether or not there is a name on the check, and 
whether or not any name is consistent with the routing number. Where a 
check is payable by one bank, but payable through another, the routing 
number is that of the payable-through bank, not that of the payor bank. 
As the payor bank has selected the payable-through bank as the point 
through which presentment is to be made, it is proper to treat the 
payable-through bank as the paying bank for purposes of this section.
    ii. There is no requirement in the regulation that the name and 
address on the check agree with the address associated with the routing 
number on the check. A bank generally may control the use of its routing 
number, just as it does the use of its name. The address associated with 
the routing number may be a processing center.
    iii. In some cases, a paying bank may have several offices in the 
city associated with the routing number. In such case, it would not be 
reasonable or efficient to require the presenting bank to sort the 
checks by more specific branch addresses that might be printed on the 
checks, and to deliver the checks to each branch. A collecting bank 
normally would deliver all checks to one location. In cases where checks 
are delivered to a branch other than the branch on which they may be 
drawn, computer and courier communication among branches should permit 
the paying bank to determine quickly whether to pay the check.
    c. If the check specifies the name of the paying bank but no 
address, the bank must accept delivery at any office. Where delivery is 
made by a person other than a bank, or where the routing number is not 
readable, delivery will be made based on the name and address of the 
paying bank on the check. If there is no address, delivery may be made 
at any office of the paying bank. This provision is consistent with 
U.C.C. 3-111, which states that presentment for payment may be made at 
the place specified in the instrument, or, if there is none, at the 
place of business of the party to pay. Thus, there is a trade-off for a 
paying bank between specifying a particular address on a check to limit 
locations of delivery, and simply stating the name of the bank to 
encourage wider currency for the check.
    d. If the check specifies the name and address of a branch or head 
office, or other location (such as a processing center), the check may 
be delivered by delivery to that office or other location. If the 
address is too general to identify a particular office, delivery may be 
made at any office consistent with the address. For example, if the 
address is ``San Francisco, California,'' each office in San Francisco 
must accept presentment. The designation of an address on the check 
generally is in the control of the paying bank.
    3. This paragraph may affect U.C.C. 3-111 to the extent that the 
U.C.C. requires presentment to occur at a place specified in the 
instrument.

                              C. [Reserved]

        D. 229.36(d) Liability of Bank During Forward Collection

    1. This paragraph makes settlement between banks during forward 
collection final when made, subject to any deferment of credit, just as 
settlements between banks during the return of checks are final. In 
addition, this paragraph clarifies that this change does not affect the 
liability scheme under U.C.C. 4-201 during forward collection of a 
check. That U.C.C. section provides that, unless a contrary intent 
clearly appears, a bank is an agent or subagent of the owner of a check, 
but that Article 4 of the U.C.C. applies even though a bank may have 
purchased an item and is the owner of it. This paragraph preserves the 
liability of a collecting bank to prior collecting banks and the 
depositary bank's customer for negligence during the forward collection 
of a check under the U.C.C., even though this paragraph provides that 
settlement between banks during forward collection is final rather than 
provisional. Settlement by a paying bank is not considered to be final 
payment for the purposes of U.C.C. 4-215(a)(2) or (3),

[[Page 747]]

because a paying bank has the right to recover settlement from a 
returning or depositary bank to which it returns a check under this 
subpart. Other provisions of the U.C.C. not superseded by this subpart, 
such as section 4-202, also continue to apply to the forward collection 
of a check and may apply to the return of a check. (See definition of 
returning bank in Sec. 229.2(cc).)

             E. 229.36(e) Issuance of Payable Through Checks

    1. If a bank arranges for checks payable by it to be payable through 
another bank, it must require its customers to use checks that contain 
conspicuously on their face the name, location, and first four digits of 
the nine-digit routing number of the bank by which the check is payable 
and the legend ``payable through'' followed by the name of the payable-
through bank. The first four digits of the nine-digit routing number and 
the location of the bank by which the check is payable must be 
associated with the same check processing region. (This section does not 
affect Sec. 229.36(b).) The required information is deemed conspicuous 
if it is printed in a type size not smaller than six-point type and if 
it is contained in the title plate, which is located in the lower left 
quadrant of the check. The required information may be conspicuous if it 
is located elsewhere on the check.
    2. If a payable-through check does not meet the requirements of this 
paragraph, the bank by which the check is payable may be liable to the 
depositary bank or others as provided in Sec. 229.38. For example, a 
bank by which a payable-through check is payable could be liable to a 
depositary bank that suffers a loss, such as lost interest or liability 
under Subpart B, that would not have occurred had the check met the 
requirements of this paragraph. Similarly, a bank may be liable under 
Sec. 229.38 if a check payable by it that is not payable through 
another bank is labeled as provided in this section. For example, a bank 
that holds checking accounts and processes checks at a central location 
but has widely-dispersed branches may be liable under this section if it 
labels all of its checks as ``payable through'' a single branch and 
includes the name, address, and four-digit routing symbol of another 
branch. These checks would not be payable through another bank and 
should not be labeled as payable-through checks. (All of a bank's 
offices within the United States are considered part of the same bank; 
see Sec. 229.2(e).) In this example, the bank by which the checks are 
payable could be liable to a depositary bank that suffers a loss, such 
as lost interest or liability under Subpart B, due to the mislabeled 
check. The bank by which the check is payable may be liable for 
additional damages if it fails to act in good faith.

                    F. 229.36(f) Same-Day Settlement

    1. This paragraph provides that, under certain conditions, a paying 
bank must settle with a presenting bank for a check on the same day the 
check is presented in order to avail itself of the ability to return the 
check on its next banking day under U.C.C. 4-301 and 4-302. This 
paragraph does not apply to checks presented for immediate payment over 
the counter. Settling for a check under this paragraph does not 
constitute final payment of the check under the U.C.C. This paragraph 
does not supersede or limit the rules governing collection and return of 
checks through Federal Reserve Banks that are contained in Subpart A of 
Regulation J (12 CFR part 210).
    2. Presentment requirements.
    a. Location and time.
    i. For presented checks to qualify for mandatory same-day 
settlement, information accompanying the checks must indicate that 
presentment is being made under this paragraph--e.g. ``these checks are 
being presented for same-day settlement''--and must include a demand for 
payment of the total amount of the checks together with appropriate 
payment instructions in order to enable the paying bank to discharge its 
settlement responsibilities under this paragraph. In addition, the check 
or checks must be presented at a location designated by the paying bank 
for receipt of checks for same-day settlement by 8:00 a.m. local time of 
that location. The designated presentment location must be a location at 
which the paying bank would be considered to have received a check under 
Sec. 229.36(b). The paying bank may not designate a location solely for 
presentment of checks subject to settlement under this paragraph; by 
designating a location for the purposes of Sec. 229.36(f), the paying 
bank agrees to accept checks at that location for the purposes of Sec. 
229.36(b).
    ii. The designated presentment location also must be within the 
check processing region consistent with the nine-digit routing number 
encoded in magnetic ink on the check. A paying bank that uses more than 
one routing number associated with a single check processing region may 
designate, for purposes of this paragraph, one or more locations in that 
check processing region at which checks will be accepted, but the paying 
bank must accept any checks with a routing number associated with that 
check processing region at each designated location. A paying bank may 
designate a presentment location for traveler's checks with an 8000-
series routing number anywhere in the country because these traveler's 
checks are not associated with any check processing region. The paying 
bank, however, must accept at that presentment location any other checks 
for which it is paying bank that have

[[Page 748]]

a routing number consistent with the check processing region of that 
location.
    iii. If the paying bank does not designate a presentment location, 
it must accept presentment for same-day settlement at any location 
identified in Sec. 229.36(b), i.e., at an address of the bank 
associated with the routing number on the check, at any branch or head 
office if the bank is identified on the check by name without address, 
or at a branch, head office, or other location consistent with the name 
and address of the bank on the check if the bank is identified on the 
check by name and address. A paying bank and a presenting bank may agree 
that checks will be accepted for same-day settlement at an alternative 
location (e.g., at an intercept processor located in a different check 
processing region) or that the cut-off time for same-day settlement be 
earlier or later than 8:00 a.m. local time.
    iv. In the case of a check payable through a bank but payable by 
another bank, this paragraph does not authorize direct presentment to 
the bank by which the check is payable. The requirements of same-day 
settlement under this paragraph would apply to a payable-through or 
payable-at bank to which the check is sent for payment or collection.
    b. Reasonable delivery requirements. A check is considered presented 
when it is delivered to and payment is demanded at a location specified 
in paragraph (f)(1). Ordinarily, a presenting bank will find it 
necessary to contact the paying bank to determine the appropriate 
presentment location and any delivery instructions. Further, because 
presentment might not take place during the paying bank's banking day, a 
paying bank may establish reasonable delivery requirements to safeguard 
the checks presented, such as use of a night depository. If a presenting 
bank fails to follow reasonable delivery requirements established by the 
paying bank, it runs the risk that it will not have presented the 
checks. However, if no reasonable delivery requirements are established 
or if the paying bank does not make provisions for accepting delivery of 
checks during its non-business hours, leaving the checks at the 
presentment location constitutes effective presentment.
    c. Sorting of checks. A paying bank may require that checks 
presented to it for same-day settlement be sorted separately from other 
forward collection checks it receives as a collecting bank or returned 
checks it receives as a returning or depositary bank. For example, if a 
bank provides correspondent check collection services and receives 
unsorted checks from a respondent bank that include checks for which it 
is the paying bank and that would otherwise meet the requirements for 
same-day settlement under this section, the collecting bank need not 
make settlement in accordance with paragraph (f)(2). If the collecting 
bank receives sorted checks from its respondent bank, consisting only of 
checks for which the collecting bank is the paying bank and that meet 
the requirements for same-day settlement under this paragraph, the 
collecting bank may not charge a fee for handling those checks and must 
make settlement in accordance with this paragraph.
    3. Settlement
    a. If a bank presents a check in accordance with the time and 
location requirements for presentment under paragraph (f)(1), the paying 
bank either must settle for the check on the business day it receives 
the check without charging a presentment fee or return the check prior 
to the time for settlement. (This return deadline is subject to 
extension under Sec. 229.30(c).) The settlement must be in the form of 
a credit to an account designated by the presenting bank at a Federal 
Reserve Bank (e.g., a Fedwire transfer). The presenting bank may agree 
with the paying bank to accept settlement in another form (e.g., credit 
to an account of the presenting bank at the paying bank or debit to an 
account of the paying bank at the presenting bank). The settlement must 
occur by the close of Fedwire on the business day the check is received 
by the paying bank. Under the provisions of Sec. 229.34(c), a 
settlement owed to a presenting bank may be set off by adjustments for 
previous settlements with the presenting bank. (See also Sec. 
229.39(d).)
    b. Checks that are presented after the 8 a.m. (local time) 
presentment deadline for same-day settlement and before the paying 
bank's cut-off hour are treated as if they were presented under other 
applicable law and settled for or returned accordingly. However, for 
purposes of settlement only, the presenting bank may require the paying 
bank to treat such checks as presented for same-day settlement on the 
next business day in lieu of accepting settlement by cash or other means 
on the business day the checks are presented to the paying bank. Checks 
presented after the paying bank's cut-off hour or on non-business days, 
but otherwise in accordance with this paragraph, are considered 
presented for same-day settlement on the next business day.
    4. Closed Paying Bank
    a. There may be certain business days that are not banking days for 
the paying bank. Some paying banks may continue to settle for checks 
presented on these days (e.g., by opening their back office operations 
or by using an intercept processor). In other cases, a paying bank may 
be unable to settle for checks presented on a day it is closed.
    If the paying bank closes on a business day and checks are presented 
to the paying bank in accordance with paragraph (f)(1), the paying bank 
is accountable for the checks unless it settles for or returns the 
checks by the close of Fedwire on its next banking day. In addition, 
checks presented on a business day

[[Page 749]]

on which the paying bank is closed are considered received on the paying 
bank's next banking day for purposes of the U.C.C. midnight deadline 
(U.C.C. 4-301 and 4-302) and this regulation's expeditious return and 
notice of nonpayment provisions.
    b. If the paying bank is closed on a business day voluntarily, the 
paying bank must pay interest compensation, as defined in Sec. 
229.2(oo), to the presenting bank for the value of the float associated 
with the check from the day of the voluntary closing until the day of 
settlement. Interest compensation is not required in the case of an 
involuntary closing on a business day, such as a closing required by 
state law. In addition, if the paying bank is closed on a business day 
due to emergency conditions, settlement delays and interest compensation 
may be excused under Sec. 229.38(e) or U.C.C. 4-109(b).
    5. Good faith. Under Sec. 229.38(a), both presenting banks and 
paying banks are held to a standard of good faith, defined in Sec. 
229.2(nn) to mean honesty in fact and the observance of reasonable 
commercial standards of fair dealing. For example, designating a 
presentment location or changing presentment locations for the primary 
purpose of discouraging banks from presenting checks for same-day 
settlement might not be considered good faith on the part of the paying 
bank. Similarly, presenting a large volume of checks without prior 
notice could be viewed as not meeting reasonable commercial standards of 
fair dealing and therefore may not constitute presentment in good faith. 
In addition, if banks, in the general course of business, regularly 
agree to certain practices related to same-day settlement, it might not 
be considered consistent with reasonable commercial standards of fair 
dealing, and therefore might not be considered good faith, for a bank to 
refuse to agree to those practices if agreeing would not cause it harm.
    6. U.C.C. sections affected. This paragraph directly affects the 
following provisions of the U.C.C. and may affect other sections or 
provisions:
    a. Section 4-204(b)(1), in that a presenting bank may not send a 
check for same-day settlement directly to the paying bank, if the paying 
bank designates a different location in accordance with paragraph 
(f)(1).
    b. Section 4-213(a), in that the medium of settlement for checks 
presented under this paragraph is limited to a credit to an account at a 
Federal Reserve Bank and that, for checks presented after the deadline 
for same-day settlement and before the paying bank's cut-off hour, the 
presenting bank may require settlement on the next business day in 
accordance with this paragraph rather than accept settlement on the 
business day of presentment by cash.
    c. Section 4-301(a), in that, to preserve the ability to exercise 
deferred posting, the time limit specified in that section for 
settlement or return by a paying bank on the banking day a check is 
received is superseded by the requirement to settle for checks presented 
under this paragraph by the close of Fedwire.
    d. Section 4-302(a), in that, to avoid accountability, the time 
limit specified in that section for settlement or return by a paying 
bank on the banking day a check is received is superseded by the 
requirement to settle for checks presented under this paragraph by the 
close of Fedwire.

              XXIII. Section 229.37 Variations by Agreement

    A. This section is similar to U.C.C. 4-103, and permits consistent 
treatment of agreements varying Article 4 or Subpart C, given the 
substantial interrelationship of the two documents. To achieve 
consistency, the official comment to U.C.C. 4-103(a) (which in turn 
follows U.C.C. 1-201(3)) should be followed in construing this section. 
For example, as stated in Official Comment 2 to section 4-103, owners of 
items and other interested parties are not affected by agreements under 
this section unless they are parties to the agreement or are bound by 
adoption, ratification, estoppel, or the like. In particular, agreements 
varying this subpart that delay the return of a check beyond the times 
required by this subpart may result in liability under Sec. 229.38 to 
entities not party to the agreement.
    B. The Board has not followed U.C.C. 4-103(b), which permits Federal 
Reserve regulations and operating letters, clearinghouse rules, and the 
like to apply to parties that have not specifically assented. 
Nevertheless, this section does not affect the status of such agreements 
under the U.C.C.
    C. The following are examples of situations where variation by 
agreement is permissible, subject to the limitations of this section:
    1. A depositary bank may authorize another bank to apply the other 
bank's indorsement to a check as the depositary bank. (See Sec. 
229.35(d).)
    2. A depositary bank may authorize returning banks to commingle 
qualified returned checks with forward collection checks. (See Sec. 
229.32(a).)
    3. A depositary bank may limit its liability to its customer in 
connection with the late return of a deposited check where the lateness 
is caused by markings on the check by the depositary bank's customer or 
prior indorser in the area of the depositary bank indorsement. (See 
Sec. 229.38(d).)
    4. A paying bank may require its customer to assume the paying 
bank's liability for delayed or missent checks where the delay or 
missending is caused by markings placed on the check by the paying 
bank's customer that obscured a properly placed indorsement of the 
depositary bank. (See Sec. 229.38(d).)
    5. A collecting or paying bank may agree to accept forward 
collection checks without

[[Page 750]]

the indorsement of a prior collecting bank. (See Sec. 229.35(a).)
    6. A bank may agree to accept returned checks without the 
indorsement of a prior bank. (See Sec. 229.35(a).)
    7. A presenting bank may agree with a paying bank to present checks 
for same-day settlement at a location that is not in the check 
processing region consistent with the routing number on the checks. (See 
Sec. 229.36(f)(1)(i).)
    8. A presenting bank may agree with a paying bank to present checks 
for same-day settlement by a deadline earlier or later than 8:00 a.m. 
(See Sec. 229.36(f)(1)(ii).)
    9. A presenting bank and a paying bank may agree that presentment 
takes place when the paying bank receives an electronic transmission of 
information describing the check rather than upon delivery of the 
physical check. (See Sec. 229.36(b).)
    10. A depositary bank may agree with a paying or returning bank to 
accept an image or other notice in lieu of a returned check even when 
the check is available for return under this part. Except to the extent 
that other parties interested in the check assent to or are bound by the 
variation of the notice-in-lieu provisions of this part, banks entering 
into such an agreement may be responsible under this part or other 
applicable law to other interested parties for any losses caused by the 
handling of a returned check under the agreement. (See Sec. Sec. 
229.30(f), 229.31(f), 229.38(a).)
    D. The Board expects to review the types of variation by agreement 
that develop under this section and will consider whether it is 
necessary to limit certain variations.

                     XXIV. Section 229.38 Liability

      A. 229.38(a) Standard of care; liability; measure of damages

    1. The standard of care established by this section applies to any 
bank covered by the requirements of Subpart C of the regulation. Thus, 
the standard of care applies to a paying bank under Sec. Sec. 229.30 
and 229.33, to a returning bank under Sec. 229.31, to a depositary bank 
under Sec. Sec. 229.32 and 229.33, to a bank erroneously receiving a 
returned check or written notice of nonpayment as depositary bank under 
Sec. 229.32(d), and to a bank indorsing a check under Sec. 229.35. The 
standard of care is similar to the standard imposed by U.C.C. 1-203 and 
4-103(a) and includes a duty to act in good faith, as defined in Sec. 
229.2(nn) of this regulation.
    2. A bank not meeting this standard of care is liable to the 
depositary bank, the depositary bank's customer, the owner of the check, 
or another party to the check. The depositary bank's customer is usually 
a depositor of a check in the depositary bank (but see Sec. 229.35(d)). 
The measure of damages provided in this section (loss incurred up to 
amount of check, less amount of loss party would have incurred even if 
bank had exercised ordinary care) is based on U.C.C. 4-103(e) (amount of 
the item reduced by an amount that could not have been realized by the 
exercise of ordinary care), as limited by 4-202(c) (bank is liable only 
for its own negligence and not for actions of subsequent banks in chain 
of collection). This subpart does not absolve a collecting bank of 
liability to prior collecting banks under U.C.C. 4-201.
    3. Under this measure of damages, a depositary bank or other person 
must show that the damage incurred results from the negligence proved. 
For example, the depositary bank may not simply claim that its customer 
will not accept a charge-back of a returned check, but must prove that 
it could not charge back when it received the returned check and could 
have charged back if no negligence had occurred, and must first attempt 
to collect from its customer. (See Marcoux v. Van Wyk, 572 F.2d 651 (8th 
Cir. 1978); Appliance Buyers Credit Corp. v. Prospect Nat'l Bank, 708 
F.2d 290 (7th Cir. 1983).) Generally, a paying or returning bank's 
liability would not be reduced because the depositary bank did not place 
a hold on its customer's deposit before it learned of nonpayment of the 
check.
    4. This paragraph also states that it does not affect a paying 
bank's liability to its customer. Under U.C.C. 4-402, for example, a 
paying bank is liable to its customer for wrongful dishonor, which is 
different from failure to exercise ordinary care and has a different 
measure of damages.

        B. 229.38(b) Paying Bank's Failure To Make Timely Rreturn

    1. Section 229.30(a) imposes requirements on the paying bank for 
expeditious return of a check and leaves in place the U.C.C. deadlines 
(as they may be modified by Sec. 229.30(c)), which may allow return at 
a different time. This paragraph clarifies that the paying bank could be 
liable for failure to meet either standard, but not for failure to meet 
both. The regulation intends to preserve the paying bank's 
accountability for missing its midnight or other deadline under the 
U.C.C., (e.g., sections 4-215 and 4-302), provisions that are not 
incorporated in this regulation, but may be useful in establishing the 
time of final payment by the paying bank.

                   C. 229.38(c) Comparative negligence

    1. This paragraph establishes a ``pure'' comparative negligence 
standard for liability under Subpart C of this regulation. This 
comparative negligence rule may have particular application where a 
paying or returning bank delays in returning a check because of 
difficulty in identifying the depositary bank. Some examples will 
illustrate liability

[[Page 751]]

in such cases. In each example, it is assumed that the returned check is 
received by the depositary bank after it has made funds available to its 
customer, that it may no longer recover the funds from its customer, and 
that the inability to recover the funds from the customer is due to a 
delay in returning the check contrary to the standards established by 
Sec. Sec. 229.30(a) or 229.31(a).
    2. Examples.
    a. If a depositary bank fails to use the indorsement required by 
this regulation, and this failure is caused by a failure to exercise 
ordinary care, and if a paying or returning bank is delayed in returning 
the check because additional time is required to identify the depositary 
bank or find its routing number, the paying or returning bank's 
liability to the depositary bank would be reduced or eliminated.
    b. If the depositary bank uses the standard indorsement, but that 
indorsement is obscured by a subsequent collecting bank's indorsement, 
and a paying or returning bank is delayed in returning the check because 
additional time was required to identify the depositary bank or find its 
routing number, the paying or returning bank may not be liable to the 
depositary bank because the delay was not due to its negligence. 
Nonetheless, the collecting bank may be liable to the depositary bank to 
the extent that its negligence in indorsing the check caused the paying 
or returning bank's delay.
    c. If a depositary bank accepts a check that has printing, a carbon 
band, or other material on the back of the check that existed at the 
time the check was issued, and the depositary bank's indorsement is 
obscured by the printing, carbon band, or other material, and a paying 
or returning bank is delayed in returning the check because additional 
time was required to identify the depositary bank, the returning bank 
may not be liable to the depositary bank because the delay was not due 
to its negligence. Nonetheless, the paying bank may be liable to the 
depositary bank to the extent that the printing, carbon band, or other 
material caused the delay.

        D. 229.38(d) Responsibility for Certain Aspects of Checks

    1. Responsibility for back of check. The indorsement standard in 
Sec. 229.35 is most effective if the back of the check remains clear of 
other matter that may obscure bank indorsements. Because bank 
indorsements are usually applied by automated equipment, it is not 
possible to avoid pre-existing matter on the back of the check. For 
example, bank indorsements are not required to avoid a carbon band or 
printed, stamped, or written terms or notations on the back of the 
check. Accordingly, this provision places responsibility on the paying 
bank, depositary bank, or reconverting bank, as appropriate, for keeping 
the back of the check clear for bank indorsements during forward 
collection and return.
    2. ANS X9.100-140 provides that an image of an original check must 
be reduced in size when placed on the first substitute check associated 
with that original check. (The image thereafter would be constant in 
size on any subsequent substitute check that might be created.) Because 
of this size reduction, the location of an indorsement, particularly a 
depositary bank indorsement, applied to an original paper check likely 
will change when the first reconverting bank creates a substitute check 
that contains that indorsement within the image of the original paper 
check. If the indorsement was applied to the original paper check in 
accordance with appendix D's location requirements for indorsements 
applied to existing paper checks, and if the size reduction of the image 
causes the placement of the indorsement to no longer be consistent with 
the appendix's requirements, then the reconverting bank bears the 
liability for any loss that results from the shift in the placement of 
the indorsement. Such a loss could result either because the original 
indorsement applied in accordance with appendix D is rendered illegible 
by a subsequent indorsement that later is applied to the substitute 
check in accordance with appendix D, or because the subsequent bank 
cannot apply its indorsement to the substitute check legibly in 
accordance with appendix D as a result of the shift in the previous 
indorsement.

                                Example.

    In accordance with appendix D's specifications, a depositary bank 
sprays its indorsement onto a business-sized original check between 3.0 
inches from the leading edge of the check and 1.5 inches from the 
trailing edge of the check. The check's conversion to electronic form 
and subsequent reconversion to paper form causes the location of the 
depositary bank indorsement, now contained within the image of the 
original check, to change such that it is less than 3.0 inches from the 
leading edge of the substitute check. In accordance with appendix D's 
specifications, a subsequent collecting bank sprays its indorsement onto 
the substitute check between the leading edge of the check and 3.0 
inches from the leading edge of the check and the indorsement happens to 
be on top of the shifted depositary bank indorsement. If the check is 
returned unpaid and the return is not expeditious because of the 
illegibility of the depositary bank indorsement, and the depositary bank 
incurs a loss that it would not have incurred had the return been 
expeditious, the reconverting bank bears the liability for that loss.
    3. Responsibility for payable-through checks.

[[Page 752]]

    a. This paragraph provides that the bank by which a payable-through 
check is payable is liable for damages under paragraph (a) of this 
section to the extent that the check is not returned through the 
payable-through bank as quickly as would have been necessary to meet the 
requirements of Sec. 229.30(a)(1) (the 2-day/4-day test) had the bank 
by which it is payable received the check as paying bank on the day the 
payable-through bank received it. The location of the bank by which a 
check is payable for purposes of the 2-day/4-day test may be determined 
from the location or the first four digits of the routing number of the 
bank by which the check is payable. This information should be stated on 
the check. (See Sec. 229.36(e) and accompanying Commentary.) 
Responsibility under paragraph (d)(2) does not include responsibility 
for the time required for the forward collection of a check to the 
payable-through bank.
    b. Generally, liability under paragraph (d)(2) will be limited in 
amount. Under Sec. 229.33(a), a paying bank that returns a check in the 
amount of $2,500 or more must provide notice of nonpayment to the 
depositary bank by 4:00 p.m. on the second business day following the 
banking day on which the check is presented to the paying bank. Even if 
a payable-through check in the amount of $2,500 or more is not returned 
through the payable-through bank as quickly as would have been required 
had the check been received by the bank by which it is payable, the 
depositary bank should not suffer damages unless it has not received 
timely notice of nonpayment. Thus, ordinarily the bank by which a 
payable-through check is payable would be liable under paragraph (a) 
only for checks in amounts up to $2,500, and the paying bank would be 
responsible for notice of nonpayment for checks in the amount of $2,500 
or more.
    4. Responsibility under paragraphs (d)(1) and (d)(2) is treated as 
negligence for comparative negligence purposes, and the contribution to 
damages under paragraphs (d)(1) and (d)(2) is treated in the same way as 
the degree of negligence under paragraph (c) of this section.

                    E. 229.38(e) Timeliness of Action

    1. This paragraph excuses certain delays. It adopts the standard of 
U.C.C. 4-109(b).

                         F. 229.38(f) Exclusion

    1. This paragraph provides that the civil liability and class action 
provisions, particularly the punitive damage provisions of sections 
611(a) and (b), and the bona fide error provision of 611(c) of the EFA 
Act (12 U.S.C. 4010(a), (b), and (c)) do not apply to regulatory 
provisions adopted to improve the efficiency of the payments mechanism. 
Allowing punitive damages for delays in the return of checks where no 
actual damages are incurred would only encourage litigation and provide 
little or no benefit to the check collection system. In view of the 
provisions of paragraph (a), which incorporate traditional bank 
collection standards based on negligence, the provision on bona fide 
error is not included in Subpart C.

                        G. 229.38(g) Jurisdiction

    1. The EFA Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions for 
violations of this subpart.

                 H. 229.38(h) Reliance on Board Rulings

    1. This provision shields banks from civil liability if they act in 
good faith in reliance on any rule, regulation, or interpretation of the 
Board, even if it were subsequently determined to be invalid. Banks may 
rely on the Commentary to this regulation, which is issued as an 
official Board interpretation, as well as on the regulation itself.

                 XXV. Section 229.39 Insolvency of Bank

                             A. Introduction

    1. These provisions cover situations where a bank becomes insolvent 
during collection or return and are derived from U.C.C. 4-216. They are 
intended to apply to all banks.

                      B. 229.39(a) Duty of Receiver

    1. This paragraph requires a receiver of a closed bank to return a 
check to the prior bank if it does not pay for the check. This permits 
the prior bank, as holder, to pursue its claims against the closed bank 
or prior indorsers on the check.

        C. 229.39(b) Preference Against Paying or Depositary Bank

    1. This paragraph gives a bank a preferred claim against a closed 
paying bank that finally pays a check without settling for it or a 
closed depositary bank that becomes obligated to pay a returned check 
without settling for it. If the bank with a preferred claim under this 
paragraph recovers from a prior bank or other party to the check, the 
prior bank or other party to the check is subrogated to the preferred 
claim.

 D. 229.39(c) Preference Against Paying, Collecting, or Depositary Bank

    1. This paragraph gives a bank a preferred claim against a closed 
collecting, paying, or returning bank that receives settlement but does 
not settle for a check. (See Commentary to Sec. 229.35(b) for 
discussion of prior and subsequent banks.) As in the case of Sec. 
229.39(b), if the bank with a preferred claim under this paragraph 
recovers from a prior bank or other party to the check, the prior

[[Page 753]]

bank or other party to the check is subrogated to the preferred claim.

             E. 229.39(d) Preference Against Presenting Bank

    1. This paragraph gives a paying bank a preferred claim against a 
closed presenting bank in the event that the presenting bank breaches an 
amount or encoding warranty as provided in Sec. 229.34(c)(1) or (3) and 
does not reimburse the paying bank for adjustments for a settlement made 
by the paying bank in excess of the value of the checks presented. This 
preference is intended to have the effect of a perfected security 
interest and is intended to put the paying bank in the position of a 
secured creditor for purposes of the receivership provisions of the 
Federal Deposit Insurance Act and similar provisions of state law.

                   F. 229.39(e) Finality of Settlement

    1. This paragraph provides that insolvency does not interfere with 
the finality of a settlement, such as a settlement by a paying bank that 
becomes final by expiration of the midnight deadline.

            XXVI. Section 229.40 Effect on Merger Transaction

    A. When banks merge, there is normally a period of adjustment 
required before their operations are consolidated. To allow for this 
adjustment period, the regulation provides that the merged banks may be 
treated as separate banks for a period of up to one year after the 
consummation of the transaction. The term merger transaction is defined 
in Sec. 229.2(t). This rule affects the status of the combined entity 
in a number of areas in this subpart. For example:
    1. The paying bank's responsibility for expeditious return (Sec. 
229.30).
    2. The returning bank's responsibility for expeditious return (Sec. 
229.31).
    3. Whether a returning bank is entitled to an extra day to qualify a 
return that will be delivered directly to a depositary bank that has 
merged with the returning bank (Sec. 229.31(a)).
    4. Where the depositary bank must accept returned checks (Sec. 
229.32(a)).
    5. Where the depositary bank must accept notice of nonpayment (Sec. 
229.33(c)).
    6. Where a paying bank must accept presentment of checks (Sec. 
229.36(b)).

               XXVII. Section 229.41 Relation to State Law

    A. This section specifies that state law relating to the collection 
of checks is preempted only to the extent that it is inconsistent with 
this regulation. Thus, this regulation is not a complete replacement for 
state laws relating to the collection or return of checks.

                    XXVIII. Section 229.42 Exclusions

    A. Checks drawn on the United States Treasury, U.S. Postal Service 
money orders, and checks drawn on states and units of general local 
government that are presented directly to the state or unit of general 
local government and that are not payable through or at a bank are 
excluded from the coverage of the expeditious-return, notice-of-
nonpayment, and same-day settlement requirements of subpart C of this 
part. Other provisions of this subpart continue to apply to the checks. 
This exclusion does not apply to checks drawn by the U.S. government on 
banks.

  XXIX. Section 229.43 Checks Payable in Guam, American Samoa, and the 
                        Northern Mariana Islands

                        A. 229.43(a) Definitions

    1. Bank offices in Guam, American Samoa, and the Northern Mariana 
Islands (which Regulation CC defines as Pacific island banks) do not 
meet the definition of bank in Sec. 229.2(e) because they are not 
located in the United States. Some checks drawn on Pacific island banks 
(defined as Pacific island checks) bear U.S. routing numbers and are 
collected and returned by banks in the same manner as checks payable in 
the U.S.

         B. 229.43(b) Rules Applicable to Pacific Island Checks

    1. When a bank handles a Pacific island check as if it were a check 
as defined in Sec. 229.2(k), the bank is subject to certain provisions 
of Regulation CC, as provided in this section. Because the Pacific 
island bank is not a bank as defined in Sec. 229.2(e), it is not a 
paying bank as defined in Sec. 229.2(z) (unless otherwise noted in this 
section). Pacific island banks are not subject to the provisions of 
Regulation CC.
    2. A bank may agree to handle a Pacific island check as a returned 
check under Sec. 229.31 and may convert the returned Pacific island 
check to a qualified returned check. The returning bank is not, however, 
subject to the expeditious-return requirements of Sec. 229.31. The 
returning bank may receive the Pacific island check directly from a 
Pacific island bank or from another returning bank. As a Pacific island 
bank is not a paying bank under Regulation CC, Sec. 229.31(c) does not 
apply to a returning bank settling with the Pacific island bank.
    3. A depositary bank that handles a Pacific island check is not 
subject to the provisions of subpart B of Regulation CC, including the 
availability, notice, and interest accrual requirements, with respect to 
that check. If, however, a bank accepts a Pacific island check for 
deposit (or otherwise accepts the check as transferee) and collects the 
Pacific island check in the same manner as other

[[Page 754]]

checks, the bank is subject to the provisions of Sec. 229.32, including 
the provisions regarding time and manner of settlement for returned 
checks in Sec. 229.32(b), in the event the Pacific island check is 
returned by a returning bank. If the depositary bank receives the 
returned Pacific island check directly from the Pacific island bank, 
however, the provisions of Sec. 229.32(b) do not apply, because the 
Pacific island bank is not a paying bank under Regulation CC. The 
depositary bank is not subject to the notice of nonpayment provisions in 
Sec. 229.33 for Pacific island checks.
    4. Banks that handle Pacific island checks in the same manner as 
other checks are subject to the indorsement provisions of Sec. 229.35. 
Section 229.35(c) eliminates the need for the restrictive indorsement 
``pay any bank.'' For purposes of Sec. 229.35(c), the Pacific island 
bank is deemed to be a bank.
    5. Pacific island checks will often be intermingled with other 
checks in a single cash letter. Therefore, a bank that handles Pacific 
island checks in the same manner as other checks is subject to the 
transfer warranty provision in Sec. 229.34(c)(2) regarding accurate 
cash letter totals and the encoding warranty in Sec. 229.34(c)(3). A 
bank that acts as a returning bank for a Pacific island check is not 
subject to the warranties in Sec. 229.34(a). Similarly, because the 
Pacific island bank is not a ``bank'' or a ``paying bank'' under 
Regulation CC, Sec. 229.34(b), (c)(1), and (c)(4) do not apply. For the 
same reason, the provisions of Sec. 229.36 governing paying bank 
responsibilities such as place of receipt and same-day settlement do not 
apply to checks presented to a Pacific island bank, and the liability 
provisions applicable to paying banks in Sec. 229.38 do not apply to 
Pacific island banks. Section 229.36(d), regarding finality of 
settlement between banks during forward collection, applies to banks 
that handle Pacific island checks in the same manner as other checks, as 
do the liability provisions of Sec. 229.38, to the extent the banks are 
subject to the requirements of Regulation CC as provided in this 
section, and Sec. Sec. 229.37 and 229.39 through 229.42.

    XXX. Sec. 229.51 General provisions governing substitute checks

                  A. Sec. 229.51(a) Legal Equivalence

    1. Section 229.51(a) states that a substitute check for which a bank 
has provided the substitute check warranties is the legal equivalent of 
the original check for all purposes and all persons if it meets the 
accuracy and legend requirements. Where the law (or a contract) requires 
production of the original check, production of a legally equivalent 
substitute check would satisfy that requirement. A person that receives 
a substitute check cannot be assessed costs associated with the creation 
of the substitute check, absent agreement to the contrary.

                                Examples.

    a. A presenting bank presents a substitute check that meets the 
legal equivalence requirements to a paying bank. The paying bank cannot 
refuse presentment of the substitute check on the basis that it is a 
substitute check, because the substitute check is the legal equivalent 
of the original check.
    b. A depositor's account agreement with a bank provides that the 
depositor is entitled to receive original cancelled checks back with his 
or her periodic account statement. The bank may honor that agreement by 
providing original checks, substitute checks, or a combination thereof. 
However, a bank may not honor such an agreement by providing something 
other than an original check or a substitute check.
    c. A mortgage company argues that a consumer missed a monthly 
mortgage payment that the consumer believes she made. A legally 
equivalent substitute check concerning that mortgage payment could be 
used in the same manner as the original check to prove the payment.
    2. A person other than a bank that creates a substitute check could 
transfer, present, or return that check only by agreement unless and 
until a bank provided the substitute check warranties.
    3. To be the legal equivalent of the original check, a substitute 
check must accurately represent all the information on the front and 
back of the check as of the time the original check was truncated. An 
accurate representation of information that was illegible on the 
original check would satisfy this requirement. The payment instructions 
placed on the check by, or as authorized by, the drawer, such as the 
amount of the check, the payee, and the drawer's signature, must be 
accurately represented, because that information is an essential element 
of a negotiable instrument. Other information that must be accurately 
represented includes (1) the information identifying the drawer and the 
paying bank that is preprinted on the check, including the MICR line; 
and (2) other information placed on the check prior to the time an image 
of the check is captured, such as any required identification written on 
the front of the check and any indorsements applied to the back of the 
check. A substitute check need not capture other characteristics of the 
check, such as watermarks, microprinting, or other physical security 
features that cannot survive the imaging process or decorative images, 
in order to meet the accuracy requirement. Conversely, some security 
features that are latent on the original check might become visible as a 
result of the check imaging process. For example, the original check 
might have a faint representation of the word ``void'' that will appear 
more clearly on a photocopied or electronic image of the check. Provided 
the inclusion of

[[Page 755]]

the clearer version of the word on the image used to create a substitute 
check did not obscure the required information listed above, a 
substitute check that contained such information could be the legal 
equivalent of an original check under Sec. 229.51(a). However, if a 
person suffered a loss due to receipt of such a substitute check instead 
of the original check, that person could have an indemnity claim under 
Sec. 229.53 and, in the case of a consumer, an expedited recredit claim 
under Sec. 229.54.
    4. To be the legal equivalent of the original check, a substitute 
check must bear the legal equivalence legend described in Sec. 
229.51(a)(2). A bank may not vary the language of the legal equivalence 
legend and must place the legend on the substitute check as specified by 
generally applicable industry standards for substitute checks contained 
in ANS X9.100-140.
    5. In some cases, the original check used to create a substitute 
check could be forged or otherwise fraudulent. A substitute check 
created from a fraudulent original check would have the same status 
under Regulation CC and the U.C.C. as the original fraudulent check. For 
example, a substitute check of a fraudulent original check would not be 
properly payable under U.C.C. 4-401 and would be subject to the transfer 
and presentment warranties in U.C.C. 4-207 and 4-208.

                  B. 229.51(b) Reconverting Bank Duties

    1. As discussed in more detail in appendix D and the commentary to 
Sec. 229.35, a reconverting bank must indorse (or, if it is a paying 
bank with respect to the check, identify itself on) the back of a 
substitute check in a manner that preserves all indorsements applied, 
whether physically or electronically, by persons that previously handled 
the check in any form for forward collection or return. Indorsements 
applied physically to the original check before an image of the check 
was captured would be preserved through the image of the back of the 
original check that a substitute check must contain. Indorsements 
applied physically to the original check after an image of the original 
check was captured would be conveyed as electronic indorsements (see 
paragraph 3 of the commentary to Sec. 229.35(a)). If indorsements were 
applied electronically after an image of the original check was captured 
or were applied electronically after a previous substitute check was 
converted to electronic form, the reconverting bank must apply those 
indorsements physically to the substitute check. A reconverting bank is 
not responsible for obtaining indorsements that persons that previously 
handled the check should have applied but did not apply.
    2. A reconverting bank also must identify itself as such on the 
front and back of the substitute check and must preserve on the back of 
the substitute check the identifications of any previous reconverting 
banks in accordance with appendix D. The presence on the back of a 
substitute check of indorsements that were applied by previous 
reconverting banks and identified with asterisks in accordance with 
appendix D would satisfy the requirement that the reconverting bank 
preserve the identification of previous reconverting banks. As discussed 
in more detail in the commentary to Sec. 229.35, the reconverting bank 
and truncating bank routing numbers on the front of a substitute check 
and, if the reconverting bank is the paying bank, the reconverting 
bank's routing number on the back of a substitute check are for 
identification only and are not indorsements or acceptances.
    3. The reconverting bank must place the routing number of the 
truncating bank surrounded by brackets on the front of the substitute 
check in accordance with appendix D and ANS X9.100-140.

                                Example.

    A bank's customer, which is a nonbank business, receives checks for 
payment and by agreement deposits substitute checks instead of the 
original checks with its depositary bank. The depositary bank is the 
reconverting bank with respect to the substitute checks and the 
truncating bank with respect to the original checks. In accordance with 
appendix D and with ANS X9.100-140, the bank must therefore be 
identified on the front of the substitute checks as a reconverting bank 
and as the truncating bank, and on the back of the substitute checks as 
the depositary bank and a reconverting bank.

                       C. 229.51(c) Applicable Law

    1. A substitute check that meets the requirements for legal 
equivalence set forth in this section is subject to any provision of 
federal or state law that applies to original checks, except to the 
extent such provision is inconsistent with the Check 21 Act or subpart 
D. A legally equivalent substitute check is subject to all laws that are 
not preempted by the Check 21 Act in the same manner and to the same 
extent as is an original check. Thus, any person could satisfy a law 
that requires production of an original check by producing a substitute 
check that is derived from the relevant original check and that meets 
the legal equivalence requirements of Sec. 229.51(a).
    2. A law is not inconsistent with the Check 21 Act or subpart D 
merely because it allows for the recovery of a greater amount of 
damages.

                                Example.

    A drawer that suffers a loss with respect to a substitute check that 
was improperly charged to its account and for which the

[[Page 756]]

drawer has an indemnity claim but not a warranty claim would be limited 
under the Check 21 Act to recovery of the amount of the substitute check 
plus interest and expenses. However, if the drawer also suffered damages 
that were proximately caused because the bank wrongfully dishonored 
subsequently presented checks as a result of the improper substitute 
check charge, the drawer could recover those losses under U.C.C. 4-402.

             XXXI. Sec. 229.52 Substitute Check Warranties

               A. 229.52(a) Warranty Content and Provision

    1. The responsibility for providing the substitute check warranties 
begins with the reconverting bank. In the case of a substitute check 
created by a bank, the reconverting bank starts the flow of warranties 
when it transfers, presents, or returns a substitute check for which it 
receives consideration. A bank that receives a substitute check created 
by a nonbank starts the flow of warranties when it transfers, presents, 
or returns for consideration either the substitute check it received or 
an electronic or paper representation of that substitute check. To 
ensure that warranty protections flow all the way through to the 
ultimate recipient of a substitute check or paper or electronic 
representation thereof, any subsequent bank that transfers, presents, or 
returns for consideration either the substitute check or a paper or 
electronic representation of the substitute check is responsible to 
subsequent transferees for the warranties. Any warranty recipient could 
bring a claim for a breach of a substitute check warranty if it received 
either the actual substitute check or a paper or electronic 
representation of a substitute check.
    2. The substitute check warranties and indemnity are not given under 
Sec. Sec. 229.52 and 229.53 by a bank that truncates the original check 
and by agreement transfers the original check electronically to a 
subsequent bank for consideration. However, parties may, by agreement, 
allocate liabilities associated with the exchange of electronic check 
information.

                                Example.

    A bank that receives check information electronically and uses it to 
create substitute checks is the reconverting bank and, when it 
transfers, presents, or returns that substitute check, becomes the first 
warrantor. However, that bank may protect itself by including in its 
agreement with the sending bank provisions that specify the sending 
bank's warranties and responsibilities to the receiving bank, 
particularly with respect to the accuracy of the check image and check 
data transmitted under the agreement.
    3. A bank need not affirmatively make the warranties because they 
attach automatically when a bank transfers, presents, or returns the 
substitute check (or a representation thereof) for which it receives 
consideration. Because a substitute check transferred, presented, or 
returned for consideration is warranted to be the legal equivalent of 
the original check and thereby subject to existing laws as if it were 
the original check, all U.C.C. and other Regulation CC warranties that 
apply to the original check also apply to the substitute check.
    4. The legal equivalence warranty by definition must be linked to a 
particular substitute check. When an original check is truncated, the 
check may move from electronic form to substitute check form and then 
back again, such that there would be multiple substitute checks 
associated with one original check. When a check changes form multiple 
times in the collection or return process, the first reconverting bank 
and subsequent banks that transfer, present, or return the first 
substitute check (or a paper or electronic representation of the first 
substitute check) warrant the legal equivalence of only the first 
substitute check. If a bank receives an electronic representation of a 
substitute check and uses that representation to create a second 
substitute check, the second reconverting bank and subsequent 
transferees of the second substitute check (or a representation thereof) 
warrant the legal equivalence of both the first and second substitute 
checks. A reconverting bank would not be liable for a warranty breach 
under Sec. 229.52 if the legal equivalence defect is the fault of a 
subsequent bank that handled the substitute check, either as a 
substitute check or in other paper or electronic form.
    5. The warranty in Sec. 229.52(a)(2), which addresses multiple 
payment requests for the same check, is not linked to a particular 
substitute check but rather is given by each bank handling the 
substitute check, an electronic representation of a substitute check, or 
a subsequent substitute check created from an electronic representation 
of a substitute check. All banks that transfer, present, or return a 
substitute check (or a paper or electronic representation thereof) 
therefore provide the warranty regardless of whether the ultimate demand 
for double payment is based on the original check, the substitute check, 
or some other electronic or paper representation of the substitute or 
original check, and regardless of the order in which the duplicative 
payment requests occur. This warranty is given by the banks that 
transfer, present, or return a substitute check even if the demand for 
duplicative payment results from a fraudulent substitute check about 
which the warranting bank had no knowledge.

[[Page 757]]

                                Example.

    A nonbank depositor truncates a check and in lieu thereof sends an 
electronic version of that check to both Bank A and Bank B. Bank A and 
Bank B each uses the check information that it received electronically 
to create a substitute check, which it presents to Bank C for payment. 
Bank A and Bank B each is a reconverting bank that made the substitute 
check warranties when it presented a substitute check to and received 
payment from Bank C. Bank C could pursue a warranty claim for the loss 
it suffered as a result of the duplicative payment against either Bank A 
or Bank B.

                    B. 229.52(b) Warranty Recipients

    1. A reconverting bank makes the warranties to the person to which 
it transfers, presents, or returns the substitute check for 
consideration and to any subsequent recipient that receives either the 
substitute check or a paper or electronic representation derived from 
the substitute check. These subsequent recipients could include a 
subsequent collecting or returning bank, the depositary bank, the 
drawer, the drawee, the payee, the depositor, and any indorser. The 
paying bank would be included as a warranty recipient, for example 
because it would be the drawee of a check or a transferee of a check 
that is payable through it.
    2. The warranties flow with the substitute check to persons that 
receive a substitute check or a paper or electronic representation of a 
substitute check. The warranties do not flow to a person that receives 
only the original check or a representation of an original check that 
was not derived from a substitute check. However, a person that 
initially handled only the original check could become a warranty 
recipient if that person later receives a returned substitute check or a 
paper or electronic representation of a substitute check that was 
derived from that original check.

             XXXII. Sec. 229.53 Substitute Check Indemnity

                     A. 229.53(a) Scope of Indemnity

    1. Each bank that for consideration transfers, presents, or returns 
a substitute check or a paper or electronic representation of a 
substitute check is responsible for providing the substitute check 
indemnity. The indemnity covers losses due to any subsequent recipient's 
receipt of the substitute check instead of the original check. The 
indemnity therefore covers the loss caused by receipt of the substitute 
check as well as the loss that a bank incurs because it pays an 
indemnity to another person. A bank that pays an indemnity would in turn 
have an indemnity claim regardless of whether it received the substitute 
check or a paper or electronic representation of the substitute check 
The indemnity would not apply to a person that handled only the original 
check or a paper or electronic version of the original check that was 
not derived from a substitute check.

                                Examples.

    a. A paying bank makes payment based on a substitute check that was 
derived from a fraudulent original cashier's check. The amount and other 
characteristics of the original cashier's check are such that, had the 
original check been presented instead, the paying bank would have 
inspected the original check for security features. The paying bank's 
fraud detection procedures were designed to detect the fraud in question 
and allow the bank to return the fraudulent check in a timely manner. 
However, the security features that the bank would have inspected were 
security features that did not survive the imaging process (see the 
commentary to Sec. 229.51(a)). Under these circumstances, the paying 
bank could assert an indemnity claim against the bank that presented the 
substitute check.
    b. By contrast with the previous examples, the indemnity would not 
apply if the characteristics of the presented substitute check were such 
that the bank's security policies and procedures would not have detected 
the fraud even if the original had been presented. For example, if the 
check was under the threshold amount at which the bank subjects an item 
to its fraud detection procedures, the bank would not have inspected the 
item for security features regardless of the form of the item and 
accordingly would have suffered a loss even if it had received the 
original check.
    c. A paying bank makes an erroneous payment based on an electronic 
representation of a substitute check because the electronic cash letter 
accompanying the electronic item included the wrong amount to be 
charged. The paying bank would not have an indemnity claim associated 
with that payment because its loss did not result from receipt of an 
actual substitute check instead of the original check. However, the 
paying bank could protect itself from such losses through its agreement 
with the bank that sent the check to it electronically and may have 
rights under other law.
    d. A drawer has agreed with its bank that the drawer will not 
receive paid checks with periodic account statements. The drawer 
requested a copy of a paid check in order to prove payment and received 
a photocopy of a substitute check. The photocopy that the bank provided 
in response to this request was illegible, such that the drawer could 
not prove payment. Any loss that the drawer suffered as a result of 
receiving the blurry check image would not trigger an indemnity claim 
because the loss was not caused by the receipt of a substitute check. 
The drawer may, however, still have a warranty claim if

[[Page 758]]

he received a copy of a substitute check, and may also have rights under 
the U.C.C.

                      B. 229.53(b) Indemnity Amount

    1. If a recipient of a substitute check is making an indemnity claim 
because a bank has breached one of the substitute check warranties, the 
recipient can recover any losses proximately caused by that warranty 
breach.

                                Examples.

    a. A drawer discovers that its account has been charged for two 
different substitute checks that were provided to the drawer and that 
were associated with the same original check. As a result of this 
duplicative charge, the paying bank dishonored several subsequently-
presented checks that it otherwise would have paid and charged the 
drawer returned check fees. The payees of the returned checks also 
charged the drawer returned check fees. The drawer would have a warranty 
claim against any of the warranting banks, including its bank, for 
breach of the warranty described in Sec. 229.52(a)(2). The drawer also 
could assert an indemnity claim. Because there is only one original 
check for any payment transaction, if the collecting and presenting bank 
had collected the original check instead of using a substitute check the 
bank would have been asked to make only one payment. The drawer could 
assert its warranty and indemnity claims against the paying bank, 
because that is the bank with which the drawer has a customer 
relationship and the drawer has received an indemnity from that bank. 
The drawer could recover from the indemnifying bank the amount of the 
erroneous charge, as well as the amount of the returned check fees 
charged by both the paying bank and the payees of the returned checks. 
If the drawer's account were an interest-bearing account, the drawer 
also could recover any interest lost on the erroneously debited amount 
and the erroneous returned check fees. The drawer also could recover its 
expenditures for representation in connection with the claim. Finally, 
the drawer could recover any other losses that were proximately caused 
by the warranty breach.
    b. In the example above, the paying bank that received the duplicate 
substitute checks also would have a warranty claim against the previous 
transferor(s) of those substitute checks and could seek an indemnity 
from that bank (or either of those banks). The indemnifying bank would 
be responsible for compensating the paying bank for all the losses 
proximately caused by the warranty breach, including representation 
expenses and other costs incurred by the paying bank in settling the 
drawer's claim.
    2. If the recipient of the substitute check does not have a 
substitute check warranty claim with respect to the substitute check, 
the amount of the loss the recipient may recover under Sec. 229.53 is 
limited to the amount of the substitute check, plus interest and 
expenses. However, the indemnified person might be entitled to 
additional damages under some other provision of law.

                                Examples.

    a. A drawer received a substitute check that met all the legal 
equivalence requirements and for which the drawer was only charged once, 
but the drawer believed that the underlying original check was a 
forgery. If the drawer suffered a loss because it could not prove the 
forgery based on the substitute check, for example because proving the 
forgery required analysis of pen pressure that could be determined only 
from the original check, the drawer would have an indemnity claim. 
However, the drawer would not have a substitute check warranty claim 
because the substitute check was the legal equivalent of the original 
check and no person was asked to pay the substitute check more than 
once. In that case, the amount of the drawer's indemnity under Sec. 
229.53 would be limited to the amount of the substitute check, plus 
interest and expenses. However, the drawer could attempt to recover 
additional losses, if any, under other law.
    b. As described more fully in the commentary to Sec. 229.53(a) 
regarding the scope of the indemnity, a paying bank could have an 
indemnity claim if it paid a legally equivalent substitute check that 
was created from a fraudulent cashier's check that the paying bank's 
fraud detection procedures would have caught and that the bank would 
have returned by its midnight deadline had it received the original 
check. However, if the substitute check was not subject to a warranty 
claim (because it met the legal equivalence requirements and there was 
only one payment request) the paying bank's indemnity would be limited 
to the amount of the substitute check plus interest and expenses.
    3. The amount of an indemnity would be reduced in proportion to the 
amount of any amount loss attributable to the indemnified person's 
negligence or bad faith. This comparative negligence standard is 
intended to allocate liability in the same manner as the comparative 
negligence provision of Sec. 229.38(c).
    4. An indemnifying bank may limit the losses for which it is 
responsible under Sec. 229.53 by producing the original check or a 
sufficient copy. However, production of the original check or a 
sufficient copy does not absolve the indemnifying bank from liability 
claims relating to a warranty the bank has provided under Sec. 229.52 
or any other law, including but not limited to subpart C of this part or 
the U.C.C.

[[Page 759]]

                   C. 229.53(c) Subrogation of Rights

    1. A bank that pays an indemnity claim is subrogated to the rights 
of the person it indemnified, to the extent of the indemnity it 
provided, so that it may attempt to recover that amount from another 
person based on an indemnity, warranty, or other claim. The person that 
the bank indemnified must comply with reasonable requests from the 
indemnifying bank for assistance with respect to the subrogated claim.

                                Example.

    A paying bank indemnifies a drawer for a substitute check that the 
drawer alleged was a forgery that would have been detected had the 
original check instead been presented. The bank that provided the 
indemnity could pursue its own indemnity claim against the bank that 
presented the substitute check, could attempt to recover from the 
forger, or could pursue any claim that it might have under other law. 
The bank also could request from the drawer any information that the 
drawer might possess regarding the possible identity of the forger.

          XXXIII. Sec. 229.54 Expedited Recredit for Consumers

            A. 229.54(a) Circumstances Giving Rise to a Claim

    1. A consumer may make a claim for expedited recredit under this 
section only for a substitute check that he or she has received and for 
which the bank charged his or her deposit account. As a result, checks 
used to access loans, such as credit card checks or home equity line of 
credit checks, that are reconverted to substitute checks would not give 
rise to an expedited recredit claim, unless such a check was returned 
unpaid and the bank charged the consumer's deposit account for the 
amount of the returned check. In addition, a consumer who received only 
a statement that contained images of multiple substitute checks per page 
would not be entitled to make an expedited recredit claim, although he 
or she could seek redress under other provisions of law, such as Sec. 
229.52 or U.C.C. 4-401. However, a consumer who originally received only 
a statement containing images of multiple substitute checks per page but 
later received a substitute check, such as in response to a request for 
a copy of a check shown in the statement, could bring a claim if the 
other expedited recredit criteria were met. Although a consumer must at 
some point have received a substitute check to make an expedited 
recredit claim, the consumer need not be in possession of the substitute 
check at the time he or she submits the claim.
    2. A consumer must in good faith assert that the bank improperly 
charged the consumer's account for the substitute check or that the 
consumer has a warranty claim for the substitute check (or both). The 
warranty in question could be a substitute check warranty described in 
Sec. 229.52 or any other warranty that a bank provides with respect to 
a check under other law. A consumer could, for example, have a warranty 
claim under Sec. 229.34(b), which contains returned check warranties 
that are made to the owner of the check.
    3. A consumer's recovery under the expedited recredit section is 
limited to the amount of his or her loss, up to the amount of the 
substitute check subject to the claim, plus interest if the consumer's 
account is an interest-bearing account. The consumer's loss could 
include fees that resulted from the allegedly incorrect charge, such as 
bounced check fees that were imposed because the improper charge caused 
the bank to dishonor subsequently presented checks that it otherwise 
would have honored. A consumer who suffers a total loss greater than the 
amount of the substitute check plus interest could attempt to recover 
the remainder of that loss by bringing warranty, indemnity, or other 
claim under this subpart or other applicable law.

                                Examples.

    a. A consumer who received a substitute check believed that he or 
she wrote the check for $150, but the bank charged his or her account 
for $1,500. The amount on the substitute check the consumer received is 
illegible. If the substitute check contained a blurry image of what was 
a legible original check, the consumer could have a claim for a breach 
of the legal equivalence warranty in addition to an improper charge 
claim. Because the amount of the check cannot be determined from the 
substitute check provided to the consumer, the consumer, if acting in 
good faith, could assert that the production of the original check or a 
better copy of the original check is necessary to determine the validity 
of the claim. The consumer in this case could attempt to recover his or 
her losses by using the expedited recredit procedure. The consumer's 
losses recoverable under Sec. 229.54 could include the $1,350 he or she 
believed was incorrectly charged plus any improperly charged fees 
associated with that charge, up to $150 (plus foregone interest on the 
amount of the consumer's loss if the account was an interest-bearing 
account). The consumer could recover any additional losses, if any, 
under other law, such as U.C.C. 4-401 and 4-402.
    b. A consumer received a substitute check for which his or her 
account was charged and believed that the original check from which the 
substitute was derived was a forgery. The forgery was good enough that 
analysis of the original check was necessary to verify

[[Page 760]]

whether the signature is that of the consumer. Under those 
circumstances, the consumer, if acting in good faith, could assert that 
the charge was improper, that he or she therefore had incurred a loss in 
the amount of the check (plus foregone interest if the account was an 
interest-bearing account), and that he or she needed the original check 
to determine the validity of the forgery claim. By contrast, if the 
signature on the substitute check obviously was forged (for example, if 
the forger signed a name other than that of the account holder) and 
there was no other defect with the substitute check, the consumer would 
not need the original check or a sufficient copy to determine the fact 
of the forgery and thus would not be able to make an expedited recredit 
claim under this section. However, the consumer would have a claim under 
U.C.C. 4-401 if the item was not properly payable.

                B. 229.54(b) Procedures for Making Claims

    1. The consumer must submit his or her expedited recredit claim to 
the bank within 40 calendar days of the later of the day on which the 
bank mailed or delivered, by a means agreed to by the consumer, (1) the 
periodic account statement containing information concerning the 
transaction giving rise to the claim, or (2) the substitute check giving 
rise to the claim. The mailing or delivery of a substitute check could 
be in connection with a regular account statement, in response to a 
consumer's specific request for a copy of a check, or in connection with 
the return of a substitute check to the payee.
    2. Section 229.54(b) contemplates more than one possible means of 
delivering an account statement or a substitute check to the consumer. 
The time period for making a claim thus could be triggered by the 
mailed, in-person, or electronic delivery of an account statement or by 
the mailed or in-person delivery of a substitute check. In-person 
delivery would include, for example, making an account statement or 
substitute check available at the bank for the consumer's retrieval 
under an arrangement agreed to by the consumer. In the case of a mailed 
statement or substitute check, the 40-day period should be calculated 
from the postmark on the envelope. In the case of in-person delivery, 
the 40-day period should be calculated from the earlier of the calendar 
day on which delivery occurred or the bank first made the statement or 
substitute check available for the consumer's retrieval.
    3. A bank must extend the consumer's time for submitting a claim for 
a reasonable period if the consumer is prevented from submitting his or 
her claim within 40 days because of extenuating circumstances. 
Extenuating circumstances could include, for example, the extended 
travel or illness of the consumer.
    4. For purposes of determining the timeliness of a consumer's 
actions, a consumer's claim is considered received on the banking day on 
which the consumer's bank receives a complete claim in person or by 
telephone or on the banking day on which the consumer's bank receives a 
letter or e-mail containing a complete claim. (But see paragraphs 9-11 
of this section for a discussion of time periods related to oral claims 
that the bank requires to be put in writing.)
    5. A consumer who makes an untimely claim would not be entitled to 
recover his or her losses using the expedited recredit procedure. 
However, he or she still could have rights under other law, such as a 
warranty or indemnity claim under subpart D, a claim for an improper 
charge to his or her account under U.C.C. 4-401, or a claim for wrongful 
dishonor under U.C.C. 4-402.
    6. A consumer's claim must include the reason why the consumer 
believes that his or her account was charged improperly or why he or she 
has a warranty claim. A charge could be improper, for example, if the 
bank charged the consumer's account for an amount different than the 
consumer believes he or she authorized or charged the consumer more than 
once for the same check, or if the check in question was a forgery or 
otherwise fraudulent.
    7. A consumer also must provide a reason why production of the 
original check or a sufficient copy is necessary to determine the 
validity of the claim identified by the consumer. For example, if the 
consumer believed that the bank charged his or her account for the wrong 
amount, the original check might be necessary to prove this claim if the 
amount of the substitute check were illegible. Similarly, if the 
consumer believed that his or her signature had been forged, the 
original check might be necessary to confirm the forgery if, for 
example, pen pressure or similar analysis were necessary to determine 
the genuineness of the signature.
    8. The information that the consumer is required to provide under 
Sec. 229.54(b)(2)(iv) to facilitate the bank's investigation of the 
claim could include, for example, a copy of the allegedly defective 
substitute check or information related to that check, such as the 
number, amount, and payee.
    9. A bank may accept an expedited recredit claim in any form but 
could in its discretion require the consumer to submit the claim in 
writing. A bank that requires a recredit claim to be in writing must 
inform the consumer of that requirement and provide a location to which 
such a written claim should be sent. If the consumer attempts to make a 
claim orally, the bank must inform the consumer at that time of the 
written notice requirement. A bank that receives a timely oral claim and 
then requires the consumer to submit the claim in writing may require 
the consumer to submit the written claim within

[[Page 761]]

10 business days of the bank's receipt of the timely oral claim. If the 
consumer's oral claim was timely and the consumer's written claim was 
received within the 10-day period for submitting the claim in writing, 
the consumer would satisfy the requirement of Sec. 229.54(b)(1) to 
submit his or her claim within 40 days, even if the bank received the 
written claim after that 40-day period.
    10. A bank may permit but may not require a consumer to submit a 
written claim electronically.
    11. If a bank requires a consumer to submit a claim in writing, the 
bank may compute time periods for the bank's action on the claim from 
the date that the bank received the written claim. Thus, if a consumer 
called the bank to make an expedited recredit claim and the bank 
required the consumer to submit the claim in writing, the time at which 
the bank must take action on the claim would be determined based on the 
date on which the bank received the written claim, not the date on which 
the consumer made the oral claim.
    12. Regardless of whether the consumer's communication with the bank 
is oral or written, a consumer complaint that does not contain all the 
elements described in Sec. 229.54(b) is not a claim for purposes of 
Sec. 229.54. If the consumer attempts to submit a claim but does not 
provide all the required information, then the bank has a duty to inform 
the consumer that the complaint does not constitute a claim under Sec. 
229.54 and identify what information is missing.

                      C. 229.54(c) Action on Claims

    1. If the bank has not determined whether or not the consumer's 
claim is valid by the end of the 10th business day after the banking day 
on which the consumer submitted the claim, the bank must by that time 
recredit the consumer's account for the amount of the consumer's loss, 
up to the lesser of the amount of the substitute check or $2,500, plus 
interest if the account is an interest-bearing account. A bank must 
provide the recredit pending investigation for each substitute check for 
which the consumer submitted a claim, even if the consumer submitted 
multiple substitute check claims in the same communication.
    2. A bank that provides a recredit to the consumer, either 
provisionally or after determining that the consumer's claim is valid, 
may reverse the amount of the recredit if the bank later determines that 
the claim in fact was not valid. A bank that reverses a recredit also 
may reverse the amount of any interest that it has paid on the 
previously recredited amount. A bank's time for reversing a recredit may 
be limited by a statute of limitations.

                  D. 229.54(d) Availability of Recredit

    1. The availability of a recredit provided by a bank under Sec. 
229.54(c) is governed solely by Sec. 229.54(d) and therefore is not 
subject to the availability provisions of subpart B. A bank generally 
must make a recredit available for withdrawal no later than the start of 
the business day after the banking day on which the bank provided the 
recredit. However, a bank may delay the availability of up to the first 
$2,500 that it provisionally recredits to a consumer account under Sec. 
229.54(c)(3)(i) if (1) the account is a new account, (2) without regard 
to the substitute check giving rise to the recredit claim, the account 
has been repeatedly overdrawn during the six month period ending on the 
date the bank received the claim, or (3) the bank has reasonable cause 
to believe that the claim is fraudulent. These first two exceptions are 
meant to operate in the same manner as the corresponding new account and 
repeated overdraft exceptions in subpart B, as described in Sec. 
229.13(a) and (d) and the commentary thereto regarding application of 
the exceptions. When a recredit amount for which a bank delays 
availability contains an interest component, that component also is 
subject to the delay because it is part of the amount recredited under 
Sec. 229.54(c)(3)(i). However, interest continues to accrue during the 
hold period.
    2. Section 229.54(d)(2) describes the maximum period of time that a 
bank may delay availability of a recredit provided under Sec. 
229.54(c). The bank may delay availability under one of the three listed 
exceptions until the business day after the banking day on which the 
bank determines that the consumer's claim is valid or the 45th calendar 
day after the banking day on which the bank received the consumer's 
claim, whichever is earlier. The only portion of the recredit that is 
subject to delay under Sec. 229.54(d)(2) is the amount that the bank 
recredits under Sec. 229.54(c)(3)(i) (including the interest component, 
if any) pending its investigation of a claim.

   E. 229.54(e) Notices Relating to Consumer Expedited Recredit Claims

    1. A bank must notify a consumer of its action regarding a recredit 
claim no later than the business day after the banking day that the bank 
makes a recredit, determines a claim is not valid, or reverses a 
recredit, as appropriate. As provided in Sec. 229.58, a bank may 
provide any notice required by this section by U.S. mail or by any other 
means through which the consumer has agreed to receive account 
information.
    2. A bank that denies the consumer's recredit claim must demonstrate 
to the consumer that the substitute check was properly charged or that 
the warranty claim was not valid, such as by explaining the reason

[[Page 762]]

that the substitute check charge was proper or the consumer's warranty 
claim was not valid. For example, if a consumer has claimed that the 
bank charged its account for an improper amount, the bank denying that 
claim must explain why it determined that the charged amount was proper.
    3. A bank denying a recredit claim also must provide the original 
check or a sufficient copy, unless the bank is providing the claim 
denial notice electronically and the consumer has agreed to receive that 
type of information electronically. In that case, Sec. 229.58 allows 
the bank instead to provide an image of the original check or an image 
of the sufficient copy that the bank would have sent to the consumer had 
the bank provided the notice by mail.
    4. A bank that relies on information or documents in addition to the 
original check or sufficient copy when denying a consumer expedited 
recredit claim also must either provide such information or documents to 
the consumer or inform the consumer that he or she may request copies of 
such information or documents. This requirement does not apply to a bank 
that relies only on the original check or a sufficient copy to make its 
determination.
    5. Models C-22 through C-25 in appendix C contain model language for 
each of three notices described in Sec. 229.54(e). A bank may, but is 
not required to, use the language listed in the appendix. The Check 21 
Act does not provide banks that use these models with a safe harbor. 
However, the Board has published these models to aid banks' efforts to 
comply with Sec. 229.54(e).

        F. 229.54(f) Recredit Does Not Abrogate Other Liabilities

    1. The amount that a consumer may recover under Sec. 229.54 is 
limited to the lesser of the amount of his or her loss or the amount of 
the substitute check, plus interest on that amount if his or her account 
earns interest. However, a consumer's total loss associated with the 
substitute check could exceed that amount, and the consumer could be 
entitled to additional damages under other law. For example, if a 
consumer's loss exceeded the amount of the substitute check plus 
interest and he or she had both a warranty and an indemnity claim with 
respect to the substitute check, he or she would be entitled to 
additional damages under Sec. 229.53 of this subpart. Similarly, if a 
consumer was charged bounced check fees as a result of an improperly 
charged substitute check and could not recover all of those fees because 
of the Sec. 229.54's limitation on recovery, he or she could attempt to 
recover additional amounts under U.C.C. 4-402.

       XXXIV. Sec. 229.55 Expedited Recredit Procedures for Banks

            A. 229.55(a) Circumstances Giving Rise to a Claim

    1. This section allows a bank to make an expedited recredit claim 
under two sets of circumstances: first, because it is obligated to 
provide a recredit, either to the consumer or to another bank that is 
obligated to provide a recredit in connection with the consumer's claim; 
and second, because the bank detected a problem with the substitute 
check that, if uncaught, could have given rise to a consumer claim.
    2. The loss giving rise to an interbank recredit claim could be the 
recredit that the claimant bank provided directly to its consumer 
customer under Sec. 229.54 or a loss incurred because the claimant bank 
was required to indemnify another bank that provided an expedited 
recredit to either a consumer or a bank.

                                Examples.

    a. A paying bank charged a consumer's account based on a substitute 
check that contained a blurry image of a legible original check, and the 
consumer whose account was charged made an expedited recredit claim 
against the paying bank because the consumer suffered a loss and needed 
the original check or a sufficient copy to determine the validity of his 
or her claim. The paying bank would have a warranty claim against the 
presenting bank that transferred the defective substitute check to it 
and against any previous transferring bank(s) that handled that 
substitute check or another paper or electronic representation of the 
check. The paying bank therefore would meet each of the requirements 
necessary to bring an interbank expedited recredit claim.
    b. Continuing with the example in paragraph a, if the presenting 
bank determined that the paying bank's claim was valid and provided a 
recredit, the presenting bank would have suffered a loss in the amount 
of the recredit it provided and could, in turn, make an expedited 
recredit claim against the bank that transferred the defective 
substitute check to it.

                B. 229.55(b) Procedures for Making Claims

    1. An interbank recredit claim under this section must be brought 
within 120 calendar days of the transaction giving rise to the claim. 
For purposes of computing this period, the transaction giving rise to 
the claim is the claimant bank's settlement for the substitute check in 
question.
    2. When estimating the amount of its loss, Sec. 229.55(b)(2)(ii) 
states that the claimant bank should include ``interest if applicable.'' 
The quoted phrase refers to any interest that the claimant bank or a 
bank that the claimant

[[Page 763]]

bank indemnified paid to a consumer who has an interest-bearing account 
in connection with an expedited recredit under Sec. 229.54.
    3. The information that the claimant bank is required to provide 
under Sec. 229.55(b)(2)(iv) to facilitate investigation of the claim 
could include, for example, a copy of any written claim that a consumer 
submitted under Sec. 229.54 or any written record the bank may have of 
a claim the consumer submitted orally. The information also could 
include a copy of the defective substitute check or information relating 
to that check, such as the number, amount, and payee of the check. 
However, a claimant bank that provides a copy of the substitute check 
must take reasonable steps to ensure that the copy is not mistaken for a 
legal equivalent of the original check or handled for forward collection 
or return.
    4. The indemnifying bank's right to require a claimant bank to 
submit a claim in writing and the computation of time from the date of 
the written submission parallel the corresponding provision in the 
consumer recredit section (Sec. 229.54(b)(3)). However, the 
indemnifying bank also may require the claimant bank to submit a copy of 
the written or electronic claim submitted by the consumer under that 
section, if any.

                      C. 229.55(c) Action on Claims

    1. An indemnifying bank that responds to an interbank expedited 
recredit claim by providing the original check or a sufficient copy of 
the original check need not demonstrate why that claim or the underlying 
consumer expedited recredit claim is or is not valid.

                      XXXV. Sec. 229.56 Liability

                     A. 229.56(a) Measure of Damages

    1. In general, a person's recovery under this section is limited to 
the amount of the loss up to the amount of the substitute check that is 
the subject of the claim, plus interest and expenses (including costs 
and reasonable attorney's fees and other expenses of representation) 
related to that substitute check. However, a person that is entitled to 
an indemnity under Sec. 229.53 because of a breach of a substitute 
check warranty also may recover under Sec. 229.53 any losses 
proximately caused by the warranty breach, including interest, costs, 
wrongfully-charged fees imposed as a result of the warranty breach, 
reasonable attorney's fees, and other expenses of representation.
    2. A reconverting bank also may be liable under Sec. 229.38 for 
damages associated with the illegibility of indorsements applied to 
substitute checks if that illegibility results because the reduction of 
the original check image and its placement on the substitute check 
shifted a previously-applied indorsement that, when applied, complied 
with appendix D. For more detailed discussion of this topic, see Sec. 
229.38 and the accompanying commentary.

                    B. 229.56(b) Timeliness of Action

    1. A bank's delay beyond the time limits prescribed or permitted by 
any provision of subpart D is excused if the delay is caused by certain 
circumstances beyond the bank's control. This parallels the standard of 
U.C.C. 4-109(b).

                        C. 229.56(c) Jurisdiction

    1. The Check 21 Act confers subject matter jurisdiction on courts of 
competent jurisdiction and provides a time limit for civil actions for 
violations of subpart D.

                      D. 229.56(d) Notice of Claims

    1. This paragraph is designed to adopt the notice of claim 
provisions of U.C.C. 4-207(d) and 4-208(e), with an added provision that 
a timely Sec. 229.54 expedited recredit claim satisfies the generally-
applicable notice requirement. The time limit described in this 
paragraph applies only to notices of warranty and indemnity claims. As 
provided in Sec. 229.56(c), all actions under Sec. 229.56 must be 
brought within one year of the date that the cause of action accrues.

                        XXXVI. Consumer Awareness

         A. 229.57(a) General Disclosure Requirement and Content

    1. A bank must provide the disclosure required by Sec. 229.57 under 
two circumstances. First, each bank must provide the disclosure to each 
of its consumer customers who receives paid checks with his or her 
account statement. This requirement does not apply if the bank provides 
with the account statement something other than paid original checks, 
paid substitute checks, or a combination thereof. For example, this 
requirement would not apply if a bank provided with the account 
statement only a document that contained multiple check images per page. 
Second, a bank also must provide the disclosure when it (a) provides a 
substitute check to a consumer in response to that consumer's request 
for a check or check copy or (b) returns a substitute check to a 
consumer depositor. A bank must provide the disclosure each time it 
provides a substitute check to a consumer on an occasional basis, 
regardless of whether the bank previously provided the disclosure to 
that consumer.
    2. A bank may, but is not required to, use the model disclosure in 
appendix C-5A to satisfy the disclosure content requirements of this 
section. A bank that uses the model language is deemed to comply with 
the disclosure content requirement(s) for which it uses the model 
language, provided the information in the disclosure accurately 
describes

[[Page 764]]

the bank's policies and practices. A bank also may include in its 
disclosure additional information relating to substitute checks that is 
not required by this section.
    3. A bank may, by agreement or at the consumer's request, provide 
the disclosure required by this section in a language other than 
English, provided that the bank makes a complete English notice 
available at the consumer's request.

                        B. 229.57(b) Distribution

    1. A consumer may request a check or a copy of a check on an 
occasional basis, such as to prove that he or she made a particular 
payment. A bank that responds to the consumer's request by providing a 
substitute check must provide the required disclosure at the time of the 
consumer's request if feasible. Otherwise, the bank must provide the 
disclosure no later than the time at which the bank provides a 
substitute check in response to the consumer's request. It would not be 
feasible for a bank to provide notice to the consumer at the time of the 
request if, for example, the bank did not know at the time of the 
request whether it would provide a substitute check in response to that 
request, regardless of the form of the consumer's request. It also would 
not be feasible for a bank to provide notice at the time of the request 
if the consumer's request was mailed to the bank or made by telephone, 
even if the bank knew when it received the request that it would provide 
a substitute check in response. A bank's provision to the consumer of 
something other a substitute check, such as a photocopy of a check or a 
statement containing images of multiple substitute checks per page, does 
not trigger the notice requirement.
    2. A consumer who does not routinely receive paid checks might 
receive a returned substitute check. For example, a consumer deposits an 
original check that is payable to him or her into his or her deposit 
account. The paying bank returns the check unpaid and the depositary 
bank returns the check to the depositor in the form of a substitute 
check. A depositary bank that provides a returned substitute check to a 
consumer depositor must provide the substitute check disclosure at that 
time.

                     XXXVII. Variation by Agreement

    Section 229.60 provides that banks involved in an interbank 
expedited recredit claim under Sec. 229.55 may vary the terms of that 
section by agreement, but otherwise no person may vary the terms of 
subpart D by agreement. A bank's decision to provide more generous 
protections for consumers than this subpart requires, such as by 
providing consumers additional time to submit expedited claims under 
Sec. 229.54 under non-exigent circumstances, would not be a variation 
prohibited by Sec. 229.60.

XXXVIII. Appendix C--Model Availability Policy Disclosures, Clauses, and 
    Notices; and Model Substitute Check Policy Disclosure and Notices

                             A. Introduction

    1. Appendix C contains model disclosure, clauses, and notices that 
may be used by banks to meet their disclosure and notice 
responsibilities under the regulation. Banks using the models (except 
models C-22 through C-25) properly will be deemed in compliance with the 
regulation's disclosure requirements.
    2. Information that must be inserted by a bank using the models is 
italicized within parentheses in the text of the models. Optional 
information is enclosed in brackets.
    3. Banks may make certain changes to the format or content of the 
models, including deleting material that is inapplicable, without losing 
the EFA Act's protection from liability for banks that use the models 
properly. For example, if a bank does not have a cut-off hour prior to 
it's closing time, or if a bank does not take advantage of the Sec. 
229.13 exceptions, it may delete the references to those provisions. 
Changes to the models may not be so extensive as to affect the 
substance, clarity, or meaningful sequence of the models. Acceptable 
changes include, for example:
    a. Using ``customer'' and ``bank'' instead of pronouns.
    b. Changing the typeface or size.
    c. Incorporating certain state law ``plain English'' requirements.
    4. Shorter time periods for availability may always be substituted 
for time periods used in the models.
    5. Banks may also add related information. For example, a bank may 
indicate that although funds have been made available to a customer and 
the customer has withdrawn them, the customer is still responsible for 
problems with the deposit, such as checks that were deposited being 
returned unpaid. Or a bank could include a telephone number to be used 
if a customer has an inquiry regarding a deposit.
    6. Banks are cautioned against using the models without reviewing 
their own policies and practices, as well as state and federal laws 
regarding the time periods for availability of specific types of checks. 
A bank using the models will be in compliance with the EFA Act and the 
regulation only if the bank's disclosures correspond to its availability 
policy.
    7. Banks that have used earlier versions of the models (such as 
those models that gave Social Security benefits and payroll payments as 
examples of preauthorized credits available the day after deposit, or 
that did

[[Page 765]]

not address the cash withdrawal limitation) are protected from civil 
liability under Sec. 229.21(e). Banks are encouraged, however, to use 
current versions of the models when reordering or reprinting supplies.

 B. Model Availability Policy and Substitute Check Policy Disclosures, 
                         Models C-1 through C-5A

    1. Models C-1 through C-5 generally.
    a. Models C-1 through C-5A are models for the availability policy 
disclosures described in Sec. 229.16 and substitute check policy 
disclosure described in Sec. 229.57. The models accommodate a variety 
of availability policies, ranging from next-day availability to holds to 
statutory limits on all deposits. Model C-3 reflects the additional 
disclosures discussed in Sec. Sec. 229.16 (b) and (c) for banks that 
have a policy of extending availability times on a case-by-case basis.
    b. As already noted, there are several places in the models where 
information must be inserted. This information includes the bank's cut-
off times, limitations relating to next-day availability, and the first 
four digits of routing numbers for local banks. In disclosing when funds 
will be available for withdrawal, the bank must insert the ordinal 
number (such as first, second, etc.) of the business day after deposit 
that the funds will become available.
    c. Models C-1 through C-5A generally do not reflect any optional 
provisions of the regulation, or those that apply only to certain banks. 
Instead, disclosures for these provisions are included in Models C-6 
through C-11A. A bank using one of the model availability policy 
disclosures should also consider whether it must incorporate one or more 
of Models C-6 through C-11A.
    d. While Sec. 229.10(b) requires next-day availability for 
electronic payments, Treasury regulations (31 CFR part 210) and ACH 
association rules require that preauthorized credits (''direct 
deposits'') be made available on the day the bank receives the funds. 
Models C-1 through C-5 reflect these rules. Wire transfers, however, are 
not governed by Treasury or ACH rules, but banks generally make funds 
from wire transfers available on the day received or on the business day 
following receipt. Banks should ensure that their disclosures reflect 
the availability given in most cases for wire transfers.
    2. Model C-1 Next-day availability. A bank may use this model when 
its policy is to make funds from all deposits available on the first 
business day after a deposit is made. This model may also be used by 
banks that provide immediate availability by substituting the word 
``immediately'' in place of ``on the first business day after the day we 
receive your deposit.''
    3. Model C-2 Next-day availability and Sec. 229.13 exceptions. A 
bank may use this model when its policy is to make funds from all 
deposits available to its customers on the first business day after the 
deposit is made, and to reserve the right to invoke the new account and 
other exceptions in Sec. 229.13. In disclosing that a longer delay may 
apply, a bank may disclose when funds will generally be available based 
on when the funds would be available if the deposit were of a nonlocal 
check.
    4. Model C-3 Next-day availability, case-by-case holds to statutory 
limits, and Sec. 229.13 exceptions. A bank may use this model when its 
policy, in most cases, is to make funds from all types of deposits 
available the day after the deposit is made, but to delay availability 
on some deposits on a case-by-case basis up to the maximum time periods 
allowed under the regulation. A bank using this model also reserves the 
right to invoke the exceptions listed in Sec. 229.13. In disclosing 
that a longer delay may apply, a bank may disclose when funds will 
generally be available based on when the funds would be available if the 
deposit were of a nonlocal check.
    5. Model C-4 Holds to statutory limits on all deposits. A bank may 
use this model when its policy is to impose delays to the full extent 
allowed under Sec. 229.12 and to reserve the right to invoke the Sec. 
229.13 exceptions. In disclosing that a longer delay may apply, a bank 
may disclose when funds will generally be available based on when the 
funds would be available if the deposit were of a nonlocal check. Model 
C-4 uses a chart to show the bank's availability policy for local and 
nonlocal checks and Model C-5 uses a narrative description.
    6. Model C-5 Holds to statutory limits on all deposits. A bank may 
use this model when its policy is to impose delays to the full extent 
allowed under Sec. 229.12 and to reserve the right to invoke the Sec. 
229.13 exceptions. In disclosing that a longer delay may apply, a bank 
may disclose when funds will generally be available based on when the 
funds would be available if the deposit were of a nonlocal check.
    7. Model C-5A A bank may use this form when it is providing the 
disclosure to its consumers required by Sec. 229.57 explaining that a 
substitute check is the legal equivalent of an original check and the 
circumstances under which the consumer may make a claim for expedited 
recredit.

               C. Model Clauses, Models C-6 Through C-11A

    1. Models C-6 through C-11A generally. Certain clauses like those in 
the models must be incorporated into a bank's availability policy 
disclosure under certain circumstances. The commentary to each clause 
indicates when a clause similar to the model clause is required.
    2. Model C-6 Holds on other funds (check cashing). A bank that 
reserves the right to place a hold on funds already on deposit

[[Page 766]]

when it cashes a check for a customer, as addressed in Sec. 229.19(e), 
must incorporate this type of clause in its availability policy 
disclosure.
    3. Model C-7 Holds on other funds (other account). A bank that 
reserves the right to place a hold on funds in an account of the 
customer other than the account into which the deposit is made, as 
addressed in Sec. 229.19(e), must incorporate this type of clause in 
its availability policy disclosure.
    4. Model C-8 Appendix B availability (nonlocal checks). A bank in a 
check processing region where the availability schedules for certain 
nonlocal checks have been reduced, as described in appendix B of 
Regulation CC, must incorporate this type of clause in its availability 
policy disclosure. Banks using Model C-5 may insert this clause at the 
conclusion of the discussion titled ``Nonlocal checks.''
    5. Model C-9 Automated teller machine deposits (extended holds). A 
bank that reserves the right to delay availability of deposits at 
nonproprietary ATMs until the fifth business day following the date of 
deposit, as permitted by Sec. 229.12(f), must incorporate this type of 
clause in its availability policy disclosure. A bank must choose among 
the alternative language based on how it chooses to differentiate 
between proprietary and nonproprietary ATMs, as required under Sec. 
229.16(b)(5).
    6. Model C-10 Cash withdrawal limitation. A bank that imposes cash 
withdrawal limitations under Sec. 229.12 must incorporate this type of 
clause in its availability policy disclosure. Banks reserving the right 
to impose the cash withdrawal limitation and using Model C-3 should 
disclose that funds may not be available until the sixth (rather than 
fifth) business day in the first paragraph under the heading ``Longer 
Delays May Apply.''
    7. Model C-11 Credit union interest payment policy. A credit union 
subject to the notice requirement of Sec. 229.14(b)(2) must incorporate 
this type of clause in its availability policy disclosure. This model 
clause is only an example of a hypothetical policy. Credit unions may 
follow any policy for accrual provided the method of accruing interest 
is the same for cash and check deposits.
    8. Model C-11A Availability of funds deposited at other locations. A 
clause similar to Model C-11A should be used if a bank bases the 
availability of funds on the location where the funds are deposited (for 
example, at a contractual or other branch located in a different check 
processing region). Similarly, a clause similar to Model C-11A should be 
used if a bank distinguishes between local and non-local checks (for 
example, a bank using model availability policy disclosure C-4 or C-5), 
and accepts deposits in more than one check processing region.

               D. Model Notices, Models C-12 through C-25

    1. Models C-12 through C-25 generally. Models C-12 through C-25 
provide models of the various notices required by the regulation. A bank 
that cashes a check and places a hold on funds in an account of the 
customer (see Sec. 229.19(e)) should modify the model hold notice 
accordingly. For example, the bank could replace the word ``deposit'' 
with the word ``transaction'' and could add the phrase ``or cashed'' 
after the word ``deposited.''
    2. Model C-12 Exception hold notice. This model satisfies the 
written notice required under Sec. 229.13(g) when a bank places a hold 
based on a Sec. 229.13 exception. If a hold is being placed on more 
than one check in a deposit, each check need not be described, but if 
different reasons apply, each reason must be indicated. A bank may use 
the actual date when funds will be available for withdrawal rather than 
the number of the business day following the day of deposit. A bank must 
incorporate in the notice the material set out in brackets if it imposes 
overdraft or returned check fees after invoking the reasonable cause 
exception under Sec. 229.13(e).
    3. Model C-13 Reasonable cause hold notice. This notice satisfies 
the written notice required under Sec. 229.13(g) when a bank invokes 
the reasonable cause exception under Sec. 229.13(e). The notice 
provides the bank with a list of specific reasons that may be given for 
invoking the exception. If a hold is being placed on more than one check 
in a deposit, each check must be described separately, and if different 
reasons apply, each reason must be indicated. A bank may disclose its 
reason for doubting collectibility by checking the appropriate reason on 
the model. If the ``Other'' category is checked, the reason must be 
given. A bank may use the actual date when funds will be available for 
withdrawal rather than the number of the business day following the day 
of deposit. A bank must incorporate in the notice the material set out 
in brackets if it imposes overdraft or returned check fees after 
invoking the reasonable cause exception under Sec. 229.13(e).
    4. Model C-14 One-time notice for large deposit and redeposited 
check exception holds. This model satisfies the notice requirements of 
Sec. 229.13(g)(2) concerning nonconsumer accounts.
    5. Model C-15 One-time notice for repeated overdraft exception hold. 
This model satisfies the notice requirements of Sec. 229.13(g)(3).
    6. Model C-16 Case-by-case hold notice. This model satisfies the 
notice required under Sec. 229.16(c)(2) when a bank with a case-by-case 
hold policy imposes a hold on a deposit. This notice does not require a 
statement of the specific reason for the hold, as is the case when a 
Sec. 229.13 exception hold is placed. A bank may specify the actual 
date when funds will be available for withdrawal rather than the number 
of the business day following the

[[Page 767]]

day of deposit when funds will be available. A bank must incorporate in 
the notice the material set out in brackets if it imposes overdraft fees 
after invoking a case-by-case hold.
    7. Model C-17 Notice at locations where employees accept consumer 
deposits and Model C-18 Notice at locations where employees accept 
consumer deposits (case-by-case holds). These models satisfy the notice 
requirement of Sec. 229.18(b). Model C-17 reflects an availability 
policy of holds to statutory limits on all deposits, and Model C-18 
reflects a case-by-case availability policy.
    8. Model C-19 Notice at automated teller machines. This model 
satisfies the ATM notice requirement of Sec. 229.18(c)(1).
    9. Model C-20 Notice at automated teller machines (delayed receipt). 
This model satisfies the ATM notice requirement of Sec. 229.18(c)(2) 
when receipt of deposits at off-premises ATMs is delayed under Sec. 
229.19(a)(4). It is based on collection of deposits once a week. If 
collections occur more or less frequently, the description of when 
deposits are received must be adjusted accordingly.
    10. Model C-21 Deposit slip notice. This model satisfies the notice 
requirements of Sec. 229.18(a) for deposit slips.
    11. Models C-22 through C-25 generally. Models C-22 through C-25 
provide models for the various notices required when a consumer who 
receives substitute checks makes an expedited recredit claim under Sec. 
229.54 for a loss related to a substitute check. The Check 21 Act does 
not provide banks that use these models with a safe harbor. However, the 
Board has published these models to aid banks' efforts to comply with 
Sec. 229.54(e).
    12. Model C-22 Valid Claim Refund Notice. A bank may use this model 
when crediting the entire amount or the remaining amount of a consumer's 
expedited recredit claim after determining that the consumer's claim is 
valid. This notice could be used when the bank provides the consumer a 
full recredit based on a valid claim determination within ten days of 
the receipt of the consumer's claim or when the bank recredits the 
remaining amount of a consumer's expedited recredit claim by the 45th 
calendar day after receiving the consumer's claim, as required under 
Sec. 229.54(e)(1).
    13. Model C-23 Provisional Refund Notice. A bank may use this model 
when providing a full or partial expedited recredit to a consumer 
pending further investigation of the consumer's claim, as required under 
Sec. 229.54(e)(1).
    14. Model C-24 Denial Notice. A bank may use this model when denying 
a claim for an expedited recredit under Sec. 229.54(e)(2).
    15. Model C-25 Reversal Notice. A bank may use this model when 
reversing an expedited recredit that was credited to a consumer's 
account under Sec. 229.54(e)(3).

[Reg. CC, 60 FR 51672, Oct. 3, 1995, as amended by Reg. CC, 62 FR 13816, 
Mar. 24, 1997; 64 FR 59613, Nov. 3, 1999; 68 FR 52078, Sept. 2, 2003; 68 
FR 53672, Sept. 12, 2003; 69 FR 47317-47328, Aug. 4, 2004; 70 FR 71225, 
Nov. 28, 2005]



Sec. Appendix F to Part 229--Official Board Interpretations; Preemption 

                             Determinations

                Uniform Commercial Code, Section 4-213(5)

    Section 4-213(5) of the Uniform Commercial Code (``U.C.C.'') 
provides that money deposited in a bank is available for withdrawal as 
of right at the opening of business of the banking day after deposit. 
Although the language ``deposited in a bank'' is unclear, arguably it is 
broader than the language ``made in person to an employee of the 
depositary bank'', which conditions the next-day availability of cash 
under Regulation CC (Sec. 229.10(a)(1)). Under Regulation CC, deposits 
of cash that are not made in person to an employee of the depositary 
bank must be made available by the second business day after the banking 
day of deposit (Sec. 229.10(a)(2)). Therefore, this provision of the 
U.C.C. may call for the availability of certain cash deposits in a 
shorter time than provided in Regulation CC.
    This provision of the U.C.C., however, is subject to Section 4-
103(1), which provides, in part, that ``the effect of the provisions of 
this Article may be varied by agreement * * *.'' (The Regulation CC 
funds availability requirements may not be varied by agreement.) U.C.C. 
Section 4-213(5) supersedes the Regulation CC provision in Sec. 
229.10(a)(2), but a depositary bank may not agree with its customer 
under section 4-103(1) of the Code to extend availability beyond the 
time periods provided in Sec. 229.10(a) of Regulation CC.

                               California

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC preempt the provisions of 
California law concerning availability of funds. This preemption 
determination specifies those provisions of the California funds 
availability law that supersede the Act and Regulation CC. (See also the 
Board's preemption determination regarding the Uniform Commercial Code, 
section 4-213(5), pertaining to availability of cash deposits.)
    California has four separate sets of regulations establishing 
maximum availability

[[Page 768]]

schedules. The regulations applicable to commercial banks and branches 
of foreign banks located in California (Cal. Admin. Code tit. 10, 
Sec. Sec. 10.190401-10.190402) were promulgated by the Superintendent 
of Banks. The regulations applicable to savings banks and savings and 
loan associations (Cal. Admin. Code tit. 10, Sec. Sec. 106.200-106.202) 
were adopted by the Savings and Loan Commissioner. The regulations 
applicable to credit unions (Cal. Admin. Code tit. 10, section 901) and 
to industrial loan companies (Cal. Admin. Code tit. 10, section 1101) 
were adopted by the Commissioner of Corporations.
    All the regulations were adopted pursuant to California Financial 
Code section 866.5 and California Commercial Code section 4213(4)(a), 
under which the appropriate state regulatory agency for each depository 
institution must issue administrative regulations to define a reasonable 
time for permitting customers to draw on items received for deposit in 
the customer's account. California Financial Code section 867 also 
establishes availability periods for funds deposited by cashier's check, 
certified check, teller's check, or depository check under certain 
circumstances. Finally, California Financial Code section 866.2 
establishes disclosure requirements.
    The Board's determination with respect to these California laws and 
regulations governing the funds availability requirements applicable to 
depository institutions in California are as follows.

             Commercial Banks and Branches of Foreign Banks

                                Coverage

    The California State Banking Department regulations, which apply to 
California state commercial banks, California national banks, and 
California branch offices of foreign banks, provide that a depositary 
bank shall make funds deposited into a deposit account available for 
withdrawal as provided in Regulation CC with certain exceptions. The 
funds availability schedules in Regulation CC apply only to accounts as 
defined in Regulation CC, which generally consist of transaction 
accounts. The California funds availability law and regulations apply to 
accounts as defined by Regulation CC as well as savings accounts (other 
than time accounts), as defined in the Board's Regulation D (12 CFR 
204.2(d)). (Note, however, that under Sec. 229.19(e) of Regulation CC, 
Holds on other funds, the federal availability schedules may apply to 
savings, time, and other accounts not defined as accounts under 
Regulation CC in certain circumstances.)

                         Availability Schedules

    Temporary schedule. Regulation CC provides that, until September 1, 
1990, nonlocal checks must be made available for withdrawal by the 
seventh business day after the banking day of deposit, except for 
certain nonlocal checks listed in appendix B-1, which must be made 
available within a shorter time (by the fifth business day following 
deposit for those California checks listed). Under the temporary 
schedule in the California regulations, a depositary bank with a four-
digit routing symbol of 1210 (``1210 bank'') or of 1220 (``1220 bank'') 
that receives for deposit a check drawn on a nonlocal, in-state 
commercial bank or foreign bank branch \1\ must make the funds available 
for withdrawal by the fourth business day after the day of deposit. The 
California regulations provide that 1210 and 1220 banks must make 
deposited checks drawn on nonlocal in-state thrifts (defined as savings 
and loan associations, savings banks, and credit unions) available by 
the fifth business day after deposit. In addition, California law 
provides that all other depositary banks must make deposited checks 
drawn on a nonlocal in-state commercial bank or foreign bank branch 
available by the fifth business day after deposit and checks drawn on 
nonlocal in-state thrifts available by the sixth business day after 
deposit. To the extent that these schedules provide for shorter holds 
than Regulation CC and its appendix B-1, the state schedules supersede 
the federal schedules.\2\ For example, the California four-day schedule 
that applies to checks drawn on in-state nonlocal commercial banks or 
foreign bank branches and deposited in a 1210 or 1220 bank would be 
shorter than and would supersede the federal schedules.
---------------------------------------------------------------------------

    \1\ The California regulation uses the term paying bank when 
describing the institution on which these checks are drawn, but does not 
define paying bank or bank. Regulation CC's definitions of paying bank 
and bank include savings institutions and credit unions as well as 
commercial banks and branches of foreign banks. However, because the 
California regulation makes separate provisions for checks drawn on 
savings institutions and credit unions, the Board concludes that the 
term paying bank, as used in the California regulation, includes only 
commercial banks and foreign bank branches.
    \2\ Appendix B-1 of Regulation CC provides that the federal 
schedules will be the same as the California schedules (5 days) in the 
following cases: A depositary bank bearing a 1210 routing number 
receiving for deposit checks bearing a 3220 or a 3223 routing number, 
and a depositary bank bearing a 1220 routing number receiving for 
deposit checks bearing a 3210 routing number. In the cases where federal 
and state law are the same, the state law is not preempted by, nor does 
it supersede, the federal law.

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

[[Page 769]]

    The California regulations do not specify whether the state 
schedules apply to deposits of checks at nonproprietary ATMs. Under the 
temporary schedules in Regulation CC, deposits at nonproprietary ATMs 
must be made available for withdrawal by the seventh business day 
following deposit. To the extent that the California schedules provide 
for shorter availability for deposits at nonproprietary ATMs, they would 
supersede the temporary schedule in Regulation CC for deposits at 
nonproprietary ATMs specified in Sec. 229.11(d).
    Permanent schedule. Regulation CC provides that, as of September 1, 
1990, nonlocal checks must be made available for withdrawal by the fifth 
business day after the banking day of deposit. Under the permanent 
schedule in the California regulations, a depositary bank with a four-
digit routing symbol of 1210 or of 1220 that receives for deposit a 
check drawn on a nonlocal, in-state commercial bank or foreign bank 
branch must make the funds available for withdrawal by the fourth 
business day after the day of deposit. These state schedules provide for 
shorter hold periods than and thus supersede the federal schedules.
    Second-day availability. Section 867 of the California Financial 
Code requires depository institutions to make funds deposited by 
cashier's check, teller's check, certified check, or depository check 
available for withdrawal on the second business day following deposit, 
if certain conditions are met. The Regulation CC next-day availability 
requirement for cashier's checks and teller's checks applies only to 
those checks issued to a customer of the bank or acquired from the bank 
for remittance purposes. To the extent that the state second-day 
availability requirement applies to cashier's and teller's checks issued 
to a non-customer of the bank for other than remittance purposes, the 
state two-day requirement supersedes the federal local and nonlocal 
schedules.
    Availability at start of day. The California regulations do not 
specify when during the day funds must be made available for withdrawal. 
Section 229.19(b) of Regulation CC provides that funds must be made 
available at the start of the business day. In those cases where federal 
and state law provide for holds for the same number of days, to the 
extent that the California regulations allow funds to be made available 
later in the day than does Regulation CC, the federal law would preempt 
state law.
    Exceptions to the availability schedules. Under the state preemption 
standards of Regulation CC (see Sec. 229.20(c) and accompanying 
Commentary), for deposits subject to the state availability schedules, a 
state exception may be used to extend the state availability schedule up 
to the federal availability schedule. Once the deposit is held up to the 
federal availability schedule limit under a state exception, the 
depositary bank may further extend the hold under any federal exception 
that can be applied to the deposit. If no state exceptions exist, then 
no exceptions holds may be placed on deposits covered by state 
schedules. Thus, to the extent that California law provides for 
exceptions to the California schedules that supersede Regulation CC, 
those exceptions may be applied in order to extend the state 
availability schedules up to the federal availability schedules or such 
later time as is permitted by a federal exception.

                               Disclosures

    California law (Cal. Fin. Code Sec. 866.2) requires depository 
institutions to provide written disclosures of their general 
availability policies to potential customers prior to opening any 
deposit account. The law also requires that preprinted deposit slips and 
ATM deposit envelopes contain a conspicuous summary of the general 
policy. Finally, the law requires depository institutions to provide 
specific notice of the time the customer may withdraw funds deposited by 
check or similar instrument into a deposit account if the funds are not 
available for immediate withdrawal.
    Section 229.20(c)(2) of Regulation CC provides that inconsistency 
may exist when a state law provides for disclosures or notices 
concerning funds availability relating to accounts. California Financial 
Code Sec. 866.2 requires disclosures that differ from those required by 
Regulation CC and, therefore, is preempted to the extent that it applies 
to accounts as defined in Regulation CC. The state law continues to 
apply to savings accounts and other accounts not governed by Regulation 
CC disclosure requirements.

                          Savings Institutions

                                Coverage

    The California Department of Savings and Loan regulations, which 
apply to California savings and loan associations and California savings 
banks, provide that a depositary bank shall make funds deposited into a 
transaction or non-transaction account available for withdrawal as 
provided in Regulation CC. The funds availability schedules in 
Regulation CC apply only to accounts as defined in Regulation CC, which 
generally consist of transaction accounts. The California funds 
availability law and regulations apply to accounts as defined by 
Regulation CC as well as savings accounts as defined in the Board's 
Regulation D (12 CFR 204.2(d)). (Note, however, that under Sec. 
229.19(e) of Regulation CC, Holds on other funds, the federal 
availability schedules may apply to savings, time, and other accounts 
not defined as accounts under Regulation CC in certain circumstances.)

[[Page 770]]

                         Availability Schedules

    Second-day availability. Section 867 of the California Financial 
Code requires depository institutions to make funds deposited by 
cashier's check, teller's check, certified check, or depository check 
available for withdrawal on the second business day following deposit, 
if certain conditions are met. The Regulation CC next-day availability 
requirement for cashier's checks and teller's checks applies only to 
those checks issued to a customer of the bank or acquired from the bank 
for remittance purposes. To the extent that the state second-day 
availability requirement applies to cashier's and teller's checks issued 
to a non-customer of the bank for other than remittance purposes, the 
state two-day requirement supersedes the federal local and nonlocal 
schedules.
    Temporary and permanent schedules. Other than the provisions of 
Section 867 discussed above, California law incorporates the Regulation 
CC availability requirements with respect to deposits to accounts 
covered by Regulation CC. Because the state requirements are consistent 
with the federal requirements, the California regulation is not 
preempted by, nor does it supersede, the federal law.

                               Disclosures

    California law (Cal. Fin. Code Sec. 866.2) requires depository 
institutions to provide written disclosures of their general 
availability policies to potential customers prior to opening any 
deposit account. The law also requires that preprinted deposit slips and 
ATM deposit envelopes contain a conspicuous summary of the general 
policy. Finally, the law requires depository institutions to provide 
specific notice of the time the customer may withdraw funds deposited by 
check or similar instrument into a deposit account if the funds are not 
available for immediate withdrawal. Section 229.20(c)(2) of Regulation 
CC provides that inconsistency may exist when a state law provides for 
disclosures or notices concerning funds availability relating to 
accounts. To the extent that California Financial Code Sec. 866.2 
requires disclosures that differ from those required by Regulation CC 
and apply to accounts as defined in Regulation CC (generally, 
transaction accounts), the California law is preempted by Regulation CC.
    The Department of Savings and Loan regulations provide that for 
those non-transaction accounts covered by state law but not by federal 
law, disclosures in accordance with Regulation CC will be deemed to 
comply with the state law disclosure requirements. To the extent that 
the Department of Savings and Loan regulations permit reliance on 
Regulation CC disclosures for transaction accounts and to the extent the 
state regulations survive the preemption of California Financial Code 
Sec. 866.2, they are not preempted by, nor do they supersede, the 
federal law. The state law continues to apply to savings accounts and 
other non-transaction accounts not governed by Regulation CC disclosure 
requirements.

               Credit Unions and Industrial Loan Companies

    Each credit union and federally-insured industrial loan company that 
maintains an office in California for the acceptance of deposits must 
make funds deposited by check available for withdrawal in accordance 
with the following table:

------------------------------------------------------------------------
                                                Availability
                                   -------------------------------------
                                                        Industrial Loan
                                       Credit Union         Company
------------------------------------------------------------------------
$100 or less checks; U.S. Treasury  1st day..........  1st day
 checks; state/local gov't checks.
On us checks; cashier's/certifies/  2nd day..........  2nd day
 teller's/depository checks.
In-state checks...................  6th day..........  6th day
out-of-state checks...............  10th day.........  12th day
------------------------------------------------------------------------
Note: These time periods are stated in terms of availability for
  withdrawal not later than the Xth business day following the banking
  day of deposit to facilitate comparison with Regulation CC. State
  regulations are stated in terms of availability at the start of the
  business day subsequent to the number of days specified in the
  regulation.

                                Coverage

    The California law and regulations govern the availability of funds 
to ``demand deposits, negotiable order of withdrawal draft accounts, 
savings deposits subject to automatic transfers, share draft accounts, 
and all savings deposits and share accounts, other than time deposits.'' 
(California Financial Code section 886(b)) The federal preemption of 
state funds availability laws only applies to accounts subject to 
Regulation CC, which generally includes transaction accounts. Thus, the 
California funds availability regulations continue to apply to deposits 
in savings and other accounts (such as accounts in which the account-
holder is another bank) that are no accounts under Regulation CC. (Note, 
however, that under Sec. 229.19(e) of Regulation CC, Holds on other 
funds, the federal availability schedules may apply to savings, time, 
and other accounts not defined as accounts under Regulation CC in 
certain circumstances.)
    The California law applies to any Item (California Financial Code 
section 866.5 and California Commercial Code section 4213(4)(a)). The 
California Commercial Code defines item to mean any instrument for the 
payment of money even though it is not negotiable * * * (Cal. Com. Code 
section 4104(g)). This term is broader in scope than the definition of 
check in the Act and Regulation CC. The Commissioner's regulations, 
however,

[[Page 771]]

define the term item to include checks, negotiable orders of withdrawal, 
share drafts, warrants, and money orders. As limited by the state 
regulations, the state law applies only to instruments that are also 
checks as defined in Sec. 229.2(k) of Regulation CC.

                         Availability Schedules

    Temporary schedule. The California regulations provide that in-state 
nonlocal checks must be made available for withdrawal not later than the 
sixth business day following deposit. This time period is shorter than 
the seventh business day availability required for nonlocal checks under 
Sec. 229.11(c) of Regulation CC, although it is not shorter than the 
schedules for nonlocal checks set forth in Sec. 229.11(c)(2) and 
appendix B-1 of Regulation CC. Thus, the state scheduled for in-state 
nonlocal checks supersede the federal schedule to the extent that they 
apply to an item payable by a California institution that is defined as 
a nonlocal check under Regulation CC, and is not subject to reduced 
schedules under Sec. 229.11(c)(2) and appendix B-1.
    Under the California regulations, credit unions and industrial loan 
companies must provide next-day availability to first-indorsed items 
issued by any federally-insured institution. This regulatory 
requirement, however, has been superseded by section 867 of the 
California Financial Code, which requires depository institutions to 
make funds deposited by cashier's check, teller's check, certified 
checks, or depository check available for withdrawal on the second 
business day following deposit, if certain conditions are met. This 
requirement became effective January 1, 1988.
    The Regulation CC next-day availability requirement for cashier's 
checks and teller's checks applies only to those checks issued for 
remittance purposes. To the extent that the state second business day 
availability requirement applies to cashier's and teller's checks issued 
for other than remittance purposes, the state two-day requirement 
supersedes the federal local and nonlocal schedules.
    The California regulations do not specify whether they apply to 
deposits of checks at nonproprietary ATMs. Under the temporary schedule 
in Regulation CC, deposits at nonproprietary ATMs must be made available 
for withdrawal at the start of the seventh business day after deposit. 
To the extent that the California schedules provide for shorter 
availability for deposits at nonproprietary ATMs, they would supersede 
the temporary schedule in Regulation CC for deposits at nonproprietary 
ATMs specified in Sec. 229.11(d).
    Permanent schedule. Under the California regulations, credit unions 
and industrial loan companies must provide next-day availability to 
first-indorsed items issued by any federally-insured institution. This 
regulatory requirement, however, has been superseded by section 867 of 
the California Financial Code, which requires depository institutions to 
make funds deposited by cashier's check, teller's check, certified 
check, or depository check available for withdrawal on the second 
business day following deposit, if certain conditions are met. This 
requirement became effective January 1, 1988.
    The Regulation CC next-day availability requirement for cashier's 
and teller's checks applies only to those checks issued for remittance 
purposes. To the extent that the state second business day availability 
requirement applies to cashier's and teller's checks issued for other 
than remittance purposes, the state two-day requirement supersedes the 
federal local and nonlocal schedules.
    Next-day availability. Credit unions and industrial loan companies 
in California are required to give next-day availability to items drawn 
by the State of California or any of its departments, agencies, or 
political subdivisions. California law supersedes the fedeal law in that 
the state law does not condition next-day availability on receipt at a 
staffed teller station or use of a special deposit slip.
    California credit unions and industrial loan companies must provide 
second business day availability to checks drawn on the depositary bank. 
Regulation CC requires next-day availability for checks deposited in a 
branch of the depositary bank and drawn on the same or another branch of 
the same bank if both branches are located in the same state or the same 
check processing region. Thus, generally, the Regulation CC rule for 
availability of on us checks preempts the California regulations. To the 
extent, however, that an on us check is (1) drawn on an out-of-state 
branch of the depositary bank that is not in the same check processing 
region as the branch in which it was deposited, or (2) deposited at an 
off-premises ATM or another facility of the depositary bank that is not 
considered a branch under federal law, the state regulation supersedes 
the Regulation CC availability requirements.
    Exceptions to the availability schedules. California law provides 
exceptions to the state availability schedules for large deposits, new 
accounts, repeated overdrafters, doubtful collectibility, foreign items, 
and emergency conditions. In all cases where the federal availability 
schedule preempts the state schedule, only the federal exceptions will 
apply. For deposits that are covered by the state availability schedule 
(e.g., in-state nonlocal checks under the temporary schedule; cashier's 
or teller's checks that are not deposited with a special deposit slip or 
at a staff teller station), the state exceptions may be used to extend 
the state availability schedule up to the federal availability schedule. 
Once the deposit is held up to the federal availability limit under a 
state exception, the depositary bank may further extend the

[[Page 772]]

hold under any federal exception that can be applied to the deposit. Any 
time a depositary bank invokes an exception to extend a hold beyond the 
time periods otherwise permitted by law, it must give notice of the 
extended hold to its customer in accordance with Sec. 229.13(g) of 
Regulation CC.
    Business day/banking day. The definitions of business day and 
banking day in the California regulations are preempted by the 
Regulation CC definition of those terms. Thus, for determining the 
permissible hold under the California schedules that supersede the 
Regulation CC schedule, deposits are considered made on the specified 
number of business days following the banking day of deposit.

                               Disclosures

    California law (Cal. Fin. Code section 866.2) requires depository 
institutions to provide written disclosures of their general 
availability policies to potential customers prior to opening any 
deposit account. The law also requires that preprinted deposit slips and 
ATM deposit envelopes contain a conspicuous summary of the general 
policy. Finally, the law requires a depository institution to provide 
specific notice of the time the customer may withdraw funds deposited by 
check or similar instrument into a deposit account if the funds are not 
available for immediate withdrawal.
    Section 229.20(c)(2) of Regulation CC provides that inconsistency 
may exist when a state law provides for disclosures or notices 
concerning funds availability relating to accounts. California Financial 
Code section 866.2 requires disclosures that differ from those required 
by Regulation CC, and therefore is preempted to the extent that it 
applies to accounts as defined in Regulation CC. The state law continues 
to apply to savings accounts and other accounts not governed by 
Regulation CC disclosure requirements.

                               Connecticut

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt provisions of 
Connecticut law relating to the availability of funds. This preemption 
determination specifies those provisions of the Connecticut funds 
availability law that supersede the Act and Regulation CC. (See also the 
Board's preemption determination regarding the Uniform Commercial Code, 
section 4-213(5), pertaining to availability of cash deposits.)
    In 1987, Connecticut amended its statute governing funds 
availability (Conn. Gen. Stat. section 36-9v), which requires 
Connecticut depository institutions to make funds deposited in a 
checking, time, interest, or savings account available for withdrawal 
with specified periods.
    Generally, the Connecticut statute, as amended, provides that items 
deposited in a checking, time, interest, or savings account at a 
depository institution must be available for withdrawal in accordance 
with the following table:

 
                                                     Availability
 
On us checks...............................  2nd day
In-state checks............................  4th day
Out-of-state checks........................  6th day
 

    Exceptions to the schedules are provided for items received for 
deposit for the purpose of opening an account and for items that the 
depositary bank has reason to believe will not clear. The Connecticut 
statute also requires availability policy disclosures to depositors in 
the form of written notices and notices posted conspicuously at each 
branch.

                                Coverage

    The Connecticut statute governs the availability of funds deposited 
in savings and time accounts, as well as accounts as defined in Sec. 
229.2(a) of Regulation CC. The federal preemption of state funds 
availability requirements only applies to accounts subject to Regulation 
CC, which generally consist of trasaction accounts. Regulation CC does 
not affect the Connecticut statute to the extent that the state law 
applies to deposits in savings and other accounts (including transaction 
accounts where the account holder is a bank, foreign bank or the U.S. 
Treasury) that are not accounts under Regulation CC. (Note, however, 
that under Sec. 229.19(e) of Regulation CC, Holds on other funds, the 
federal availability schedules may apply to savings, time, and other 
accounts not defined as accounts under Regulation CC, in certain 
circumstances.)
    The Connecticut statute applies to items deposited in accounts. This 
term encompasses instruments that are not defined as checks in 
Regulation CC (Sec. 229.2(k)), such as nonnegotiable instruments, and 
are therefore not subject to Regulation CC's provisions governing funds 
availability. Those items that are subject to Connecticut law but are 
not subject to Regulation CC will continue to be covered by the state 
availability schedules and exceptions.

                         Availability Schedules

    Temporary schedule. Connecticut law provides that certain checks 
that are nonlocal under Regulation CC must be available in a shorter 
time (sixth business day after deposit for checks payable by depository 
institutions not located in Connecticut) than

[[Page 773]]

under the federal regulation (seventh business day after deposit under 
the temporary schedule for nonlocal checks). Accordingly, the 
Connecticut law supersedes Regulation CC with respect to nonlocal checks 
(other than checks covered by appendix B-1) deposited in accounts until 
the federal permanent availability schedules take effect on September 1, 
1990.
    The Connecticut statute does not specify whether it applies to 
deposits of checks at nonproprietary ATMs. Under the temporary schedule 
in Regulation CC, deposits at nonproprietary ATMs must be made available 
for withdrawal at the start of the seventh business day after deposit. 
To the extent that the Connecticut schedules provide for shorter 
availability for deposits at nonproprietary ATMs, they would supersede 
the temporary schedule in Regulation CC for deposits at nonproprietary 
ATMs specified in Sec. 229.11(d).
    Exceptions to the availability schedule. The Connecticut law 
provides exceptions for items received for deposit for the purpose of 
opening new accounts and for items that the depositary bank has reason 
to believe will not clear. In all cases where the federal availability 
schedule preempts the state schedule, only the federal exceptions will 
apply. For deposits that are covered by the state availability schedule 
(e.g., nonlocal out-of-state checks under the temporary schedule), the 
state exceptions may be used to extend the state availability schedule 
(of six business days) to meet the federal availability schedule (of 
seven business days). Once the deposit is held up to the federal 
availability schedule limit under a state exception, the depositary bank 
may further extend the hold under any federal exception that can be 
applied to the deposit. Any time a depositary bank invokes an exception 
to extend a hold beyond the time periods otherwise permitted by law, it 
must give notice of the extended hold to its customer, in accordance 
with Sec. 229.13(g) of Regulation CC.

                               Disclosures

    The Connecticut statute (Conn. Gen. Stat. Section 36-9v(b)) requires 
written notice to depositors of an institution's check hold policy and 
requires a notice of the policy to be posted in each branch.
    Regulation CC preempts state disclosure requirements concerning 
funds availability that relate to accounts that are inconsistent with 
the federal requirements. The state requriements are different from, and 
therefore inconsistent with, the federal disclosure rules. (Sec. 
229.20(c)(2)). Thus, the Connecticut statute is preempted by Regulation 
CC to the extent that these disclosure provisions apply to accounts as 
defined by Regulation CC. The Connecticut disclosure rules would 
continue to apply to accounts, such as savings and time accounts, not 
governed by the Regulation CC disclosure requirements.

                                Illinois

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act and subpart B, and, in connection therewith, 
subpart A, of Regulation CC, preempt provisions of Illinois law relating 
to the availability of funds. Section 4-213(5) of the Uniform Commercial 
Code as adopted in Illinois (Illinois Revised Statutes Chapter 26, 
paragraph 4-213(5), enacted July 26, 1988) provides that:

    Time periods after which deposits must be available for withdrawal 
shall be determined by the provisions of the federal Expedited Funds 
Availability Act (Title VI of the Competitive Equality Banking Act of 
1987) and the regulations promulgated by the Federal Reserve Board for 
the implementation of that Act.

    Section 4-213(5) of the Illinois law does not supersede Regulation 
CC; and, because this provision of Illinois law does not permit funds to 
be made available for withdrawal in a longer period of time than 
required under the Act and Regulation, it is not preempted by Regulation 
CC.

                                  Maine

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt the provisions of Maine 
law concerning the availability of funds. This preemption determination 
addresses the relation of the Act and Regulation CC to the Maine funds 
availability law. (See also the Board's preemption determination 
regarding the Uniform Commercial Code, section 4-213(5), pertaining to 
availability of cash deposits.)
    In 1985, Maine adopted a statute governing funds availability (Title 
9-B MRSA section 241(5)), which requires Maine financial institutions to 
make funds deposited in a transaction account, savings account, or time 
account available for withdrawal within a reasonable period. The Maine 
statute gives the Superintendent of Banking for the State of Maine the 
authority to promulgate rules setting forth time limitations and 
disclosure requirements governing funds availability.
    The Superintendent of Banking issued regulations implementing the 
Maine funds availability statute, effective July 1, 1987 (Regulation 
18(IV)), and adopted amendments to this regulation, effective September 
1, 1988. Under the revised regulation, funds deposited to any deposit 
account in a

[[Page 774]]

Maine financial institution must be made available for withdrawal in 
accordance with the Act and Regulation CC (Regulation 18-IV(A)(1)). The 
state regulation provides that an institution's funds availability 
policies for accounts subject to Regulation CC be disclosed in a manner 
consistent with the Regulation CC requirements. Funds availability 
policies for accounts not subject to Regulation CC must be disclosed in 
accordance with the state regulation (Regulation 18-IV(A)(2)).

                                Coverage

    The Maine law and regulation govern the availability of funds to any 
deposit account, as defined in the Board's Regulation D (12 CFR 
204.2(a)). This coverage is broader than the accounts covered in 
Regulation CC. The Maine law continues to apply to all deposit accounts, 
including those that are not accounts under Regulation CC. (Note, 
however, that under Sec. 229.19(e) of Regulation CC, Holds on other 
funds, the federal availability schedules may apply to savings, time, 
and other accounts not defined as accounts under Regulation CC, in 
certain circumstances.)

                 Availability Schedules and Disclosures

    The Maine regulation incorporates the Regulation CC availability and 
disclosure requirements with respect to deposits to accounts covered by 
Regulation CC. Because the state requirements are consistent with the 
federal requirements, the Maine regulation is not preempted by, nor does 
it supersede, the federal law.

                              Massachusetts

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt provisions of 
Massachusetts law relating to the availability of funds. This preemption 
determination addresses the relationship of the Act and Regulation CC to 
the Massachusetts funds availability law. (See also the Board's 
preemption determination regarding the Uniform Commercial Code, section 
4-213(5), pertaining to availability of cash deposits.)
    In 1988, Massachusetts amended its statute governing funds 
availability (Mass. Gen. L. ch. 167D, section 35), to require 
Massachusetts banking institutions to make funds available for 
withdrawal and disclose their availability policies in accordance with 
the Act and Regulation CC. The Massachusetts law, however, provides that 
``local originating depository institution'' is to be defined as any 
originating depository institution located in the Commonwealth.

                                Coverage

    The Massachusetts statute governs the availability of funds 
deposited in ``any demand deposit, negotiable order of withdrawal 
account, savings deposit, share account or other asset account.'' 
Regulation CC applies only to accounts as defined in Sec. 229.2(a). 
Regulation CC does not affect the Massachusetts statute to the extent 
that the state law applies to deposits in savings and other accounts 
(including transaction accounts where the account holder is a bank, 
foreign bank, or the U.S. Treasury) that are not accounts under 
Regulation CC. (Note, however, that under Sec. 229.19(e) of Regulation 
CC, Holds on other funds, the federal availability schedules may apply 
to savings, time, and other accounts not defined as accounts under 
Regulation CC, in certain circumstances.)

                         Availability Schedules

    The Massachusetts definition of local originating depository 
institution (local paying bank in Regulation CC terminology) requires 
that in-state checks that are nonlocal checks under Regulation CC be 
made available in accordance with the Regulation CC local schedule. The 
Massachusetts law supersedes Regulation CC under the temporary and 
permanent schedule with respect to nonlocal checks payable by banks 
located in Massachusetts and deposited into accounts. Regulation CC 
preempts the Massachusetts law, however, to the extent the state law 
does not define banks located outside of Massachusetts, but in the same 
check processing region as the paying bank, as local originating 
depository institutions.

                               Disclosures

    The Massachusetts regulation incorporates the Regulation CC 
disclosure requirements with respect to both accounts covered by 
Regulation CC and savings and other accounts not governed by the federal 
regulation. Because the state requirements are consistent with the 
federal requirements, the Massachusetts regulation is not preempted by, 
nor does it supersede, the federal law. The Massachusetts disclosure 
rules would continue to apply to accounts not governed by the Regulation 
CC disclosure requirements.

                               New Jersey

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC preempt the provisions of New 
Jersey law concerning disclosure of a bank's funds availability policy.

[[Page 775]]

(See also the Board's preemption determination regarding the Uniform 
Commercial Code, section 4-213(5), pertaining to availability of cash 
deposits.)
    New Jersey does not have a law or regulation establishing the 
maximum time periods within which funds deposited by check or electronic 
payment must be made available for withdrawal. New Jersey does, however, 
have regulations concerning the disclosure of a banking institution's 
availability policy (N.J.A.C. 3:1-15.1 et seq.).

                               Disclosures

    New Jersey law requires every banking institution (defined as any 
state or federally chartered commercial bank, savings bank, or savings 
and loan association) to provide written disclosure to all holders of 
and applicants for deposit accounts which describes the institution's 
funds availability policy. Institutions must also disclose to their 
customers any significant changes to their availability policy.
    Regulation CC preempts state disclosure requirements concerning 
funds availability that relates to accounts that are inconsistent with 
the federal requirements. The state requirements are different from, and 
therefore inconsistent with, the federal disclosure rules. (Sec. 
229.20(c)(2)). Thus, the New Jersey statute (N.J.A.C. sections 3:1-15.1 
et seq.) is preempted by Regulation CC to the extent that these 
disclosure provisions apply to accounts as defined by Regulation CC. The 
New Jersey disclosure rules would continue to apply to other deposit 
accounts, as defined by New Jersey law, including money market accounts 
and savings accounts established by a natural person for personal or 
family purposes, which are not governed by the Regulation CC disclosure 
requirements.

                                New York

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, preempt the provisions of New 
York law concerning the availability of funds. This preemption 
determination addresses the relation of the Act and Regulation CC to the 
New York funds availability law. (See also the Board's preemption 
determination regarding the Uniform Commercial Code, section 4-213(5), 
pertaining to availability of cash deposits.)
    In 1983, the New York State Banking Department, pursuant to section 
14-d of the New York Banking law, issued regulations requiring that 
funds deposited in an account be made available for withdrawal within 
specified time periods, and provided certain exceptions to those 
availability schedules. Part 34 of the New York State Banking 
Department's General Regulations established time frames within which 
commercial banks, trust companies, and branches of foreign banks 
(banks); and savings banks, savings and loan associations, and credit 
unions (savings institutions) must make funds deposited in customer 
accounts available for withdrawal.
    The Banking Department amended part 34, effective September 1, 1988, 
generally to exclude accounts covered by Regulation CC from the scope of 
the state regulation. Part 34.4 (a)(2) and (b)(2) of the revised New 
York rules, however, continue to apply to checks deposited to accounts, 
as defined in Regulation CC. These provisions require that the proceeds 
of nonlocal checks payable by a New York institution be made available 
for withdrawal not later than the start of the fourth business day 
following deposit, if deposited in a bank, or the fifth business day 
following deposit, if deposited in a savings institution. The revised 
regulation also provides that, with respect to savings accounts and time 
deposits, New York institutions could elect to comply with either the 
state or federal availability and disclosure requirements.
    This preemption determination supersedes the determination issued by 
the Board on August 18, 1988 (53 FR 32357 (August 24, 1988)).

                                Coverage

    The New York law and regulation govern the availability of funds in 
savings accounts and time deposits, as well as accounts as defined in 
Sec. 229.2(a) of Regulation CC. The New York law continues to apply to 
deposits to savings accounts and time deposits that are not accounts 
under Regulation CC. (Note, however, that under Sec. 229.19(e) of 
Regulation CC, Hold on other funds, the federal availability schedules 
may apply to savings, time, and other accounts not defined as accounts 
under Regulation CC, in certain circumstances.)
    The New York law and regulation apply to items deposited to 
accounts. Part 34.3(e) defines item as a check, negotiable order of 
withdrawal or money order deposited into an account. The Board 
interprets the definition of item in New York law to be consistent with 
the definition of check in Regulation CC (Sec. 229.2(k)).

                         Availability Schedules

    The provisions of New York law governing the availability of in-
state nonlocal items provide for shorter hold than is provided under 
Regulation CC, and supersede that federal availability requirements. 
With the exception of these provisions, the New York regulation does not 
apply to deposits to accounts covered by Regulation CC.

[[Page 776]]

    Temporary schedule. The time periods for the availability of in-
state nonlocal checks, contained in part 34.4 (a)(2) and (b)(2), are 
shorter that the seventh business day availability required for nonlocal 
checks under Sec. 229.11(c) of Regulation CC, although they are not 
necessarily shorter than the schedules for nonlocal checks set forth in 
Sec. 229.11(c)(2) and appendix B-1 of Regulation CC. Thus, these state 
schedules supersede the federal schedule to the extent that they apply 
to an item payable by a New York bank or savings institution that is 
defined as a nonlocal checks under Regulation CC and the applicable 
state schedule is less than the applicable schedule specified in Sec. 
229.11(c) and appendix B-1.
    Permanent schedule. The New York schedule for banks supersedes the 
Regulation CC requirement in the permanent schedule, effective September 
1, 1990, that nonlocal checks be made available for withdrawal by the 
start of the fifth business day following deposit, to the extent that 
the in-state checks are defined as nonlocal under Regulation CC, and the 
Regulation CC schedule for nonlocal checks is not shortened under Sec. 
229.12(c)(2) and appendix B-2 of Regulation CC. In addition, the New 
York schedule for savings institutions supersedes the Regulation CC time 
period adjustment for withdrawal by cash or similar means in the 
permanent schedule, to the extent that the in-state checks are defined 
as nonlocal under Regulation CC, and the Regulation CC schedule for 
nonlocal checks is not shortened under Sec. 229.12(c)(2) and appendix 
B-2.
    Exceptions to the availability schedules. New York law provides 
exceptions to the state availability schedules for large deposits, new 
accounts, repeated overdrafters, doubtful collectibility, foreign items, 
and emergency conditions (part 34.4). The state exceptions apply only 
with respect to deposits of in-state nonlocal checks that are subject to 
the state availability schedule. For these deposits, the depositary bank 
may invoke a state exception and place a hold on the deposit up to the 
federal availability schedule limit for that type of deposit. Once the 
federal availability schedule limit is reached, the depositary bank may 
further extend the hold under any of the federal exceptions that apply 
to that deposit. Any time a depositary bank invokes an exception to 
extend a hold beyond the time periods otherwise permitted by law, it 
must give notice of the extended hold to its customer in accordance with 
Sec. 229.12(g) of Regulation CC.

                               Disclosures

    The revised New York regulation does not contain funds availability 
disclosure requirements applicable to accounts subject to Regulation CC.

                              Rhode Island

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the ``Act'') and subpart B (and in connection 
therewith, subpart A) of Regulation CC, supersede provisions of Rhode 
Island law relating to the availability of funds. This preemption 
determination specifies those provisions in the Rhode Island funds 
availability law that supersede the Act and Regulation CC. (See also the 
Board's preemption determination regarding the Uniform Commercial Code, 
section 4-213(5), pertaining to availability of cash deposits.)
    In 1986, Rhode Island adopted a statute governing funds availability 
(R.I. Gen. Laws tit. 6A, sections 4-601 through 4-608), which requires 
Rhode Island depository institutions to make checks deposited in a 
personal transaction account available for withdrawal within certain 
specific periods. Commercial banks and thrift institutions (mutual 
savings banks, savings banks, savings and loan institutions and credit 
unions) must make funds available for withdrawal in accordance with the 
following table:

------------------------------------------------------------------------
                                                            Thrift
                                    Commercial banks     institutions
------------------------------------------------------------------------
Treasury checks, Rhode Island       2nd.............  2nd
 Government checks, first-indorsed.
In-state cashier's checks less      2nd.............  2nd
 than $2,500.
On-us checks......................  2nd.............  3rd
In-state clearinghouse checks.....  3rd.............  4th
In-state nonclearinghouse checks..  5th.............  6th
1st or 2nd Federal Reserve          7th.............  7th
 District checks (out-of-state).
Other checks......................  9th.............  10th
------------------------------------------------------------------------
Note: These time periods are stated in terms of availability for
  withdrawal not later than the Xth business day following the banking
  day of deposit to facilitate comparison with Regulation CC. State
  regulations are stated in terms of availability at the start of the
  business day subsequent to the number of days specified in the
  regulation.

The Rhode Island statute also provides restrictions and exceptions to 
the schedules and requires institutions to make certain disclosures to 
their customers.

                                Coverage

    The Rhode Island statute governing the availability of funds 
deposited in personal transaction accounts, a term not defined in the 
statute. The federal law would continue to apply to accounts, as defined 
in Sec. 229.2(a), that are not personal transaction accounts.
    The Rhode Island statute applies to items, defined as checks, 
negotiable orders of withdrawal, or money orders. The Board interprets 
the definition of item to be consistent with the definition of check in 
Regulation CC (Sec. 299.2(k)).

[[Page 777]]

                         Availability Schedules

    Temporary schedule. Rhode Island law requires availability for 
certain checks in the same time as does Regulation CC. Thus, in these 
instances, the federal law does not preempt the state law. Rhode Island 
law requires commercial banks (but not thrift institutions) to make 
checks payable by a depositary institution that uses the same in-state 
clearing facility as the depositary bank available for withdrawal on the 
third business day following the day of the deposit. This is the same 
time period contained in Regulation CC for local checks payable by a 
bank that is a member of the same local clearinghouse as the depositary 
bank. (The Board views the definition of the same in-state clearing 
facility as having the same meaning as the term the same check 
clearinghouse association in the federal law's provision that allows 
banks to limit the customer's ability to withdraw cash on the third 
business day if the local check being deposited is payable by a bank 
that is not a member of the same local clearinghouse as the depositary 
bank.) Since the Rhode Island law and the federal law both require the 
funds to be made available no later than the third business day, the 
state law is not preempted by the federal law.
    The Rhode Island law also requires commercial banks and savings 
institutions to make checks payable by a depository institution located 
in the First or Second Federal Reserve District (outside of Rhode 
Island) available on the seventh business day following deposit. To the 
extent that this provision applies to checks payable by institutions 
located outside the Boston check processing region, it provides for 
availability in the same time as required for nonlocal checks under the 
temporary federal schedule, and thus is not preempted by the federal 
law.
    The Rhode Island statute does not specify whether it applies to 
deposits of checks at nonproprietary ATMs. Under the temporary schedule 
in Regulation CC, deposits at nonproprietary ATMs must be made available 
for withdrawal at the opening of the seventh business day after deposit. 
To the extent that the Rhode Island schedules provide for shorter 
availability for deposits at nonproprietary ATMs, they would supersede 
the temporary schedule.
    Exceptions to the availability schedules. The Rhode Island law 
contains exceptions for reason to doubt collectibility or ability of the 
depositor to reimburse the depositary bank, for new accounts, for large 
checks, and for foreign checks. In all cases where the federal 
availability schedule preempts the state schedule, only the federal 
exceptions will apply. For deposits that are covered by the state 
availability schedule, the state exceptions may be used to extend the 
state availability schedule to meet the federal availability schedule. 
Once the deposit is held up to the federal availability schedule limit 
under a state exception, the depositary bank may further extend the hold 
under any federal exception that can be applied to the deposit. Thus, if 
the state and federal availability schedules are the same for a 
particular deposit, both a state and a federal exception must be 
applicable to that deposit in order to extend the hold beyond the 
schedule. Any time a depositary bank invokes an exception to extend a 
hold beyond the time periods otherwise permitted by law, it must give 
notice of the extended hold to its customer, in accordance with Sec. 
229.13(g) of Regulation CC.
    Business day/banking day. The Rhode Island statute defines business 
day as excluding Saturday, Sunday and legal holidays. This definition is 
preempted by the Regulation CC definitions of business day and banking 
day. Thus, for determining the permissible hold under the Rhode Island 
schedules that supersede the Regulation CC schedule, deposits are 
considered made on the specified number of business days following the 
banking day of deposit.

                               Disclosures

    The Rhode Island statute requires written notice to depositors of an 
institution's check hold policy and requires a notice on deposit slips. 
Regulation CC preempts state disclosure requirements concerning funds 
availability that relate to accounts that are inconsistent with the 
federal requirements. The state reuirements are different from, and 
therefore inconsistent with, the federal rules. (Sec. 229.20(c)(2)) 
Thus, Regulation CC preempts the Rhode Island disclosure requirements 
concerning funds availability.

                                Wisconsin

                               Background

    The Board has been requested, in accordance with Sec. 229.20(d) of 
Regulation CC (12 CFR part 229), to determine whether the Expedited 
Funds Availability Act (the Act) and subpart B (and in connection 
therewith, subpart A) of Regulation CC preempt the provisions of 
Wisconsin law concerning availability of funds. This preemption 
determination specifies those provisions of the Wisconsin funds 
availability law that are not preempted by the Act and Regulation CC. 
(See also the Board's preemption determination regarding the Uniform 
Commercial Code, section 4-213(5), pertaining to availability of cash 
deposits.)
    Wisconsin Statutes sections 404.213(4m), 215.136, and 186.117 
require Wisconsin banks, savings and loan associations, and credit 
unions, respectively, to make funds deposited in accounts available for 
withdrawal within specified time frames. Generally,

[[Page 778]]

checks drawn on the U.S. Treasury, the State of Wisconsin, or on a local 
government located in Wisconsin must be made available for withdrawal by 
the second day following deposit. (The law governing commercial banks 
determines availability based on banking day; the laws governing savings 
and loan associations and credit unions determine availability based on 
business days.) In-state and out-of-state checks must be made available 
for withdrawal within five days and eight days following deposit, 
respectively. Exceptions are provided for new accounts and reason to 
doubt collectibility. In addition, Wisconsin Statutes section 404.103 
permits commercial banks to vary these availability requirements by 
agreement.

                                Coverage

    Wisconsin law defines account, with respect to the rules governing 
commercial banks, as any account with a bank and includes a checking, 
time, interest or savings account (Wisconsin Statutes section 
404.104(1)(a)). The statutes relating to the funds availability 
requirements applicable to savings and loan associations and credit 
unions do not define the term account. The Federal preemption of state 
funds availability requirements applies only to accounts subject to 
Regulation CC, which generally consist of transaction accounts. 
Regulation CC does not affect the Wisconsin law to the extent that the 
state law applies to deposits in savings, time, and other accounts 
(including transaction accounts where the account holder is a bank, 
foreign bank, or the U.S. Treasury) that are not accounts under 
Regulation CC. (Note, however, that under Sec. 229.19(e) of Regulation 
CC, Holds on Other Funds, the federal availability schedules may apply 
to savings, time, and other accounts not defined as accounts under 
Regulation CC in certain circumstances.)
    The Wisconsin statute applies to items deposited in accounts. This 
term encompasses instruments that are not defined as checks in 
Regulation CC (Sec. 229.2(k)), such as nonnegotiable instruments, and 
are therefore not subject to Regulation CC's provisions governing funds 
availability. Those items that are subject to Wisconsin law but are not 
subject to Regulation CC will continue to be covered by the state 
availability schedules and exceptions.

                         Availability Schedules

    Temporary schedule. The Wisconsin statute requires that in-state 
nonlocal checks be made available for withdrawal not later than the 
fifth day following deposit (Wisconsin Statutes sections 
404.213(4m)(b)(2); 215.136(2)(b); 186.117(2)(b)). This time period is 
shorter than the seventh business day availability required for nonlocal 
checks under Sec. 229.11(c) of Regulation CC, although it is not 
shorter than the schedules for nonlocal checks set forth in Sec. 
229.11(c)(2) and appendix B-1 of Regulation CC. Thus, the state schedule 
for in-state nonlocal checks supersedes the Federal schedule to the 
extent that it applies to an item payable by a Wisconsin bank that is 
defined as a nonlocal check under Regulation CC and is not subject to 
reduced schedules under Sec. 229.11(c)(2) and appendix B-1.
    Permanent Schedule. Under the Federal permanent availability 
schedule, nonlocal checks must be made available for withdrawal not 
later than the fifth business day following deposit. The fifth day 
availability requirement for in-state items in the Wisconsin statute 
supersedes the Regulation CC time period adjustment for withdrawal by 
cash or similar means in the permanent schedule, to the extent that the 
in-state checks are defined as nonlocal under Regulation CC.
    Next-day availability. Under the Wisconsin statute, the proceeds of 
state and local government checks must be made available for withdrawal 
by the second day following deposit, if the check is endorsed only by 
the person to whom it was issued (Wisconsin Statutes sections 
404.213(4m)(b)(1); 215.136(2)(b); and 186.117(2)(a)). Regulation CC 
requires next-day availability for these checks if they are (1) 
deposited in an account of a payee of the check, (2) deposited in a 
depositary bank located in the same state as the state or local 
government that issued the check, (3) deposited in person to an employee 
of the depositary bank, and (4) deposited with a special deposit slip, 
if the depositary bank informed its customers that use of such a slip is 
a condition to next-day availability. Under the Federal law, if a state 
or local government check is not deposited in person to an employee of 
the depositary bank, but meets the other conditions set forth in Sec. 
229.10(c)(1)(iv), the funds must be made available for withdrawal not 
later than the second business day following deposit. The Wisconsin 
statute supersedes Regulation CC to the extent that the state law does 
not permit the use of a special deposit slip as a condition to receipt 
of second-day availability.
    Exceptions to the schedules. Wisconsin law provides exceptions to 
the state availability schedules for new accounts (those opened less 
than 90 days) and reason to doubt collectibility (Wisconsin Statutes 
sections 404.213(4m)(b); 215.136(2); and 186.117(2)). The state 
availability law also permits commercial banks to vary the funds 
availability requirements by agreement (Wisconsin Statute section 
404.103(1)). In all cases where the Federal schedule preempts the state 
schedule, only the Federal exceptions apply. For deposits that are 
covered by the state availability schedule (e.g., in-state nonlocal 
checks), a state exception must apply in

[[Page 779]]

order to extend the state availability schedule up to the Federal 
availability schedule. Once the deposit is held up to the Federal 
availability limit under a state exception, the depositary bank may 
further extend the hold only if a Federal exception can be applied to 
the deposit. Any time a depositary bank invokes an exception to extend a 
hold beyond the time periods otherwise permitted by law, it must give 
notice of the extended hold to its customer in accordance with Sec. 
229.13(g) of Regulation CC.
    Business day/banking day. The definitions of business day and 
banking day in the Wisconsin statutes are preempted by the Regulation CC 
definition of those terms. For determining the permissible hold under 
the Wisconsin schedules that supersede the Regulation CC schedule, 
deposits are considered available for withdrawal on the specified number 
of business days following the banking day of deposit.
    Wisconsin law considers funds to be deposited, for the purpose of 
determining when they must be made available for withdrawal, when an 
item is ``received at the proof and transit facility of the 
depository.'' For the purposes of this preemption determination, funds 
are considered deposited under Wisconsin law in accordance with the 
rules set forth in Sec. 229.19(a) of Regulation CC.

                               Disclosures

    The Wisconsin statute does not require disclosure of a bank's funds 
availability policy. The state law does require, however, that a bank 
give notice to its customer if it extends the time within which funds 
will be available for withdrawal due to the bank's doubt as to the 
collectibility of the item (Wisconsin Statutes sections 404.213(4m)(b); 
215.136(2); and 186.117(2)).
    Regulation CC preempts state disclosure requirements concerning 
funds availability that relate to accounts that are inconsistent with 
the Federal requirements. The state requirement is different from, and 
therefore inconsistent with, the Federal disclosure rules (Sec. 
229.20(c)(2)). Thus, the Wisconsin statute is preempted by Regulation CC 
to the extent that the state notice requirement applies to accounts as 
defined by Regulation CC. The Wisconsin requirement would continue to 
apply to accounts, such as savings and time accounts, not governed by 
the Regulation CC disclosure requirements.

[53 FR 32356, Aug. 24, 1988, as amended at 53 FR 44328, Nov. 2, 1988; 53 
FR 47524, Nov. 22, 1988; 53 FR 51748, Dec. 23, 1988; Reg. CC, 54 FR 
13838, Apr. 6, 1989; 55 FR 11358, Mar. 28, 1990; 60 FR 51703, Oct. 3, 
1995]



PART 230_TRUTH IN SAVINGS (REGULATION DD)--Table of Contents




Sec.
230.1 Authority, purpose, coverage, and effect on state laws.
230.2 Definitions.
230.3 General disclosure requirements.
230.4 Account disclosures.
230.5 Subsequent disclosures.
230.6 Periodic statement disclosures.
230.7 Payment of interest.
230.8 Advertising.
230.9 Enforcement and record retention.
230.10 [Reserved]
230.11 Additional disclosure requirements for institutions advertising 
          the payment of overdrafts.

Appendix A to Part 230--Annual Percentage Yield Calculation
Appendix B to Part 230--Model Clauses and Sample Forms
Appendix C to Part 230--Effect on State Laws
Appendix D to Part 230--Issuance of Staff Interpretations
Supplement I to Part 230--Official Staff Interpretations

    Authority: 12 U.S.C. 4301 et seq.

    Source: 57 FR 43376, Sept. 21, 1992, unless otherwise noted.



Sec. 230.1  Authority, purpose, coverage, and effect on state laws.

    (a) Authority. This part, known as Regulation DD, is issued by the 
Board of Governors of the Federal Reserve System to implement the Truth 
in Savings Act of 1991 (the act), contained in the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4301 et seq., 
Pub. L. 102-242, 105 Stat. 2236). Information collection requirements 
contained in this part 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. 7100-0255.
    (b) Purpose. The purpose of this part is to enable consumers to make 
informed decisions about accounts at depository institutions. This part 
requires depository institutions to provide disclosures so that 
consumers can make meaningful comparisons among depository institutions.
    (c) Coverage. This part applies to depository institutions except 
for credit unions. In addition, the advertising rules in Sec. 230.8 of 
this part apply to any

[[Page 780]]

person who advertises an account offered by a depository institution, 
including deposit brokers.
    (d) Effect on state laws. State law requirements that are 
inconsistent with the requirements of the act and this part are 
preempted to the extent of the inconsistency. Additional information on 
inconsistent state laws and the procedures for requesting a preemption 
determination from the Board are set forth in appendix C of this part.



Sec. 230.2  Definitions.

    For purposes of this part, the following definitions apply:
    (a) Account means a deposit account at a depository institution that 
is held by or offered to a consumer. It includes time, demand, savings, 
and negotiable order of withdrawal accounts. For purposes of the 
advertising requirements in Sec. 230.8 of this part, the term also 
includes an account at a depository institution that is held by or on 
behalf of a deposit broker, if any interest in the account is held by or 
offered to a consumer.
    (b) Advertisement means a commercial message, appearing in any 
medium, that promotes directly or indirectly:
    (1) The availability or terms of, or a deposit in, a new account; 
and
    (2) For purposes of Sec. 230.8(a) and Sec. 230.11 of this part, 
the terms of, or a deposit in, a new or existing account.
    (c) Annual percentage yield means a percentage rate reflecting the 
total amount of interest paid on an account, based on the interest rate 
and the frequency of compounding for a 365-day period and calculated 
according to the rules in appendix A of this part.
    (d) Average daily balance method means the application of a periodic 
rate to the average daily balance in the account for the period. The 
average daily balance is determined by adding the full amount of 
principal in the account for each day of the period and dividing that 
figure by the number of days in the period.
    (e) Board means the Board of Governors of the Federal Reserve 
System.
    (f) Bonus means a premium, gift, award, or other consideration worth 
more than $10 (whether in the form of cash, credit, merchandise, or any 
equivalent) given or offered to a consumer during a year in exchange for 
opening, maintaining, renewing, or increasing an account balance. The 
term does not include interest, other consideration worth $10 or less 
given during a year, the waiver or reduction of a fee, or the absorption 
of expenses.
    (g) Business day means a calendar day other than a Saturday, a 
Sunday, or any of the legal public holidays specified in 5 U.S.C. 
6103(a).
    (h) Consumer means a natural person who holds an account primarily 
for personal, family, or household purposes, or to whom such an account 
is offered. The term does not include a natural person who holds an 
account for another in a professional capacity.
    (i) Daily balance method means the application of a daily periodic 
rate to the full amount of principal in the account each day.
    (j) Depository institution and institution mean an institution 
defined in section 19(b)(1)(A)(i)-(vi) of the Federal Reserve Act (12 
U.S.C. 461), except credit unions defined in section 19(b)(1)(A)(iv).
    (k) Deposit broker means any person who is a deposit broker as 
defined in section 29(g) of the Federal Deposit Insurance Act (12 U.S.C. 
1831f(g)).
    (l) Fixed-rate account means an account for which the institution 
contracts to give at least 30 calendar days advance written notice of 
decreases in the interest rate.
    (m) Grace period means a period following the maturity of an 
automatically renewing time account during which the consumer may 
withdraw funds without being assessed a penalty.
    (n) Interest means any payment to a consumer or to an account for 
the use of funds in an account, calculated by application of a periodic 
rate to the balance. The term does not include the payment of a bonus or 
other consideration worth $10 or less given during a year, the waiver or 
reduction of a fee, or the absorption of expenses.
    (o) Interest rate means the annual rate of interest paid on an 
account which does not reflect compounding. For the purposes of the 
account disclosures in Sec. 230.4(b)(1)(i) of this part, the interest 
rate may, but need not, be referred to as the ``annual percentage

[[Page 781]]

rate'' in addition to being referred to as the ``interest rate.''
    (p) Passbook savings account means a savings account in which the 
consumer retains a book or other document in which the institution 
records transactions on the account.
    (q) Periodic statement means a statement setting forth information 
about an account (other than a time account or passbook savings account) 
that is provided to a consumer on a regular basis four or more times a 
year.
    (r) State means a state, the District of Columbia, the commonwealth 
of Puerto Rico, and any territory or possession of the United States.
    (s) Stepped-rate account means an account that has two or more 
interest rates that take effect in succeeding periods and are known when 
the account is opened.
    (t) Tiered-rate account means an account that has two or more 
interest rates that are applicable to specified balance levels.
    (u) Time account means an account with a maturity of at least seven 
days in which the consumer generally does not have a right to make 
withdrawals for six days after the account is opened, unless the deposit 
is subject to an early withdrawal penalty of at least seven days' 
interest on amounts withdrawn.
    (v) Variable-rate account means an account in which the interest 
rate may change after the account is opened, unless the institution 
contracts to give at least 30 calendar days advance written notice of 
rate decreases.

[57 FR 43376, Sept. 21, 1992, as amended at 58 FR 15081, Mar. 19, 1993; 
59 FR 52658, Oct. 19, 1994; 70 FR 29593, May 24, 2005]



Sec. 230.3  General disclosure requirements.

    (a) Form. Depository institutions shall make the disclosures 
required by Sec. Sec. 230.4 through 230.6 of this part, as applicable, 
clearly and conspicuously, in writing, and in a form the consumer may 
keep. The disclosures required by this part may be provided to the 
consumer in electronic form, subject to compliance with the consumer 
consent and other applicable provisions of the Electronic Signatures in 
Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.). 
The disclosures required by Sec. Sec. 230.4(a)(2) and 230.8 may be 
provided to the consumer in electronic form without regard to the 
consumer consent or other provisions of the E-Sign Act in the 
circumstances set forth in those sections. Disclosures for each account 
offered by an institution may be presented separately or combined with 
disclosures for the institution's other accounts, as long as it is clear 
which disclosures are applicable to the consumer's account.
    (b) General. The disclosures shall reflect the terms of the legal 
obligation of the account agreement between the consumer and the 
depository institution. Disclosures may be made in languages other than 
English, provided the disclosures are available in English upon request.
    (c) Relation to Regulation E (12 CFR part 205). Disclosures required 
by and provided in accordance with the Electronic Fund Transfer Act (15 
U.S.C. 1601) and its implementing Regulation E (12 CFR part 205) that 
are also required by this part may be substituted for the disclosures 
required by this part.
    (d) Multiple consumers. If an account is held by more than one 
consumer, disclosures may be made to any one of the consumers.
    (e) Oral response to inquiries. In an oral response to a consumer's 
inquiry about interest rates payable on its accounts, the depository 
institution shall state the annual percentage yield. The interest rate 
may be stated in addition to the annual percentage yield. No other rate 
may be stated.
    (f) Rounding and accuracy rules for rates and yields--(1) Rounding. 
The annual percentage yield, the annual percentage yield earned, and the 
interest rate shall be rounded to the nearest one-hundredth of one 
percentage point (.01%) and expressed to two decimal places. For account 
disclosures, the interest rate may be expressed to more than two decimal 
places.
    (2) Accuracy. The annual percentage yield (and the annual percentage 
yield earned) will be considered accurate if not more that one-twentieth 
of one percentage point (.05%) above or below the annual percentage 
yield (and the

[[Page 782]]

annual percentage yield earned) determined in accordance with the rules 
in appendix A of this part.

[57 FR 43376, Sept. 21, 1992, as amended by Reg. DD, 66 FR 17802, Apr. 
4, 2001; 72 FR 63483, Nov. 9, 2007]



Sec. 230.4  Account disclosures.

    (a) Delivery of account disclosures--(1) Account opening. (i) 
General. A depository institution shall provide account disclosures to a 
consumer before an account is opened or a service is provided, whichever 
is earlier. An institution is deemed to have provided a service when a 
fee required to be disclosed is assessed. Except as provided in 
paragraph (a)(1)(ii) of this section, if the consumer is not present at 
the institution when the account is opened or the service is provided 
and has not already received the disclosures, the institution shall mail 
or deliver the disclosures no later than 10 business days after the 
account is opened or the service is provided, whichever is earlier.
    (ii) Timing of electronic disclosures. If a consumer who is not 
present at the institution uses electronic means (for example, an 
Internet Web site) to open an account or request a service, the 
disclosures required under paragraph (a)(1) of this section must be 
provided before the account is opened or the service is provided.
    (2) Requests. (i) A depository institution shall provide account 
disclosures to a consumer upon request. If a consumer who is not present 
at the institution makes a request, the institution shall mail or 
deliver the disclosures within a reasonable time after it receives the 
request and may provide the disclosures in paper form, or electronically 
if the consumer agrees.
    (ii) In providing disclosures upon request, the institution may:
    (A) Specify an interest rate and annual percentage yield that were 
offered within the most recent seven calendar days; state that the rate 
and yield are accurate as of an identified date; and provide a telephone 
number consumers may call to obtain current rate information.
    (B) State the maturity of a time account as a term rather than a 
date.
    (b) Content of account disclosures. Account disclosures shall 
include the following, as applicable:
    (1) Rate information--(i) Annual percentage yield and interest rate. 
The ``annual percentage yield'' and the ``interest rate,'' using those 
terms, and for fixed-rate accounts the period of time the interest rate 
will be in effect.
    (ii) Variable rates. For variable-rate accounts:
    (A) The fact that the interest rate and annual percentage yield may 
change;
    (B) How the interest rate is determined;
    (C) The frequency with which the interest rate may change; and
    (D) Any limitation on the amount the interest rate may change.
    (2) Compounding and crediting--(i) Frequency. The frequency with 
which interest is compounded and credited.
    (ii) Effect of closing an account. If consumers will forfeit 
interest if they close the account before accrued interest is credited, 
a statement that interest will not be paid in such cases.
    (3) Balance information--(i) Minimum balance requirements. Any 
minimum balance required to:
    (A) Open the account;
    (B) Avoid the imposition of a fee; or
    (C) Obtain the annual percentage yield disclosed.

Except for the balance to open the account, the disclosure shall state 
how the balance is determined for these purposes.
    (ii) Balance computation method. An explanation of the balance 
computation method specified in Sec. 230.7 of this part used to 
calculate interest on the account.
    (iii) When interest begins to accrue. A statement of when interest 
begins to accrue on noncash deposits.
    (4) Fees. The amount of any fee that may be imposed in connection 
with the account (or an explanation of how the fee will be determined) 
and the conditions under which the fee may be imposed.
    (5) Transaction limitations. Any limitations on the number or dollar 
amount of withdrawals or deposits.
    (6) Features of time accounts. For time accounts:

[[Page 783]]

    (i) Time requirements. The maturity date.
    (ii) Early withdrawal penalties. A statement that a penalty will or 
may be imposed for early withdrawal, how it is calculated, and the 
conditions for its assessment.
    (iii) Withdrawal of interest prior to maturity. If compounding 
occurs during the term and interest may be withdrawn prior to maturity, 
a statement that the annual percentage yield assumes interest remains on 
deposit until maturity and that a withdrawal will reduce earnings. For 
accounts with a stated maturity greater than one year that do not 
compound interest on an annual or more frequent basis, that require 
interest payouts at least annually, and that disclose an APY determined 
in accordance with section E of appendix A of this part, a statement 
that interest cannot remain on deposit and that payout of interest is 
mandatory.
    (iv) Renewal policies. A statement of whether or not the account 
will renew automatically at maturity. If it will, a statement of whether 
or not a grace period will be provided and, if so, the length of that 
period must be stated. If the account will not renew automatically, a 
statement of whether interest will be paid after maturity if the 
consumer does not renew the account must be stated.
    (7) Bonuses. The amount or type of any bonus, when the bonus will be 
provided, and any minimum balance and time requirements to obtain the 
bonus.
    (c) Notice to existing account holders--(1) Notice of availability 
of disclosures. Depository institutions shall provide a notice to 
consumers who receive periodic statements and who hold existing accounts 
of the type offered by the institution on June 21, 1993. The notice 
shall be included on or with the first periodic statement sent on or 
after June 21, 1993 (or on or with the first periodic statement for a 
statement cycle beginning on or after that date). The notice shall state 
that consumers may request account disclosures containing terms, fees, 
and rate information for their account. In responding to such a request, 
institutions shall provide disclosures in accordance with paragraph 
(a)(2) of this section.
    (2) Alternative to notice. As an alternative to the notice described 
in paragraph (c)(1) of this section, institutions may provide account 
disclosures to consumers. The disclosures may be provided either with a 
periodic statement or separately, but must be sent no later than when 
the periodic statement described in paragraph (c)(1) is sent.

[57 FR 43376, Sept. 21, 1992, as amended at 58 FR 15081, Mar. 19, 1993; 
Reg. DD, 60 FR 5130, Jan. 26, 1995; 63 FR 40637, July 30, 1998; 66 FR 
17802, Apr. 4, 2001; 72 FR 63483, Nov. 9, 2007]



Sec. 230.5  Subsequent disclosures.

    (a) Change in terms--(1) Advance notice required. A depository 
institution shall give advance notice to affected consumers of any 
change in a term required to be disclosed under Sec. 230.4(b) of this 
part if the change may reduce the annual percentage yield or adversely 
affect the consumer. The notice shall include the effective date of the 
change. The notice shall be mailed or delivered at least 30 calendar 
days before the effective date of the change.
    (2) No notice required. No notice under this section is required 
for:
    (i) Variable-rate changes. Changes in the interest rate and 
corresponding changes in the annual percentage yield in variable-rate 
accounts.
    (ii) Check printing fees. Changes in fees assessed for check 
printing.
    (iii) Short-term time accounts. Changes in any term for time 
accounts with maturities of one month or less.
    (b) Notice before maturity for time accounts longer than one month 
that renew automatically. For time accounts with a maturity longer than 
one month that renew automatically at maturity, institutions shall 
provide the disclosures described below before maturity. The disclosures 
shall be mailed or delivered at least 30 calendar days before maturity 
of the existing account. Alternatively, the disclosures may be mailed or 
delivered at least 20 calendar days before the end of the grace period 
on the existing account, provided a grace period of at least five 
calendar days is allowed.
    (1) Maturities of longer than one year. If the maturity is longer 
than one year, the institution shall provide account disclosures set 
forth in Sec. 230.4(b) of this part for the new account, along with

[[Page 784]]

the date the existing account matures. If the interest rate and annual 
percentage yield that will be paid for the new account are unknown when 
disclosures are provided, the institution shall state that those rates 
have not yet been determined, the date when they will be determined, and 
a telephone number consumers may call to obtain the interest rate and 
the annual percentage yield that will be paid for the new account.
    (2) Maturities of one year or less but longer than one month. If the 
maturity is one year or less but longer than one month, the institution 
shall either:
    (i) Provide disclosures as set forth in paragraph (b)(1) of this 
section; or
    (ii) Disclose to the consumer:
    (A) The date the existing account matures and the new maturity date 
if the account is renewed;
    (B) The interest rate and the annual percentage yield for the new 
account if they are known (or that those rates have not yet been 
determined, the date when they will be determined, and a telephone 
number the consumer may call to obtain the interest rate and the annual 
percentage yield that will be paid for the new account); and
    (C) Any difference in the terms of the new account as compared to 
the terms required to be disclosed under Sec. 230.4(b) of this part for 
the existing account.
    (c) Notice before maturity for time accounts longer than one year 
that do not renew automatically. For time accounts with a maturity 
longer than one year that do not renew automatically at maturity, 
institutions shall disclose to consumers the maturity date and whether 
interest will be paid after maturity. The disclosures shall be mailed or 
delivered at least 10 calendar days before maturity of the existing 
account.

[57 FR 43376, Sept. 21, 1992, as amended at 58 FR 15081, Mar. 19, 1993; 
Reg. DD, 63 FR 52107, Sept. 29, 1998]



Sec. 230.6  Periodic statement disclosures.

    (a) General rule. If a depository institution mails or delivers a 
periodic statement, the statement shall include the following 
disclosures:
    (1) Annual percentage yield earned. The ``annual percentage yield 
earned'' during the statement period, using that term, calculated 
according to the rules in appendix A of this part.
    (2) Amount of interest. The dollar amount of interest earned during 
the statement period.
    (3) Fees imposed. Fees required to be disclosed under Sec. 
230.4(b)(4) of this part that were debited to the account during the 
statement period. The fees shall be itemized by type and dollar amounts. 
Except as provided in Sec. 230.11(a)(1) of this part, when fees of the 
same type are imposed more than once in a statement period, a depository 
institution may itemize each fee separately or group the fees together 
and disclose a total dollar amount for all fees of that type.
    (4) Length of period. The total number of days in the statement 
period, or the beginning and ending dates of the period.
    (b) Special rule for average daily balance method. In making the 
disclosures described in paragraph (a) of this section, institutions 
that use the average daily balance method and that calculate interest 
for a period other than the statement period shall calculate and 
disclose the annual percentage yield earned and amount of interest 
earned based on that period rather than the statement period. The 
information in paragraph (a)(4) of this section shall be stated for that 
period as well as for the statement period.

[Reg. DD 57 FR 43376, Sept. 21, 1992, as amended at 57 FR 46480, Oct. 9, 
1992; 64 FR 49848, Sept. 14, 1999; 66 FR 17802, Apr. 4, 2001; 70 FR 
29593, May 24, 2005]



Sec. 230.7  Payment of interest.

    (a) Permissible methods--(1) Balance on which interest is 
calculated. Institutions shall calculate interest on the full amount of 
principal in an account for each day by use of either the daily balance 
method or the average daily balance method.\1\
---------------------------------------------------------------------------

    \1\ Institutions shall calculate interest by use of a daily rate of 
at least \1/365\ of the interest rate. In a leap year a daily rate of 
\1/366\ of the interest rate may be used.
---------------------------------------------------------------------------

    (2) Determination of minimum balance to earn interest. An 
institution shall use the same method to determine any

[[Page 785]]

minimum balance required to earn interest as it uses to determine the 
balance on which interest is calculated. An institution may use an 
additional method that is unequivocally beneficial to the consumer.
    (b) Compounding and crediting policies. This section does not 
require institutions to compound or credit interest at any particular 
frequency.
    (c) Date interest begins to accrue. Interest shall begin to accrue 
not later than the business day specified for interest-bearing accounts 
in section 606 of the Expedited Funds Availability Act (12 U.S.C. 4005 
et seq.) and implementing Regulation CC (12 CFR part 229). Interest 
shall accrue until the day funds are withdrawn.



Sec. 230.8  Advertising.

    (a) Misleading or inaccurate advertisements. An advertisement shall 
not:
    (1) Be misleading or inaccurate or misrepresent a depository 
institution's deposit contract; or
    (2) Refer to or describe an account as ``free'' or ``no cost'' (or 
contain a similar term) if any maintenance or activity fee may be 
imposed on the account. The word ``profit'' shall not be used in 
referring to interest paid on an account.
    (b) Permissible rates. If an advertisement states a rate of return, 
it shall state the rate as an ``annual percentage yield'' using that 
term. (The abbreviation ``APY'' may be used provided the term ``annual 
percentage yield'' is stated at least once in the advertisement.) The 
advertisement shall not state any other rate, except that the ``interest 
rate,'' using that term, may be stated in conjunction with, but not more 
conspicuously than, the annual percentage yield to which it relates.
    (c) When additional disclosures are required. Except as provided in 
paragraph (e) of this section, if the annual percentage yield is stated 
in an advertisement, the advertisement shall state the following 
information, to the extent applicable, clearly and conspicuously:
    (1) Variable rates. For variable-rate accounts, a statement that the 
rate may change after the account is opened.
    (2) Time annual percentage yield is offered. The period of time the 
annual percentage yield will be offered, or a statement that the annual 
percentage yield is accurate as of a specified date.
    (3) Minimum balance. The minimum balance required to obtain the 
advertised annual percentage yield. For tiered-rate accounts, the 
minimum balance required for each tier shall be stated in close 
proximity and with equal prominence to the applicable annual percentage 
yield.
    (4) Minimum opening deposit. The minimum deposit required to open 
the account, if it is greater than the minimum balance necessary to 
obtain the advertised annual percentage yield.
    (5) Effect of fees. A statement that fees could reduce the earnings 
on the account.
    (6) Features of time accounts. For time accounts:
    (i) Time requirements. The term of the account.
    (ii) Early withdrawal penalties: A statement that a penalty will or 
may be imposed for early withdrawal.
    (iii) Required interest payouts. For noncompounding time accounts 
with a stated maturity greater than one year that do not compound 
interest on an annual or more frequent basis, that require interest 
payouts at least annually, and that disclose an APY determined in 
accordance with section E of appendix A of this part, a statement that 
interest cannot remain on deposit and that payout of interest is 
mandatory.
    (d) Bonuses. Except as provided in paragraph (e) of this section, if 
a bonus is stated in an advertisement, the advertisement shall state the 
following information, to the extent applicable, clearly and 
conspicuously:
    (1) The ``annual percentage yield,'' using that term;
    (2) The time requirement to obtain the bonus;
    (3) The minimum balance required to obtain the bonus;
    (4) The minimum balance required to open the account, if it is 
greater than the minimum balance necessary to obtain the bonus; and
    (5) When the bonus will be provided.

[[Page 786]]

    (e) Exemption for certain advertisements--(1) Certain media. If an 
advertisement is made through one of the following media, it need not 
contain the information in paragraphs (c)(1), (c)(2), (c)(4), (c)(5), 
(c)(6)(ii), (d)(4), and (d)(5) of this section:
    (i) Broadcast or electronic media, such as television or radio;
    (ii) Outdoor media, such as billboards; or
    (iii) Telephone response machines.
    (2) Indoor signs. (i) Signs inside the premises of a depository 
institution (or the premises of a deposit broker) are not subject to 
paragraphs (b), (c), (d) or (e)(1) of this section.
    (ii) If a sign exempt by paragraph (e)(2) of this section states a 
rate of return, it shall:
    (A) State the rate as an ``annual percentage yield,'' using that 
term or the term ``APY.'' The sign shall not state any other rate, 
except that the interest rate may be stated in conjunction with the 
annual percentage yield to which it relates.
    (B) Contain a statement advising consumers to contact an employee 
for further information about applicable fees and terms.
    (f) Additional disclosures in connection with the payment of 
overdrafts. Institutions that promote the payment of overdrafts in an 
advertisement shall include in the advertisement the disclosures 
required by Sec. 230.11(b) of this part.

[57 FR 43376, Sept. 21, 1992, as amended at 58 FR 15081, Mar. 19, 1993; 
Reg. DD, 60 FR 5130, Jan. 26, 1995; Reg. DD, 63 FR 40638, July 30, 1998; 
Reg. DD, 63 FR 52107, Sept. 29, 1998; 70 FR 29593, May 24, 2005]



Sec. 230.9  Enforcement and record retention.

    (a) Administrative enforcement. Section 270 of the act contains the 
provisions relating to administrative sanctions for failure to comply 
with the requirements of the act and this part. Compliance is enforced 
by the agencies listed in that section.
    (b) Civil liability. Section 271 of the Act contains the provisions 
relating to civil liability for failure to comply with the requirements 
of the act and this part; Section 271 is repealed effective September 
30, 2001.
    (c) Record retention. A depository institution shall retain evidence 
of compliance with this part for a minimum of two years after the date 
disclosures are required to be made or action is required to be taken. 
The administrative agencies responsible for enforcing this part may 
require depository institutions under their jurisdiction to retain 
records for a longer period if necessary to carry out their enforcement 
responsibilities under section 270 of the act.

[57 FR 43376, Sept. 21, 1992, as amended by Reg. DD, 63 FR 52107, Sept. 
29, 1998]



Sec. 230.10  [Reserved]



Sec. 230.11  Additional disclosure requirements for institutions advertising 

the payment of overdrafts.

    (a) Periodic statement disclosures--(1) Disclosure of Total Fees. 
(i) Except as provided in paragraph (a)(2) of this section, if a 
depository institution promotes the payment of overdrafts in an 
advertisement, the institution must separately disclose on each periodic 
statement:
    (A) The total dollar amount for all fees or charges imposed on the 
account for paying checks or other items when there are insufficient 
funds and the account becomes overdrawn; and
    (B) The total dollar amount for all fees imposed on the account for 
returning items unpaid.
    (ii) The disclosures required by this paragraph must be provided for 
the statement period and for the calendar year to date, for any account 
to which the advertisement applies.
    (2) Communications not triggering disclosure of total fees. The 
following communications by a depository institution do not trigger the 
disclosures required by paragraph (a)(1) of this section:
    (i) Promoting in an advertisement a service for paying overdrafts 
where the institution's payment of overdrafts will be agreed upon in 
writing and subject to the Board's Regulation Z (12 CFR part 226);
    (ii) Communicating (whether by telephone, electronically, or 
otherwise) about the payment of overdrafts in response to a consumer-
initiated inquiry about deposit accounts or overdrafts.

[[Page 787]]

Providing information about the payment of overdrafts in response to a 
balance inquiry made through an automated system, such as a telephone 
response machine, an automated teller machine (ATM), or an institution's 
Internet site, is not a response to a consumer-initiated inquiry for 
purposes of this paragraph;
    (iii) Engaging in an in-person discussion with a consumer;
    (iv) Making disclosures that are required by Federal or other 
applicable law;
    (v) Providing a notice or including information on a periodic 
statement informing a consumer about a specific overdrawn item or the 
amount the account is overdrawn;
    (vi) Including in a deposit account agreement a discussion of the 
institution's right to pay overdrafts;
    (vii) Providing a notice to a consumer, such as at an ATM, that 
completing a requested transaction may trigger a fee for overdrawing an 
account, or providing a general notice that items overdrawing an account 
may trigger a fee; or
    (viii) Providing informational or educational materials concerning 
the payment of overdrafts if the materials do not specifically describe 
the institution's overdraft service.
    (3) Time period covered by disclosures. An institution must make the 
disclosures required by paragraph (a)(1) of this section for the first 
statement period that begins after an institution advertises the payment 
of overdrafts. An institution may disclose total fees imposed for the 
calendar year by aggregating fees imposed since the beginning of the 
calendar year, or since the beginning of the first statement period that 
year for which such disclosures are required.
    (4) Termination of promotions. Paragraph (a)(1) of this section 
shall cease to apply with respect to a deposit account two years after 
the date of an institution's last advertisement promoting the payment of 
overdrafts applicable to that account.
    (5) Acquired accounts. An institution that acquires an account must 
thereafter provide the disclosures required by paragraph (a)(1) of this 
section for the first statement period that begins after the institution 
promotes the payment of overdrafts in an advertisement that applies to 
the acquired account. If disclosures under paragraph (a)(1) of this 
section are required for the acquired account, the institution may, but 
is not required to, include fees imposed prior to acquisition of the 
account.
    (b) Advertising disclosures for overdraft services--(1) Disclosures. 
Except as provided in paragraphs (b)(2),(b)(3), and (b)(4) of this 
section, any advertisement promoting the payment of overdrafts shall 
disclose in a clear and conspicuous manner:
    (i) The fee or fees for the payment of each overdraft;
    (ii) The categories of transactions for which a fee for paying an 
overdraft may be imposed;
    (iii) The time period by which the consumer must repay or cover any 
overdraft; and
    (iv) The circumstances under which the institution will not pay an 
overdraft.
    (2) Communications about the payment of overdrafts not subject to 
additional advertising disclosures. Paragraph (b)(1) of this section 
does not apply to:
    (i) An advertisement promoting a service where the institution's 
payment of overdrafts will be agreed upon in writing and subject to the 
Board's Regulation Z (12 CFR part 226);
    (ii) A communication by an institution about the payment of 
overdrafts in response to a consumer-initiated inquiry about deposit 
accounts or overdrafts. Providing information about the payment of 
overdrafts in response to a balance inquiry made through an automated 
system, such as a telephone response machine, ATM, or an institution's 
Internet site, is not a response to a consumer-initiated inquiry for 
purposes of this paragraph;
    (iii) An advertisement made through broadcast or electronic media, 
such as television or radio;
    (iv) An advertisement made on outdoor media, such as billboards;
    (v) An ATM receipt;
    (vi) An in-person discussion with a consumer;
    (vii) Disclosures required by federal or other applicable law;

[[Page 788]]

    (viii) Information included on a periodic statement or a notice 
informing a consumer about a specific overdrawn item or the amount the 
account is overdrawn;
    (ix) A term in a deposit account agreement discussing the 
institution's right to pay overdrafts;
    (x) A notice provided to a consumer, such as at an ATM, that 
completing a requested transaction may trigger a fee for overdrawing an 
account, or a general notice that items overdrawing an account may 
trigger a fee; or
    (xi) Informational or educational materials concerning the payment 
of overdrafts if the materials do not specifically describe the 
institution's overdraft service.
    (3) Exception for ATM screens and telephone response machines. The 
disclosures described in paragraphs (b)(1)(ii) and (b)(1)(iv) of this 
section are not required in connection with any advertisement made on an 
ATM screen or using a telephone response machine.
    (4) Exception for indoor signs. Paragraph (b)(1) of this section 
does not apply to advertisements for the payment of overdrafts on indoor 
signs as described by Sec. 230.8(e)(2) of this part, provided that the 
sign contains a clear and conspicuous statement that fees may apply and 
that consumers should contact an employee for further information about 
applicable fees and terms. For purposes of this paragraph (b)(4), an 
indoor sign does not include an ATM screen.

[70 FR 29593, May 24, 2005]



    Sec. Appendix A to Part 230--Annual Percentage Yield Calculation

    The annual percentage yield measures the total amount of interest 
paid on an account based on the interest rate and the frequency of 
compounding.\1\ The annual percentage yield is expressed as an 
annualized rate, based on a 365-day year.\2\ Part I of this appendix 
discusses the annual percentage yield calculations for account 
disclosures and advertisements, while Part II discusses annual 
percentage yield earned calculations for periodic statements.
---------------------------------------------------------------------------

    \1\ The annual percentage yield reflects only interest and does not 
include the value of any bonus (or other consideration worth $10 or 
less) that may be provided to the consumer to open, maintain, increase 
or renew an account. Interest or other earnings are not to be included 
in the annual percentage yield if such amounts are determined by 
circumstances that may or may not occur in the future.
    \2\ Institutions may calculate the annual percentage yield based on 
a 365-day or a 366-day year in a leap year.
---------------------------------------------------------------------------

Part I. Annual Percentage Yield for Account Disclosures and Advertising 
                                Purposes

    In general, the annual percentage yield for account disclosures 
under Sec. Sec. 230.4 and 230.5 and for advertising under Sec. 230.8 
is an annualized rate that reflects the relationship between the amount 
of interest that would be earned by the consumer for the term of the 
account and the amount of principal used to calculate that interest. 
Special rules apply to accounts with tiered and stepped interest rates, 
and to certain time accounts with a stated maturity greater than one 
year.

                            A. General Rules

    Except as provided in Part I.E. of this appendix, the annual 
percentage yield shall be calculated by the formula shown below. 
Institutions shall calculate the annual percentage yield based on the 
actual number of days in the term of the account. For accounts without a 
stated maturity date (such as a typical savings or transaction account), 
the calculation shall be based on an assumed term of 365 days. In 
determining the total interest figure to be used in the formula, 
institutions shall assume that all principal and interest remain on 
deposit for the entire term and that no other transactions (deposits or 
withdrawals) occur during the term.\3\ For time accounts that are 
offered in multiples of months, institutions may base the number of days 
on either the actual number of days during the applicable period, or the 
number of days that would occur for any actual sequence of that many 
calendar months. If institutions choose to use the latter rule, they 
must use the same number of days to calculate the dollar amount of 
interest earned on the account that is used in the annual percentage 
yield formula (where ``Interest'' is divided by ``Principal'').
---------------------------------------------------------------------------

    \3\ This assumption shall not be used if an institution requires, as 
a condition of the account, that consumers withdraw interest during the 
term. In such a case, the interest (and annual percentage yield 
calculation) shall reflect that requirement.
---------------------------------------------------------------------------

    The annual percentage yield is calculated by use of the following 
general formula (``APY'' is used for convenience in the formulas):

APY=100 [(1+Interest/Principal)(365/Days in term)-1]


[[Page 789]]


    ``Principal'' is the amount of funds assumed to have been deposited 
at the beginning of the account.
    ``Interest'' is the total dollar amount of interest earned on the 
Principal for the term of the account.
    ``Days in term'' is the actual number of days in the term of the 
account. When the ``days in term'' is 365 (that is, where the stated 
maturity is 365 days or where the account does not have a stated 
maturity), the annual percentage yield can be calculated by use of the 
following simple formula:

APY=100 (Interest/Principal)

                                Examples

    (1) If an institution pays $61.68 in interest for a 365-day year on 
$1,000 deposited into a NOW account, using the general formula above, 
the annual percentage yield is 6.17%:

APY=100[(1+61.68/1,000) (365/365) -1]
APY=6.17%
    Or, using the simple formula above (since, as an account without a 
stated term, the term is deemed to be 365 days):

APY=100(61.68/1,000)
APY=6.17%
    (2) If an institution pays $30.37 in interest on a $1,000 six-month 
certificate of deposit (where the six-month period used by the 
institution contains 182 days), using the general formula above, the 
annual percentage yield is 6.18%:

APY=100[(1+30.37/1,000) (365/182) -1]
APY=6.18%

 B. Stepped-Rate Accounts (Different Rates Apply in Succeeding Periods)

    For accounts with two or more interest rates applied in succeeding 
periods (where the rates are known at the time the account is opened), 
an institution shall assume each interest rate is in effect for the 
length of time provided for in the deposit contract.

                                Examples

    (1) If an institution offers a $1,000 6-month certificate of deposit 
on which it pays a 5% interest rate, compounded daily, for the first 
three months (which contain 91 days), and a 5.5% interest rate, 
compounded daily, for the next three months (which contain 92 days), the 
total interest for six months is $26.68 and, using the general formula 
above, the annual percentage yield is 5.39%:

APY=100[(1+26.68/1,000) (365/183) -1]
APY=5.39%
    (2) If an institution offers a $1,000 two-year certificate of 
deposit on which it pays a 6% interest rate, compounded daily, for the 
first year, and a 6.5% interest rate, compounded daily, for the next 
year, the total interest for two years is $133.13, and, using the 
general formula above, the annual percentage yield is 6.45%:

APY=100[(1+133.13/1,000) (365/730) -1]
APY=6.45%

                        C. Variable-Rate Accounts

    For variable-rate accounts without an introductory premium or 
discounted rate, an institution must base the calculation only on the 
initial interest rate in effect when the account is opened (or 
advertised), and assume that this rate will not change during the year.
    Variable-rate accounts with an introductory premium (or discount) 
rate must be calculated like a stepped-rate account. Thus, an 
institution shall assume that: (1) The introductory interest rate is in 
effect for the length of time provided for in the deposit contract; and 
(2) the variable interest rate that would have been in effect when the 
account is opened or advertised (but for the introductory rate) is in 
effect for the remainder of the year. If the variable rate is tied to an 
index, the index-based rate in effect at the time of disclosure must be 
used for the remainder of the year. If the rate is not tied to an index, 
the rate in effect for existing consumers holding the same account (who 
are not receiving the introductory interest rate) must be used for the 
remainder of the year.
    For example, if an institution offers an account on which it pays a 
7% interest rate, compounded daily, for the first three months (which, 
for example, contain 91 days), while the variable interest rate that 
would have been in effect when the account was opened was 5%, the total 
interest for a 365-day year for a $1,000 deposit is $56.52 (based on 91 
days at 7% followed by 274 days at 5%). Using the simple formula, the 
annual percentage yield is 5.65%:

APY=100(56.52/1,000)
APY=5.65%

  D. Tiered-Rate Accounts (Different Rates Apply to Specified Balance 
                                 Levels)

    For accounts in which two or more interest rates paid on the account 
are applicable to specified balance levels, the institution must 
calculate the annual percentage yield in accordance with the method 
described below that it uses to calculate interest. In all cases, an 
annual percentage yield (or a range of annual percentage yields, if 
appropriate) must be disclosed for each balance tier.
    For purposes of the examples discussed below, assume the following:

------------------------------------------------------------------------
 Interest
   rate                Deposit balance required to earn rate
(percent)
------------------------------------------------------------------------
     5.25  Up to but not exceeding $2,500.
     5.50  Above $2,500 but not exceeding $15,000.
     5.75  Above $15,000.
------------------------------------------------------------------------


[[Page 790]]

    Tiering Method A. Under this method, an institution pays on the full 
balance in the account the stated interest rate that corresponds to the 
applicable deposit tier. For example, if a consumer deposits $8,000, the 
institution pays the 5.50% interest rate on the entire $8,000.
    When this method is used to determine interest, only one annual 
percentage yield will apply to each tier. Within each tier, the annual 
percentage yield will not vary with the amount of principal assumed to 
have been deposited.
    For the interest rates and deposit balances assumed above, the 
institution will state three annual percentage yields--one corresponding 
to each balance tier. Calculation of each annual percentage yield is 
similar for this type of account as for accounts with a single interest 
rate. Thus, the calculation is based on the total amount of interest 
that would be received by the consumer for each tier of the account for 
a year and the principal assumed to have been deposited to earn that 
amount of interest.
    First tier. Assuming daily compounding, the institution will pay 
$53.90 in interest on a $1,000 deposit. Using the general formula, for 
the first tier, the annual percentage yield is 5.39%:

APY=100[(1+53.90/1,000) (365/365) -1]
APY=5.39%
    Using the simple formula:

APY=100(53.90/1,000)
APY=5.39%
    Second tier. The institution will pay $452.29 in interest on an 
$8,000 deposit. Thus, using the simple formula, the annual percentage 
yield for the second tier is 5.65%:

APY=100(452.29/8,000)
APY=5.65%
    Third tier. The institution will pay $1,183.61 in interest on a 
$20,000 deposit. Thus, using the simple formula, the annual percentage 
yield for the third tier is 5.92%:

APY=100(1,183.61/20,000)
APY=5.92%
    Tiering Method B. Under this method, an institution pays the stated 
interest rate only on that portion of the balance within the specified 
tier. For example, if a consumer deposits $8,000, the institution pays 
5.25% on $2,500 and 5.50% on $5,500 (the difference between $8,000 and 
the first tier cut-off of $2,500).
    The institution that computes interest in this manner must provide a 
range that shows the lowest and the highest annual percentage yields for 
each tier (other than for the first tier, which, like the tiers in 
Method A, has the same annual percentage yield throughout). The low 
figure for an annual percentage yield range is calculated based on the 
total amount of interest earned for a year assuming the minimum 
principal required to earn the interest rate for that tier. The high 
figure for an annual percentage yield range is based on the amount of 
interest the institution would pay on the highest principal that could 
be deposited to earn that same interest rate. If the account does not 
have a limit on the maximum amount that can be deposited, the 
institution may assume any amount.
    For the tiering structure assumed above, the institution would state 
a total of five annual percentage yields--one figure for the first tier 
and two figures stated as a range for the other two tiers.
    First tier. Assuming daily compounding, the institution would pay 
$53.90 in interest on a $1,000 deposit. For this first tier, using the 
simple formula, the annual percentage yield is 5.39%:

APY=100(53.90/1,000)
APY=5.39%
    Second tier. For the second tier, the institution would pay between 
$134.75 and $841.45 in interest, based on assumed balances of $2,500.01 
and $15,000, respectively. For $2,500.01, interest would be figured on 
$2,500 at 5.25% interest rate plus interest on $.01 at 5.50%. For the 
low end of the second tier, therefore, the annual percentage yield is 
5.39%, using the simple formula:

APY=100(134.75/2,500)
APY=5.39%
    For $15,000, interest is figured on $2,500 at 5.25% interest rate 
plus interest on $12,500 at 5.50% interest rate. For the high end of the 
second tier, the annual percentage yield, using the simple formula, is 
5.61%:

APY=100(841.45/15,000)
APY=5.61%
    Thus, the annual percentage yield range for the second tier is 5.39% 
to 5.61%.
    Third tier. For the third tier, the institution would pay $841.45 in 
interest on the low end of the third tier (a balance of $15,000.01). For 
$15,000.01, interest would be figured on $2,500 at 5.25% interest rate, 
plus interest on $12,500 at 5.50% interest rate, plus interest on $.01 
at 5.75% interest rate. For the low end of the third tier, therefore, 
the annual percentage yield (using the simple formula) is 5.61%:

APY=100 (841.45/15,000)
APY=5.61%
    Since the institution does not limit the account balance, it may 
assume any maximum amount for the purposes of computing the annual 
percentage yield for the high end of the third tier. For an assumed 
maximum balance amount of $100,000, interest would be figured on $2,500 
at 5.25% interest rate, plus interest on $12,500 at 5.50% interest rate, 
plus interest on $85,000 at 5.75% interest rate. For the high end of the 
third tier, therefore, the annual percentage yield, using the simple 
formula, is 5.87%.

APY=100 (5,871.79/100,000)
APY=5.87%

[[Page 791]]

    Thus, the annual percentage yield range that would be stated for the 
third tier is 5.61% to 5.87%.
    If the assumed maximum balance amount is $1,000,000 instead of 
$100,000, the institution would use $985,000 rather than $85,000 in the 
last calculation. In that case, for the high end of the third tier the 
annual percentage yield, using the simple formula, is 5.91%:

APY=100 (59134.22/1,000,000)
APY=5.91%
    Thus, the annual percentage yield range that would be stated for the 
third tier is 5.61% to 5.91%.
    E. Time Accounts with a Stated Maturity Greater than One Year that 
Pay Interest At Least Annually
    1. For time accounts with a stated maturity greater than one year 
that do not compound interest on an annual or more frequent basis, and 
that require the consumer to withdraw interest at least annually, the 
annual percentage yield may be disclosed as equal to the interest rate.

                                 Example

    (1) If an institution offers a $1,000 two-year certificate of 
deposit that does not compound and that pays out interest semi-annually 
by check or transfer at a 6.00% interest rate, the annual percentage 
yield may be disclosed as 6.00%.
    (2) For time accounts covered by this paragraph that are also 
stepped-rate accounts, the annual percentage yield may be disclosed as 
equal to the composite interest rate.

                                 Example

    (1) If an institution offers a $1,000 three-year certificate of 
deposit that does not compound and that pays out interest annually by 
check or transfer at a 5.00% interest rate for the first year, 6.00% 
interest rate for the second year, and 7.00% interest rate for the third 
year, the institution may compute the composite interest rate and APY as 
follows:
    (a) Multiply each interest rate by the number of days it will be in 
effect;
    (b) Add these figures together; and
    (c) Divide by the total number of days in the term.
    (2) Applied to the example, the products of the interest rates and 
days the rates are in effect are (5.00%x365 days) 1825, (6.00%x365 days) 
2190, and (7.00%x365 days) 2555, respectively. The sum of these 
products, 6570, is divided by 1095, the total number of days in the 
term. The composite interest rate and APY are both 6.00%.

     Part II. Annual Percentage Yield Earned for Periodic Statements

    The annual percentage yield earned for periodic statements under 
Sec. 230.6(a) is an annualized rate that reflects the relationship 
between the amount of interest actually earned on the consumer's account 
during the statement period and the average daily balance in the account 
for the statement period. Pursuant to Sec. 230.6(b), however, if an 
institution uses the average daily balance method and calculates 
interest for a period other than the statement period, the annual 
percentage yield earned shall reflect the relationship between the 
amount of interest earned and the average daily balance in the account 
for that other period.
    The annual percentage yield earned shall be calculated by using the 
following formulas (``APY Earned'' is used for convenience in the 
formulas):
    A. General formula.
APY Earned=100 [(1+Interest earned/
Balance)(365/Days in period)-1]

    ``Balance'' is the average daily balance in the account for the 
period.
    ``Interest earned'' is the actual amount of interest earned on the 
account for the period.
    ``Days in period'' is the actual number of days for the period.

                                Examples

    (1) Assume an institution calculates interest for the statement 
period (and uses either the daily balance or the average daily balance 
method), and the account has a balance of $1,500 for 15 days and a 
balance of $500 for the remaining 15 days of a 30-day statement period. 
The average daily balance for the period is $1,000. The interest earned 
(under either balance computation method) is $5.25 during the period. 
The annual percentage yield earned (using the formula above) is 6.58%:

APY Earned=100 [(1+5.25/1,000)(365/30)-1]
APY Earned=6.58%
    (2) Assume an institution calculates interest on the average daily 
balance for the calendar month and provides periodic statements that 
cover the period from the 16th of one month to the 15th of the next 
month. The account has a balance of $2,000 September 1 through September 
15 and a balance of $1,000 for the remaining 15 days of September. The 
average daily balance for the month of September is $1,500, which 
results in $6.50 in interest earned for the month. The annual percentage 
yield earned for the month of September would be shown on the periodic 
statement covering September 16 through October 15. The annual 
percentage yield earned (using the formula above) is 5.40%:

APY Earned=100 [(6.50/1,500)(365/30)-1]
APY Earned=5.40%
    (3) Assume an institution calculates interest on the average daily 
balance for a quarter (for example, the calendar months of September 
through November), and provides monthly periodic statements covering 
calendar months. The account has a balance of

[[Page 792]]

$1,000 throughout the 30 days of September, a balance of $2,000 
throughout the 31 days of October, and a balance of $3,000 throughout 
the 30 days of November. The average daily balance for the quarter is 
$2,000, which results in $21 in interest earned for the quarter. The 
annual percentage yield earned would be shown on the periodic statement 
for November. The annual percentage yield earned (using the formula 
above) is 4.28%:

APY Earned=100 [(1+21/2,000)(365/91)-1]
APY Earned=4.28%
    B. Special formula for use where periodic statement is sent more 
often than the period for which interest is compounded.
    Institutions that use the daily balance method to accrue interest 
and that issue periodic statements more often than the period for which 
interest is compounded shall use the following special formula:
[GRAPHIC] [TIFF OMITTED] TC27SE91.048

    The following definition applies for use in this formula (all other 
terms are defined under Part II):

``Compounding'' is the number of days in each compounding period.
    Assume an institution calculates interest for the statement period 
using the daily balance method, pays a 5.00% interest rate, compounded 
annually, and provides periodic statements for each monthly cycle. The 
account has a daily balance of $1,000 for a 30-day statement period. The 
interest earned is $4.11 for the period, and the annual percentage yield 
earned (using the special formula above) is 5.00%:
[GRAPHIC] [TIFF OMITTED] TC27SE91.049

APY Earned=5.00%

[57 FR 43376, Sept. 21, 1992, as amended at 57 FR 46480, Oct. 9, 1992; 
58 FR 15082, Mar. 19, 1993; 60 FR 5130, Jan. 26, 1995; Reg. DD, 63 FR 
40638, July 30, 1998]



       Sec. Appendix B to Part 230--Model Clauses and Sample Forms

                            Table of contents

B-1--Model Clauses for Account Disclosures (Section 230.4(b))
B-2--Model Clauses for Change in Terms (Section 230.5(a))
B-3--Model Clauses for Pre-Maturity Notices for Time Accounts (Section 
          230.5(b)(2) and 230.5(d))
B-4--Sample Form (Multiple Accounts)
B-5--Sample Form (Now Account)
B-6--Sample Form (Tiered Rate Money Market Account)
B-7--Sample Form (Certificate of Deposit)
B-8--Sample Form (Certificate of Deposit Advertisement)
B-9--Sample Form (Money Market Account Advertisement)

               B-1--Model Clauses for Account Disclosures

    (a) Rate information
    (i) Fixed-rate accounts
    The interest rate on your account is ----% with an annual percentage 
yield of ----%. You will be paid this rate [for (time period)/until 
(date)/ for at least 30 calendar days].
    (ii) Variable-rate accounts
    The interest rate on your account is ----% with an annual percentage 
yield of ----%.
    Your interest rate and annual percentage yield may change.

                          Determination of Rate

    The interest rate on your account is based on (name of index) [plus/
minus a margin of --------].

 or

    At our discretion, we may change the interest rate on your account.

                        Frequency of Rate Changes

    We may change the interest rate on your account [every (time 
period)/at any time].

[[Page 793]]

                       Limitations on Rate Changes

    The interest rate for your account will never change by more than --
--% each (time period).
    The interest rate will never be [less/more] than ----%.

 or

    The interest rate will never [exceed----% above/drop more than ----% 
below] the interest rate initially disclosed to you.
    (iii) Stepped-rate accounts
    The initial interest rate for your account is ----%. You will be 
paid this rate [for (time period)/until (date)]. After that time, the 
interest rate for your account will be ----%, and you will be paid this 
rate [for (time period)/until (date)]. The annual percentage yield for 
your account is ----%.
    (iv) Tiered-rate accounts

                            Tiering Method A

     If your [daily balance/average daily balance] is 
$---- or more, the interest rate paid on the entire balance in your 
account will be ----% with an annual percentage yield of ----%.
     If your [daily balance/average daily balance] is 
more than $----, but less than $----, the interest rate paid on the 
entire balance in your account will be ----% with an annual percentage 
yield of ----%.
     If your [daily balance/average daily balance] is 
$---- or less, the interest rate paid on the entire balance will be ----
% with an annual percentage yield of ----%.

                            Tiering Method B

     An interest rate of ----% will be paid only for 
that portion of your [daily balance/average daily balance] that is 
greater than $----. The annual percentage yield for this tier will range 
from ----% to ----%, depending on the balance in the account.
     An interest rate of ----% will be paid only for 
that portion of your [daily balance/average daily balance] that is 
greater than $----, but less than $----. The annual percentage yield for 
this tier will range from ----% to ----%, depending on the balance in 
the account.
     If your [daily balance/average daily balance] is 
$---- or less, the interest rate paid on the entire balance will be ----
% with an annual percentage yield of ----%.
    (b) Compounding and crediting

                              (i) Frequency

    Interest will be compounded [on a ---- basis/every (time period)]. 
Interest will be credited to your account [on a ---- basis/every (time 
period)].
    (ii) Effect of closing an account
    If you close your account before interest is credited, you will not 
receive the accrued interest.
    (c) Minimum balance requirements
    (i) To open the account
    You must deposit $------ to open this account.
    (ii) To avoid imposition of fees
    A minimum balance fee of $------ will be imposed every (time period) 
if the balance in the account falls below $------ any day of the (time 
period).
    A minimum balance fee of $------ will be imposed every (time period) 
if the average daily balance for the (time period) falls below $------. 
The average daily balance is calculated by adding the principal in the 
account for each day of the period and dividing that figure by the 
number of days in the period.
    (iii) To obtain the annual percentage yield disclosed
    You must maintain a minimum balance of $------ in the account each 
day to obtain the disclosed annual percentage yield.
    You must maintain a minimum average daily balance of $------ to 
obtain the disclosed annual percentage yield. The average daily balance 
is calculated by adding the principal in the account for each day of the 
period and dividing that figure by the number of days in the period.
    (d) Balance computation method
    (i) Daily balance method
    We use the daily balance method to calculate the interest on your 
account. This method applies a daily periodic rate to the principal in 
the account each day.
    (ii) Average daily balance method
    We use the average daily balance method to calculate interest on 
your account. This method applies a periodic rate to the average daily 
balance in the account for the period. The average daily balance is 
calculated by adding the principal in the account for each day of the 
period and dividing that figure by the number of days in the period.
    (e) Accrual of interest on noncash deposits
    Interest begins to accrue no later than the business day we receive 
credit for the deposit of noncash items (for example, checks).

 or

    Interest begins to accrue on the business day you deposit noncash 
items (for example, checks).
    (f) Fees
    The following fees may be assessed against your account:
    ------------------------------$--------
    ------------------------------$--------
    ------------------------------$--------
    --------(conditions for imposing fee) $--------
    ----------------------------------% of --------.
    (g) Transaction limitations
    The minimum amount you may [withdraw/write a check for] is $------.
    You may make -------- [deposits into/withdrawals from] your account 
each (time period).

[[Page 794]]

    You may not make [deposits into/withdrawals from] your account until 
the maturity date.
    (h) Disclosures relating to time accounts
    (i) Time requirements
    Your account will mature on (date).
    Your account will mature in (time period).
    (ii) Early withdrawal penalties
    We [will/may] impose a penalty if you withdraw [any/all] of the 
[deposited funds/principal] before the maturity date. The fee imposed 
will equal ------ days/week[s]/month[s] of interest.

 or

    We [will/may] impose a penalty of $------ if you withdraw [any/all] 
of the [deposited funds/principal] before the maturity date.
    If you withdraw some of your funds before maturity, the interest 
rate for the remaining funds in your account will be ------% with an 
annual percentage yield of ------%.
    (iii) Withdrawal of interest prior to maturity
    The annual percentage yield assumes interest will remain on deposit 
until maturity. A withdrawal will reduce earnings.
    (iv) Renewal policies
    (1) Automatically renewable time accounts
    This account will automatically renew at maturity.
    You will have [------ calendar/business] days after the maturity 
date to withdraw funds without penalty.

 or

    There is no grace period following the maturity of this account to 
withdraw funds without penalty.
    (2) Non-automatically renewable time accounts
    This account will not renew automatically at maturity. If you do not 
renew the account, your deposit will be placed in [an interest-bearing/a 
noninterest-bearing] account.
    (v) Required interest distribution.
    This account requires the distribution of interest and does not 
allow interest to remain in the account.
    (i) Bonuses
    You will [be paid/receive] [$------ /(description of item)] as a 
bonus [when you open the account/on (date) ------].
    You must maintain a minimum [daily balance/average daily balance] of 
$------ to obtain the bonus.
    To earn the bonus, [$------ /your entire principal] must remain on 
deposit [for (time period)/until (date)------].

                 B-2--Model Clauses for Change in Terms

    On (date), the cost of (type of fee) will increase to $------.
    On (date), the interest rate on your account will decrease to ------
% with an annual percentage yield of ------%.
    On (date), the minimum [daily balance/average daily balance] 
required to avoid imposition of a fee will increase to $------.

      B-3--Model Clauses for Pre-Maturity Notices for Time Accounts

    (a) Automatically renewable time accounts with maturities of one 
year or less but longer than one month
    Your account will mature on (date).
    If the account renews, the new maturity date will be (date).
    The interest rate for the renewed account will be ------% with an 
annual percentage yield of ------%.

 or

    The interest rate and annual percentage yield have not yet been 
determined. They will be available on (date). Please call (phone number) 
to learn the interest rate and annual percentage yield for your new 
account.
    (b) Non-automatically renewable time accounts with maturities longer 
than one year
    Your account will mature on (date).
    If you do not renew the account, interest [will/will not] be paid 
after maturity.

[[Page 795]]

[GRAPHIC] [TIFF OMITTED] TC27SE91.050


[[Page 796]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.051


[[Page 797]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.052


[[Page 798]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.053


[[Page 799]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.054


[[Page 800]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.055


[[Page 801]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.056


[[Page 802]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.057


[[Page 803]]


[GRAPHIC] [TIFF OMITTED] TC27SE91.058


[57 FR 43376, Sept. 21, 1992, as amended at 57 FR 46480, Oct. 9, 1992; 
Reg. DD, 60 FR 5131, Jan. 26, 1995]



            Sec. Appendix C to Part 230--Effect on State Laws

                      (a) Inconsistent Requirements

    State law requirements that are inconsistent with the requirements 
of the act and this part are preempted to the extent of the 
inconsistency. A state law is inconsistent if it requires a depository 
institution to make disclosures or take actions that contradict the 
requirements of the federal law. A state law is also contradictory if it 
requires the use of the same term to represent a different amount or a 
different meaning than the federal law, requires the use of a term 
different from that required in the federal law to describe the same 
item, or permits a method of calculating interest on an account 
different from that required in the federal law.

                      (b) Preemption Determinations

    A depository institution, state, or other interested party may 
request the Board to determine whether a state law requirement is 
inconsistent with the federal requirements. A request for a 
determination shall be in writing and addressed to the Secretary, Board 
of Governors of the Federal Reserve

[[Page 804]]

System, Washington, DC 20551. Notice that the Board intends to make a 
determination (either on request or on its own motion) will be published 
in the Federal Register, with an opportunity for public comment unless 
the Board finds that notice and opportunity for comment would be 
impracticable, unnecessary, or contrary to the public interest and 
publishes its reasons for such decision. Notice of a final determination 
will be published in the Federal Register and furnished to the party who 
made the request and to the appropriate state official.

                 (c) Effect of Preemption Determinations

    After the Board determines that a state law is inconsistent, a 
depository institution may not make disclosures using the inconsistent 
term or take actions relying on the inconsistent law.

                      (d) Reversal of Determination

    The Board reserves the right to reverse a determination for any 
reason bearing on the coverage or effect of state or federal law. Notice 
of reversal of a determination will be published in the Federal Register 
and a copy furnished to the appropriate state official.



     Sec. Appendix D to Part 230--Issuance of Staff Interpretations

    Officials in the Board's Division of Consumer and Community Affairs 
are authorized to issue official staff interpretations of this part. 
These interpretations provide the protections afforded under section 
271(f) of the act. Except in unusual circumstances, interpretations will 
not be issued separately but will be incorporated in an official 
commentary to this part, which will be amended periodically. No staff 
interpretations will be issued approving depository institutions' forms, 
statements, or calculation tools or methods.



      Sec. Supplement I to Part 230--Official Staff Interpretations

                              Introduction

    1. Official status. 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 DD. Good faith 
compliance with this commentary affords protection from liability under 
section 271(f) of the Truth in Savings Act.

Section 230.1 Authority, purpose, coverage, and effect on state laws
    (c) Coverage
    1. Foreign applicability. Regulation DD applies to all depository 
institutions, except credit unions, that offer deposit accounts to 
residents (including resident aliens) of any state as defined in Sec. 
230.2(r). Accounts held in an institution located in a state are 
covered, even if funds are transferred periodically to a location 
outside the United States. Accounts held in an institution located 
outside the United States are not covered, even if held by a U.S. 
resident.
    2. Persons who advertise accounts. Persons who advertise accounts 
are subject to the advertising rules. For example, if a deposit broker 
places an advertisement offering consumers an interest in an account at 
a depository institution, the advertising rules apply to the 
advertisement, whether the account is to be held by the broker or 
directly by the consumer.

Section 230.2 Definitions
    (a) Account
    1. Covered accounts. Examples of accounts subject to the regulation 
are:
    i. Interest-bearing and noninterest-bearing accounts
    ii. Deposit accounts opened as a condition of obtaining a credit 
card
    iii. Accounts denominated in a foreign currency
    iv. Individual retirement accounts (IRAs) and simplified employee 
pension (SEP) accounts
    v. Payable on death (POD) or ``Totten trust'' accounts
    2. Other accounts. Examples of accounts not subject to the 
regulation are:
    i. Mortgage escrow accounts for collecting taxes and property 
insurance premiums
    ii. Accounts established to make periodic disbursements on 
construction loans
    iii. Trust accounts opened by a trustee pursuant to a formal written 
trust agreement (not merely declarations of trust on a signature card 
such as a ``Totten trust,'' or an IRA and SEP account)
    iv. Accounts opened by an executor in the name of a decedent's 
estate
    3. Other investments. The term ``account'' does not apply to all 
products of a depository institution. Examples of products not covered 
are:
    i. Government securities
    ii. Mutual funds
    iii. Annuities
    iv. Securities or obligations of a depository institution
    v. Contractual arrangements such as repurchase agreements, interest 
rate swaps, and bankers acceptances
    (b) Advertisement

    1. Covered messages. Advertisements include commercial messages in 
visual, oral, or print media that invite, offer, or otherwise announce 
generally to prospective customers the availability of consumer 
accounts--such as:
    i. Telephone solicitations
    ii. Messages on automated teller machine (ATM) screens

[[Page 805]]

    iii. Messages on a computer screen in an institution's lobby 
(including any printout) other than a screen viewed solely by the 
institution's employee
    iv. Messages in a newspaper, magazine, or promotional flyer or on 
radio
    v. Messages that are provided along with information about the 
consumer's existing account and that promote another account at the 
institution
    2. Other messages. Examples of messages that are not advertisements 
are:
    i. Rate sheets in a newspaper, periodical, or trade journal (unless 
the depository institution, or a deposit broker offering accounts at the 
institution, pays a fee for or otherwise controls publication)
    ii. In-person discussions with consumers about the terms for a 
specific account
    iii. For purposes of Sec. 230.8(b) of this part through Sec. 
230.8(e) of this part, information given to consumers about existing 
accounts, such as current rates recorded on a voice-response machine or 
notices for automatically renewable time account sent before renewal
    iv. Information about a particular transaction in an existing 
account
    v. Disclosures required by federal or other applicable law
    vi. A deposit account agreement

    (f) Bonus
    1. Examples. Bonuses include items of value, other than interest, 
offered as incentives to consumers, such as an offer to pay the final 
installment deposit for a holiday club account. Items that are not a 
bonus include discount coupons for goods or services at restaurants or 
stores.
    2. De minimis rule. Items with a de minimis value of $10 or less are 
not bonuses. Institutions may rely on the valuation standard used by the 
Internal Revenue Service to determine if the value of the item is de 
minimis. Examples of items of de minimis value are:
    i. Disability insurance premiums valued at an amount of $10 or less 
per year
    ii. Coffee mugs, T-shirts or other merchandise with a market value 
of $10 or less
    3. Aggregation. In determining if an item valued at $10 or less is a 
bonus, institutions must aggregate per account per calendar year items 
that may be given to consumers. In making this determination, 
institutions aggregate per account only the market value of items that 
may be given for a specific promotion. To illustrate, assume an 
institution offers in January to give consumers an item valued at $7 for 
each calendar quarter during the year that the average account balance 
in a negotiable order of withdrawal (NOW) account exceeds $10,000. The 
bonus rules are triggered, since consumers are eligible under the 
promotion to receive up to $28 during the year. However, the bonus rules 
are not triggered if an item valued at $7 is offered to consumers 
opening a NOW account during the month of January, even though in 
November the institution introduces a new promotion that includes, for 
example, an offer to existing NOW account holders for an item valued at 
$8 for maintaining an average balance of $5,000 for the month.
    4. Waiver or reduction of a fee or absorption of expenses. Bonuses 
do not include value that consumers receive through the waiver or 
reduction of fees (even if the fees waived exceed $10) for banking-
related services such as the following:
    i. A safe deposit box rental fee for consumers who open a new 
account
    ii. Fees for travelers checks for account holders
    iii. Discounts on interest rates charged for loans at the 
institution
    (h) Consumer
    1. Professional capacity. Examples of accounts held by a natural 
person in a professional capacity for another are attorney-client trust 
accounts and landlord-tenant security accounts.
    2. Other accounts. Accounts not held in a professional capacity 
include accounts held by an individual for a child under the Uniform 
Gifts to Minors Act.
    3. Sole proprietors. Accounts held by individuals as sole 
proprietors are not covered.
    4. Retirement plans. IRAs and SEP accounts are consumer accounts to 
the extent that funds are invested in covered accounts. But Keogh 
accounts are not subject to the regulation.
    (j) Depository institution and institution
    1. Foreign institutions. Branches of foreign institutions located in 
the United States are subject to the regulation if they offer deposit 
accounts to consumers. Edge Act and Agreement corporations, and agencies 
of foreign institutions, are not depository institutions for purposes of 
this regulation.
    (k) Deposit broker
    1. General. A deposit broker is a person who is in the business of 
placing or facilitating the placement of deposits in an institution, as 
defined by the Federal Deposit Insurance Act (12 U.S.C. 29(g)).
    (n) Interest
    1. Relation to Regulation Q. While bonuses are not interest for 
purposes of this regulation, other regulations may treat them as the 
equivalent of interest. For example, Regulation Q identifies payments of 
cash or merchandise that violate the prohibition against paying interest 
on demand accounts. (See 12 CFR Sec. 217.2(d).)
    (p) Passbook savings account
    1. Relation to Regulation E. Passbook savings accounts include 
accounts accessed by preauthorized electronic fund transfers to the 
account (as defined in 12 CFR Sec. 205.2(j)), such as an account that 
receives direct deposit of social security payments. Accounts permitting 
access by other electronic means are not ``passbook saving accounts'' 
and must comply with the requirements of Sec. 230.6

[[Page 806]]

if statements are sent four or more times a year.
    (q) Periodic statement
    1. Examples. Periodic statements do not include:
    i. Additional statements provided solely upon request
    ii. General service information such as a quarterly newsletter or 
other correspondence describing available services and products
    (t) Tiered-rate account
    1. Time accounts. Time accounts paying different rates based solely 
on the amount of the initial deposit are not tiered-rate accounts.
    2. Minimum balance requirements. A requirement to maintain a minimum 
balance to earn interest does not make an account a tiered-rate account.
    (u) Time account
    1. Club accounts. Although club accounts typically have a maturity 
date, they are not time accounts unless they also require a penalty of 
at least seven days' interest for withdrawals during the first six days 
after the account is opened.
    2. Relation to Regulation D. Regulation D permits in limited 
circumstances the withdrawal of funds without penalty during the first 
six days after a ``time deposit'' is opened. (See 12 CFR Sec. 
204.2(c)(1)(i).) But the fact that a consumer makes a withdrawal as 
permitted by Regulation D does not disqualify the account from being a 
time account for purposes of this regulation.
    (v) Variable-rate account
    1. General. A certificate of deposit permitting one or more rate 
adjustments prior to maturity at the consumer's option is a variable-
rate account.

Section 230.3 General disclosure requirements
    (a) Form
    1. Design requirements. Disclosures must be presented in a format 
that allows consumers to readily understand the terms of their account. 
Institutions are not required to use a particular type size or typeface, 
nor are institutions required to state any term more conspicuously than 
any other term. Disclosures may be made:
    i. In any order
    ii. In combination with other disclosures or account terms
    iii. In combination with disclosures for other types of accounts, as 
long as it is clear to consumers which disclosures apply to their 
account
    iv. On more than one page and on the front and reverse sides
    v. By using inserts to a document or filling in blanks
    vi. On more than one document, as long as the documents are provided 
at the same time
    2. Consistent terminology. Institutions must use consistent 
terminology to describe terms or features required to be disclosed. For 
example, if an institution describes a monthly fee (regardless of 
account activity) as a ``monthly service fee'' in account-opening 
disclosures, the periodic statement and change-in-term notices must use 
the same terminology so that consumers can readily identify the fee.
    (b) General
    1. Specificity of legal obligation. Institutions may refer to the 
calendar month or to roughly equivalent intervals during a calendar year 
as a ``month.''
    (c) Relation to Regulation E
    1. General rule. Compliance with Regulation E (12 CFR part 205) is 
deemed to satisfy the disclosure requirements of this regulation, such 
as when:
    i. An institution changes a term that triggers a notice under 
Regulation E, and uses the timing and disclosure rules of Regulation E 
for sending change-in-term notices
    ii. Consumers add an ATM access feature to an account, and the 
institution provides disclosures pursuant to Regulation E, including 
disclosure of fees (See 12 CFR Sec. 205.7.)
    iii. An institution complying with the timing rules of Regulation E 
discloses at the same time fees for electronic services (such as for 
balance inquiry fees at ATMs) required to be disclosed by this 
regulation but not by Regulation E
    iv. An institution relies on Regulation E's rules regarding 
disclosure of limitations on the frequency and amount of electronic fund 
transfers, including security-related exceptions. But any limitations on 
``intra-institutional transfers'' to or from the consumer's other 
accounts during a given time period must be disclosed, even though 
intra-institutional transfers are exempt from Regulation E.
    (e) Oral response to inquiries
    1. Application of rule. Institutions are not required to provide 
rate information orally.
    2. Relation to advertising. The advertising rules do not cover an 
oral response to a question about rates.
    3. Existing accounts. This paragraph does not apply to oral 
responses about rate information for existing accounts. For example, if 
a consumer holding a one-year certificate of deposit (CD) requests 
interest rate information about the CD during the term, the institution 
need not disclose the annual percentage yield.
    (f) Rounding and accuracy rules for rates and yields
    (f)(1) Rounding
    1. Permissible rounding. Examples of permissible rounding are an 
annual percentage yield calculated to be 5.644%, rounded down and 
disclosed as 5.64%; 5.645% rounded up and disclosed as 5.65%.
    (f)(2) Accuracy
    1. Annual percentage yield and annual percentage yield earned. The 
tolerance for annual

[[Page 807]]

percentage yield and annual percentage yield earned calculations is 
designed to accommodate inadvertent errors. Institutions may not 
purposely incorporate the tolerance into their calculation of yields.

Section 230.4 Account disclosures

    (a) Delivery of account disclosures
    (a)(1) Account opening
    1. New accounts. New account disclosures must be provided when:
    i. A time account that does not automatically rollover is renewed by 
a consumer
    ii. A consumer changes a term for a renewable time account (see 
Sec. 230.5(b)-5 regarding disclosure alternatives)
    iii. An institution transfers funds from an account to open a new 
account not at the consumer's request, unless the institution previously 
gave account disclosures and any change-in-term notices for the new 
account
    iv. An institution accepts a deposit from a consumer to an account 
that the institution had deemed closed for the purpose of treating 
accrued but uncredited interest as forfeited interest (see Sec. 
230.7(b)-3)
    2. Acquired accounts. New account disclosures need not be given when 
an institution acquires an account through an acquisition of or merger 
with another institution (but see Sec. 230.5(a) regarding advance 
notice requirements if terms are changed).
    (a)(2) Requests
    (a)(2)(i)
    1. Inquiries versus requests. A response to an oral inquiry (by 
telephone or in person) about rates and yields or fees does not trigger 
the duty to provide account disclosures. But when consumers ask for 
written information about an account (whether by telephone, in person, 
or by other means), the institution must provide disclosures unless the 
account is no longer offered to the public.
    2. General requests. When responding to a consumer's general request 
for disclosures about a type of account (a NOW account, for example), an 
institution that offers several variations may provide disclosures for 
any one of them.
    3. Timing for response. Ten business days is a reasonable time for 
responding to requests for account information that consumers do not 
make in person, including requests made by electronic means (such as by 
electronic mail).
    4. Use of electronic means. If a consumer who is not present at the 
institution makes a request for account disclosures, including a request 
made by telephone, e-mail, or via the institution's Web site, the 
institution may send the disclosures in paper form or, if the consumer 
agrees, may provide the disclosures electronically, such as to an e-mail 
address that the consumer provides for that purpose, or on the 
institution's Web site, without regard to the consumer consent or other 
provisions of the E-Sign Act. The regulation does not require an 
institution to provide, nor a consumer to agree to receive, the 
disclosures required by Sec. 230.4(a)(2) in electronic form.
    (a)(2)(ii)(A)
    1. Recent rates. Institutions comply with this paragraph if they 
disclose an interest rate and annual percentage yield accurate within 
the seven calendar days preceding the date they send the disclosures.
    (a)(2)(ii)(B)
    1. Term. Describing the maturity of a time account as ``1 year'' or 
``6 months,'' for example, illustrates a statement of the maturity of a 
time account as a term rather than a date (``January 10, 1995'').
    (b) Content of account disclosures
    (b)(1) Rate information
    (b)(1)(i) Annual percentage yield and interest rate
    1. Rate disclosures. In addition to the interest rate and annual 
percentage yield, institutions may disclose a periodic rate 
corresponding to the interest rate. No other rate or yield (such as 
``tax effective yield'') is permitted. If the annual percentage yield is 
the same as the interest rate, institutions may disclose a single figure 
but must use both terms.
    2. Fixed-rate accounts. For fixed-rate time accounts paying the 
opening rate until maturity, institutions may disclose the period of 
time the interest rate will be in effect by stating the maturity date. 
(See appendix B, B-7--Sample Form.) For other fixed-rate accounts, 
institutions may use a date (``This rate will be in effect through May 
4, 1995'') or a period (``This rate will be in effect for at least 30 
days'').
    3. Tiered-rate accounts. Each interest rate, along with the 
corresponding annual percentage yield for each specified balance level 
(or range of annual percentage yields, if appropriate), must be 
disclosed for tiered-rate accounts. (See appendix A, Part I, Paragraph 
D.)
    4. Stepped-rate accounts. A single composite annual percentage yield 
must be disclosed for stepped-rate accounts. (See appendix A, Part I, 
Paragraph B.) The interest rates and the period of time each will be in 
effect also must be provided. When the initial rate offered for a 
specified time on a variable-rate account is higher or lower than the 
rate that would otherwise be paid on the account, the calculation of the 
annual percentage yield must be made as if for a stepped-rate account. 
(See appendix A, Part I, Paragraph C.)
    (b)(1)(ii) Variable rates
    (b)(1)(ii)(B)
    1. Determining interest rates. To disclose how the interest rate is 
determined, institutions must:
    i. Identify the index and specific margin, if the interest rate is 
tied to an index

[[Page 808]]

    ii. State that rate changes are within the institution's discretion, 
if the institution does not tie changes to an index
    (b)(1)(ii)(C)
    1. Frequency of rate changes. An institution reserving the right to 
change rates at its discretion must state the fact that rates may change 
at any time.
    (b)(1)(ii)(D)
    1. Limitations. A floor or ceiling on rates or on the amount the 
rate may decrease or increase during any time period must be disclosed. 
Institutions need not disclose the absence of limitations on rate 
changes.
    (b)(2) Compounding and crediting
    (b)(2)(ii) Effect of closing an account
    1. Deeming an account closed. An institution may, subject to state 
or other law, provide in its deposit contracts the actions by consumers 
that will be treated as closing the account and that will result in the 
forfeiture of accrued but uncredited interest. An example is the 
withdrawal of all funds from the account prior to the date that interest 
is credited.
    (b)(3) Balance information
    (b)(3)(ii) Balance computation method
    1. Methods and periods. Institutions may use different methods or 
periods to calculate minimum balances for purposes of imposing a fee 
(the daily balance for a calendar month, for example) and accruing 
interest (the average daily balance for a statement period, for 
example). Each method and corresponding period must be disclosed.
    (b)(3)(iii) When interest begins to accrue
    1. Additional information. Institutions may disclose additional 
information such as the time of day after which deposits are treated as 
having been received the following business day, and may use additional 
descriptive terms such as ``ledger'' or ``collected'' balances to 
disclose when interest begins to accrue.
    (b)(4) Fees
    1. Covered fees. The following are types of fees that must be 
disclosed:
    i. Maintenance fees, such as monthly service fees
    ii. Fees to open or to close an account
    iii. Fees related to deposits or withdrawals, such as fees for use 
of the institution's ATMs
    iv. Fees for special services, such as stop-payment fees, fees for 
balance inquiries or verification of deposits, fees associated with 
checks returned unpaid, and fees for regularly sending to consumers 
checks that otherwise would be held by the institution
    2. Other fees. Institutions need not disclose fees such as the 
following:

    i. Fees for services offered to account and nonaccount holders 
alike, such as travelers checks and wire transfers (even if different 
amounts are charged to account and nonaccount holders)
    ii. Incidental fees, such as fees associated with state escheat 
laws, garnishment or attorneys fees, and fees for photocopying
    3. Amount of fees. Institutions must state the amount and conditions 
under which a fee may be imposed. Naming and describing the fee (such as 
``$4.00 monthly service fee'') will typically satisfy these 
requirements.
    4. Tied-accounts. Institutions must state if fees that may be 
assessed against an account are tied to other accounts at the 
institution. For example, if an institution ties the fees payable on a 
NOW account to balances held in the NOW account and a savings account, 
the NOW account disclosures must state that fact and explain how the fee 
is determined.
    5. Fees for overdrawing an account. Under Sec. 230.4(b)(4) of this 
part, institutions must disclose the conditions under which a fee may be 
imposed. In satisfying this requirement institutions must specify the 
categories of transactions for which an overdraft fee may be imposed. An 
exhaustive list of transactions is not required. It is sufficient for an 
institution to state that the fee applies to overdrafts ``created by 
check, in-person withdrawal, ATM withdrawal, or other electronic 
means,'' as applicable. Disclosing a fee ``for overdraft items'' would 
not be sufficient.
    (b)(5) Transaction limitations
    1. General rule. Examples of limitations on the number or dollar 
amount of deposits or withdrawals that institutions must disclose are:

    i. Limits on the number of checks that may be written on an account 
within a given time period
    ii. Limits on withdrawals or deposits during the term of a time 
account
    iii. Limitations required by Regulation D on the number of 
withdrawals permitted from money market deposit accounts by check to 
third parties each month. Institutions need not disclose reservations of 
right to require notices for withdrawals from accounts required by 
federal or state law.
    (b)(6) Features of time accounts
    (b)(6)(i) Time requirements
    1. ``Callable'' time accounts. In addition to the maturity date, an 
institution must state the date or the circumstances under which it may 
redeem a time account at the institution's option (a ``callable'' time 
account).
    (b)(6)(ii) Early withdrawal penalties
    1. General. The term ``penalty'' may but need not be used to 
describe the loss of interest that consumers may incur for early 
withdrawal of funds from time accounts.
    2. Examples. Examples of early withdrawal penalties are:
    i. Monetary penalties, such as ``$10.00'' or ``seven days' interest 
plus accrued but uncredited interest''
    ii. Adverse changes to terms such as a lowering of the interest 
rate, annual percentage

[[Page 809]]

yield, or compounding frequency for funds remaining on deposit
    iii. Reclamation of bonuses
    3. Relation to rules for IRAs or similar plans. Penalties imposed by 
the Internal Revenue Code for certain withdrawals from IRAs or similar 
pension or savings plans are not early withdrawal penalties for purposes 
of this regulation.
    4. Disclosing penalties. Penalties may be stated in months, whether 
institutions assess the penalty using the actual number of days during 
the period or using another method such as a number of days that occurs 
in any actual sequence of the total calendar months involved. For 
example, stating ``one month's interest'' is permissible, whether the 
institution assesses 30 days' interest during the month of April, or 
selects a time period between 28 and 31 days for calculating the 
interest for all early withdrawals regardless of when the penalty is 
assessed.
    (b)(6)(iv) Renewal policies
    1. Rollover time accounts. Institutions offering a grace period on 
time accounts that automatically renew need not state whether interest 
will be paid if the funds are withdrawn during the grace period.
    2. Nonrollover time accounts. Institutions paying interest on funds 
following the maturity of time accounts that do not renew automatically 
need not state the rate (or annual percentage yield) that may be paid. 
(See appendix B, Model Clause B-1(h)(iv)(2).)

Section 230.5 Subsequent disclosures
    (a) Change in terms
    (a)(1) Advance notice required
    1. Form of notice. Institutions may provide a change-in-term notice 
on or with a periodic statement or in another mailing. If an institution 
provides notice through revised account disclosures, the changed term 
must be highlighted in some manner. For example, institutions may note 
that a particular fee has been changed (also specifying the new amount) 
or use an accompanying letter that refers to the changed term.
    2. Effective date. An example of language for disclosing the 
effective date of a change is ``As of November 21, 1994.''
    3. Terms that change upon the occurrence of an event. An institution 
offering terms that will automatically change upon the occurrence of a 
stated event need not send an advance notice of the change provided the 
institution fully describes the conditions of the change in the account 
opening disclosures (and sends any change-in-term notices regardless of 
whether the changed term affects that consumer's account at that time).
    4. Examples. Examples of changes not requiring an advance change-in-
terms notice are:
    i. The termination of employment for consumers for whom account 
maintenance or activity fees were waived during their employment by the 
depository institution
    ii. The expiration of one year in a promotion described in the 
account opening disclosures to ``waive $4.00 monthly service charges for 
one year''
    (a)(2) No notice required
    (a)(2)(ii) Check printing fees
    1. Increase in fees. A notice is not required for an increase in 
fees for printing checks (or deposit and withdrawal slips) even if the 
institution adds some amount to the price charged by the vendor.
    (b) Notice before maturity for time accounts longer than one month 
that renew automatically
    1. Maturity dates on nonbusiness days. In determining the term of a 
time account, institutions may disregard the fact that the term will be 
extended beyond the disclosed number of days because the disclosed 
maturity falls on a nonbusiness day. For example, a holiday or weekend 
may cause a ``one-year'' time account to extend beyond 365 days (or 366, 
in a leap year) or a ``one-month'' time account to extend beyond 31 
days.
    2. Disclosing when rates will be determined. Ways to disclose when 
the annual percentage yield will be available include the use of:
    i. A specific date, such as ``October 28''
    ii. A date that is easily determinable, such as ``the Tuesday before 
the maturity date stated on this notice'' or ``as of the maturity date 
stated on this notice''
    3. Alternative timing rule. Under the alternative timing rule, an 
institution offering a 10-day grace period would have to provide the 
disclosures at least 10 days prior to the scheduled maturity date.
    4. Club accounts. If consumers have agreed to the transfer of 
payments from another account to a club time account for the next club 
period, the institution must comply with the requirements for 
automatically renewable time accounts--even though consumers may 
withdraw funds from the club account at the end of the current club 
period.
    5. Renewal of a time account. In the case of a change in terms that 
becomes effective if a rollover time account is subsequently renewed:
    i. If the change is initiated by the institution, the disclosure 
requirements of this paragraph apply. (Paragraph 230.5(a) applies if the 
change becomes effective prior to the maturity of the existing time 
account.)
    ii. If the change is initiated by the consumer, the account opening 
disclosure requirements of Sec. 230.4(b) apply. (If the notice required 
by this paragraph has been provided, institutions may give new account 
disclosures or disclosures highlighting only the new term.)
    6. Example. If a consumer receives a prematurity notice on a one-
year time account

[[Page 810]]

and requests a rollover to a six-month account, the institution must 
provide either account opening disclosures including the new maturity 
date or, if all other terms previously disclosed in the prematurity 
notice remain the same, only the new maturity date.
    (b)(1) Maturities of longer than one year
    1. Highlighting changed terms. Institutions need not highlight terms 
that changed since the last account disclosures were provided.
    (c) Notice for time accounts one month or less that renew 
automatically
    (d) Notice before maturity for time accounts longer than one year 
that do not renew automatically
    1. Subsequent account. When funds are transferred following maturity 
of a nonrollover time account, institutions need not provide account 
disclosures unless a new account is established.

Section 230.6 Periodic statement disclosures
    (a) General rule
    1. General. Institutions are not required to provide periodic 
statements. If they do provide statements, disclosures need only be 
furnished to the extent applicable. For example, if no interest is 
earned for a statement period, institutions need not state that fact. 
Or, institutions may disclose ``$0'' interest earned and ``0%'' annual 
percentage yield earned.
    2. Regulation E interim statements. When an institution provides 
regular quarterly statements, and in addition provides a monthly interim 
statement to comply with Regulation E, the interim statement need not 
comply with this section unless it states interest or rate information. 
(See 12 CFR Sec. 205.9(b).)
    3. Combined statements. Institutions may provide information about 
an account (such as an MMDA) on the periodic statement for another 
account (such as a NOW account) without triggering the disclosures 
required by this section, as long as:
    i. The information is limited to the account number, the type of 
account, or balance information, and
    ii. The institution also provides a periodic statement complying 
with this section for each account.
    4. Other information. Additional information that may be given on or 
with a periodic statement includes:
    i. Interest rates and corresponding periodic rates applied to 
balances during the statement period
    ii. The dollar amount of interest earned year-to-date
    iii. Bonuses paid (or any de minimis consideration of $10 or less)
    iv. Fees for products such as safe deposit boxes
    (a)(1) Annual percentage yield earned
    1. Ledger and collected balances. Institutions that accrue interest 
using the collected balance method may use either the ledger or the 
collected balance in determining the annual percentage yield earned.
    (a)(2) Amount of interest
    1. Accrued interest. Institutions must state the amount of interest 
that accrued during the statement period, even if it was not credited.
    2. Terminology. In disclosing interest earned for the period, 
institutions must use the term ``interest'' or terminology such as:
    i. ``Interest paid,'' to describe interest that has been credited
    ii. ``Interest accrued'' or ``interest earned,'' to indicate that 
interest is not yet credited
    3. Closed accounts. If consumers close an account between crediting 
periods and forfeits accrued interest, the institution may not show any 
figures for interest earned or annual percentage yield earned for the 
period (other than zero, at the institution's option).
(a)(3) Fees imposed
    1. General. Periodic statements must state fees disclosed under 
Sec. 230.4(b) that were debited to the account during the statement 
period, even if assessed for an earlier period.
    2. Itemizing fees by type. In itemizing fees imposed more than once 
in the period, institutions may group fees if they are the same type. 
(See Sec. 230.11(a)(1) of this part regarding certain fees that are 
required to be grouped when an institution promotes the payment of 
overdrafts.) When fees of the same type are grouped together, the 
description must make clear that the dollar figure represents more than 
a single fee, for example, ``total fees for checks written this 
period.'' Examples of fees that may not be grouped together are--
    i. Monthly maintenance and excess-activity fees
    ii. ``transfer'' fees, if different dollar amounts are imposed'' 
such as $.50 for deposits and $1.00 for withdrawals
    iii. fees for electronic fund transfers and fees for other services, 
such as balance-inquiry or maintenance fees
    iv. fees for paying overdrafts and fees for returning checks or 
other items unpaid

    3. Identifying fees. Statement details must enable consumers to 
identify the specific fee. For example:
    i. Institutions may use a code to identify a particular fee if the 
code is explained on the periodic statement or in documents accompanying 
the statement.
    ii. Institutions using debit slips may disclose the date the fee was 
debited on the periodic statement and show the amount and type of fee on 
the dated debit slip.
    4. Relation to Regulation E. Disclosure of fees in compliance with 
Regulation E complies with this section for fees related to

[[Page 811]]

electronic fund transfers (for example, totaling all electronic funds 
transfer fees in a single figure).
    (a)(4) Length of period
    1. General. Institutions providing the beginning and ending dates of 
the period must make clear whether both dates are included in the 
period.
    2. Opening or closing an account mid-cycle. If an account is opened 
or closed during the period for which a statement is sent, institutions 
must calculate the annual percentage yield earned based on account 
balances for each day the account was open.
(b) Special rule for average daily balance method
    1. Monthly statements and quarterly compounding. This rule applies, 
for example, when an institution calculates interest on a quarterly 
average daily balance and sends monthly statements. In this case, the 
first two monthly statements would omit annual percentage yield earned 
and interest earned figures; the third monthly statement would reflect 
the interest earned and the annual percentage yield earned for the 
entire quarter.
    2. Length of the period. Institutions must disclose the length of 
both the interest calculation period and the statement period. For 
example, a statement could disclose a statement period of April 16 
through May 15 and further state that ``the interest earned and the 
annual percentage yield earned are based on your average daily balance 
for the period April 1 through April 30.''
    3. Quarterly statements and monthly compounding. Institutions that 
use the average daily balance method to calculate interest on a monthly 
basis and that send statements on a quarterly basis may disclose a 
single interest (and annual percentage yield earned) figure. 
Alternatively, an institution may disclose three interest and three 
annual percentage yield earned figures, one for each month in the 
quarter, as long as the institution states the number of days (or 
beginning and ending dates) in the interest period if different from the 
statement period.

Section 230.7 Payment of interest

    (a)(1) Permissible methods
    1. Prohibited calculation methods. Calculation methods that do not 
comply with the requirement to pay interest on the full amount of 
principal in the account each day include:
    i. Paying interest on the balance in the account at the end of the 
period (the ``ending balance'' method)
    ii. Paying interest for the period based on the lowest balance in 
the account for any day in that period (the ``low balance'' method)
    iii. Paying interest on a percentage of the balance, excluding the 
amount set aside for reserve requirements (the ``investable balance'' 
method)
    2. Use of 365-day basis. Institutions may apply a daily periodic 
rate greater than 1/365 of the interest rate--such as 1/360 of the 
interest rate--as long as it is applied 365 days a year.
    3. Periodic interest payments. An institution can pay interest each 
day on the account and still make uniform interest payments. For 
example, for a one-year certificate of deposit an institution could make 
monthly interest payments equal to 1/12 of the amount of interest that 
will be earned for a 365-day period (or 11 uniform monthly payments--
each equal to roughly 1/12 of the total amount of interest--and one 
payment that accounts for the remainder of the total amount of interest 
earned for the period).
    4. Leap year. Institutions may apply a daily rate of 1/366 or 1/365 
of the interest rate for 366 days in a leap year, if the account will 
earn interest for February 29.
    5. Maturity of time accounts. Institutions are not required to pay 
interest after time accounts mature. (See 12 CFR part 217, the Board's 
Regulation Q, for limitations on duration of interest payments.) 
Examples include:
    i. During a grace period offered for an automatically renewable time 
account, if consumers decide during that period not to renew the account
    ii. Following the maturity of nonrollover time accounts
    iii. When the maturity date falls on a holiday, and consumers must 
wait until the next business day to obtain the funds
    6. Dormant accounts. Institutions must pay interest on funds in an 
account, even if inactivity or the infrequency of transactions would 
permit the institution to consider the account to be ``inactive'' or 
``dormant'' (or similar status) as defined by state or other law or the 
account contract.
    (a)(2) Determination of minimum balance to earn interest
    1. Daily balance accounts. Institutions that require a minimum 
balance may choose not to pay interest for days when the balance drops 
below the required minimum, if they use the daily balance method to 
calculate interest.
    2. Average daily balance accounts. Institutions that require a 
minimum balance may choose not to pay interest for the period in which 
the balance drops below the required minimum, if they use the average 
daily balance method to calculate interest.
    3. Beneficial method. Institutions may not require that consumers 
maintain both a minimum daily balance and a minimum average daily 
balance to earn interest, such as by requiring consumers to maintain a 
$500 daily balance and a prescribed average daily balance (whether 
higher or lower). But an institution could offer a minimum balance to

[[Page 812]]

earn interest that includes an additional method that is ``unequivocally 
beneficial'' to consumers such as the following: An institution using 
the daily balance method to calculate interest and requiring a $500 
minimum daily balance could offer to pay interest on the account for 
those days the minimum balance is not met as long as consumers maintain 
an average daily balance throughout the month of $400.
    4. Paying on full balance. Institutions must pay interest on the 
full balance in the account that meets the required minimum balance. For 
example, if $300 is the minimum daily balance required to earn interest, 
and a consumer deposits $500, the institution must pay the stated 
interest rate on the full $500 and not just on $200.
    5. Negative balances prohibited. Institutions must treat a negative 
account balance as zero to determine:
    i. The daily or average daily balance on which interest will be paid
    ii. Whether any minimum balance to earn interest is met
    6. Club accounts. Institutions offering club accounts (such as a 
``holiday'' or ``vacation'' club) cannot impose a minimum balance 
requirement for interest based on the total number or dollar amount of 
payments required under the club plan. For example, if a plan calls for 
$10 weekly payments for 50 weeks, the institution cannot set a $500 
``minimum balance'' and then pay interest only if the consumer has made 
all 50 payments.
    7. Minimum balances not affecting interest. Institutions may use the 
daily balance, average daily balance, or any other computation method to 
calculate minimum balance requirements not involving the payment of 
interest--such as to compute minimum balances for assessing fees.
    (b) Compounding and crediting policies
    1. General. Institutions choosing to compound interest may compound 
or credit interest annually, semi-annually, quarterly, monthly, daily, 
continuously, or on any other basis.
    2. Withdrawals prior to crediting date. If consumers withdraw funds 
(without closing the account) prior to a scheduled crediting date, 
institutions may delay paying the accrued interest on the withdrawn 
amount until the scheduled crediting date, but may not avoid paying 
interest.
    3. Closed accounts. Subject to state or other law, an institution 
may choose not to pay accrued interest if consumers close an account 
prior to the date accrued interest is credited, as long as the 
institution has disclosed that fact.
    (c) Date interest begins to accrue
    1. Relation to Regulation CC. Institutions may rely on the Expedited 
Funds Availability Act (EFAA) and Regulation CC (12 CFR part 229) to 
determine, for example, when a deposit is considered made for purposes 
of interest accrual, or when interest need not be paid on funds because 
a deposited check is later returned unpaid.
    2. Ledger and collected balances. Institutions may calculate 
interest by using a ``ledger'' or ``collected'' balance method, as long 
as the crediting requirements of the EFAA are met (12 CFR 229.14).
    3. Withdrawal of principal. Institutions must accrue interest on 
funds until the funds are withdrawn from the account. For example, if a 
check is debited to an account on a Tuesday, the institution must accrue 
interest on those funds through Monday.

Section 230.8 Advertising

    (a) Misleading or inaccurate advertisements
    1. General. All advertisements are subject to the rule against 
misleading or inaccurate advertisements, even though the disclosures 
applicable to various media differ.
    2. Indoor signs. An indoor sign advertising an annual percentage 
yield is not misleading or inaccurate when:
    i. For a tiered-rate account, it also provides the lower dollar 
amount of the tier corresponding to the advertised annual percentage 
yield
    ii. For a time account, it also provides the term required to obtain 
the advertised annual percentage yield
    3. Fees affecting ``free'' accounts. For purposes of determining 
whether an account can be advertised as ``free'' or ``no cost,'' 
maintenance and activity fees include:
    i. Any fee imposed when a minimum balance requirement is not met, or 
when consumers exceed a specified number of transactions
    ii. Transaction and service fees that consumers reasonably expect to 
be imposed on a regular basis
    iii. A flat fee, such as a monthly service fee
    iv. Fees imposed to deposit, withdraw, or transfer funds, including 
per-check or per-transaction charges (for example, $.25 for each 
withdrawal, whether by check or in person)
    4. Other fees. Examples of fees that are not maintenance or activity 
fees include:
    i. Fees not required to be disclosed under Sec. 230.4(b)(4)
    ii. Check printing fees
    iii. Balance inquiry fees
    iv. Stop-payment fees and fees associated with checks returned 
unpaid
    v. Fees assessed against a dormant account
    vi. Fees for ATM or electronic transfer services (such as 
preauthorized transfers or home banking services) not required to obtain 
an account
    5. Similar terms. An advertisement may not use the term ``fees 
waived'' if a maintenance or activity fee may be imposed because it is 
similar to the terms ``free'' or ``no cost.''

[[Page 813]]

    6. Specific account services. Institutions may advertise a specific 
account service or feature as free if no fee is imposed for that service 
or feature. For example, institutions offering an account that is free 
of deposit or withdrawal fees could advertise that fact, as long as the 
advertisement does not mislead consumers by implying that the account is 
free and that no other fee (a monthly service fee, for example) may be 
charged.
    7. Free for limited time. If an account (or a specific account 
service) is free only for a limited period of time--for example, for one 
year following the account opening--the account (or service) may be 
advertised as free if the time period is also stated.
    8. Conditions not related to deposit accounts. Institutions may 
advertise accounts as ``free'' for consumers meeting conditions not 
related to deposit accounts, such as the consumer's age. For example, 
institutions may advertise a NOW account as ``free for persons over 65 
years old,'' even though a maintenance or activity fee is assessed on 
accounts held by consumers 65 or younger.
    9. Electronic advertising. If an electronic advertisement (such as 
an advertisement appearing on an Internet Web site) displays a 
triggering term (such as a bonus or annual percentage yield) the 
advertisement must clearly refer the consumer to the location where the 
additional required information begins. For example, an advertisement 
that includes a bonus or annual percentage yield may be accompanied by a 
link that directly takes the consumer to the additional information.
    10. Examples. Examples of advertisements that would ordinarily be 
misleading, inaccurate, or misrepresent the deposit contract are:
    i. Representing an overdraft service as a ``line of credit,'' unless 
the service is subject to the Board's Regulation Z, 12 CFR part 226.
    ii. Representing that the institution will honor all checks or 
authorize payment of all transactions that overdraw an account, with or 
without a specified dollar limit, when the institution retains 
discretion at any time not to honor checks or authorize transactions.
    iii. Representing that consumers with an overdrawn account are 
allowed to maintain a negative balance when the terms of the account's 
overdraft service require consumers promptly to return the deposit 
account to a positive balance.
    iv. Describing an institution's overdraft service solely as 
protection against bounced checks when the institution also permits 
overdrafts for a fee for overdrawing their accounts by other means, such 
as ATM withdrawals, debit card transactions, or other electronic fund 
transfers.
    v. Advertising an account-related service for which the institution 
charges a fee in an advertisement that also uses the word ``free'' or 
``no cost'' (or a similar term) to describe the account, unless the 
advertisement clearly and conspicuously indicates that there is a cost 
associated with the service. If the fee is a maintenance or activity fee 
under Sec. 230.8(a)(2) of this part, however, an advertisement may not 
describe the account as ``free'' or ``no cost'' (or contain a similar 
term) even if the fee is disclosed in the advertisement.
    11. Additional disclosures in connection with the payment of 
overdrafts. The rule in Sec. 230.3(a), providing that disclosures 
required by Sec. 230.8 may be provided to the consumer in electronic 
form without regard to E-Sign Act requirements, applies to the 
disclosures described in Sec. 230.11(b), which are incorporated by 
reference in Sec. 230.8(f).
    (b) Permissible rates
    1. Tiered-rate accounts. An advertisement for a tiered-rate account 
that states an annual percentage yield must also state the annual 
percentage yield for each tier, along with corresponding minimum balance 
requirements. Any interest rates stated must appear in conjunction with 
the applicable annual percentage yields for each tier.
    2. Stepped-rate accounts. An advertisement that states an interest 
rate for a stepped-rate account must state all the interest rates and 
the time period that each rate is in effect.
    3. Representative examples. An advertisement that states an annual 
percentage yield for a given type of account (such as a time account for 
a specified term) need not state the annual percentage yield applicable 
to other time accounts offered by the institution or indicate that other 
maturity terms are available. In an advertisement stating that rates for 
an account may vary depending on the amount of the initial deposit or 
the term of a time account, institutions need not list each balance 
level and term offered. Instead, the advertisement may:
    i. Provide a representative example of the annual percentage yields 
offered, clearly described as such. For example, if an institution 
offers a $25 bonus on all time accounts and the annual percentage yield 
will vary depending on the term selected, the institution may provide a 
disclosure of the annual percentage yield as follows: ``For example, our 
6-month certificate of deposit currently pays a 3.15% annual percentage 
yield.''
    ii. Indicate that various rates are available, such as by stating 
short-term and longer-term maturities along with the applicable annual 
percentage yields: ``We offer certificates of deposit with annual 
percentage yields that depend on the maturity you choose. For example, 
our one-month CD earns a 2.75% APY. Or, earn a 5.25% APY for a three-
year CD.''
    (c) When additional disclosures are required

[[Page 814]]

    1. Trigger terms. The following are examples of information stated 
in advertisements that are not ``trigger'' terms:
    i. ``One, three, and five year CDs available''
    ii. ``Bonus rates available''
    iii. ``1% over our current rates,'' so long as the rates are not 
determinable from the advertisement
    (2) Time annual percentage yield is offered
    1. Specified date. If an advertisement discloses an annual 
percentage yield as of a specified date, that date must be recent in 
relation to the publication or broadcast frequency of the media used, 
taking into account the particular circumstances or production deadlines 
involved. For example, the printing date of a brochure printed once for 
a deposit account promotion that will be in effect for six months would 
be considered ``recent,'' even though rates change during the six-month 
period. Rates published in a daily newspaper or on television must 
reflect rates offered shortly before (or on) the date the rates are 
published or broadcast.
    2. Reference to date of publication. An advertisement may refer to 
the annual percentage yield as being accurate as of the date of 
publication, if the date is on the publication itself. For instance, an 
advertisement in a periodical may state that a rate is ``current through 
the date of this issue,'' if the periodical shows the date.
    (c)(5) Effect of fees
    1. Scope. This requirement applies only to maintenance or activity 
fees described in paragraph 8(a).
    (c)(6) Features of time accounts
    (c)(6)(i) Time requirements
    1. Club accounts. If a club account has a maturity date but the term 
may vary depending on when the account is opened, institutions may use a 
phrase such as: ``The maturity date of this club account is November 15; 
its term varies depending on when the account is opened.''
    (c)(6)(ii) Early withdrawal penalties
    1. Discretionary penalties. Institutions imposing early withdrawal 
penalties on a case-by-case basis may disclose that they ``may'' (rather 
than ``will'') impose a penalty if such a disclosure accurately 
describes the account terms.
    (d) Bonuses
    1. General reference to ``bonus.'' General statements such as 
``bonus checking'' or ``get a bonus when you open a checking account'' 
do not trigger the bonus disclosures.
    (e) Exemption for certain advertisements
    (e)(1) Certain media
    (e)(1)(i)
    1. Internet advertisements. The exemption for advertisements made 
through broadcast or electronic media does not extend to advertisements 
posted on the Internet or sent by e-mail.
    (e)(1)(iii)
    1. Tiered-rate accounts. Solicitations for a tiered-rate account 
made through telephone response machines must provide the annual 
percentage yields and the balance requirements applicable to each tier.
    (e)(2) Indoor signs
    (e)(2)(i)
    1. General. Indoor signs include advertisements displayed on 
computer screens, banners, preprinted posters, and chalk or peg boards. 
Any advertisement inside the premises that can be retained by a consumer 
(such as a brochure or a printout from a computer) is not an indoor 
sign.

Section 230.9 Enforcement and record retention

    (c) Record retention
    1. Evidence of required actions. Institutions comply with the 
regulation by demonstrating that they have done the following:

    i. Established and maintained procedures for paying interest and 
providing timely disclosures as required by the regulation, and
    ii. Retained sample disclosures for each type of account offered to 
consumers, such as account-opening disclosures, copies of 
advertisements, and change-in-term notices; and information regarding 
the interest rates and annual percentage yields offered.
    2. Methods of retaining evidence. Institutions must be able to 
reconstruct the required disclosures or other actions. They need not 
keep disclosures or other business records in hard copy. Records 
evidencing compliance may be retained on microfilm, microfiche, or by 
other methods that reproduce records accurately (including computer 
files).
    3. Payment of interest. Institutions must retain sufficient rate and 
balance information to permit the verification of interest paid on an 
account, including the payment of interest on the full principal 
balance.

Section 230.10 Electronic Communication [Reserved]

Section 230.11 Additional disclosure requirements for institutions 
          advertising the payment of overdrafts
    (a) Periodic statement disclosures.
    (a)(1) Disclosure of total fees.
    1. Examples of institutions advertising the payment of overdrafts. 
An institution would trigger the periodic statement disclosures if it:
    i. Promotes the institution's policy or practice of paying some 
overdrafts (unless the service would be subject to the Board's 
Regulation Z (12 CFR part 226)), in advertisements using broadcast 
media, brochures, telephone solicitations or electronic mail, or on 
Internet sites, ATM screens or receipts, billboards, or indoor signs. 
(But see Sec. 230.11(a)(2) of this part regarding communications about 
the payment of overdrafts

[[Page 815]]

that would not trigger periodic statement disclosures);
    ii. Includes a message on a periodic statement informing the 
consumer of an overdraft limit or the amount of funds available for 
overdrafts. For example, an institution that includes a message on a 
periodic statement informing the consumer of a $500 overdraft limit or 
that the consumer has $300 remaining on the overdraft limit, is 
promoting an overdraft service;
    iii. Discloses an overdraft limit or includes the dollar amount of 
an overdraft limit in a balance disclosed by any means, including on an 
ATM receipt or on an automated system, such as a telephone response 
machine, ATM screen, or the institution's Internet site.
    2. Applicability of periodic statement disclosures. The periodic 
statement disclosures apply to all accounts for which the institution 
has advertised the payment of overdrafts. For example, if an 
advertisement promoting the payment of overdrafts specifies the types of 
accounts to which the advertisement applies, the institution would not 
be required to provide the periodic statement disclosures for other 
types of accounts offered by the institution for which the advertisement 
does not apply. If an advertisement does not specify the types of 
accounts to which it applies, the advertisement would be considered to 
apply to all of an institution's deposit accounts.
    3. Transfer services. The overdraft services covered by Sec. 
230.11(a)(1) of this part do not include a service providing for the 
transfer of funds from another deposit account of the consumer to permit 
the payment of items without creating an overdraft, even if a fee is 
charged for the transfer.
    4. Fees for paying overdrafts. An institution that advertises the 
payment of overdrafts must disclose on periodic statements a total 
dollar amount for all fees charged to the account for paying overdrafts. 
The institution must disclose separate totals for the statement period 
and for the calendar year to date. The total dollar amount includes per-
item fees as well as interest charges, daily or other periodic fees, or 
fees charged for maintaining an account in overdraft status, whether the 
overdraft is by check or by other means. It also includes fees charged 
when there are insufficient funds because previously deposited funds are 
subject to a hold or are uncollected. It does not include fees for 
transferring funds from another account to avoid an overdraft, or fees 
charged when the institution has previously agreed in writing to pay 
items that overdraw the account and the service is subject to the 
Board's Regulation Z, 12 CFR part 226.
    5. Fees for returning items unpaid. An institution that advertises 
the payment of overdrafts must disclose a total dollar amount for all 
fees charged to the account for dishonoring or returning checks or other 
items drawn on the account. The institution must disclose separate 
totals for the statement period and for the calendar year to date. Fees 
imposed when deposited items are returned are not included.
    6. Waived fees. In some cases, an institution may provide a 
statement for the current period reflecting that fees imposed during a 
previous period were waived and credited to the account. Institutions 
may, but are not required to, reflect the adjustment in the total for 
the calendar year to date. Such adjustments should not affect the total 
disclosed for fees imposed during the current statement period.
    7. Totals for the calendar year to date. Some institutions' 
statement periods do not coincide with the calendar month. In such 
cases, the institution may disclose a calendar year-to-date total by 
aggregating fees for 12 monthly cycles, starting with the period that 
begins during January and finishing with the period that begins during 
December. For example, if statement periods begin on the 10th day of 
each month, the statement covering December 10, 2006 through January 9, 
2007 may disclose the year-to-date total for fees imposed from January 
10, 2006 through January 9, 2007. Alternatively, the institution could 
provide a statement for the cycle ending January 9, 2007 showing the 
year-to-date total for fees imposed January 1, 2006 through December 31, 
2006.
    8. Itemization of fees. An institution may itemize each fee in 
addition to providing the disclosures required by Sec. 230.11(a)(1) of 
this part.
    (a)(3) Time period covered by disclosures
    1. Periodic statement disclosures. The disclosures under Sec. 
230.11(a)(1) of this part must be included on periodic statements 
provided by an institution reflecting the first statement period that 
begins after the institution advertises the payment of overdrafts. For 
example, if a consumer's statement period typically closes on the 15th 
of each month, an institution that promotes the payment of overdrafts on 
July 1, 2006 must provide the disclosures required by Sec. 230.11(a)(1) 
of this part on subsequent periodic statements for that consumer 
beginning with the statement reflecting the period from July 16, 2006 
through August 15, 2006. Only depository institutions that promote the 
payment of overdrafts in an advertisement on or after July 1, 2006 must 
provide disclosures on periodic statements under Sec. 230.11(a)(1) of 
this part.
    (a)(5) Acquired accounts
    1. Examples. As provided in Sec. 230.11(a)(5) of this part, an 
institution that acquires deposit accounts through merger or acquisition 
must provide the disclosures required by paragraph (a)(1) of this 
section for the first statement period that begins after the institution 
promotes the payment of overdrafts in an advertisement that applies to 
the acquired account. If the acquiring institution

[[Page 816]]

does not advertise the payment of overdrafts, or the advertisement does 
not apply to the acquired accounts, the institution need not provide the 
disclosures required by Sec. 230.11(a)(1) of this part for the acquired 
accounts even if the depository institution that previously held the 
accounts advertised the payment of overdrafts with respect to those 
accounts.

    (b) Advertising Disclosures in Connection With Overdraft Services

    1. Examples of institutions promoting the payment of overdrafts. A 
depository institution would be required to include the advertising 
disclosures in Sec. 230.11(b)(1) of this part if the institution:
    i. Promotes the institution's policy or practice of paying 
overdrafts (unless the service would be subject to the Board's 
Regulation Z (12 CFR part 226)). This includes advertisements using 
print media such as newspapers or brochures, telephone solicitations, 
electronic mail, or messages posted on an Internet site. (But see Sec. 
230.11(b)(2) of this part for communications that are not subject to the 
additional advertising disclosures);
    ii. Includes a message on a periodic statement informing the 
consumer of an overdraft limit or the amount of funds available for 
overdrafts. For example, an institution that includes a message on a 
periodic statement informing the consumer of a $500 overdraft limit or 
that the consumer has $300 remaining on the overdraft limit, is 
promoting an overdraft service.
    iii. Discloses an overdraft limit or includes the dollar amount of 
an overdraft limit in a balance disclosed on an automated system, such 
as a telephone response machine, ATM screen or the institution's 
Internet site. (See, however, Sec. 230.11(b)(3) of this part.).
    2. Transfer services. The overdraft services covered by Sec. 
230.11(b)(1) of this part do not include a service providing for the 
transfer of funds from another deposit account of the consumer to permit 
the payment of items without creating an overdraft, even if a fee is 
charged for the transfer.
    3. Electronic media. The exception for advertisements made through 
broadcast or electronic media, such as television or radio, does not 
apply to advertisements posted on an institution's Internet site, on an 
ATM screen, provided on telephone response machines, or sent by 
electronic mail.
    4. Fees. The fees that must be disclosed under Sec. 230.11(b)(1) of 
this part include per-item fees as well as interest charges, daily or 
other periodic fees, and fees charged for maintaining an account in 
overdraft status, whether the overdraft is by check or by other means. 
The fees also include fees charged when there are insufficient funds 
because previously deposited funds are subject to a hold or are 
uncollected. The fees do not include fees for transferring funds from 
another account to avoid an overdraft, or fees charged when the 
institution has previously agreed in writing to pay items that overdraw 
the account and the service is subject to the Board's Regulation Z, 12 
CFR part 226.
    5. Categories of transactions. An exhaustive list of transactions is 
not required. Disclosing that a fee may be imposed for covering 
overdrafts ``created by check, in-person withdrawal, ATM withdrawal, or 
other electronic means' would satisfy the requirements of Sec. 
230.11(b)(1)(ii) of this part where the fee may be imposed in these 
circumstances. See comment 4(b)(4)-5 of this part.
    6. Time period to repay. If a depository institution reserves the 
right to require a consumer to pay an overdraft immediately or on demand 
instead of affording consumers a specific time period to establish a 
positive balance in the account, an institution may comply with Sec. 
230.11(b)(1)(iii) of this part by disclosing this fact.
    7. Circumstances for nonpayment. An institution must describe the 
circumstances under which it will not pay an overdraft. It is sufficient 
to state, as applicable: ``Whether your overdrafts will be paid is 
discretionary and we reserve the right not to pay. For example, we 
typically do not pay overdrafts if your account is not in good standing, 
or you are not making regular deposits, or you have too many 
overdrafts.''
    8. Advertising an account as ``free.'' If the advertised account-
related service is an overdraft service subject to the requirements of 
Sec. 230.11(b)(1) of this part, institutions must disclose the fee or 
fees for the payment of each overdraft, not merely that a cost is 
associated with the overdraft service, as well as other required 
information. Compliance with comment 8(a)-10.v. is not sufficient.

       Appendix A to Part 230--Annual Percentage Yield Calculation

Part I. Annual Percentage Yield for Account Disclosures and Advertising 
                                Purposes

    1. Rounding for calculations. The following are examples of 
permissible rounding for calculating interest and the annual percentage 
yield:

    i. The daily rate applied to a balance carried to five or more 
decimal places
    ii. The daily interest earned carried to five or more decimal places

     Part II. Annual Percentage Yield Earned for Periodic Statements

    1. Balance method. The interest figure used in the calculation of 
the annual percentage yield earned may be derived from the daily balance 
method or the average daily balance method. The balance used in the 
formula for the annual percentage yield earned is the

[[Page 817]]

sum of the balances for each day in the period divided by the number of 
days in the period.
    2. Negative balances prohibited. Institutions must treat a negative 
account balance as zero to determine the balance on which the annual 
percentage yield earned is calculated. (See commentary to Sec. 
230.7(a)(2).)

                           A. General Formula

    1. Accrued but uncredited interest. To calculate the annual 
percentage yield earned, accrued but uncredited interest:

    i. May not be included in the balance for statements issued at the 
same time or less frequently than the account's compounding and 
crediting frequency. For example, if monthly statements are sent for an 
account that compounds interest daily and credits interest monthly, the 
balance may not be increased each day to reflect the effect of daily 
compounding.
    ii. Must be included in the balance for succeeding statements if a 
statement is issued more frequently than compounded interest is credited 
on an account. For example, if monthly statements are sent for an 
account that compounds interest daily and credits interest quarterly, 
the balance for the second monthly statement would include interest that 
had accrued for the prior month.
    2. Rounding. The interest earned figure used to calculate the annual 
percentage yield earned must be rounded to two decimals and reflect the 
amount actually paid. For example, if the interest earned for a 
statement period is $20.074 and the institution pays the consumer 
$20.07, the institution must use $20.07 (not $20.074) to calculate the 
annual percentage yield earned. For accounts paying interest based on 
the daily balance method that compound and credit interest quarterly, 
and send monthly statements, the institution may, but need not, round 
accrued interest to two decimals for calculating the annual percentage 
yield earned on the first two monthly statements issued during the 
quarter. However, on the quarterly statement the interest earned figure 
must reflect the amount actually paid.

 B. Special Formula for Use Where Periodic Statement is Sent More Often 
            Than the Period for Which Interest is Compounded

    1. Statements triggered by Regulation E. Institutions may, but need 
not, use this formula to calculate the annual percentage yield earned 
for accounts that receive quarterly statements and are subject to 
Regulation E's rule calling for monthly statements when an electronic 
fund transfer has occurred. They may do so even though no monthly 
statement was issued during a specific quarter. But institutions must 
use this formula for accounts that compound and credit interest 
quarterly and receive monthly statements that, while triggered by 
Regulation E, comply with the provisions of Sec. 230.6.
    2. Days in compounding period. Institutions using the special annual 
percentage yield earned formula must use the actual number of days in 
the compounding period.

         Appendix B to Part 230--Model Clauses and Sample Forms

    1. Modifications. Institutions that modify the model clauses will be 
deemed in compliance as long as they do not delete required information 
or rearrange the format in a way that affects the substance or clarity 
of the disclosures.
    2. Format. Institutions may use inserts to a document (see Sample 
Form B-4) or fill-in blanks (see Sample Forms B-5, B-6 and B-7, which 
use underlining to indicate terms that have been filled in) to show 
current rates, fees, or other terms.
    3. Disclosures for opening accounts. The sample forms illustrate the 
information that must be provided to consumers when an account is 
opened, as required by Sec. 230.4(a)(1). (See Sec. 230.4(a)(2), which 
states the requirements for disclosing the annual percentage yield, the 
interest rate, and the maturity of a time account in responding to a 
consumer's request.)
    4. Compliance with Regulation E. Institutions may satisfy certain 
requirements under Regulation DD with disclosures that meet the 
requirements of Regulation E. (See Sec. 230.3(c).) For disclosures 
covered by both this regulation and Regulation E (such as the amount of 
fees for ATM usage, institutions should consult appendix A to Regulation 
E for appropriate model clauses.
    5. Duplicate disclosures. If a requirement such as a minimum balance 
applies to more than one account term (to obtain a bonus and determine 
the annual percentage yield, for example), institutions need not repeat 
the requirement for each term, as long as it is clear which terms the 
requirement applies to.
    6. Sample forms. The sample forms (B-4 through B-8) serve a purpose 
different from the model clauses. They illustrate ways of adapting the 
model clauses to specific accounts. The clauses shown relate only to the 
specific transactions described.

                B-1 Model Clauses for Account Disclosures

              B-1(h) Disclosures Relating to Time Accounts

    1. Maturity. The disclosure in Clause (h)(i) stating a specific date 
may be used in all cases. The statement describing a time period is 
appropriate only when providing disclosures in response to a consumer's 
request.

[[Page 818]]

                  B-2 Model Clauses for Change in Terms

    1. General. The second clause, describing a future decrease in the 
interest rate and annual percentage yield, applies to fixed-rate 
accounts only.

                   B-4 Sample Form (Multiple Accounts)

    1. Rate sheet insert. In the rate sheet insert, the calculations of 
the annual percentage yield for the three-month and six-month 
certificates are based on 92 days and 181 days respectively. All 
calculations in the insert assume daily compounding.

           B-6 Sample Form (Tiered-Rate Money Market Account)

    1. General. Sample Form B-6 uses Tiering Method A (discussed in 
appendix A and Clause (a)(iv)) to calculate interest. It gives a 
narrative description of a tiered-rate account; institutions may use 
different formats (for example, a chart similar to the one in Sample 
Form B-4), as long as all required information for each tier is clearly 
presented. The form does not contain a separate disclosure of the 
minimum balance required to obtain the annual percentage yield; the 
tiered-rate disclosure provides that information.

[Reg. DD, 59 FR 40221, Aug. 8, 1994, as amended at 59 FR 52658, Oct. 19, 
1994; 63 FR 52107, Sept. 29, 1998; 66 FR 17803, Apr. 4, 2001; 70 FR 
29594, May 24, 2005; 72 FR 63484, Nov. 9, 2007]



PART 231_NETTING ELIGIBILITY FOR FINANCIAL INSTITUTION (REGULATION EE)--Table 

of Contents




Sec.
231.1 Authority, purpose, and scope.
231.2 Definitions.
231.3 Qualification as a financial institution.

    Authority: 12 U.S.C. 4402(1)(B) and 4402(9).

    Source: Reg. EE, 59 FR 4784, Feb. 2, 1994, unless otherwise noted.



Sec. 231.1  Authority, purpose, and scope.

    (a) Authority. This part (Regulation EE; 12 CFR part 231) is issued 
by the Board of Governors of the Federal Reserve System under the 
authority of sections 402(1)(B) and 402(9) of the Federal Deposit 
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4402(1)(B) and 
4402(9)).
    (b) Purpose and scope. The purpose of the Act and this part is to 
enhance efficiency and reduce systemic risk in the financial markets. 
This part expands the Act's definition of ``financial institution'' to 
allow more financial market participants to avail themselves of the 
netting provisions set forth in sections 401-407 of the Act (12 U.S.C. 
4401-4407). This part does not affect the status of those financial 
institutions specifically defined in the Act.



Sec. 231.2  Definitions.

    As used in this part, unless the context requires otherwise:
    (a) Act means the Federal Deposit Insurance Corporation Improvement 
Act of 1991 (Pub. L. 102-242, 105 Stat. 2236), as amended.
    (b) Affiliate, with respect to a person, means any other person that 
controls, is controlled by, or is under common control with the person.
    (c) Financial contract means a qualified financial contract as 
defined in section 11(e)(8)(D) of the Federal Deposit Insurance Act (12 
U.S.C. 1821(e)(8)(D)), as amended, except that a forward contract 
includes a contract with a maturity date two days or less after the date 
the contract is entered into (i.e., a ``spot'' contract).
    (d) Financial market means a market for a financial contract.
    (e) Gross mark-to-market positions in one or more financial 
contracts means the sum of the absolute values of positions in those 
contracts, adjusted to reflect the market values of those positions in 
accordance with the methods used by the parties to each contract to 
value the contract.
    (f) Person means any legal entity, foreign or domestic, including a 
corporation, unincorporated company, partnership, government unit or 
instrumentality, trust, natural person, or any other entity or 
organization.



Sec. 231.3  Qualification as a financial institution.

    (a) A person qualifies as a financial institution for purposes of 
sections 401-407 of the Act if it represents, orally or in writing, that 
it will engage in financial contracts as a counterparty on both sides of 
one or more financial markets and either--
    (1) Had one or more financial contracts of a total gross dollar 
value of at least $1 billion in notional principal amount outstanding on 
any day during the previous 15-month period with

[[Page 819]]

counterparties that are not its affiliates; or
    (2) Had total gross mark-to-market positions of at least $100 
million (aggregated across counterparties) in one or more financial 
contracts on any day during the previous 15-month period with 
counterparties that are not its affiliates.
    (b) If a person qualifies as a financial institution under paragraph 
(a) of this section, that person will be considered a financial 
institution for the purposes of any contract entered into during the 
period it qualifies, even if the person subsequently fails to qualify.
    (c) If a person qualifies as a financial institution under paragraph 
(a) of this section on March 7, 1994, that person will be considered a 
financial institution for the purposes of any outstanding contract 
entered into prior to March 7, 1994.

[Reg. EE, 59 FR 4784, Feb. 2, 1994, as amended at 61 FR 1274, Jan. 19, 
1996]



PART 232_OBTAINING AND USING MEDICAL INFORMATION IN CONNECTION WITH CREDIT 

(REGULATION FF)--Table of Contents




Sec.
232.1 Scope, General Prohibition and Definitions
232.2 Rule of Construction for Obtaining and Using Unsolicited Medical 
          Information
232.3 Financial Information Exception for Obtaining and Using Medical 
          Information
232.4 Specific Exceptions for Obtaining and Using Medical Information

    Authority: 15 U.S.C. 1681b.

    Source: 70 FR 70682, Nov. 22, 2005, unless otherwise noted.



Sec. 232.1  Scope, General Prohibition and Definitions

    (a) Scope. This part applies to creditors, as defined in paragraph 
(c)(3) of this section, except for creditors that are subject to 
Sec. Sec. 41.30, 222.30, 334.30, 571.30, or 717.30.
    (b) In general. A creditor may not obtain or use medical information 
pertaining to a consumer in connection with any determination of the 
consumer's eligibility, or continued eligibility, for credit, except as 
provided in this section.
    (c) Definitions. (1) Consumer means an individual.
    (2) Credit has the same meaning as in section 702 of the Equal 
Credit Opportunity Act, 15 U.S.C. 1691a.
    (3) Creditor has the same meaning as in section 702 of the Equal 
Credit Opportunity Act, 15 U.S.C. 1691a.
    (4) Eligibility, or continued eligibility, for credit means the 
consumer's qualification or fitness to receive, or continue to receive, 
credit, including the terms on which credit is offered. The term does 
not include:
    (i) Any determination of the consumer's qualification or fitness for 
employment, insurance (other than a credit insurance product), or other 
non-credit products or services;
    (ii) Authorizing, processing, or documenting a payment or 
transaction on behalf of the consumer in a manner that does not involve 
a determination of the consumer's eligibility, or continued eligibility, 
for credit; or
    (iii) Maintaining or servicing the consumer's account in a manner 
that does not involve a determination of the consumer's eligibility, or 
continued eligibility, for credit.
    (5) Medical information means:
    (i) Information or data, whether oral or recorded, in any form or 
medium, created by or derived from a health care provider or the 
consumer, that relates to--
    (A) The past, present, or future physical, mental, or behavioral 
health or condition of an individual;
    (B) The provision of health care to an individual; or
    (C) The payment for the provision of health care to an individual.
    (ii) The term does not include:
    (A) The age or gender of a consumer;
    (B) Demographic information about the consumer, including a 
consumer's residence address or e-mail address;
    (C) Any other information about a consumer that does not relate to 
the physical, mental, or behavioral health or condition of a consumer, 
including the existence or value of any insurance policy; or
    (D) Information that does not identify a specific consumer.

[[Page 820]]

    (6) Person means any individual, partnership, corporation, trust, 
estate cooperative, association, government or governmental subdivision 
or agency, or other entity.



Sec. 232.2  Rule of construction for obtaining and using unsolicited medical 

information.

    (a) In general. A creditor does not obtain medical information in 
violation of the prohibition if it receives medical information 
pertaining to a consumer in connection with any determination of the 
consumer's eligibility, or continued eligibility, for credit without 
specifically requesting medical information.
    (b) Use of unsolicited medical information. A creditor that receives 
unsolicited medical information in the manner described in paragraph (a) 
of this section may use that information in connection with any 
determination of the consumer's eligibility, or continued eligibility, 
for credit to the extent the creditor can rely on at least one of the 
exceptions in Sec. 232.3 or Sec. 232.4.
    (c) Examples. A creditor does not obtain medical information in 
violation of the prohibition if, for example:
    (1) In response to a general question regarding a consumer's debts 
or expenses, the creditor receives information that the consumer owes a 
debt to a hospital.
    (2) In a conversation with the creditor's loan officer, the consumer 
informs the creditor that the consumer has a particular medical 
condition.
    (3) In connection with a consumer's application for an extension of 
credit, the creditor requests a consumer report from a consumer 
reporting agency and receives medical information in the consumer report 
furnished by the agency even though the creditor did not specifically 
request medical information from the consumer reporting agency.



Sec. 232.3  Financial information exception for obtaining and using medical 

information.

    (a) In general. A creditor may obtain and use medical information 
pertaining to a consumer in connection with any determination of the 
consumer's eligibility, or continued eligibility, for credit so long as:
    (1) The information is the type of information routinely used in 
making credit eligibility determinations, such as information relating 
to debts, expenses, income, benefits, assets, collateral, or the purpose 
of the loan, including the use of proceeds;
    (2) The creditor uses the medical information in a manner and to an 
extent that is no less favorable than it would use comparable 
information that is not medical information in a credit transaction; and
    (3) The creditor does not take the consumer's physical, mental, or 
behavioral health, condition or history, type of treatment, or prognosis 
into account as part of any such determination.
    (b) Examples--(1) Examples of the types of information routinely 
used in making credit eligibility determinations. Paragraph (a)(1) of 
this section permits a creditor, for example, to obtain and use 
information about:
    (i) The dollar amount, repayment terms, repayment history, and 
similar information regarding medical debts to calculate, measure, or 
verify the repayment ability of the consumer, the use of proceeds, or 
the terms for granting credit;
    (ii) The value, condition, and lien status of a medical device that 
may serve as collateral to secure a loan;
    (iii) The dollar amount and continued eligibility for disability 
income, workers' compensation income, or other benefits related to 
health or a medical condition that is relied on as a source of 
repayment; or
    (iv) The identity of creditors to whom outstanding medical debts are 
owed in connection with an application for credit, including but not 
limited to, a transaction involving the consolidation of medical debts.
    (2) Examples of uses of medical information consistent with the 
exception. (i) A consumer includes on an application for credit 
information about two $20,000 debts. One debt is to a hospital; the 
other debt is to a retailer. The creditor contacts the hospital and the 
retailer to verify the amount and payment status of the debts. The 
creditor learns that both debts are more than 90 days past due. Any two 
debts of this size

[[Page 821]]

that are more than 90 days past due would disqualify the consumer under 
the creditor's established underwriting criteria. The creditor denies 
the application on the basis that the consumer has a poor repayment 
history on outstanding debts. The creditor has used medical information 
in a manner and to an extent no less favorable than it would use 
comparable non-medical information.
    (ii) A consumer indicates on an application for a $200,000 mortgage 
loan that she receives $15,000 in long-term disability income each year 
from her former employer and has no other income. Annual income of 
$15,000, regardless of source, would not be sufficient to support the 
requested amount of credit. The creditor denies the application on the 
basis that the projected debt-to-income ratio of the consumer does not 
meet the creditor's underwriting criteria. The creditor has used medical 
information in a manner and to an extent that is no less favorable than 
it would use comparable non-medical information.
    (iii) A consumer includes on an application for a $10,000 home 
equity loan that he has a $50,000 debt to a medical facility that 
specializes in treating a potentially terminal disease. The creditor 
contacts the medical facility to verify the debt and obtain the 
repayment history and current status of the loan. The creditor learns 
that the debt is current. The applicant meets the income and other 
requirements of the creditor's underwriting guidelines. The creditor 
grants the application. The creditor has used medical information in 
accordance with the exception.
    (3) Examples of uses of medical information inconsistent with the 
exception. (i) A consumer applies for $25,000 of credit and includes on 
the application information about a $50,000 debt to a hospital. The 
creditor contacts the hospital to verify the amount and payment status 
of the debt, and learns that the debt is current and that the consumer 
has no delinquencies in her repayment history. If the existing debt were 
instead owed to a retail department store, the creditor would approve 
the application and extend credit based on the amount and repayment 
history of the outstanding debt. The creditor, however, denies the 
application because the consumer is indebted to a hospital. The creditor 
has used medical information, here the identity of the medical creditor, 
in a manner and to an extent that is less favorable than it would use 
comparable non-medical information.
    (ii) A consumer meets with a loan officer of a creditor to apply for 
a mortgage loan. While filling out the loan application, the consumer 
informs the loan officer orally that she has a potentially terminal 
disease. The consumer meets the creditor's established requirements for 
the requested mortgage loan. The loan officer recommends to the credit 
committee that the consumer be denied credit because the consumer has 
that disease. The credit committee follows the loan officer's 
recommendation and denies the application because the consumer has a 
potentially terminal disease. The creditor has used medical information 
in a manner inconsistent with the exception by taking into account the 
consumer's physical, mental, or behavioral health, condition, or 
history, type of treatment, or prognosis as part of a determination of 
eligibility or continued eligibility for credit.
    (iii) A consumer who has an apparent medical condition, such as a 
consumer who uses a wheelchair or an oxygen tank, meets with a loan 
officer to apply for a home equity loan. The consumer meets the 
creditor's established requirements for the requested home equity loan 
and the creditor typically does not require consumers to obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product in connection with such loans. However, based on the consumer's 
apparent medical condition, the loan officer recommends to the credit 
committee that credit be extended to the consumer only if the consumer 
obtains a debt cancellation contract, debt suspension agreement, or 
credit insurance product from a nonaffiliated third party. The credit 
committee agrees with the loan officer's recommendation. The loan 
officer informs the consumer that the consumer must obtain a debt 
cancellation contract, debt suspension agreement, or credit insurance 
product from a nonaffiliated third

[[Page 822]]

party to qualify for the loan. The consumer obtains one of these 
products and the creditor approves the loan. The creditor has used 
medical information in a manner inconsistent with the exception by 
taking into account the consumer's physical, mental, or behavioral 
health, condition, or history, type of treatment, or prognosis in 
setting conditions on the consumer's eligibility for credit.



Sec. 232.4  Specific exceptions for obtaining and using medical information.

    (a) In general. A creditor may obtain and use medical information 
pertaining to a consumer in connection with any determination of the 
consumer's eligibility, or continued eligibility, for credit:
    (1) To determine whether the use of a power of attorney or legal 
representative that is triggered by a medical condition or event is 
necessary and appropriate or whether the consumer has the legal capacity 
to contract when a person seeks to exercise a power of attorney or act 
as legal representative for a consumer based on an asserted medical 
condition or event;
    (2) To comply with applicable requirements of local, state, or 
Federal laws;
    (3) To determine, at the consumer's request, whether the consumer 
qualifies for a legally permissible special credit program or credit-
related assistance program that is--
    (i) Designed to meet the special needs of consumers with medical 
conditions; and
    (ii) Established and administered pursuant to a written plan that--
    (A) Identifies the class of persons that the program is designed to 
benefit; and
    (B) Sets forth the procedures and standards for extending credit or 
providing other credit-related assistance under the program;
    (4) To the extent necessary for purposes of fraud prevention or 
detection;
    (5) In the case of credit for the purpose of financing medical 
products or services, to determine and verify the medical purpose of a 
loan and the use of proceeds;
    (6) Consistent with safe and sound practices, if the consumer or the 
consumer's legal representative specifically requests that the creditor 
use medical information in determining the consumer's eligibility, or 
continued eligibility, for credit, to accommodate the consumer's 
particular circumstances, and such request is documented by the 
creditor;
    (7) Consistent with safe and sound practices, to determine whether 
the provisions of a forbearance practice or program that is triggered by 
a medical condition or event apply to a consumer;
    (8) To determine the consumer's eligibility for, the triggering of, 
or the reactivation of a debt cancellation contract or debt suspension 
agreement if a medical condition or event is a triggering event for the 
provision of benefits under the contract or agreement; or
    (9) To determine the consumer's eligibility for, the triggering of, 
or the reactivation of a credit insurance product if a medical condition 
or event is a triggering event for the provision of benefits under the 
product.
    (b) Example of determining eligibility for a special credit program 
or credit assistance program. A not-for-profit organization establishes 
a credit assistance program pursuant to a written plan that is designed 
to assist disabled veterans in purchasing homes by subsidizing the down 
payment for the home purchase mortgage loans of qualifying veterans. The 
organization works through mortgage lenders and requires mortgage 
lenders to obtain medical information about the disability of any 
consumer that seeks to qualify for the program, use that information to 
verify the consumer's eligibility for the program, and forward that 
information to the organization. A consumer who is a veteran applies to 
a creditor for a home purchase mortgage loan. The creditor informs the 
consumer about the credit assistance program for disabled veterans and 
the consumer seeks to qualify for the program. Assuming that the program 
complies with all applicable law, including applicable fair lending 
laws, the creditor may obtain and use medical information about the 
medical condition and disability, if any, of the consumer to determine 
whether the consumer

[[Page 823]]

qualifies for the credit assistance program.
    (c) Examples of verifying the medical purpose of the loan or the use 
of proceeds. (1) If a consumer applies for $10,000 of credit for the 
purpose of financing vision correction surgery, the creditor may verify 
with the surgeon that the procedure will be performed. If the surgeon 
reports that surgery will not be performed on the consumer, the creditor 
may use that medical information to deny the consumer's application for 
credit, because the loan would not be used for the stated purpose.
    (2) If a consumer applies for $10,000 of credit for the purpose of 
financing cosmetic surgery, the creditor may confirm the cost of the 
procedure with the surgeon. If the surgeon reports that the cost of the 
procedure is $5,000, the creditor may use that medical information to 
offer the consumer only $5,000 of credit.
    (3) A creditor has an established medical loan program for financing 
particular elective surgical procedures. The creditor receives a loan 
application from a consumer requesting $10,000 of credit under the 
established loan program for an elective surgical procedure. The 
consumer indicates on the application that the purpose of the loan is to 
finance an elective surgical procedure not eligible for funding under 
the guidelines of the established loan program. The creditor may deny 
the consumer's application because the purpose of the loan is not for a 
particular procedure funded by the established loan program.
    (d) Examples of obtaining and using medical information at the 
request of the consumer. (1) If a consumer applies for a loan and 
specifically requests that the creditor consider the consumer's medical 
disability at the relevant time as an explanation for adverse payment 
history information in his credit report, the creditor may consider such 
medical information in evaluating the consumer's willingness and ability 
to repay the requested loan to accommodate the consumer's particular 
circumstances, consistent with safe and sound practices. The creditor 
may also decline to consider such medical information to accommodate the 
consumer, but may evaluate the consumer's application in accordance with 
its otherwise applicable underwriting criteria. The creditor may not 
deny the consumer's application or otherwise treat the consumer less 
favorably because the consumer specifically requested a medical 
accommodation, if the creditor would have extended the credit or treated 
the consumer more favorably under the creditor's otherwise applicable 
underwriting criteria.
    (2) If a consumer applies for a loan by telephone and explains that 
his income has been and will continue to be interrupted on account of a 
medical condition and that he expects to repay the loan liquidating 
assets, the creditor may, but is not required to, evaluate the 
application using the sale of assets as the primary source of repayment, 
consistent with safe and sound practices, provided that the creditor 
documents the consumer's request by recording the oral conversation or 
making a notation of the request in the consumer's file.
    (3) If a consumer applies for a loan and the application form 
provides a space where the consumer may provide any other information or 
special circumstances, whether medical or non-medical, that the consumer 
would like the creditor to consider in evaluating the consumer's 
application, the creditor may use medical information provided by the 
consumer in that space on that application to accommodate the consumer's 
application for credit, consistent with safe and sound practices, or may 
disregard that information.
    (4) If a consumer specifically requests that the creditor use 
medical information in determining the consumer's eligibility, or 
continued eligibility, for credit and provides the creditor with medical 
information for that purpose, and the creditor determines that it needs 
additional information regarding the consumer's circumstances, the 
creditor may request, obtain, and use additional medical information 
about the consumer as necessary to verify the information provided by 
the consumer or to determine whether to make an accommodation for the 
consumer. The consumer may decline to

[[Page 824]]

provide additional information, withdraw the request for an 
accommodation, and have the application considered under the creditor's 
otherwise applicable underwriting criteria.
    (5) If a consumer completes and signs a credit application that is 
not for medical purpose credit and the application contains boilerplate 
language that routinely requests medical information from the consumer 
or that indicates that by applying for credit the consumer authorizes or 
consents to the creditor obtaining and using medical information in 
connection with a determination of the consumer's eligibility, or 
continued eligibility, for credit, the consumer has not specifically 
requested that the creditor obtain and use medical information to 
accommodate the consumer's particular circumstances.
    (e) Example of a forbearance practice or program. After an 
appropriate safety and soundness review, a creditor institutes a program 
that allows consumers who are or will be hospitalized to defer payments 
as needed for up to three months, without penalty, if the credit account 
has been open for more than one year and has not previously been in 
default, and the consumer provides confirming documentation at an 
appropriate time. A consumer is hospitalized and does not pay her bill 
for a particular month. This consumer has had a credit account with the 
creditor for more than one year and has not previously been in default. 
The creditor attempts to contact the consumer and speaks with the 
consumer's adult child, who is not the consumer's legal representative. 
The adult child informs the creditor that the consumer is hospitalized 
and is unable to pay the bill at that time. The creditor defers payments 
for up to three months, without penalty, for the hospitalized consumer 
and sends the consumer a letter confirming this practice and the date on 
which the next payment will be due. The creditor has obtained and used 
medical information to determine whether the provisions of a medically-
triggered forbearance practice or program apply to a consumer.



PART 233_PROHIBITION ON FUNDING OF UNLAWFUL INTERNET GAMBLING (REGULATION 

GG)--Table of Contents




Sec.
233.1 Authority, purpose, collection of information, and incorporation 
          by reference.
233.2 Definitions.
233.3 Designated payment systems.
233.4 Exemptions.
233.5 Policies and procedures required.
233.6 Non-exclusive examples of policies and procedures.
233.7 Regulatory enforcement.

Appendix A to Part 233--Model Notice

    Authority: 31 U.S.C. 5364.

    Source: Reg. GG, 73 FR 69405, Nov. 18, 2008 unless otherwise noted.

    Effective Date Note: At 73 FR 69405, Nov. 18, 2008, part 233 was 
added, effective Jan. 19, 2009.



Sec. 233.1  Authority, purpose, collection of information, and incorporation 

by reference.

    (a) Authority. This part is issued jointly by the Board of Governors 
of the Federal Reserve System (Board) and the Secretary of the 
Department of the Treasury (Treasury) under section 802 of the Unlawful 
Internet Gambling Enforcement Act of 2006 (Act) (enacted as Title VIII 
of the Security and Accountability For Every Port Act of 2006, Pub. L. 
No. 109-347, 120 Stat. 1884, and codified at 31 U.S.C. 5361-5367). The 
Act states that none of its provisions shall be construed as altering, 
limiting, or extending any Federal or State law or Tribal-State compact 
prohibiting, permitting, or regulating gambling within the United 
States. See 31 U.S.C. 5361(b). In addition, the Act states that its 
provisions are not intended to change which activities related to 
horseracing may or may not be allowed under Federal law, are not 
intended to change the existing relationship between the Interstate 
Horseracing Act of 1978 (IHA) (15 U.S.C. 3001 et seq.) and other Federal 
statutes in effect on October 13, 2006, the date of the Act's enactment, 
and are not intended to resolve any existing disagreements over how to 
interpret the relationship between the IHA and other Federal statutes. 
See 31 U.S.C. 5362(10)(D)(iii). This part is intended to be consistent 
with these provisions.

[[Page 825]]

    (b) Purpose. The purpose of this part is to issue implementing 
regulations as required by the Act. The part sets out necessary 
definitions, designates payment systems subject to the requirements of 
this part, exempts certain participants in designated payment systems 
from certain requirements of this part, provides nonexclusive examples 
of policies and procedures reasonably designed to identify and block, or 
otherwise prevent and prohibit, restricted transactions, and sets out 
the Federal entities that have exclusive regulatory enforcement 
authority with respect to the designated payments systems and non-exempt 
participants therein.
    (c) Collection of information. The Office of Management and Budget 
(OMB) has approved the collection of information requirements in this 
part for the Department of the Treasury and assigned OMB control number 
1505-0204. The Board has approved the collection of information 
requirements in this part under the authority delegated to the Board by 
OMB, and assigned OMB control number 7100-0317.
    (d) Incorporation by reference--relevant definitions from ACH rules. 
(1) This part incorporates by reference the relevant definitions of ACH 
terms as published in the ``2008 ACH Rules: A Complete Guide to Rules & 
Regulations Governing the ACH Network'' (the ``ACH Rules''). The 
Director of the Federal Register approves this incorporation by 
reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. Copies 
of the ``2008 ACH Rules'' are available from the National Automated 
Clearing House Association, Suite 100, 13450 Sunrise Valley Drive, 
Herndon, Virginia 20171, http://nacha.org, (703) 561-1100. Copies also 
are available for public inspection at the Department of Treasury 
Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue, 
NW., Washington, DC 20220, and the National Archives and Records 
Administration (NARA). Before visiting the Treasury library, you must 
call (202) 622-0990 for an appointment. For information on the 
availability of this material at NARA, call (202) 741-6030, or go to: 
http://www.archives.gov/federal--register/code--of--federal--
regulations/ibr--locations.html 20002.
    (2) Any amendment to definitions of the relevant ACH terms in the 
ACH Rules shall not apply to this part unless the Treasury and the Board 
jointly accept such amendment by publishing notice of acceptance of the 
amendment to this part in the Federal Register. An amendment to the 
definition of a relevant ACH term in the ACH Rules that is accepted by 
the Treasury and the Board shall apply to this part on the effective 
date of the rulemaking specified by the Treasury and the Board in the 
joint Federal Register notice expressly accepting such amendment.



Sec. 233.2  Definitions.

    The following definitions apply solely for purposes of this part:
    (a) Actual knowledge with respect to a transaction or commercial 
customer means when a particular fact with respect to that transaction 
or commercial customer is known by or brought to the attention of:
    (1) An individual in the organization responsible for the 
organization's compliance function with respect to that transaction or 
commercial customer; or
    (2) An officer of the organization.
    (b) Automated clearing house system or ACH system means a funds 
transfer system, primarily governed by the ACH Rules, which provides for 
the clearing and settlement of batched electronic entries for 
participating financial institutions. When referring to ACH systems, the 
terms in this regulation (such as ``originating depository financial 
institution,'' ``operator,'' ``originating gateway operator,'' 
``receiving depository financial institution,'' ``receiving gateway 
operator,'' and ``third-party sender'') are defined as those terms are 
defined in the ACH Rules.
    (c) Bet or wager:
    (1) Means the staking or risking by any person of something of value 
upon the outcome of a contest of others, a sporting event, or a game 
subject to chance, upon an agreement or understanding that the person or 
another person will receive something of value in the event of a certain 
outcome;

[[Page 826]]

    (2) Includes the purchase of a chance or opportunity to win a 
lottery or other prize (which opportunity to win is predominantly 
subject to chance);
    (3) Includes any scheme of a type described in 28 U.S.C. 3702;
    (4) Includes any instructions or information pertaining to the 
establishment or movement of funds by the bettor or customer in, to, or 
from an account with the business of betting or wagering (which does not 
include the activities of a financial transaction provider, or any 
interactive computer service or telecommunications service); and
    (5) Does not include--
    (i) Any activity governed by the securities laws (as that term is 
defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 
U.S.C. 78c(a)(47)) for the purchase or sale of securities (as that term 
is defined in section 3(a)(10) of that act (15 U.S.C. 78c(a)(10));
    (ii) Any transaction conducted on or subject to the rules of a 
registered entity or exempt board of trade under the Commodity Exchange 
Act (7 U.S.C. 1 et seq.);
    (iii) Any over-the-counter derivative instrument;
    (iv) Any other transaction that--
    (A) Is excluded or exempt from regulation under the Commodity 
Exchange Act (7 U.S.C. 1 et seq.); or
    (B) Is exempt from State gaming or bucket shop laws under section 
12(e) of the Commodity Exchange Act (7 U.S.C. 16(e)) or section 28(a) of 
the Securities Exchange Act of 1934 (15 U.S.C. 78bb(a));
    (v) Any contract of indemnity or guarantee;
    (vi) Any contract for insurance;
    (vii) Any deposit or other transaction with an insured depository 
institution;
    (viii) Participation in any game or contest in which participants do 
not stake or risk anything of value other than--
    (A) Personal efforts of the participants in playing the game or 
contest or obtaining access to the Internet; or
    (B) Points or credits that the sponsor of the game or contest 
provides to participants free of charge and that can be used or redeemed 
only for participation in games or contests offered by the sponsor; or
    (ix) Participation in any fantasy or simulation sports game or 
educational game or contest in which (if the game or contest involves a 
team or teams) no fantasy or simulation sports team is based on the 
current membership of an actual team that is a member of an amateur or 
professional sports organization (as those terms are defined in 28 
U.S.C. 3701) and that meets the following conditions:
    (A) All prizes and awards offered to winning participants are 
established and made known to the participants in advance of the game or 
contest and their value is not determined by the number of participants 
or the amount of any fees paid by those participants.
    (B) All winning outcomes reflect the relative knowledge and skill of 
the participants and are determined predominantly by accumulated 
statistical results of the performance of individuals (athletes in the 
case of sports events) in multiple real-world sporting or other events.
    (C) No winning outcome is based--
    (1) On the score, point-spread, or any performance or performances 
of any single real-world team or any combination of such teams, or
    (2) Solely on any single performance of an individual athlete in any 
single real-world sporting or other event.
    (d) Block means to reject a particular transaction before or during 
processing, but it does not require freezing or otherwise prohibiting 
subsequent transfers or transactions regarding the proceeds or account.
    (e) Card issuer means any person who issues a credit card, debit 
card, pre-paid card, or stored value card, or the agent of such person 
with respect to such card.
    (f) Card system means a system for authorizing, clearing and 
settling transactions in which credit cards, debit cards, pre-paid 
cards, or stored value cards (such cards being issued or authorized by 
the operator of the system), are used to purchase goods or services or 
to obtain a cash advance. The term includes systems both in which the 
merchant acquirer, card issuer, and system operator are separate 
entities and in which more than one of these roles are performed by the 
same entity.

[[Page 827]]

    (g) Check clearing house means an association of banks or other 
payors that regularly exchange checks for collection or return.
    (h) Check collection system means an interbank system for 
collecting, presenting, returning, and settling for checks or intrabank 
system for settling for checks deposited in and drawn on the same bank. 
When referring to check collection systems, the terms in this regulation 
(such as ``paying bank,'' ``collecting bank,'' ``depositary bank,'' 
``returning bank,'' and ``check'') are defined as those terms are 
defined in 12 CFR 229.2. For purposes of this part, ``check'' also 
includes an electronic representation of a check that a bank agrees to 
handle as a check.
    (i) Commercial customer means a person that is not a consumer and 
that contracts with a non-exempt participant in a designated payment 
system to receive, or otherwise accesses, payment transaction services 
through that non-exempt participant.
    (j) Consumer means a natural person.
    (k) Designated payment system means a system listed in Sec. 233.3.
    (l) Electronic fund transfer has the same meaning given the term in 
section 903 of the Electronic Fund Transfer Act (15 U.S.C. 1693a), 
except that such term includes transfers that would otherwise be 
excluded under section 903(6)(E) of that act (15 U.S.C. 1693a(6)(E)), 
and includes any funds transfer covered by Article 4A of the Uniform 
Commercial Code, as in effect in any State.
    (m) Financial institutionn means a State or national bank, a State 
or Federal savings and loan association, a mutual savings bank, a State 
or Federal credit union, or any other person that, directly or 
indirectly, holds an account belonging to a consumer. The term does not 
include a casino, sports book, or other business at or through which 
bets or wagers may be placed or received.
    (n) Financial transaction provider means a creditor, credit card 
issuer, financial institution, operator of a terminal at which an 
electronic fund transfer may be initiated, money transmitting business, 
or international, national, regional, or local payment network utilized 
to effect a credit transaction, electronic fund transfer, stored value 
product transaction, or money transmitting service, or a participant in 
such network, or other participant in a designated payment system.
    (o) Foreign banking office means:
    (1) Any non-U.S. office of a financial institution; and
    (2) Any non-U.S. office of a foreign bank as described in 12 U.S.C. 
3101(7).
    (p) Interactive computer service means any information service, 
system, or access software provider that provides or enables computer 
access by multiple users to a computer server, including specifically a 
service or system that provides access to the Internet and such systems 
operated or services offered by libraries or educational institutions.
    (q) Internet means the international computer network of 
interoperable packet switched data networks.
    (r) Internet gambling business means the business of placing, 
receiving or otherwise knowingly transmitting a bet or wager by any 
means which involves the use, at least in part, of the Internet, but 
does not include the performance of the customary activities of a 
financial transaction provider, or any interactive computer service or 
telecommunications service.
    (s) Intrastate transaction means placing, receiving, or otherwise 
transmitting a bet or wager where--
    (1) The bet or wager is initiated and received or otherwise made 
exclusively within a single State;
    (2) The bet or wager and the method by which the bet or wager is 
initiated and received or otherwise made is expressly authorized by and 
placed in accordance with the laws of such State, and the State law or 
regulations include--
    (i) Age and location verification requirements reasonably designed 
to block access to minors and persons located out of such State; and
    (ii) Appropriate data security standards to prevent unauthorized 
access by any person whose age and current location has not been 
verified in accordance with such State's law or regulations; and

[[Page 828]]

    (3) The bet or wager does not violate any provision of--
    (i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.);
    (ii) 28 U.S.C. chapter 178 (professional and amateur sports 
protection);
    (iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et 
seq.); or
    (iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
    (t) Intratribal transaction means placing, receiving or otherwise 
transmitting a bet or wager where--
    (1) The bet or wager is initiated and received or otherwise made 
exclusively--
    (i) Within the Indian lands of a single Indian tribe (as such terms 
are defined under the Indian Gaming Regulatory Act (25 U.S.C. 2703)); or
    (ii) Between the Indian lands of two or more Indian tribes to the 
extent that intertribal gaming is authorized by the Indian Gaming 
Regulatory Act (25 U.S.C. 2701 et seq.);
    (2) The bet or wager and the method by which the bet or wager is 
initiated and received or otherwise made is expressly authorized by and 
complies with the requirements of--
    (i) The applicable tribal ordinance or resolution approved by the 
Chairman of the National Indian Gaming Commission; and
    (ii) With respect to class III gaming, the applicable Tribal-State 
compact;
    (3) The applicable tribal ordinance or resolution or Tribal-State 
compact includes--
    (i) Age and location verification requirements reasonably designed 
to block access to minors and persons located out of the applicable 
Tribal lands; and
    (ii) Appropriate data security standards to prevent unauthorized 
access by any person whose age and current location has not been 
verified in accordance with the applicable tribal ordinance or 
resolution or Tribal-State Compact; and
    (4) The bet or wager does not violate any provision of--
    (i) The Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et seq.);
    (ii) 28 U.S.C. chapter 178 (professional and amateur sports 
protection);
    (iii) The Gambling Devices Transportation Act (15 U.S.C. 1171 et 
seq.); or
    (iv) The Indian Gaming Regulatory Act (25 U.S.C. 2701 et seq.).
    (u) Money transmitting business has the meaning given the term in 31 
U.S.C. 5330(d)(1) (determined without regard to any regulations 
prescribed by the Secretary of the Treasury thereunder).
    (v) Operator of a designated payment system means an entity that 
provides centralized clearing and delivery services between participants 
in the designated payment system and maintains the operational framework 
for the system. In the case of an automated clearinghouse system, the 
term ``operator'' has the same meaning as provided in the ACH Rules.
    (w) Participant in a designated payment system means an operator of 
a designated payment system, a financial transaction provider that is a 
member of, or has contracted for financial transaction services with, or 
is otherwise participating in, a designated payment system, or a third-
party processor. This term does not include a customer of the financial 
transaction provider, unless the customer is also a financial 
transaction provider otherwise participating in the designated payment 
system on its own behalf.
    (x) Reasoned legal opinion means a written expression of 
professional judgment by a State-licensed attorney that addresses the 
facts of a particular client's business and the legality of the client's 
provision of its services to relevant customers in the relevant 
jurisdictions under applicable federal and State law, and, in the case 
of intratribal transactions, applicable tribal ordinances, tribal 
resolutions, and Tribal-State compacts. A written legal opinion will not 
be considered ``reasoned'' if it does nothing more than recite the facts 
and express a conclusion.
    (y) Restricted transaction means any of the following transactions 
or transmittals involving any credit, funds, instrument, or proceeds 
that the Act prohibits any person engaged in the business of betting or 
wagering (which does not include the activities of a financial 
transaction provider, or any interactive computer service or 
telecommunications service) from knowingly accepting, in connection with 
the

[[Page 829]]

participation of another person in unlawful Internet gambling--
    (1) Credit, or the proceeds of credit, extended to or on behalf of 
such other person (including credit extended through the use of a credit 
card);
    (2) An electronic fund transfer, or funds transmitted by or through 
a money transmitting business, or the proceeds of an electronic fund 
transfer or money transmitting service, from or on behalf of such other 
person; or
    (3) Any check, draft, or similar instrument that is drawn by or on 
behalf of such other person and is drawn on or payable at or through any 
financial institution.
    (z) State means any State of the United States, the District of 
Columbia, or any commonwealth, territory, or other possession of the 
United States, including the Commonwealth of Puerto Rico, the 
Commonwealth of the Northern Mariana Islands, American Samoa, Guam, and 
the Virgin Islands.
    (aa) Third-party processor means a service provider that--
    (1) In the case of a debit transaction payment, such as an ACH debit 
entry or card system transaction, has a direct relationship with the 
commercial customer that is initiating the debit transfer transaction 
and acts as an intermediary between the commercial customer and the 
first depository institution to handle the transaction;
    (2) In the case of a credit transaction payment, such as an ACH 
credit entry, has a direct relationship with the commercial customer 
that is to receive the proceeds of the credit transfer and acts as an 
intermediary between the commercial customer and the last depository 
institution to handle the transaction; and
    (3) In the case of a cross-border ACH debit or check collection 
transaction, is the first service provider located within the United 
States to receive the ACH debit instructions or check for collection.
    (bb) Unlawful Internet gambling means to place, receive, or 
otherwise knowingly transmit a bet or wager by any means which involves 
the use, at least in part, of the Internet where such bet or wager is 
unlawful under any applicable Federal or State law in the State or 
Tribal lands in which the bet or wager is initiated, received, or 
otherwise made. The term does not include placing, receiving, or 
otherwise transmitting a bet or wager that is excluded from the 
definition of this term by the Act as an intrastate transaction or an 
intra-tribal transaction, and does not include any activity that is 
allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et 
seq.; see Sec. 233.1(a)). The intermediate routing of electronic data 
shall not determine the location or locations in which a bet or wager is 
initiated, received, or otherwise made.
    (cc) Wire transfer system means a system through which an 
unconditional order to a bank to pay a fixed or determinable amount of 
money to a beneficiary upon receipt, or on a day stated in the order, is 
transmitted by electronic or other means through the network, between 
banks, or on the books of a bank. When referring to wire transfer 
systems, the terms in this regulation (such as ``bank,'' ``originator's 
bank,'' ``beneficiary's bank,'' and ``intermediary bank'') are defined 
as those terms are defined in 12 CFR part 210, appendix B.



Sec. 233.3  Designated payment systems.

    The following payment systems could be used by participants in 
connection with, or to facilitate, a restricted transaction:
    (a) Automated clearing house systems;
    (b) Card systems;
    (c) Check collection systems;
    (d) Money transmitting businesses solely to the extent they
    (1) Engage in the transmission of funds, which does not include 
check cashing, currency exchange, or the issuance or redemption of money 
orders, travelers' checks, and other similar instruments; and
    (2) Permit customers to initiate transmission of funds transactions 
remotely from a location other than a physical office of the money 
transmitting business; and
    (e) Wire transfer systems.

[[Page 830]]



Sec. 233.4  Exemptions.

    (a) Automated clearing house systems. The participants processing a 
particular transaction through an automated clearing house system are 
exempt from this regulation's requirements for establishing written 
policies and procedures reasonably designed to prevent or prohibit 
restricted transactions with respect to that transaction, except for--
    (1) The receiving depository financial institution and any third-
party processor receiving the transaction on behalf of the receiver in 
an ACH credit transaction;
    (2) The originating depository financial institution and any third-
party processor initiating the transaction on behalf of the originator 
in an ACH debit transaction; and
    (3) The receiving gateway operator and any third-party processor 
that receives instructions for an ACH debit transaction directly from a 
foreign sender (which could include a foreign banking office, a foreign 
third-party processor, or a foreign originating gateway operator).
    (b) Check collection systems. The participants in a particular check 
collection through a check collection system are exempt from this 
regulation's requirements for establishing written policies and 
procedures reasonably designed to prevent or prohibit restricted 
transactions with respect to that check collection, except for the 
depositary bank.
    (c) Money transmitting businesses. The participants in a money 
transmitting business are exempt from this regulation's requirements for 
establishing written policies and procedures reasonably designed to 
prevent or prohibit restricted transactions, except for the operator.
    (d) Wire transfer systems. The participants in a particular wire 
transfer through a wire transfer system are exempt from this 
regulation's requirements for establishing written policies and 
procedures reasonably designed to prevent or prohibit restricted 
transactions with respect to that transaction, except for the 
beneficiary's bank.



Sec. 233.5  Policies and procedures required.

    (a) All non-exempt participants in designated payment systems shall 
establish and implement written policies and procedures reasonably 
designed to identify and block or otherwise prevent or prohibit 
restricted transactions.
    (b) A non-exempt financial transaction provider participant in a 
designated payment system shall be considered to be in compliance with 
the requirements of paragraph (a) of this section if--
    (1) It relies on and complies with the written policies and 
procedures of the designated payment system that are reasonably designed 
to--
    (i) Identify and block restricted transactions; or
    (ii) Otherwise prevent or prohibit the acceptance of the products or 
services of the designated payment system or participant in connection 
with restricted transactions; and
    (2) Such policies and procedures of the designated payment system 
comply with the requirements of this part.
    (c) For purposes of paragraph (b)(2) in this section, a participant 
in a designated payment system may rely on a written statement or notice 
by the operator of that designated payment system to its participants 
that states that the operator has designed or structured the system's 
policies and procedures for identifying and blocking or otherwise 
preventing or prohibiting restricted transactions to comply with the 
requirements of this part as conclusive evidence that the system's 
policies and procedures comply with the requirements of this part, 
unless the participant is notified otherwise by its Federal functional 
regulator or, in the case of participants that are not directly 
supervised by a Federal functional regulator, the Federal Trade 
Commission.
    (d) As provided in the Act, a person that identifies and blocks a 
transaction, prevents or prohibits the acceptance of its products or 
services in connection with a transaction, or otherwise refuses to honor 
a transaction, shall not be liable to any party for such action if--
    (1) The transaction is a restricted transaction;

[[Page 831]]

    (2) Such person reasonably believes the transaction to be a 
restricted transaction; or
    (3) The person is a participant in a designated payment system and 
blocks or otherwise prevents the transaction in reliance on the policies 
and procedures of the designated payment system in an effort to comply 
with this regulation.
    (e) Nothing in this part requires or is intended to suggest that 
designated payment systems or participants therein must or should block 
or otherwise prevent or prohibit any transaction in connection with any 
activity that is excluded from the definition of ``unlawful Internet 
gambling'' in the Act as an intrastate transaction, an intratribal 
transaction, or a transaction in connection with any activity that is 
allowed under the Interstate Horseracing Act of 1978 (15 U.S.C. 3001 et 
seq.; see Sec. 233.1(a)).
    (f) Nothing in this part modifies any requirement imposed on a 
participant by other applicable law or regulation to file a suspicious 
activity report to the appropriate authorities.
    (g) The requirement of this part to establish and implement written 
policies and procedures applies only to the U.S. offices of participants 
in designated payment systems.



Sec. 233.6  Non-exclusive examples of policies and procedures.

    (a) In general. The examples of policies and procedures to identify 
and block or otherwise prevent or prohibit restricted transactions set 
out in this section are non-exclusive. In establishing and implementing 
written policies and procedures to identify and block or otherwise 
prevent or prohibit restricted transactions, a non-exempt participant in 
a designated payment system is permitted to design and implement 
policies and procedures tailored to its business that may be different 
than the examples provided in this section. In addition, non-exempt 
participants may use different policies and procedures with respect to 
different business lines or different parts of the organization.
    (b) Due diligence. If a non-exempt participant in a designated 
payment system establishes and implements procedures for due diligence 
of its commercial customer accounts or commercial customer relationships 
in order to comply, in whole or in part, with the requirements of this 
regulation, those due diligence procedures will be deemed to be 
reasonably designed to identify and block or otherwise prevent or 
prohibit restricted transactions if the procedures include the steps set 
out in paragraphs (b)(1), (b)(2), and (b)(3) of this section and subject 
to paragraph (b)(4) of this section.
    (1) At the establishment of the account or relationship, the 
participant conducts due diligence of a commercial customer and its 
activities commensurate with the participant's judgment of the risk of 
restricted transactions presented by the customer's business.
    (2) Based on its due diligence, the participant makes a 
determination regarding the risk the commercial customer presents of 
engaging in an Internet gambling business and follows either paragraph 
(b)(2)(i) or (b)(2)(ii) of this section.
    (i) The participant determines that the commercial customer presents 
a minimal risk of engaging in an Internet gambling business.
    (ii) The participant cannot determine that the commercial customer 
presents a minimal risk of engaging in an Internet gambling business, in 
which case it obtains the documentation in either paragraph 
(b)(2)(ii)(A) or (b)(2)(ii)(B) of this section--
    (A) Certification from the commercial customer that it does not 
engage in an Internet gambling business; or
    (B) If the commercial customer does engage in an Internet gambling 
business, each of the following--
    (1) Evidence of legal authority to engage in the Internet gambling 
business, such as--
    (i) A copy of the commercial customer's license that expressly 
authorizes the customer to engage in the Internet gambling business 
issued by the appropriate State or Tribal authority or, if the 
commercial customer does not have such a license, a reasoned legal 
opinion that demonstrates that the commercial customer's Internet 
gambling business does not involve restricted transactions; and

[[Page 832]]

    (ii) A written commitment by the commercial customer to notify the 
participant of any changes in its legal authority to engage in its 
Internet gambling business.
    (2) A third-party certification that the commercial customer's 
systems for engaging in the Internet gambling business are reasonably 
designed to ensure that the commercial customer's Internet gambling 
business will remain within the licensed or otherwise lawful limits, 
including with respect to age and location verification.
    (3) The participant notifies all of its commercial customers, 
through provisions in the account or commercial customer relationship 
agreement or otherwise, that restricted transactions are prohibited from 
being processed through the account or relationship.
    (4) With respect to the determination in paragraph (b)(2)(i) of this 
section, participants may deem the following commercial customers to 
present a minimal risk of engaging in an Internet gambling business--
    (i) An entity that is directly supervised by a Federal functional 
regulator as set out in Sec. 233.7(a); or
    (ii) An agency, department, or division of the Federal government or 
a State government.
    (c) Automated clearing house system examples. (1) The policies and 
procedures of the originating depository financial institution and any 
third party processor in an ACH debit transaction, and the receiving 
depository financial institution and any third party processor in an ACH 
credit transaction, are deemed to be reasonably designed to identify and 
block or otherwise prevent or prohibit restricted transactions if they--
    (i) Address methods to conduct due diligence in establishing a 
commercial customer account or relationship as set out in Sec. 
233.6(b);
    (ii) Address methods to conduct due diligence as set out in Sec. 
233.6(b)(2)(ii)(B) in the event that the participant has actual 
knowledge that an existing commercial customer of the participant 
engages in an Internet gambling business; and
    (iii) Include procedures to be followed with respect to a commercial 
customer if the originating depository financial institution or third-
party processor has actual knowledge that its commercial customer has 
originated restricted transactions as ACH debit transactions or if the 
receiving depository financial institution or third-party processor has 
actual knowledge that its commercial customer has received restricted 
transactions as ACH credit transactions, such as procedures that 
address--
    (A) The circumstances under which the commercial customer should not 
be allowed to originate ACH debit transactions or receive ACH credit 
transactions; and
    (B) The circumstances under which the account should be closed.
    (2) The policies and procedures of a receiving gateway operator and 
third-party processor that receives instructions to originate an ACH 
debit transaction directly from a foreign sender are deemed to be 
reasonably designed to prevent or prohibit restricted transactions if 
they include procedures to be followed with respect to a foreign sender 
if the receiving gateway operator or third-party processor has actual 
knowledge, obtained through notification by a government entity, such as 
law enforcement or a regulatory agency, that such instructions included 
instructions for restricted transactions. Such procedures may address 
sending notification to the foreign sender, such as in the form of the 
notice contained in appendix A to this part.
    (d) Card system examples. The policies and procedures of a card 
system operator, a merchant acquirer, third-party processor, or a card 
issuer, are deemed to be reasonably designed to identify and block or 
otherwise prevent or prohibit restricted transactions, if the policies 
and procedures--
    (1) Provide for either--
    (i) Methods to conduct due diligence--
    (A) In establishing a commercial customer account or relationship as 
set out in Sec. 233.6(b); and
    (B) As set out in Sec. 233.6(b)(2)(ii)(B) in the event that the 
participant has actual knowledge that an existing commercial customer of 
the participant engages in an Internet gambling business; or

[[Page 833]]

    (ii) Implementation of a code system, such as transaction codes and 
merchant/business category codes, that are required to accompany the 
authorization request for a transaction, including--
    (A) The operational functionality to enable the card system operator 
or the card issuer to reasonably identify and deny authorization for a 
transaction that the coding procedure indicates may be a restricted 
transaction; and
    (B) Procedures for ongoing monitoring or testing by the card system 
operator to detect potential restricted transactions, including--
    (1) Conducting testing to ascertain whether transaction 
authorization requests are coded correctly; and
    (2) Monitoring and analyzing payment patterns to detect suspicious 
payment volumes from a merchant customer; and
    (2) For the card system operator, merchant acquirer, or third-party 
processor, include procedures to be followed when the participant has 
actual knowledge that a merchant has received restricted transactions 
through the card system, such as--
    (i) The circumstances under which the access to the card system for 
the merchant, merchant acquirer, or third-party processor should be 
denied; and
    (ii) The circumstances under which the merchant account should be 
closed.
    (e) Check collection system examples. (1) The policies and 
procedures of a depositary bank are deemed to be reasonably designed to 
identify and block or otherwise prevent or prohibit restricted 
transactions, if they--
    (i) Address methods for the depositary bank to conduct due diligence 
in establishing a commercial customer account or relationship as set out 
in Sec. 233.6(b);
    (ii) Address methods for the depositary bank to conduct due 
diligence as set out in Sec. 233.6(b)(2)(ii)(B) in the event that the 
depositary bank has actual knowledge that an existing commercial 
customer engages in an Internet gambling business; and
    (iii) Include procedures to be followed if the depositary bank has 
actual knowledge that a commercial customer of the depositary bank has 
deposited checks that are restricted transactions, such as procedures 
that address--
    (A) The circumstances under which check collection services for the 
customer should be denied; and
    (B) The circumstances under which the account should be closed.
    (2) The policies and procedures of a depositary bank that receives 
checks for collection from a foreign banking office are deemed to be 
reasonably designed to identify and block or otherwise prevent or 
prohibit restricted transactions if they include procedures to be 
followed by the depositary bank when it has actual knowledge, obtained 
through notification by a government entity, such as law enforcement or 
a regulatory agency, that a foreign banking office has sent checks to 
the depositary bank that are restricted transactions. Such procedures 
may address sending notification to the foreign banking office, such as 
in the form of the notice contained in the appendix to this part.
    (f) Money transmitting business examples. The policies and 
procedures of an operator of a money transmitting business are deemed to 
be reasonably designed to identify and block or otherwise prevent or 
prohibit restricted transactions if they--
    (1) Address methods for the operator to conduct due diligence in 
establishing a commercial customer relationship as set out in Sec. 
233.6(b);
    (2) Address methods for the operator to conduct due diligence as set 
out in Sec. 233.6(b)(2)(ii)(B) in the event that the operator has 
actual knowledge that an existing commercial customer engages in an 
Internet gambling business;
    (3) Include procedures regarding ongoing monitoring or testing by 
the operator to detect potential restricted transactions, such as 
monitoring and analyzing payment patterns to detect suspicious payment 
volumes to any recipient; and
    (4) Include procedures when the operator has actual knowledge that a 
commercial customer of the operator has received restricted transactions 
through the money transmitting business, that address--
    (i) The circumstances under which money transmitting services should 
be

[[Page 834]]

denied to that commercial customer; and
    (ii) The circumstances under which the commercial customer account 
should be closed.
    (g) Wire transfer system examples. The policies and procedures of 
the beneficiary's bank in a wire transfer are deemed to be reasonably 
designed to identify and block or otherwise prevent or prohibit 
restricted transactions if they--
    (1) Address methods for the beneficiary's bank to conduct due 
diligence in establishing a commercial customer account as set out in 
Sec. 233.6(b);
    (2) Address methods for the beneficiary's bank to conduct due 
diligence as set out in Sec. 233.6(b)(2)(ii)(B) in the event that the 
beneficiary's bank has actual knowledge that an existing commercial 
customer of the bank engages in an Internet gambling business;
    (3) Include procedures to be followed if the beneficiary's bank 
obtains actual knowledge that a commercial customer of the bank has 
received restricted transactions through the wire transfer system, such 
as procedures that address
    (i) The circumstances under which the beneficiary bank should deny 
wire transfer services to the commercial customer; and
    (ii) The circumstances under which the commercial customer account 
should be closed.



Sec. 233.7  Regulatory enforcement.

    The requirements under this part are subject to the exclusive 
regulatory enforcement of--
    (a) The Federal functional regulators, with respect to the 
designated payment systems and participants therein that are subject to 
the respective jurisdiction of such regulators under section 505(a) of 
the Gramm-Leach-Bliley Act (15 U.S.C. 6805(a)) and section 5g of the 
Commodity Exchange Act (7 U.S.C. 7b-2); and
    (b) The Federal Trade Commission, with respect to designated payment 
systems and participants therein not otherwise subject to the 
jurisdiction of any Federal functional regulators (including the 
Commission) as described in paragraph (a) of this section.



                Sec. Appendix A to Part 233--Model Notice

[Date]
[Name of foreign sender or foreign banking office]
[Address]
Re: U.S. Unlawful Internet Gambling Enforcement Act Notice

Dear [Name of foreign counterparty]:

    On [date], U.S. government officials informed us that your 
institution processed payments through our facilities for Internet 
gambling transactions restricted by U.S. law on [dates, recipients, and 
other relevant information if available].
    We provide this notice to comply with U.S. Government regulations 
implementing the Unlawful Internet Gambling Enforcement Act of 2006 
(Act), a U.S. federal law. Our policies and procedures established in 
accordance with those regulations provide that we will notify a foreign 
counterparty if we learn that the counterparty has processed payments 
through our facilities for Internet gambling transactions restricted by 
the Act. This notice ensures that you are aware that we have received 
information that your institution has processed payments for Internet 
gambling restricted by the Act.
    The Act is codified in subchapter IV, chapter 53, title 31 of the 
U.S. Code (31 U.S.C. 5361 et seq.). Implementing regulations that 
duplicate one another can be found at part 233 of title 12 of the U.S. 
Code of Federal Regulations (12 CFR part 233) and part 132 of title 31 
of the U.S. Code of Federal Regulations (31 CFR part 132).



PART 250_MISCELLANEOUS INTERPRETATIONS--Table of Contents




                             Interpretations

Sec.
250.141 Member bank purchase of stock of ``operations subsidiaries.''
250.142 Meaning of ``obligor or maker'' in determining limitation on 
          securities investments by member State banks.
250.143 Member bank purchase of stock of foreign operations 
          subsidiaries.
250.160 Federal funds transactions.
250.163 Inapplicability of amount limitations to ``ineligible 
          acceptances.''
250.164 Bankers' acceptances.
250.165 Bankers' acceptances: definition of participations.
250.166 Treatment of mandatory convertible debt and subordinated notes 
          of state member banks and bank holding companies as 
          ``capital''.
250.180 Reports of changes in control of management.
250.181 Reports of change in control of bank management incident to a 
          merger.

[[Page 835]]

250.182 Terms defining competitive effects of proposed mergers.
250.200 Investment in bank premises by holding company banks.
250.220 Whether member bank acting as trustee is prohibited by section 
          20 of the Banking Act of 1933 from acquiring majority of 
          shares of mutual fund.
250.221 Issuance and sale of short-term debt obligations by bank holding 
          companies.
250.260 Miscellaneous interpretations; gold coin and bullion.

         Interpretations of Section 32 of the Glass-Steagall Act

250.400 Service of open-end investment company.
250.401 Director serving member bank and closed-end investment company 
          being organized.
250.402 Service as officer, director, or employee of licensee 
          corporation under the Small Business Investment Act of 1958.
250.403 Service of member bank and real estate investment company.
250.404 Serving as director of member bank and corporation selling own 
          stock.
250.405 No exception granted a special or limited partner.
250.406 Serving member bank and investment advisor with mutual fund 
          affiliation.
250.407 Interlocking relationship involving securities affiliate of 
          brokerage firm.
250.408 Short-term negotiable notes of banks not securities under 
          section 32, Banking Act of 1933.
250.409 Investment for own account affects applicability of section 32.
250.410 Interlocking relationships between bank and its commingled 
          investment account.
250.411 Interlocking relationships between member bank and variable 
          annuity insurance company.
250.412 Interlocking relationships between member bank and insurance 
          company-mutual fund complex.
250.413 ``Bank-eligible'' securities activities.

    Authority: 12 U.S.C. 78, 248(i), 371c(f) and 371c-1(e).

    Source: 33 FR 9866, July 10, 1968, unless otherwise noted.

                             Interpretations



Sec. 250.141  Member bank purchase of stock of ``operations subsidiaries.''

    (a) The Board of Governors has reexamined its position that the so-
called ``stock-purchase prohibition'' of section 5136 of the Revised 
Statutes (12 U.S.C. 24), which is made applicable to member State banks 
by the 20th paragraph of section 9 of the Federal Reserve Act (12 U.S.C. 
335), forbids the purchase by a member bank ``for its own account of any 
shares of stock of any corporation'' (the statutory language), except as 
specifically permitted by provisions of Federal law or as comprised 
within the concept of ``such incidental powers as shall be necessary to 
carry on the business of banking'', referred to in the first sentence of 
paragraph ``Seventh'' of R.S. 5136.
    (b) In 1966 the Board expressed the view that said incidental powers 
do not permit member banks to purchase stock of ``operations 
subsidiaries''--that is, organizations designed to serve, in effect, as 
separately-incorporated departments of the bank, performing, at 
locations at which the bank is authorized to engage in business, 
functions that the bank is empowered to perform directly. (See 1966 
Federal Reserve Bulletin 1151.)
    (c) The Board now considers that the incidental powers clause 
permits a bank to organize its operations in the manner that it believes 
best facilitates the performance thereof. One method of organization is 
through departments; another is through separate incorporation of 
particular operations. In other words, a wholly owned subsidiary 
corporation engaged in activities that the bank itself may perform is 
simply a convenient alternative organizational arrangement.
    (d) Reexamination of the apparent purposes and legislative history 
of the stock-purchase prohibition referred to above has led the Board to 
conclude that such prohibition should not be interpreted to preclude a 
member bank from adopting such an organizational arrangement unless its 
use would be inconsistent with other Federal law, either statutory or 
judicial.
    (e) In view of the relationship between the operation of certain 
subsidiaries and the branch banking laws, the Board has also reexamined 
its rulings on what constitutes ``money lent'' for the purposes of 
section 5155 of the Revised Statutes (12 U.S.C. 36), which provides that 
``The termbranch * * * shall be held to include any branch bank, branch 
office, branch agency, additional office, or any branch place of

[[Page 836]]

business * * * at which deposits are received, or checks paid, or money 
lent.'' \1\
---------------------------------------------------------------------------

    \1\ In the Board's judgment, the statutory enumeration of three 
specific functions that establish branch status is not meant to be 
exclusive but to assure that offices at which any of these functions is 
performed are regarded as branches by the bank regulatory authorities. 
In applying the statute the emphasis should be to assure that 
significant banking functions are made available to the public only at 
governmentally authorized offices.
---------------------------------------------------------------------------

    (f) The Board noted in its 1967 interpretation that offices that are 
open to the public and staffed by employees of the bank who regularly 
engage in soliciting borrowers, negotiating terms, and processing 
applications for loans (so-called loan production offices) constitute 
branches. (1967 Federal Reserve Bulletin 1334.) The Board also noted 
that later in that year it considered the question whether a bank 
holding company may acquire the stock of a so-called mortgage company on 
the basis that the company would be engaged in ``furnishing services to 
or performing services for such bank holding company or its banking 
subsidiaries'' (the so-called servicing exemption of section 4(c)(1)(C) 
of the Bank Holding Company Act; 12 U.S.C. 1843). In concluding 
affirmatively, the Board stated that ``the appropriate test for 
determining whether the company may be considered as within the 
servicing exemption is whether the company will perform as principal any 
banking activities--such as receiving deposits, paying checks, extending 
credit, conducting a trust department, and the like. In other words, if 
the mortgage company is to act merely as an adjunct to a bank for the 
purpose of facilitating the bank's operations, the company may 
appropriately be considered as within the scope of the servicing 
exemption.'' (1967 Federal Reserve Bulletin 1911; 12 CFR 225.122.)
    (g) The Board believes that the purposes of the branch banking laws 
and the servicing exemption are related. Generally, what constitutes a 
branch does not constitute a servicing organization and, vice versa, an 
office that only performs servicing functions should not be considered a 
branch. (See 1958 Federal Reserve Bulletin 431, last paragraph; 12 CFR 
225.104(e).) When viewed together, the above-cited interpretations on 
loan production offices and mortgage companies represent a departure 
from this principle. In reconsidering the laws involved, the Board has 
concluded that a test similar to that adopted with respect to the 
servicing exemption under the Bank Holding Company Act is appropriate 
for use in determining whether or not what constitutes money [is] lent 
at a particular office, for the purpose of the Federal branch banking 
laws.
    (h) Accordingly, the Board considers that the following activities, 
individually or collectively, do not constitute the lending of money 
within the meaning of section 5155 of the revised statutes: Soliciting 
loans on behalf of a bank (or a branch thereof), assembling credit 
information, making property inspections and appraisals, securing title 
information, preparing applications for loans (including making 
recommendations with respect to action thereon), soliciting investors to 
purchase loans from the bank, seeking to have such investors contract 
with the bank for the servicing of such loans, and other similar agent-
type activities. When loans are approved and funds disbursed solely at 
the main office or a branch of the bank, an office at which only 
preliminary and servicing steps are taken is not a place where money 
[is] lent. Because preliminary and servicing steps of the kinds 
described do not constitute the performance of significant banking 
functions of the type that Congress contemplated should be performed 
only at governmentally approved offices, such office is accordingly not 
a branch.
    (i) To summarize the foregoing, the Board has concluded that, 
insofar as Federal law is concerned, a member bank may purchase for its 
own account shares of a corporation to perform, at locations at which 
the bank is authorized to engage in business, functions that the bank is 
empowered to perform directly. Also, a member bank may establish and 
operate, at any location in the United States, a loan production office 
of the type described herein. Such offices may be established and 
operated

[[Page 837]]

by the bank either directly, or indirectly through a wholly-owned 
subsidiary corporation.
    (j) This interpretation supersedes both the Board's 1966 ruling on 
operations subsidiaries and its 1967 ruling on loan production offices, 
referred to above.

(12 U.S.C. 24, 36, 321, 335)

[33 FR 11813, Aug. 21, 1968; 43 FR 53414, Nov. 16, 1978]



Sec. 250.142  Meaning of ``obligor or maker'' in determining limitation on 

securities investments by member State banks.

    (a) From time to time the New York State Dormitory Authority offers 
issues of bonds with respect to each of which a different educational 
institution enters into an agreement to make rental payments to the 
Authority sufficient to cover interest and principal thereon when due. 
The Board of Governors of the Federal Reserve System has been asked 
whether a member State bank may invest up to 10 percent of its capital 
and surplus in each such issue.
    (b) Paragraph Seventh of section 5136 of the U.S. Revised Statutes 
(12 U.S.C. 24) provides that ``In no event shall the total amount of the 
investment securities of any one obligor or maker, held by [a national 
bank] for its own account, exceed at any time 10 per centum of its 
capital stock * * * and surplus fund''. That limitation is made 
applicable to member State banks by the 20th paragraph of section 9 of 
the Federal Reserve Act (12 U.S.C. 335).
    (c) The Board considers that, within the meaning of these provisions 
of law, obligor does not include any person that acts solely as a 
conduit for transmission of funds received from another source, 
irrespective of a promise by such person to pay principal or interest on 
the obligation. While an obligor does not cease to be such merely 
because a third person has agreed to pay the obligor amounts sufficient 
to cover principal and interest on the obligations when due, a person 
that promises to pay an obligation, but as a practical matter has no 
resources with which to assume payment of the obligation except the 
amounts received from such third person, is not an obligor within the 
meaning of section 5136.
    (d) Review of the New York Dormitory Authority Act (N.Y. Public 
Authorities Law sections 1675-1690), the Authority's interpretation 
thereof, and materials with respect to the Authority's ``Revenue Bonds, 
Mills College of Education Issue, Series A'' indicates that the 
Authority is not an obligor on those and similar bonds. Although the 
Authority promises to make all payments of principal and interest, a 
bank that invests in such bonds cannot be reasonably considered as doing 
so in reliance on the promise and responsibility of the Authority. 
Despite the Authority's obligation to make payments on the bonds, if the 
particular college fails to perform its agreement to make rental 
payments to the Authority sufficient to cover all payments of bond 
principal and interest when due, as a practical matter the sole source 
of funds for payments to the bondholder is the particular college. The 
Authority has general borrowing power but no resources from which to 
assure repayment of any borrowing except from the particular colleges, 
and rentals received from one college may not be used to service bonds 
issued for another.
    (e) Accordingly, the Board has concluded that each college for which 
the Authority issues obligations is the sole obligor thereon. A member 
State bank may therefore invest an amount up to 10 percent of its 
capital and surplus in the bonds of a particular college that are 
eligible investments under the Investment Securities Regulation of the 
Comptroller of the Currency (12 CFR Part 1), whether issued directly or 
indirectly through the Dormitory Authority.

(12 U.S.C. 24, 335)



Sec. 250.143  Member bank purchase of stock of foreign operations 

subsidiaries.

    (a) In a previous interpretation, the Board determined that a State 
member bank would not violate the ``stock-purchase prohibition'' of 
section 5136 of the Revised Statutes (12 U.S.C. 24 ] 7) by purchasing 
and holding the shares of a corporation which performs ``at locations at 
which the bank is authorized

[[Page 838]]

to engage in business, functions that the bank is empowered to perform 
directly''.\1\ (1968 Federal Reserve Bulletin 681, 12 CFR 250.141). The 
Board of Governors has been asked by a State member bank whether, under 
that interpretation, the bank may establish such a so-called operations 
subsidiary outside the United States.
---------------------------------------------------------------------------

    \1\ National banking associations are prohibited by section 5136 of 
the Revised Statutes from purchasing and holding shares of any 
corporation except those corporations whose shares are specifically made 
eligible by statute. This prohibition is made applicable to State member 
banks by section 9 ] 20 of the Federal Reserve Act (12 U.S.C. 335).
---------------------------------------------------------------------------

    (b) In the above interpretation the Board viewed the creation of a 
wholly-owned subsidiary which engaged in activities that the bank itself 
could perform directly as an alternative organizational arrangement that 
would be permissible for member banks unless ``its use would be 
inconsistent with other Federal law, either statutory or judicial''.
    (c) In the Board's judgment, the use by member banks of operations 
subsidiaries outside the United States would be clearly inconsistent 
with the statutory scheme of the Federal Reserve Act governing the 
foreign investments and operations of member banks. It is clear that 
Congress has given member banks the authority to conduct operations and 
make investments outside the United States only through gradually 
adopting a series of specific statutory amendments to the Federal 
Reserve Act, each of which has been carefully drawn to give the Board 
approval, supervisory, and regulatory authority over those operations 
and investments.
    (d) As part of the original Federal Reserve Act, national banks 
were, with the Board's permission, given the power to establish foreign 
branches.\2\ In 1916, Congress amended the Federal Reserve Act to permit 
national banks to invest in international or foreign banking 
corporations known as Agreement Corporations, because such corporations 
were required to enter into an agreement or understanding with the Board 
to restrict their operations. Subject to such limitations or 
restrictions as the Board may prescribe, such Agreement corporations may 
principally engage in international or foreign banking, or banking in a 
dependency or insular possession of the United States, either directly 
or through the agency, ownership or control of local institutions in 
foreign countries, or in such dependencies or insular possessions of the 
United States. In 1919 the enactment of section 25(a) of the Federal 
Reserve Act (the ``Edge Act'') permitted national banks to invest in 
federally chartered international or foreign banking corporations (so-
called Edge Corporations) which may engage in international or foreign 
banking or other international or foreign financial operations, or in 
banking or other financial operations in a dependency or insular 
possession of the United States, either directly or through the 
ownership or control of local institutions in foreign countries, or in 
such dependencies or insular possessions. Edge Corporations may only 
purchase and hold stock in certain foreign subsidiaries with the consent 
of the Board. And in 1966, Congress amended section 25 of the Federal 
Reserve Act to allow national banks to invest directly in the shares of 
a foreign bank. In the Board's judgment, the above statutory scheme of 
the Federal Reserve Act evidences a clear Congressional intent that 
member banks may only purchase and hold stock in subsidiaries located 
outside the United States through the prescribed statutory provisions of 
sections 25 and 25(a) of the Federal Reserve Act. It is through these 
statutorily prescribed forms of organization that member banks must 
conduct their operations outside the United States.
---------------------------------------------------------------------------

    \2\ Under section 9 of the Federal Reserve Act, State member banks, 
subject, of course, to any necessary approval from their State banking 
authority, may establish foreign branches on the same terms and subject 
to the same limitations and restrictions as are applicable to the 
establishment of branches by national banks (12 U.S.C. 321). State 
member banks may also purchase and hold shares of stock in Edge or 
Agreement Corporations and foreign banks because national banks, as a 
result of specific statutory exceptions to the stock purchase 
prohibitions of section 5136, can purchase and hold stock in these 
Corporations or banks.

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

[[Page 839]]

    (e) To summarize, the Board has concluded that a member bank may 
only organize and operate operations subsidiaries at locations in the 
United States. Investments by member banks in foreign subsidiaries must 
be made either with the Board's permission under section 25 of the 
Federal Reserve Act or, with the Board's consent, through an Edge 
Corporation subsidiary under section 25(a) of the Federal Reserve Act or 
through an Agreement Corporation subsidiary under section 25 of the 
Federal Reserve Act. In addition, it should be noted that bank holding 
companies may acquire the shares of certain foreign subsidiaries with 
the Board's approval under section 4(c)(13) of the Bank Holding Company 
Act. These statutory sections taken together already give member banks a 
great deal of organizational flexibility in conducting their operations 
---------------------------------------------------------------------------
abroad.

(Interprets and applies 12 U.S.C. 24, 335)

[40 FR 12252, Mar. 18, 1975]



Sec. 250.160  Federal funds transactions.

    (a) It is the position of the Board of Governors of the Federal 
Reserve System that, for purposes of provisions of law administered by 
the Board, a transaction in Federal funds involves a loan on the part of 
the selling bank and a borrowing on the part of the purchasing bank.
    (b) [Reserved]

(12 U.S.C. 371c)

[33 FR 9866, July 10, 1968, as amended at 67 FR 76622, Dec. 12, 2002]



Sec. 250.163  Inapplicability of amount limitations to ``ineligible 

acceptances.''

    (a) Since 1923, the Board has been of the view that ``the acceptance 
power of State member banks is not necessarily confined to the 
provisions of section 13 (of the Federal Reserve Act), inasmuch as the 
laws of many States confer broader acceptance powers upon their State 
banks, and certain State member banks may, therefore, legally make 
acceptances of kinds which are not eligible for rediscount, but which 
may be eligible for purchase by Federal reserve banks under section 
14.'' 1923 FR bulletin 316, 317.
    (b) In 1963, the Comptroller of the Currency ruled that ``[n]ational 
banks are not limited in the character of acceptances which they may 
make in financing credit transactions, and bankers' acceptances may be 
used for such purpose, since the making of acceptances is an essential 
part of banking authorized by 12 U.S.C. 24.'' Comptroller's manual 
7.7420. Therefore, national banks are authorized by the Comptroller to 
make acceptances under 12 U.S.C. 24, although the acceptances are not 
the type described in section 13 of the Federal Reserve Act.
    (c) A review of the legislative history surrounding the enactment of 
the acceptance provisions of section 13, reveals that Congress believed 
in 1913, that it was granting to national banks a power which they would 
not otherwise possess and had not previously possessed. See remarks of 
Congressmen Phelan, Helvering, Saunders, and Glass, 51 Cong. Rec. 4676, 
4798, 4885, and 5064 (September 10, 12, 13, and 17 of 1913). 
Nevertheless, the courts have long recognized the evolutionary nature of 
banking and of the scope of the ``incidental powers'' clause of 12 
U.S.C. 24. See Merchants Bank v. State Bank, 77 U.S. 604 (1870) 
(upholding the power of a national bank to certify a check under the 
``incidental powers'' clause of 12 U.S.C. 24).
    (d) It now appears that, based on the Board's 1923 ruling, and the 
Comptroller's 1963 ruling, both State member banks and national banks 
may make acceptances which are not of the type described in section 13 
of the Federal Reserve Act. Yet, this appears to be a development that 
Congress did not contemplate when it drafted the acceptance provisions 
of section 13.
    (e) The question is presented whether the amount limitations of 
section 13 should apply to acceptances made by a member bank that are 
not of the type described in section 13. (The amount limitations are of 
two kinds:
    (1) A limitation on the amount that may be accepted for any one 
customer, and
    (2) A limitation on the aggregate amount of acceptances that a 
member bank may make.)


[[Page 840]]



In interpreting any Federal statutory provision, the primary guide is 
the intent of Congress, yet, as noted earlier, Congress did not 
contemplate in 1913, the development of so-called ``ineligible 
acceptances.'' (Although there is some indication that Congress did 
contemplate State member banks' making acceptances of a type not 
described in section 13 [remarks of Congressman Glass, 51 Cong. Rec. 
5064], the primary focus of congressional attention was on the 
acceptance powers of national banks.) In the absence of an indication of 
congressional intent, we are left to reach an interpretation that is in 
harmony with the language of the statutory provisions and with the 
purposes of the Federal Reserve Act.
    (f) Section 13 authorizes acceptances of two types. The seventh 
paragraph of section 13 (12 U.S.C. 372) authorizes certain acceptances 
that arise out of specific transactions in goods. (These acceptances are 
sometimes referred to as ``commercial acceptances.'') The 12th paragraph 
of section 13 authorizes member banks to make acceptances ``for the 
purpose of furnishing dollar exchange as required by the usages of 
trade'' in foreign transactions. (Such acceptances are referred to as 
``dollar exchange acceptances.'') In the 12th paragraph, there is a 10 
percent limit on the amount of dollar exchange acceptances that may be 
accepted for any one customer (unless adequately secured) and a 
limitation on the aggregate amount of dollar exchange acceptances that a 
member bank may make. (The 12th paragraph, in imposing these 
limitations, refers to the acceptance of ``such drafts or bills of 
exchange referred to (in) this paragraph.'') Similarly, the seventh 
paragraph imposes on commercial acceptances a parallel 10 percent per-
customer limitation, and limitations on the aggregate amount of 
commercial acceptances. (In the case of the aggregate limitations, the 
seventh paragraph states that ``no bank shall accept such bills to an 
amount'' in excess of the aggregate limit; the reference to ``such 
bills'' makes clear that the limitation is only in respect of drafts or 
bills of exchange of the specific type described in the seventh 
paragraph.)
    (g) Based on the language and parallel structure of the 7th and 12th 
paragraphs of section 13, and in the absence of a statement of 
congressional intent in the legislative history, the Board concludes 
that the per-customer and aggregate limitations of the 12th paragraph 
apply only to acceptances of the type described in that paragraph 
(dollar exchange acceptances), and the per-customer and aggregate 
limitations of the 7th paragraph (12 U.S.C. 372) apply only to 
acceptances of the type described in that paragraph.

(Interprets and applies 12 U.S.C. 372 and the 12th paragraph of sec. 13 
of the Federal Reserve Act, which paragraph is omitted from the United 
States Code)

[38 FR 13728, May 25, 1973]



Sec. 250.164  Bankers' acceptances.

    (a) Section 207 of the Bank Export Services Act (title II of Pub. L. 
97-290) (``BESA'') raised the limits on the aggregate amount of eligible 
bankers' acceptances (``BAs'') that may be created by an individual 
member bank from 50 per cent (or 100 per cent with the permission of the 
Board) of its paid up and unimpaired capital stock and surplus 
(``capital'') to 150 per cent (or 200 per cent with the permission of 
the Board) of its capital. Section 207 also prohibits a member bank from 
creating eligible BAs for any one person in the aggregate in excess of 
10 per cent of the institution's capital. This section of the BESA 
applies the same limits applicable to member banks to U.S. branches and 
agencies of foreign banks that are subject to reserve requirements under 
section 7 of the International Banking Act of 1978 (12 U.S.C. 3105). The 
Board is clarifying the proper meaning of the seventh paragraph of 
section 13 of the Federal Reserve Act, as amended by the BESA.
    (b)(1) This section of the BESA provides that any portion of an 
eligible BA created by an institution subject to the BA limitations 
contained therein (``covered bank'') that is conveyed through a 
participation to another covered bank shall not be included in the 
calculation of the creating bank's BA limits. The amount of the 
participation is to be applied to the calculation of the BA limits 
applicable to the covered

[[Page 841]]

bank receiving the participation. Although a covered bank that has 
reached its 150 or 200 percent limit can continue to create eligible 
acceptances by conveying participations to other covered banks, Congress 
has in effect imposed an aggregate limit on the eligible acceptances 
that may be created by all covered banks equal to the sum of 150 or 200 
percent of the capital of all covered banks.
    (2) The Board has clarified that under the statute an eligible BA 
created by a covered bank that is conveyed through a participation to an 
institution that is not subject to the limitations of this section of 
the BESA continues to be included in the calculation of the limits 
applicable to the creating covered bank. This will ensure that the total 
amount of eligible BAs that may be created by covered banks does not 
exceed the limitations established by Congress. In addition, this 
ensures that participations in acceptances are not used as a device for 
the avoidance of reserve requirements. Finally, this promotes the 
Congressional intent, with respect to covered banks, that foreign and 
domestic banks be on an equal footing and under the same legal 
requirements.
    (3) In addition, the amount of a participation received by a covered 
bank from an institution not covered by the limitations of the Act is to 
be included in the calculation of the limits applicable to the covered 
bank receiving the participation. This result is based upon the language 
of the statute which includes within a covered bank's limits on eligible 
BAs outstanding the amount of participations received by the covered 
bank. This provision reflects Congressional intent that a covered bank 
not be obligated on eligible bankers' acceptances, and participations 
therein, for an amount in excess of 150 or 200 percent of the 
institution's capital.
    (c) The statute also provides that eligible acceptances growing out 
of domestic transactions are not to exceed 50 percent of the aggregate 
of all eligible acceptances authorized for covered banks. The Board has 
clarified that this 50 percent limitation is applicable to the maximum 
permissible amount of eligible BAs (150 or 200 percent of capital), 
regardless of the bank's amount of eligible acceptances outstanding. The 
statutory language prior to the BESA amendment made clear that covered 
banks could issue eligible acceptances growing out of domestic 
transactions up to 50 percent of the amount of the total permissible 
eligible acceptances the bank could issue. The legislative history of 
the BESA indicates no intent to change this domestic acceptance 
limitation.
    (d) The statute also provides that for the purpose of the 
limitations applicable to U.S. branches and agencies of foreign banks, a 
branch's or agency's capital is to be calculated as the dollar 
equivalent of the capital stock and surplus of the parent foreign bank 
as determined by the Board. The Board has clarified that for purposes of 
calculating the BA limits applicable to U.S. branches and agencies of 
foreign banks, the identity of the parent foreign bank is generally the 
same as for reserve requirement purposes; that is, the bank entity that 
owns the branch or agency most directly. The Board has also clarified 
that the procedures currently used for purposes of reporting to the 
Board on the Annual Report of Foreign Banking Organizations, Form FR Y-
7, are also to be used in the calculation of the acceptance limits 
applicable to U.S. branches and agencies of foreign banks. (The FR Y-7 
generally requires financial statements prepared in accordance with 
local accounting practices and an explanation of the accounting 
terminology and the major features of the accounting standards used in 
the preparation of the financial statements.) Conversions to the dollar 
equivalent of the worldwide capital of the foreign bank should be made 
periodically, but in no event less frequently than quarterly. In this 
regard, the Board recognizes the need to be flexible in dealing with the 
effect of foreign exchange rate fluctuations on the calculation of the 
worldwide capital of the parent foreign bank. Each foreign bank is to be 
responsible for coordinating the BA activity of its U.S. branches and 
agencies (including the aggregation of such activity) and establishing 
procedures that ensure that

[[Page 842]]

examiners will be able readily to determine compliance with the BESA 
limits.

(Sec. 13, Federal Reserve Act (12 U.S.C. 372))

[48 FR 28975, June 24, 1983]



Sec. 250.165  Bankers' acceptances: definition of participations.

    (a)(1) Section 207 of the Bank Export Services Act (Title II of Pub. 
L. 97-290) (``BESA'') raised the limits on the aggregate amount of 
eligible bankers' acceptances (``BAs'') that may be created by a member 
bank from 50 percent (or 100 percent with the permission of the Board) 
of its paid up and unimpaired capital stock and surplus (``capital'') to 
150 percent (or 200 percent with the permission of the Board) of its 
capital. Section 207 also prohibits a member bank from creating eligible 
BAs for any one person in the aggregate in excess of 10 percent of the 
institution's capital. Eligible BAs growing out of domestic transactions 
are not to exceed 50 percent of the aggregate of all eligible 
acceptances authorized for a member bank. This section of the BESA 
applies the same limits applicable to member banks to U.S. branches and 
agencies of foreign banks that are subject to reserve requirements under 
section 7 of the International Banking Act of 1978 (12 U.S.C. 3105). \1\
---------------------------------------------------------------------------

    \1\ The institutions subject to the BA limitations of BESA will 
hereinafter be referred to as ``covered banks.''
---------------------------------------------------------------------------

    (2) This section of the BESA also provides that any portion of an 
eligible BA created by a covered bank (``senior bank'') that is conveyed 
through a ``participation agreement'' to another covered bank (``junior 
bank'') shall not be included in the calculation of the senior bank's 
bankers' acceptance limits established by section 207 of BESA.\2\ 
However, the amount of the participation is to be included in the BA 
limits applicable to the junior bank. The language of the statute does 
not define what constitutes a participation agreement for purposes of 
the applicability of the BESA limitations. However, the statute does 
authorize the Board to further define any of the terms used in section 
207 of the BESA (12 U.S.C. 372(g)). The Board is clarifying the term 
participation for purposes of the BA limitations of the BESA.
---------------------------------------------------------------------------

    \2\ The use of the terms senior bank and junior bank has no 
implications regarding priority of claims. These terms merely represent 
a shorthand method of identifying the depository institution that has 
created the acceptance and conveyed the participation (senior bank) and 
the depository institution that has received the participation (junior 
bank).
---------------------------------------------------------------------------

    (b) The legislative history of section 207 of the BESA indicates 
that Congress intended that the junior bank be obligated to the senior 
bank in the event that the account party defaults on its obligation to 
pay, but that the junior bank need not also be obligated to pay the 
holder of the acceptance at the time the BA is presented for payment. H. 
Rep. No. 97-629, 97th Cong., 2nd Sess. 15 (1982); 128 Cong. Rec. H 4647 
(daily ed. July 27, 1982) (remarks by Rep. Barnard): and 128 Cong. Rec. 
H 8462 (daily ed. October 1, 1982) (remarks by Rep. Barnard). The 
legislative history also indicates that Congress intended that eligible 
BAs in which participations had been conveyed not be required to 
indicate the name(s) (or interest(s)) of the junior bank(s) on the 
acceptance in order for the BA to be excluded from the BESA limitations 
applicable to the senior bank. 128 Cong. Rec. S 12237 (daily ed. 
September 24, 1982) (remarks of Senators Heinz and Garn): and 128 Cong. 
Rec. H 4647 (daily ed. July 27, 1982) (remarks of Rep. Barnard).
    (c)(1) In view of Congressional intent with regard to what 
constitutes a participation in an eligible BA, the Board has determined 
that, for purposes of the BESA limits, a participation must satisfy the 
following two minimum requirements:
    (i) A written agreement entered into between the junior and senior 
bank under which the junior bank acquires the senior bank's claim 
against the account party to the extent of the amount of the 
participation that is enforceable in the event that the account party 
fails to perform in accordance with the terms of the acceptance; and
    (ii) The agreement between the junior and senior bank provides that 
the senior bank obtains a claim against the junior bank to the extent of 
the amount of the participation that is enforceable in the event the 
account

[[Page 843]]

party fails to perform in accordance with the terms of the acceptance.
    (2) Consistent with Congressional intent, the minimum requirements 
do not require the junior bank to be obligated to pay the holder of the 
acceptance at the time the BA is presented for payment. Similarly, the 
minimum requirements do not require the name(s) or interest(s) of the 
junior bank(s) to appear on the face of the acceptance.
    (3) An eligible BA that is conveyed through a participation that 
does not satisfy these minimum requirements would continue to be 
included in the BA limits applicable to the senior bank. Further, an 
eligible BA conveyed to a covered bank through a participation that 
provided for additional rights and obligations among the parties would 
be excluded from the BESA limitations of the senior bank provided the 
minimum requirements were satisfied.
    (4) A participation structured pursuant to these minimum 
requirements would be as follows: Upon the conveyance of the 
participation, the senior bank retains its entire obligation to pay the 
holder of the BA at maturity. The senior bank has a claim against the 
junior bank to the extent of the amount of the participation that is 
enforceable in the event the account party fails to perform in 
accordance with the terms of the acceptance. Similarly, the junior bank 
has a corresponding claim against the account party to the extent of the 
amount of the participation that is enforceable in the event the account 
party fails to perform in accordance with the terms of the acceptance.
    (d)(1) The Board is not requiring the senior bank and the account 
party specifically to agree that the senior bank's rights are assignable 
because the Board believes such rights to be assignable even in the 
absence of an explicit agreement.
    (2) The junior and senior banks may contract among themselves as to 
which party(ies) have the responsibility for administering the 
arrangement, enforcing claims, or exercising remedies.
    (e) The Board recognizes that both the junior bank's claim on the 
account party and the senior bank's claim on the junior bank involve 
risk. Therefore, it is essential that these risks be assessed by the 
banks involved in accordance with prudent and sound banking practices. 
The examiners will in the normal course of the examination process 
review the risk assessment procedures instituted by the banks. The 
junior bank should review the creditworthiness of each account party 
when the junior bank acquires a participation and the senior bank should 
review on an ongoing basis the creditworthiness of the junior bank. 
Junior bank agreement to rely exclusively upon the credit judgment of 
the senior bank and purchase on an ongoing basis from the senior bank 
all participations in BAs regardless of the identity of the account 
party is not appropriate in view of the risks involved. However, in 
those cases involving a participation between a parent bank and its Edge 
affiliate where the credit review for both entities is performed by the 
parent bank, the Edge Corporation should maintain documentation 
indicating that it concurs with the parent bank's analysis and that the 
acceptance participation is appropriate for inclusion in the Edge 
Corporation's portfolio.
    (f) Similarly, the Board has determined that it is appropriate to 
include the risks incurred by the senior bank in assessing the senior 
bank's capital and the risks incurred by the junior bank in assessing 
the junior bank's capital.
    (g) In view of this clarification of the issues relating to 
participations in BAs, the Board encourages the private sector to 
develop standardized forms for BAs and participations therein that 
clearly delineate the rights and responsibilities of the relevant 
parties.

(Sec. 13, Federal Reserve Act (12 U.S.C. 372))

[48 FR 57109, Dec. 28, 1983]



Sec. 250.166  Treatment of mandatory convertible debt and subordinated notes 

of state member banks and bank holding companies as ``capital''.

    (a) General. Under the Board's risk-based capital guidelines, state 
member banks and bank holding companies may include in Tier 2 capital 
subordinated debt and mandatory convertible debt that meets certain 
criteria. The purpose of this interpretation is to

[[Page 844]]

clarify these criteria. This interpretation should be read with those 
guidelines, particularly with paragraphs II.c. through II.e. of appendix 
A of 12 CFR part 208 if the issuer is a state member bank and with 
paragraphs II.A.2.c. and II.A.2.d. of appendix A of 12 CFR part 225 if 
the issuer is a bank holding company.
    (b) Criteria for subordinated debt included in capital--(1) 
Characteristics. To be included in Tier 2 capital under the Board's 
risk-based capital guidelines for state member banks and bank holding 
companies, subordinated debt must be subordinated in right of payment to 
the claims of the issuer's general creditors \1\ and, for banks, to the 
claims of depositors as well; must be unsecured; must state clearly on 
its face that it is not a deposit and is not insured by a federal 
agency; must have a minimum average maturity of five years; \2\ must not 
contain provisions that permit debtholders to accelerate payment of 
principal prior to maturity except in the event of bankruptcy of or the 
appointment of a receiver for the issuing organization; must not contain 
or be covered by any covenants, terms, or restrictions that are 
inconsistent with safe and sound banking practice; and must not be 
credit sensitive.
---------------------------------------------------------------------------

    \1\ The risk-based capital guidelines for bank holding companies 
state that bank holding company debt must be subordinated to all senior 
indebtedness of the company. To meet this requirement, the debt should 
be subordinated to all general creditors.
    \2\ The ``average maturity'' of an obligation or issue repayable in 
scheduled periodic payments shall be the weighted average of the 
maturities of all such scheduled payments.
---------------------------------------------------------------------------

    (2) Acceleration clauses--(i) In order to be included in Tier 2 
capital, the appendices provide that subordinated debt instruments must 
have an original weighted average maturity of at least five years. For 
this purpose, maturity is defined as the earliest possible date on which 
the holder can put the instrument back to the issuing banking 
organization. Since acceleration clauses permit the holder to put the 
debt back upon the occurrence of certain events, which could happen at 
any time after the instrument is issued, subordinated debt that includes 
provisions permitting acceleration upon events other than bankruptcy or 
reorganization under Chapters 7 (Liquidation) and 11 (Reorganization) of 
the Bankruptcy Code, in the case of a bank holding company, or 
insolvency--i.e., the appointment of a receiver--in the case of a state 
member bank, does not qualify for inclusion in Tier 2 capital.
    (ii) Further, subordinated debt whose terms provide for acceleration 
upon the occurrence of events other than bankruptcy or the appointment 
of a receiver does not qualify as Tier 2 capital. For example, the terms 
of some subordinated debt issues would permit debtholders to accelerate 
repayment if the issuer failed to pay principal or interest on the 
subordinated debt issue when due (or within a certain timeframe after 
the due date), failed to make mandatory sinking fund deposits, defaulted 
on any other debt, failed to honor covenants, or if an institution 
affiliated with the issuer entered into bankruptcy or receivership. Some 
banking organizations have also issued, or proposed to issue, 
subordinated debt that would allow debtholders to accelerate repayment 
if, for example, the banking organization failed to maintain certain 
prescribed minimum capital ratios or rates of return, or if the amount 
of nonperforming assets or charge-offs of the banking organization 
exceeded a certain level.
    (iii) These and other similar acceleration clauses raise significant 
supervisory concerns because repayment of the debt could be accelerated 
at a time when an organization may be experiencing financial 
difficulties. Acceleration of the debt could restrict the ability of the 
organization to resolve its problems in the normal course of business 
and could cause the organization involuntarily to enter into bankruptcy 
or receivership. Furthermore, since such acceleration clauses could 
allow the holders of subordinated debt to be paid ahead of general 
creditors or depositors, their inclusion in a debt issue throws into 
question whether the debt is, in fact, subordinated.
    (iv) Subordinated debt issues whose terms state that the debtholders 
may accelerate the repayment of principal only in the event of 
bankruptcy or receivership of the issuer do not permit

[[Page 845]]

the holders of the debt to be paid before general creditors or 
depositors and do not raise supervisory concerns because the 
acceleration does not occur until the institution has failed. 
Accordingly, debt issues that permit acceleration of principal only in 
the event of bankruptcy (liquidation or reorganization) in the case of 
bank holding companies and receivership in the case of banks may 
generally be classified as capital.
    (3) Provisions inconsistent with safe and sound banking practices--
(i) The risk-based capital guidelines state that instruments included in 
capital may not contain or be covered by any covenants, terms, or 
restrictions that are inconsistent with safe and sound banking practice. 
As a general matter, capital instruments should not contain terms that 
could adversely affect liquidity or unduly restrict management's 
flexibility to run the organization, particularly in times of financial 
difficulty, or that could limit the regulator's ability to resolve 
problem bank situations. For example, some subordinated debt includes 
covenants that would not allow the banking organization to make 
additional secured or senior borrowings. Other covenants would prohibit 
a banking organization from disposing of a major subsidiary or 
undergoing a change in control. Such covenants could restrict the 
banking organization's ability to raise funds to meet its liquidity 
needs. In addition, such terms or conditions limit the ability of bank 
supervisors to resolve problem bank situations through a change in 
control.
    (ii) Certain other provisions found in subordinated debt may provide 
protection to investors in subordinated debt without adversely affecting 
the overall benefits of the instrument to the organization. For example, 
some instruments include covenants that may require the banking 
organization to:
    (A) Maintain an office or agency where securities may be presented,
    (B) Hold payments on the securities in trust,
    (C) Preserve the rights and franchises of the company,
    (D) Pay taxes and assessments before they become delinquent,
    (E) Provide an annual statement of compliance on whether the company 
has observed all conditions of the debt agreement, or
    (F) Maintain its properties in good condition. Such covenants, as 
long as they do not unduly restrict the activity of the banking 
organization, generally would be acceptable in qualifying subordinated 
debt, provided that failure to meet them does not give the holders of 
the debt the right to accelerate the debt.\3\
---------------------------------------------------------------------------

    \3\ This notice does not attempt to list or address all clauses 
included in subordinated debt; rather, it is intended to give general 
supervisory guidance regarding the types of clauses that could raise 
supervisory concerns. Issuers of subordinated debt may need to consult 
further with Federal Reserve staff about other subordinated debt 
provisions not specifically discussed above to determine whether such 
provisions are appropriate in a debt capital instrument.
---------------------------------------------------------------------------

    (4) Credit sensitive features. Credit sensitive subordinated debt 
(including mandatory convertible securities) where payments are tied to 
the financial condition of the borrower generally do not qualify for 
inclusion in capital. Interest rate payments may be linked to the 
financial condition of an institution through various ways, such as 
through an auction rate mechanism, a preset schedule that either 
mandates interest rate increases as the credit rating of the institution 
declines or automatically increases them over the passage of time,\4\ or 
that raises the interest rate if payment is not made in a

[[Page 846]]

timely fashion.\5\ As the financial condition of an organization 
declines, it is faced with higher and higher payments on its credit 
sensitive subordinated debt at a time when it most needs to conserve its 
resources. Thus, credit sensitive debt does not provide the support 
expected of a capital instrument to an institution whose financial 
condition is deteriorating; rather, the credit sensitive feature can 
accelerate depletion of the institution's resources and increase the 
likelihood of default on the debt.
---------------------------------------------------------------------------

    \4\ Although payments on debt whose interest rate increases over 
time on the surface may not appear to be directly linked to the 
financial condition of the issuing organization, such debt (sometimes 
referred to as expanding or exploding rate debt) has a strong potential 
to be credit sensitive in substance. Organizations whose financial 
condition has strengthened are more likely to be able to refinance the 
debt at a rate lower than that mandated by the preset increase, whereas 
institutions whose condition has deteriorated are less likely to be able 
to do so. Moreover, just when these latter institutions would be in the 
most need of conserving capital, they would be under strong pressure to 
redeem the debt as an alternative to paying higher rates and, thus, 
would accelerate depletion of their resources.
    \5\ While such terms may be acceptable in perpetual preferred stock 
qualifying as Tier 2 capital, it would be inconsistent with safe and 
sound banking practice to include debt with such terms in Tier 2 
capital. The organization does not have the option, as it does with 
auction rate preferred stock issues, of eliminating the higher payments 
on the subordinated debt without going into default.
---------------------------------------------------------------------------

    (c) Criteria for mandatory convertible debt included in capital. 
Mandatory convertible debt included in capital must meet all the 
criteria cited above for subordinated debt with the exception of the 
minimum maturity requirement.\6\ Since mandatory convertible debt 
eventually converts to an equity instrument, it has no minimum maturity 
requirement. Such debt, however, is subject to a maximum maturity 
requirement of 12 years.
---------------------------------------------------------------------------

    \6\ Mandatory convertible debt is subordinated debt that contains 
provisions committing the issuing organization to repay the principal 
from the proceeds of future equity issues.
---------------------------------------------------------------------------

    (d) Previously issued subordinated debt. Subordinated debt including 
mandatory convertible debt that has been issued prior to the date of 
this interpretation and that contains provisions permitting acceleration 
for reasons other than bankruptcy or receivership of the issuing 
institution; includes other questionable terms or conditions; or that is 
credit sensitive will not automatically be excluded from capital. 
Rather, such debt will be considered on a case-by-case basis to 
determine whether it qualifies as Tier 2 capital. As a general matter, 
subordinated debt issued prior to the release of this interpretation and 
containing such provisions or features may qualify as Tier 2 capital so 
long as these terms:
    (1) have been commonly used by banking organizations,
    (2) do not provide an unreasonably high degree of protection to the 
holder in cases not involving bankruptcy or receivership, and
    (3) do not effectively allow the holder to stand ahead of the 
general creditors of the issuing institution in cases of bankruptcy or 
receivership.
    Subordinated debt containing provisions that permit the holders of 
the debt to accelerate payment of principal when the banking 
organization begins to experience difficulties, for example, when it 
fails to meet certain financial ratios, such as capital ratios or rates 
of return, does not meet these three criteria. Consequently, 
subordinated debt issued prior to the release of this interpretation 
containing such provisions may not be included within Tier 2 capital.
    (e) Limitations on the amount of subordinated debt in capital--(1) 
Basic limitation. The amount of subordinated debt an institution may 
include in Tier 2 capital is limited to 50 percent of the amount of the 
institution's Tier 1 capital. The amount of a subordinated debt issue 
that may be included in Tier 2 capital is discounted as it approaches 
maturity; one-fifth of the original amount of the instrument, less any 
redemptions, is excluded each year from Tier 2 capital during the last 
five years prior to maturity. If the instrument has a serial redemption 
feature such that, for example, half matures in seven years and half 
matures in ten years, the issuing organization should begin discounting 
the seven-year portion after two years and the ten-year portion after 
five years.
    (2) Treatment of debt with dedicated proceeds. If a banking 
organization has issued common or preferred stock and dedicated the 
proceeds to the redemption of a mandatory convertible debt security, 
that portion of the security covered by the amount of the proceeds so 
dedicated is considered to be ordinary subordinated debt for capital 
purposes, provided the proceeds are not placed in a sinking fund, trust 
fund, or similar segregated account or are not used in the interim for 
some other purpose. Thus, dedicated portions of mandatory convertible 
debt securities are

[[Page 847]]

subject, like other subordinated debt, to the 50 percent sublimit within 
Tier 2 capital, as well as to discounting in the last five years of 
life. Undedicated portions of mandatory convertible debt may be included 
in Tier 2 capital without any sublimit and are not subject to 
discounting.
    (3) Treatment of debt with segregated funds. In some cases, the 
provisions in mandatory convertible debt issues may require the issuing 
banking organization to set up a sinking fund, trust fund, or similar 
segregated account to hold the proceeds from the sale of equity 
securities dedicated to pay off the principal of the mandatory 
convertible debt at maturity. The portion of mandatory convertibles 
covered by the amount of proceeds deposited in such a segregated fund is 
considered secured and, thus, may not be included in capital at all, let 
alone be treated as subordinated debt that is subject to the 50 percent 
sublimit within Tier 2 capital. The maintenance of such separate 
segregated funds for the redemption of mandatory convertible debt 
exceeds the requirements of appendix B to Regulation Y. Accordingly, if 
a banking organization, with the agreement of its debtholders, seeks 
Federal Reserve approval to eliminate such a fund, approval normally 
would be given unless supervisory concerns warrant otherwise.
    (f) Redemption of subordinated debt prior to maturity--(1) By state 
member banks. State member banks must obtain approval from the 
appropriate Reserve Bank prior to redeeming before maturity subordinated 
debt or mandatory convertible debt included in capital.\7\ A Reserve 
Bank will not approve such early redemption unless it is satisfied that 
the capital position of the bank will be adequate after the proposed 
redemption.
---------------------------------------------------------------------------

    \7\ Some agreements governing mandatory convertible debt issued 
prior to the risk-based capital guidelines provide that the bank may 
redeem the notes if they no longer count as primary capital as defined 
in appendix B to Regulation Y. Such a provision does not obviate the 
requirement to receive Federal Reserve approval prior to redemption.
---------------------------------------------------------------------------

    (2) By bank holding companies. While bank holding companies are not 
formally required to obtain approval prior to redeeming subordinated 
debt, the risk-based capital guidelines state that bank holding 
companies should consult with the Federal Reserve before redeeming any 
capital instruments prior to stated maturity. This also applies to any 
redemption of mandatory convertible debt with proceeds of an equity 
issuance that were dedicated to the redemption of that debt. 
Accordingly, a bank holding company should consult with its Reserve Bank 
prior to redeeming subordinated debt or dedicated portions of mandatory 
convertible debt included in capital. A Reserve Bank generally will not 
acquiesce to such a redemption unless it is satisfied that the capital 
position of the bank holding company would be adequate after the 
proposed redemption.
    (3) Special concerns involving mandatory convertible debt. 
Consistent with appendix B to Regulation Y, bank holding companies 
wishing to redeem before maturity undedicated portions of mandatory 
convertible debt included in capital are required to receive prior 
Federal Reserve approval, unless the redemption is effected with the 
proceeds from the sale or common or perpetual preferred stock. An 
organization planning to effect such a redemption with the proceeds from 
the sale of common or perpetual preferred stock is advised to consult 
informally with its Reserve Bank in order to avoid the possibility of 
taking an action that could result in weakening its capital position. A 
Reserve Bank will not approve the redemption of mandatory convertible 
securities, or acquiesce in such a redemption effected with the sale of 
common or perpetual preferred stock, unless it is satisfied that the 
capital position of the bank holding company will be satisfactory after 
the redemption.\8\
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    \8\ The guidance contained in this paragraph applies to mandatory 
convertible debt issued prior to the risk-based capital guidelines that 
state that the banking organization may redeem the notes if they no 
longer count as primary capital as defined in appendix B to Regulation 
Y. Such provisions do not obviate the need to consult with, or obtain 
approval from, the Federal Reserve prior to redemption of the debt.

[57 FR 40598, Sept. 4, 1992]

[[Page 848]]



Sec. 250.180  Reports of changes in control of management.

    (a) Under a statute enacted September 12, 1964 (Pub. L. 88-593; 78 
Stat. 940) all insured banks are required to report promptly (1) changes 
in the outstanding voting stock of the bank which will result in control 
or in a change in control of the bank and (2) any instances where the 
bank makes a loan or loans, secured, or to be secured, by 25 percent or 
more of the outstanding voting stock of an insured bank.
    (b) Reports concerning changes in control of a State member bank are 
to be made by the president or other chief executive officer of the 
bank, and shall be submitted to the Federal Reserve Bank of its 
district.
    (c) Reports concerning loans by an insured bank on the stock of a 
State member bank are to be made by the president or other chief 
executive officer of the lending bank, and shall be submitted to the 
Federal Reserve Bank of the State member bank on the stock of which the 
loan was made.
    (d) Paragraphs 3 and 4 of this legislation specify the information 
required in the reports which, in cases involving State member banks, 
should be addressed to the Vice President in Charge of Examinations of 
the appropriate Federal Reserve Bank.

(12 U.S.C. 1817)



Sec. 250.181  Reports of change in control of bank management incident to a 

merger.

    (a) A State member bank has inquired whether Pub. L. 88-593 (78 
Stat. 940) requires reports of change in control of bank management in 
situations where the change occurs as an incident in a merger.
    (b) Under the Bank Merger Act of 1960 (12 U.S.C. 1828(c)), no bank 
with Federal deposit insurance may merge or consolidate with, or acquire 
the assets of, or assume the liability to pay deposits in, any other 
insured bank without prior approval of the appropriate Federal bank 
supervisory agency. Where the bank resulting from any such transaction 
is a State member bank, the Board of Governors is the agency that must 
pass on the transaction. In the course of consideration of such an 
application, the Board would, of necessity, acquire knowledge of any 
change in control of management that might result. Information 
concerning any such change in control of management is supplied with 
each merger application and, in the circumstances, it is the view of the 
Board that the receipt of such information in connection with a merger 
application constitutes compliance with Pub. L. 88-593. However, once a 
merger has been approved and completely effectuated, the resulting bank 
would thereafter be subject to the reporting requirements of Pub. L. 88-
593.

(12 U.S.C. 1817)



Sec. 250.182  Terms defining competitive effects of proposed mergers.

    Under the Bank Merger Act (12 U.S.C. 1828(c)), a Federal Banking 
agency receiving a merger application must request the views of the 
other two banking agencies and the Department of Justice on the 
competitive factors involved. Standard descriptive terms are used by the 
Board, the Federal Deposit Insurance Corporation, and the Comptroller of 
the Currency. The terms and their definitions are as follows:
    (a) The term monopoly means that the proposed transaction must be 
disapproved in accordance with 12 U.S.C. 1828(c)(5)(A).
    (b) The term substantially adverse means that the proposed 
transaction would have anticompetitive effects which preclude approval 
unless the anticompetitive effects are clearly outweighed in the public 
interest by the probable effect of the transaction in meeting the 
convenience and needs of the community to be served as specified in 12 
U.S.C. 1828(c)(5)(B).
    (c) The term adverse means that proposed transaction would have 
anticompetitive effects which would be material to the decision but 
which would not preclude approval.
    (d) The term no significant effect means that the anticompetitive 
effects of the proposed transaction, if any, would not be material to 
the decision.

(12 U.S.C. 1828(c))

[45 FR 45257, July 3, 1980]

[[Page 849]]



Sec. 250.200  Investment in bank premises by holding company banks.

    (a) The Board of Governors has been asked whether, in determining 
under section 24A of the Federal Reserve Act (12 U.S.C. 371d) how much 
may be invested in bank premises without prior Board approval, a State 
member bank, which is owned by a registered bank holding company, is 
required to include indebtedness of a corporation, wholly owned by the 
holding company, that is engaged in holding premises of banks in the 
holding company system.
    (b) Section 24A provides, in part, as follows:

    Hereafter * * * no State member bank, without the approval of the 
Board of Governors of the Federal Reserve System, shall (1) invest in 
bank premises, or in the stock, bonds, debentures, or other such 
obligations of any corporation holding the premises of such bank or (2) 
make loans to or upon the security of the stock of any such corporation, 
if the aggregate of all such investments and loans, together with the 
amount of any indebtedness incurred by any such corporation which is an 
affiliate of the bank, as defined in section 2 of the Banking Act of 
1933, as amended [12 U.S.C. 221a], will exceed the amount of the capital 
stock of such banks.

    (c) A corporation that is owned by a holding company is an 
``affiliate of each of the holding company's majority-owned banks as 
that term is defined in said section 2. Therefore, under the explicit 
provisions of section 24A, each State member bank, any part of whose 
premises is owned by such an affiliate, must include the affiliate's 
total indebtedness in determining whether a proposed premises investment 
by the bank would cause the aggregate figure to exceed the amount of the 
bank's capital stock, so that the Board's prior approval would be 
required. Where the affiliate holds the premises of a number of the 
holding company's banks, the amount of the affiliate's indebtedness may 
be so large that Board approval is required for every proposed 
investment in bank premises by each majority-owned State member bank, to 
which the entire indebtedness of the affiliate is required to be 
attributed. The Board believes that, in these circumstances, individual 
approvals are not essential to effectuate the purpose of section 24A, 
which is to safeguard the soundness and liquidity of member banks, and 
that the protection sought by Congress can be achieved by a suitably 
circumscribed general approval.
    (d) Accordingly the Board hereby grants general approval for any 
investment or loan (as described in section 24A) by any State member 
bank, the majority of the stock of which is owned by a registered bank 
holding company, if the proposed investment or loan will not cause 
either (1) all such investments and loans by the member bank (together 
with the indebtedness of any bank premises subsidiary thereof) to exceed 
100 percent of the bank's capital stock, or (2) the aggregate of such 
investments and loans by all of the holding company's subsidiary banks 
(together with the indebtedness of any bank premises affiliates thereof) 
to exceed 100 percent of the aggregate capital stock of said banks.

(12 U.S.C. 221a, 371d)



Sec. 250.220  Whether member bank acting as trustee is prohibited by section 

20 of the Banking Act of 1933 from acquiring majority of shares of mutual 

fund.

    (a) The Board recently considered whether section 20 of the Banking 
Act of 1933 (12 U.S.C. 377) would prohibit a member bank, while acting 
as trustee of a tax exempt employee benefit trust or trusts, from, under 
the following circumstances, acquiring a majority of the shares of an 
open-end investment company (``Fund'') registered under the Investment 
Company Act of 1940, or more than 50 percent of the number of Fund's 
shares voted at the preceding election of directors of the Fund.
    (b) The bank has acted as trustee, since December 1963, pursuant to 
a trust agreement with a county medical society to administer its group 
retirement program, under which individual members of the society could 
participate in accordance with the provisions of the Self-Employed 
Individuals Tax Retirement Act of 1962 (commonly referred to as ``H.R. 
10'').
    (c) Under the trust agreement as presently constituted, each 
employer, who is a participating member of the medical society, directs 
the bank to invest his contributions to the retirement plan in such 
proportions as he

[[Page 850]]

may elect in insurance or annuity contracts or in a diversified 
portfolio of securities and other property. The diversified portfolio 
held by the bank is invested and administered by the bank solely at the 
direction of a committee of the medical society.
    (d) It has now been proposed that the trust agreement be amended to 
provide that all investments constituting the trust fund, apart from 
insurance and annuity contracts, will be made exclusively in shares of a 
single open-end investment company to be named in the trust agreement 
and that the assets constituting the diversified portfolio now held by 
the bank, as trustee, will be exchanged for the Fund's shares. The bank 
will, in addition to holding the shares of the Fund, allocate income and 
dividends to the accounts of the various participants in the retirement 
program, invest and reinvest income and dividends, and perform other 
ministerial functions.
    (e) In addition, it is proposed to amend the trust agreement so that 
voting of the shares held by the bank as trustee will be controlled 
exclusively by the participants. Under the proposed amendment, the bank 
will sign all proxies prior to mailing them to the participants,

    it being intended that the Participant(s) shall vote the proxies 
notwithstanding the fact that the Trustee is the owner of the shares * * 
*.

    (f) The bank believes that amendments are now under consideration 
that will also require investment of the assets of these plans 
exclusively in the Fund's shares. Accordingly, the bank may eventually 
own the Fund's shares in several separate trust accounts and in an 
aggregate amount equal to a majority of the Fund's shares.
    (g) Section 20 of the Banking Act of 1933 provides in relevant part 
that

    no member bank shall be affiliated in any manner described in 
section 2(b) hereof with any corporation * * * engaged principally in 
the issue, flotation, underwriting, public sale, or distribution at 
wholesale or retail or through syndicate participation of stocks * * * 
or other securities: * * *.

    (h) Section 2(b) defines the term affiliate to include

    any corporation, business trust, association or other similar 
organization (1) Of which a member bank, directly or indirectly, owns or 
controls either a majority of the voting shares or more than 50 per 
centum of the number 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; * * 
*.

    (i) The Board has previously taken the position, in an 
interpretation involving the term affiliate under the Banking Act of 
1933, that it would not require a member bank to obtain and publish a 
report of a corporation the majority of the stock of which is held by 
the member bank as executor or trustee, provided that the member bank 
holds such stock subject to control by a court or by a beneficiary or 
other principal and that the member bank may not lawfully exercise 
control of such stock independently of any order or direction of a 
court, beneficiary or other principal. 1933 Federal Reserve Bulletin 
651. The rationale of that interpretation--which was reaffirmed by the 
Board in 1957--would appear to be equally applicable to the facts in the 
present case. In the circumstances, and on the basis of the Board's 
understanding that the bank will not vote any of Fund's shares or 
control in any manner the election of any of its directors, trustees, or 
other persons exercising similar functions, the Board has concluded that 
the situation in question would not fall within the purpose or coverage 
of section 20 of the Banking Act of 1933 and, therefore, would not 
involve a violation of the statute.



Sec. 250.221  Issuance and sale of short-term debt obligations by bank holding 

companies.

    (a) The opinion of the Board of Governors of the Federal Reserve 
System has been requested recently with respect to the proposed sale of 
``thrift notes'' by a bank holding company for the purpose of supplying 
capital to its wholly-owned nonbanking subsidiaries.
    (b) The thrift notes would bear the name of the holding company, 
which in the case presented, was substantially similar to the name of 
its affiliated

[[Page 851]]

banks. It was proposed that they be issued in denominations of $50 to 
$100 and initially be of 12-month or less maturities. There would be no 
maximum amount of the issue. Interest rates would be variable according 
to money market conditions but would presumably be at rates somewhat 
above those permitted by Regulation Q ceilings. There would be no 
guarantee or indemnity of the notes by any of the banks in the holding 
company system and, if required to do so, the holding company would 
place on the face of the notes a negative representation that the 
purchase price was not a deposit, nor an indirect obligation of banks in 
the holding company system, nor covered by deposit insurance.
    (c) The notes would be generally available for sale to members of 
the public, but only at offices of the holding company and its 
nonbanking subsidiaries. Although offices of the holding company may be 
in the same building or quarters as its banking offices, they would be 
physically separated from the banking offices. Sales would be made only 
by officers or employees of the holding company and its nonbanking 
subsidiaries. Initially, the notes would only be offered in the State in 
which the holding company was principally doing business, thereby 
complying with the exemption provided by section 3(a)(11) of the 
Securities Act of 1933 (15 U.S.C. 77c) for ``intra-state'' offerings. If 
it was decided to offer the notes on an interstate basis, steps would be 
taken to register the notes under the Securities Act of 1933. Funds from 
the sale of the notes would be used only to supply the financial needs 
of the nonbanking subsidiaries of the holding company. These nonbank 
subsidiaries are, at present, a small loan company, a mortgage banking 
company and a factoring company. In no instance would the proceeds from 
the sale of the notes be used in the bank subsidiaries of the holding 
company nor to maintain the availability of funds in its bank 
subsidiaries.
    (d) The sale of the thrift notes, in the specific manner proposed, 
is an activity described in section 20 of the Banking Act of 1933 (12 
U.S.C. 377), that is, ``the issue, flotation, underwriting, public sale 
or distribution * * * of * * * notes, or other securities''. Briefly 
stated, this statute prohibits a member bank to be affiliated with a 
company ``engaged principally'' in such activity. Since the continued 
issuance and sale of such securities would be necessary to permit 
maintenance of the holding company's activities without substantial 
contraction and would be an integral part of its operations, the Board 
concluded that the issuance and sale of such notes would constitute a 
principal activity of a holding company within the spirit and purpose of 
the statute. (For prior Board decisions in this connection, see 1934 
Federal Reserve Bulletin 485, 12 CFR 218.104, 12 CFR 218.105 and 12 CFR 
218.101.)
    (e) In reaching this conclusion, the Board distinguished the 
proposed activity from the sale of short-term notes commonly known as 
commercial paper, which is a recognized form of financing for bank 
holding companies. For purposes of this interpretation, commercial paper 
may be defined as notes, with maturities not exceeding nine months, the 
proceeds of which are to be used for current transactions, which are 
usually sold to sophisticated institutional investors, rather than to 
members of the general public, in minimum denominations of $10,000 
(although sometimes they may be sold in minimum denominations of 
$5,000). Commercial paper is exempt from registration under the 
Securities Act of 1933 by reason of the exemption provided by section 
3(a)(3) thereof (15 U.S.C. 77c). That exemption is inapplicable where 
the securities are sold to the general public (17 CFR 231.4412). The 
reasons for such exemption, taken together with the abuses that gave 
rise to the passage of the Banking Act of 1933 (``the Glass-Steagall 
Act''), have led the Board to conclude that the issuance of commercial 
paper by a bank holding company is not an activity intended to be 
included within the scope of section 20.

(Interprets and applies 12 U.S.C. 377 and 1843)

[Reg. Y, 38 FR 35231, Dec. 26, 1973]



Sec. 250.260  Miscellaneous interpretations; gold coin and bullion.

    The Board has received numerous inquiries from member banks relating 
to the repeal of the ban on ownership of

[[Page 852]]

gold by United States citizens. Listed below are questions and answers 
which affect member banks and relate to the responsibilities of the 
Federal Reserve System.
    (a) May gold in the form of coins or bullion be counted as vault 
cash in order to satisfy reserve requirements? No. Section 19(c) of the 
Federal Reserve Act requires that reserve balances be satisfied either 
by a balance maintained at the Federal Reserve Bank or by vault cash, 
consisting of United States currency and coin. Gold in bullion form is 
not United States currency. Since the bullion value of United States 
gold coins far exceeds their face value, member banks would not in 
practice distribute them over the counter at face value to satisfy 
customer demands.
    (b) Will the Federal Reserve Banks perform services for member banks 
with respect to gold, such as safekeeping or assaying? No.
    (c) Will a Federal Reserve Bank accept gold as collateral for an 
advance to a member bank under section 10(b) of the Federal Reserve Act? 
No.

[39 FR 45254, Dec. 31, 1974]

         Interpretations of Section 32 of the Glass-Steagall Act



Sec. 250.400  Service of open-end investment company.

    An open-end investment company is defined in section 5(a)(1) of the 
Investment Company Act of 1940 as a company ``which is offering for sale 
or has outstanding any redeemable security of which it is the issuer.'' 
Section 2(a)(31) of said act provides that a redeemable security means 
``any security, other than short-term paper, under the terms of which 
the holder, upon its presentation to the issuer or to a person 
designated by the issuer, is entitled (whether absolutely or only out of 
surplus) to receive approximately his proportionate share of the 
issuer's current net assets, or the cash equivalent thereof.''


It is customary for such companies to have but one class of securities, 
namely, capital stock, and it is apparent that the more or less 
continued process of redemption of the stock issued by such a company 
would restrict and contract its activities if it did not continue to 
issue its stock. Thus, the issuance and sale of its stock is essential 
to the maintenance of the company's size and to the continuance of 
operations without substantial contraction, and therefore the issue and 
sale of its stock constitutes one of the primary activities of such a 
company.


Accordingly, it is the opinion of the Board that if such a company is 
issuing or offering its redeemable stock for sale, it is ``primarily 
engaged in the issue * * * public sale, or distribution, * * * of 
securities'' and that section 32 of the Banking Act of 1933, as amended, 
prohibits an officer, director or employee of any such company from 
serving at the same time as an officer, director or employee of any 
member bank. It is the Board's view that this is true even though the 
shares are sold to the public through independent organizations with the 
result that the investment company does not derive any direct profit 
from the sales.


If, however, the company has ceased to issue or offer any of its stock 
for sale, the company would not be engaged in the issue or distribution 
of its stock, and, therefore, the prohibition contained in section 32 
would be inapplicable unless the company were primarily engaged in the 
underwriting, public sale or distribution of securities other than its 
own stock.

[16 FR 4963, May 26, 1951. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.401  Director serving member bank and closed-end investment company 

being organized.

    (a) The Board has previously expressed the opinion (Sec. 218.101) 
that section 32 of the Banking Act of 1933 (12 U.S.C. 78) is applicable 
to a director of a member bank serving as a director of an open-end 
investment company, because the more or less continued process of 
redemption of the stock issued by such company makes the issuance and 
sale of its stock essential to the maintenance of the company's size and 
to the continuance of operations, with the result that the issuance and 
sale of its stock constitutes one of the primary activities of such a 
company. The Board also stated that if the company

[[Page 853]]

had ceased to issue or offer any of its stock for sale, the company 
would not be engaged in the issuance or distribution of its stock and 
therefore the prohibitions of section 32 would not be applicable. 
Subsequently, the Board expressed the opinion that section 32 would not 
be applicable in the case of a closed-end investment company.
    (b) The Board has recently stated that it believed that a closed-end 
company which was in process of organization and was actively engaged in 
issuing and selling its shares was in the same position relative to 
section 32 as an open-end company, and that the section would be 
applicable while this activity continued.

[25 FR 3464, Apr. 21, 1960. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.402  Service as officer, director, or employee of licensee 

corporation under the Small Business Investment Act of 1958.

    (a) The Board of Governors has been requested to express an opinion 
whether Sec. 218.1 would prohibit an officer, director, or employee of 
a member bank from serving at the same time as an officer, director, or 
employee of a Licensee corporation under the Small Business Investment 
Act of 1958 (15 U.S.C. 661 et seq.). It is understood that a Licensee 
would be authorized to engage only in the activities set forth in the 
statute, namely, to provide capital and long-term loan funds to small 
business concerns.
    (b) In the opinion of the Board, a corporation engaged exclusively 
in the enumerated activities would not be ``primarily engaged in the 
issue, flotation, underwriting, public sale, or distribution, at 
wholesale or retail, or through syndicate participation, of stocks, 
bonds, or other similar securities.'' Accordingly, the prohibition of 
Sec. 218.1 would not apply to serving as an officer, director, or 
employee of either a small business investment company organized under 
the Small Business Investment Act of 1958, or an investment company 
chartered under the laws of a State solely for the purpose of operating 
under the Small Business Investment Act of 1958.

[25 FR 4427, May 19, 1960. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.403  Service of member bank and real estate investment company.

    (a) The Board recently considered two inquiries regarding the 
question whether proposed real estate investment companies would be 
subject to the provisions of sections 20 and 32 of the Banking Act of 
1933 (12 U.S.C. 377 and 78). These sections relate to affiliations 
between member banks and companies engaged principally in the issue, 
flotation, underwriting, public sale or distribution of stocks, bonds, 
or similar securities, and interlocking directorates between member 
banks and companies primarily so engaged. In both instances the 
companies, after their organization, would engage only in the business 
of financing real estate development or investing in real estate 
interests, and not in the type of business described in the statute. 
However, each of the companies, in the process of its organization, 
would issue its own stock. In one instance, it appeared that the stock 
would be issued over a period of from 30 to 60 days; in the other 
instance it was stated that the stock would be sold by a firm of 
underwriters and that distribution was expected to be completed in not 
more than a few days.
    (b) On the basis of the facts stated, the Board concluded that the 
companies involved would not be subject to sections 20 and 32 of the 
Banking Act of 1933, since they would not be principally or primarily 
engaged in the business of issuing or distributing securities but would 
only be issuing their own stock for a period ordinarily required for 
corporate organization. The Board stated, however, that if either of the 
companies should subsequently issue additional shares frequently and in 
substantial amounts relative to the size of the company's capital 
structure, it would be necessary for the Board to reconsider the matter.
    (c) Apart from the legal question, the Board noted that an 
arrangement of the kind proposed could involve some dangers to an 
affiliated bank because the relationship might tend to impair the 
independent judgment that should be exercised by the bank in appraising 
its credits and might cause the company to be so identified in the minds 
of

[[Page 854]]

the public with the bank that any financial reverses suffered by the 
company might affect the confidence of the public in the bank.
    (d) Because of the foregoing conclusion that the companies would not 
be subject to sections 20 and 32, it seems advisable to clarify Sec. 
218.102, in which the Board took the position that a closed-end 
investment company which was in process of organization and was actively 
engaged in issuing and selling its shares was subject to section 32 as 
long as this activity continued. That interpretation should be regarded 
as applicable only where the circumstances are such as to indicate that 
the issuance of the company's stock is a primary or principal activity 
of the company. For example, such circumstances might exist where the 
initial stock of a company is actively issued over a period of time 
longer than that ordinarily required for corporate organization, or 
where, subsequent to organization, the company issues its own stock 
frequently and in substantial amounts relative to the total amount of 
shares outstanding.

[26 FR 868, Jan. 28, 1961. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.404  Serving as director of member bank and corporation selling own 

stock.

    (a) The Board recently considered the question whether section 32 of 
the Banking Act of 1933 (12 U.S.C. 78) would be applicable to the 
service of a director of a corporation which planned to acquire or 
organize, as proceeds from the sale of stock became available, 
subsidiaries to operate in a wide variety of fields, including 
manufacturing, foreign trade, leasing of heavy equipment, and real 
estate development. The corporation had a paid-in capital of about 
$60,000 and planned to sell additional shares at a price totaling $10 
million, with the proviso that if less than $3 million worth were sold 
by March 1962, the funds subscribed would be refunded. It thus appeared 
to be contemplated that the sale of stock would take at least a year, 
and there appeared to be no reason for believing that, if the venture 
proved successful, additional shares would not be offered so that the 
corporation could continue to expand.
    (b) The Board concluded that section 32 would be applicable, stating 
that although Sec. 218.102, as clarified by Sec. 218.104, related to 
closed-end investment companies, the rationale of that interpretation is 
applicable to corporations generally.

[26 FR 2456, Mar. 23, 1961. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.405  No exception granted a special or limited partner.

    (a) The Board has been asked on several occasions whether section 32 
of the Banking Act of 1933 (12 U.S.C. 78) is applicable to a director, 
officer, or employee of a member bank who is a special or limited 
partner in a firm primarily engaged in the business described in that 
section.
    (b) Since the Board cannot issue an individual permit, it can exempt 
a limited or special partner only by amending part 218 (Regulation R). 
After the statute was amended in 1935 so as to make it applicable to a 
partner, the Board carefully considered the desirability of making such 
an exception. On several subsequent occasions it has reconsidered the 
question. In each instance the Board has decided that in view of a 
limited partner's interest in the underwriting and distributing 
business, it should not make the exception.

[27 FR 7954, Aug. 10, 1962. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.406  Serving member bank and investment advisor with mutual fund 

affiliation.

    (a) The opinion of the Board of Governors of the Federal Reserve 
System has been requested with respect to service as vice president of a 
corporation engaged in supplying investment advice and management 
services to mutual funds and others (``Manager'') and as director of a 
member bank.
    (b) Section 32 of the Banking Act of 1933 (12 U.S.C. 78), forbids 
any officer, director, or employee of any corporation ``primarily 
engaged in the issue, flotation, underwriting, public sale, or 
distribution, at wholesale or retail, or through syndicate 
participation, of stocks, bonds, or other similar securities * * *'' to 
serve at the same time as an officer, director, or employee of a member 
bank.

[[Page 855]]

    (c) Manager has for several years served a number of different open-
end or mutual funds, as well as individuals, institutions, and other 
clients, as an investment advisor and manager. However, it appears that 
Manager has a close relationship with two of the mutual funds which it 
serves. A wholly owned subsidiary of Manager (``Distributors''), serves 
as distributor for the two mutual funds and has no other function. In 
addition, the chairman and treasurer of Manager, as well as the 
president, assistant treasurer, and a director of Manager, are officers 
and directors of Distributors and trustees of both funds. It appears 
also that a director of Manager is president and director of 
Distributors, while the clerk of Manager is also clerk of Distributors. 
Manager, Distributors and both funds are listed at the same address in 
the local telephone directory.
    (d) While the greater part of the total annual income of Manager 
during the past five years has derived from ``individuals, institutions, 
and other clients'', it appears that a substantial portion has been 
attributable to the involvement with the two funds in question. During 
each of the last four years, that portion has exceeded a third of the 
total income of Manager, and in 1962 it reached nearly 40 percent.
    (e) The Board has consistently held that an open-end or mutual fund 
is engaged in the activities described in section 32, so long as it is 
issuing its securities for sale, since it is apparent that the more or 
less continued process of redemption of the stock issued by such a 
company would restrict and contract its activities if it did not 
continue to issue the stock. Clearly, a corporation that is engaged in 
underwriting or selling open-end shares, is so engaged.
    (f) In connection with incorporated manager-advisors to open-end or 
mutual funds, the Board has expressed the view in a number of cases that 
where the corporation served a number of different clients, and the 
corporate structure was not interlocked with that of mutual fund and 
underwriter in such a way that it could be regarded as being controlled 
by or substantially one with them, it should not be held to be 
``primarily engaged'' in section 32 activities. On the other hand, where 
a manager-advisor was created for the sole purpose of serving a 
particular fund, and its activities were limited to that function, the 
Board has regarded the group as a single entity for purposes of section 
32.
    (g) In the present case, the selling organization is a wholly-owned 
subsidiary of the advisor-manager, hence subject to the parent's 
control. Stock of the subsidiary will be voted according to decisions by 
the parent's board of directors, and presumably will be voted for a 
board of directors of the subsidiary which is responsive to policy lines 
laid down by the parent. Financial interests of the parent are obviously 
best served by an aggressive selling policy, and, in fact, both the 
share and the absolute amount of the parent's income provided by the two 
funds have shown a steady increase over recent years. The fact that 
dividends from Distributors have represented a relatively small 
proportion of the income of Manager, and that there were, indeed, no 
dividends in 1961 or 1962, does not support a contrary argument, in view 
of the steady increase in total income of Manager from the funds and 
Distributors taken as a whole.
    (h) In view of all these facts, the Board has concluded that the 
separate corporate entities of Manager and Distributors should be 
disregarded and Distributors viewed as essentially a selling arm of 
Manager. As a result of this conclusion, section 32 would forbid 
interlocking service as an officer of Manager and a director of a member 
bank.

[28 FR 13437, Dec. 12, 1963. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.407  Interlocking relationship involving securities affiliate of 

brokerage firm.

    (a) The Board of Governors was asked recently whether section 32 of 
the Banking Act of 1933 (``section 32''), 12 U.S.C. 78, prohibits the 
interlocking service of X as a director of a member bank of the Federal 
Reserve System and as a partner in a New York City brokerage firm 
(``Partnership'') having a corporation affiliate (``Corporation'')

[[Page 856]]

engaged in business of the kinds described in section 32 (``section 32 
business'').
    (b) Section 32, subject to an exception not applicable here, 
provides that

    No officer, director, or employee of any corporation or 
unincorporated association, no partner or employee of any partnership, 
and no individual, primarily engaged in the issue, flotation, 
underwriting, public sale, or distribution, at wholesale or retail, or 
through syndicate participation, of stocks, bonds, or other similar 
securities, shall serve the same time as an officer, director, or 
employee of any member bank * * *.

    (c) From the information submitted it appears that Partnership, a 
member firm of the New York Stock Exchange, is the successor of two 
prior partnerships, in one of which X had been a partner. This prior 
partnership had been found not to be ``primarily engaged'' in section 32 
business. The other prior partnership, however, had been so engaged. By 
arrangement between the two prior firms, Corporation was formed chiefly 
for the purpose of carrying on the section 32 business of the prior firm 
that had been ``primarily engaged'' in that business, which business was 
transferred to Corporation. The two prior firms were then merged and the 
stock of Corporation was acquired by all the partners of Partnership, 
other than X, in proportion to the respective partnership interests of 
the stockholding partners. The information submitted indicated also that 
two of the three directors and ``some'' of the principal officers of 
Corporation are partners in Partnership, although X is not a director or 
officer of Corporation.
    (d) It is understood that the practice of forming corporate 
affiliates of brokerage firms, in order that the affiliate may carry on 
the securities business (such as section 32 business) with limited 
liability and other advantages, has become rather widespread in recent 
years. Accordingly, other cases may arise where a partner in such a firm 
may desire to serve at the same time as director of a member bank.
    (e) On the basis of the information presented the Board concluded 
that X in his capacity as an ``individual'', was not engaged in section 
32 business. However, as that information showed Corporation to be 
``primarily engaged'' in section 32 business, the Board stated that a 
finding that Partnership and Corporation were one entity for the 
purposes of the statute would mean that X would be forbidden to serve 
both the member bank and Partnership, if the one entity were so engaged.
    (f) Paragraph .15 of Rule 321 of the New York Stock Exchange 
governing the formation and conduct of affiliated companies of member 
organizations states that:

    Since Rule 314 provides that each member and allied member in a 
member organization must have a fixed interest in its entire business, 
it follows that the fixed interest of each member and allied member must 
extend to the member organization's corporate affiliate. When any of the 
corporate affiliate's participating stock is owned by the members and 
allied members in the member organization, such holdings must at all 
times be distributed among such members and allied members in 
approximately the same proportions as their respective interests in the 
profits of the member organization. When a member or allied member's 
interest in the member organization is changed, a corresponding change 
must be made in his participating interest in the affiliate.

    (g) Although it was understood that X had received special 
permission from the Exchange not to own any of the stock of Corporation, 
it appeared to the Board that Rule 321.15 would apply to the remaining 
partners. Moreover, other paragraphs of the rule forbid transfers of the 
stock, except under certain circumstances to limited classes of persons, 
such as employees of the organization or estates of decedent partners, 
without permission of the Exchange.
    (h) The information supplied to the Board clearly indicated that 
Corporation was formed in order to provide Partnership with an 
``underwriting arm''. Under Rule 321 of the Exchange, the partners 
(other than X) are required to own stock in Corporation because of their 
partnership interest, would be required to surrender that stock on 
leaving the partnership, and incoming partners would be required to 
acquire such stock. Furthermore, Rule 321 speaks of a corporate 
affiliate, such as Corporation, as a part of the ``entire business'' of 
a member organization.

[[Page 857]]

    (i) On the basis of the foregoing, the Board concluded that 
Partnership and Corporation must be regarded as a single entity or 
enterprise for purposes of section 32.
    (j) The remaining question was whether the enterprise, as a whole, 
should be regarded as ``primarily engaged'' in section 32 business. The 
Information presented stated that the total dollar volume of section 32 
business of Corporation during the first eleven months of its operation 
was $89 million. The gross income from section 32 business was less than 
half a million, and represented about 7.9 percent of the income of 
Partnership. The Board was advised that the relatively low amount of 
income from section 32 business of Corporation as due to special costs, 
and to the condition of the market for municipal and State bonds during 
the past year, a field in which Corporation specializes. Corporation is 
listed in a standard directory of securities dealers, and holds itself 
out as having separate departments to deal with the principal 
underwriting areas in which it functions.
    (k) In view of the above information, the Board concluded that the 
enterprise consisting of Partnership and Corporation was ``primarily 
engaged'' in section 32 business. Accordingly, the Board stated that the 
partners in Partnership, including X, were forbidden by that section and 
by this part 218 (Reg. R), issued pursuant to the statute, to serve as 
officers, directors, or employees of any member banks.

[29 FR 5315, Apr. 18, 1964. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.408  Short-term negotiable notes of banks not securities under 

section 32, Banking Act of 1933.

    (a) The Board of Governors has been asked whether short-term 
unsecured negotiable notes of the kinds issued by some of the large 
banks in this country as a means of obtaining funds are ``other similar 
securities'' within the meaning of section 32, Banking Act of 1933 (12 
U.S.C. 78) and this part.
    (b) Section 32 forbids certain interlocking relationships between 
banks which are members of the Federal Reserve System and individuals or 
organizations ``primarily engaged in the issue, flotation, underwriting, 
public sale, or distribution, at wholesale or retail, or through 
syndicate participation, of stocks, bonds, or other similar securities * 
* *.'' Therefore, if such notes are securities similar to stocks or 
bonds, any dealing therein would be an activity covered in section 32 
and would have to be taken into consideration in determining whether the 
individual or organization involved was ``primarily engaged'' in such 
activities.
    (c) The Board has concluded that such short-term notes of the kind 
described above are not ``other similar securities'' within the meaning 
of section 32 and this part.

[29 FR 16065, Dec. 2, 1964. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.409  Investment for own account affects applicability of section 32.

    (a) The Board of Governors has been presented with the question 
whether a certain firm is primarily engaged in the activities described 
in section 32 of the Banking Act of 1933. If the firm is so engaged, 
then the prohibitions of section 32 forbids a limited partner to serve 
as employee of a member bank.
    (b) The firm describes the bulk of its business, producing roughly 
60 percent of its income, as ``investing for its own account.'' However, 
it has a seat on the local stock exchange, and acts as specialist and 
odd-lot dealer on the floor of the exchange, an activity responsible for 
some 30 percent of its volume and profits. The firm's ``off-post 
trading,'' apart from the investment account, gives rise to about 5 
percent of its total volume and 10 percent of its profits. Gross volume 
has risen from $4 to $10 million over the past 3 years, but underwriting 
has accounted for no more than one-half of 1 percent of that amount.
    (c) Section 32 provides that

    No officer, director, or employee of any corporation or 
unincorporated association, no partner, or employee of any partnership, 
and no individual, primarily engaged in the issue, flotation, 
underwriting, public sale, or distribution, at wholesale, or retail, or 
through syndicate participation, of stocks, bonds, or other similar 
securities, shall serve the same time (sic) as an officer, director, or 
employee of any member bank * * *


[[Page 858]]


    (d) In interpreting this language, the Board has consistently held 
that underwriting, acting as a dealer, or generally speaking, selling, 
or distributing securities as a principal, is covered by the section, 
while acting as broker or agent is not.
    (e) In one type of situation, however, although a firm was engaged 
in selling securities as principal, on its own behalf, the Board held 
that section 32 did not apply. In these cases, the firm alleged that it 
bought and sold securities purely for investment purposes. Typically, 
those cases involved personal holding companies or small family 
investment companies. Securities had been purchased only for members of 
a restricted family group, and had been held for relatively long periods 
of time.
    (f) The question now before the Board is whether a similar exception 
can apply in the case of the investment account of a professional 
dealer. In order to answer this question, it is necessary to analyze, in 
the light of applicable principles under the statute, the three main 
types of activity in which the firm has been engaged, (1) acting as 
specialist and odd-lot dealer, (2) off-post trading as an ordinary 
dealer, and (3) investing for its own account.
    (g) On several occasions, the Board has held that, to the extent the 
trading of a specialist or odd-lot dealer is limited to that required 
for him to perform his function on the floor of the exchange, he is 
acting essentially in an agency capacity. In a letter of September 13, 
1934, the Board held that the business of a specialist was not of the 
kind described in the (unamended) section on the understanding that

    * * * in acting as specialists on the New York Curb Exchange, it is 
necessary for the firm to buy and sell odd lots and * * * in order to 
protect its position after such transactions have been made, the firm 
sells or buys shares in lots of 100 or multiples thereof in order to 
reduce its position in the stock in question to the smallest amount 
possible by this method. It appears therefore that, in connection with 
these transactions, the firm is neither trading in the stock in question 
or taking a position in it except to the extent made necessary by the 
fact that it deals in odd lots and cannot complete the transactions by 
purchases and sales on the floor of the exchange except to the nearest 
100 share amount.

    (h) While subsequent amendments to section 32 to some extent changed 
the definition of the kinds of securities business that would be covered 
by the section, the amendments were designed so far as is relevant to 
the present question, to embody existing interpretations of the Board. 
Accordingly, to the extent that the firm's business is described by the 
above letter of the Board, it should not be considered to be of a kind 
described in section 32.
    (i) Turning to the firm's off-post trading, the Board is inclined to 
agree with the view that this is sufficient to make the case a 
borderline one under the statute. In the circumstances, the Board might 
prefer to postpone making a determination until figures for 1965 could 
be reviewed, particularly in the light of the recent increase in total 
volume, if it were not for the third category, the firm's own investment 
account.
    (j) While this question has not been squarely presented to it in the 
past, the Board is of the opinion that when a firm is doing any 
significant amount of business as a dealer or underwriter, then 
investments for the firm's own account should be taken into 
consideration in determining whether the firm is ``primarily engaged'' 
in the activities described in section 32. The division into dealing for 
one's own account, and dealing with customers, is a highly subjective 
one, and although a particular firm or individual may be quite 
scrupulous in separating the two, the opportunity necessarily exists for 
the kind of abuse at which the statute is directed. The Act is designed 
to prevent situations from arising in which a bank director, officer, or 
employee could influence the bank or its customers to invest in 
securities in which his firm has an interest, regardless of whether he, 
as an individual, is likely to do so. In the present case, when these 
activities are added to the firm's ``off-post trading'', the firm 
clearly falls within the statutory definition.
    (k) For the reasons just discussed, the Board concludes that the 
firm must be considered to be primarily engaged in activities described 
in section 32, and that the prohibitions of the section

[[Page 859]]

forbid a limited partner in that firm to serve as employee of a member 
bank.

(12 U.S.C. 248(i))

[30 FR 7743, June 16, 1965. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.410  Interlocking relationships between bank and its commingled 

investment account.

    (a) The Board of Governors was asked recently whether the 
establishment of a proposed ``Commingled Investment Account'' 
(``Account'') by a national bank would involve a violation of section 32 
of the Banking Act of 1933 in view of the interlocking relationships 
that would exist between the bank and Account.
    (b) From the information submitted, it was understood that Account 
would comprise a commingled fund, to be operated under the effective 
control of the bank, for the collective investment of sums of money that 
might otherwise be handled individually by the bank as managing agent. 
It was understood further that the Comptroller of the Currency had taken 
the position that Account would be an eligible operation for a national 
bank under his Regulation 9, ``Fiduciary Powers of National Banks and 
Collective Investment Funds'' (part 9 of this title). The bank had 
advised the Board that the Securities and Exchange Commission was of the 
view that Account would be a ``registered investment company'' within 
the meaning of the Investment Company Act of 1940, and that 
participating interests in Account would be ``securities'' subject to 
the registration requirements of the Securities Act of 1933.
    (c) The information submitted showed also that the minimum 
individual participation that would be permitted in Account would be 
$10,000, while the maximum acceptable individual investment would be 
half a million dollars; that there would be no ``load'' or payment by 
customers for the privilege of investing in Account; and that:

    The availability of the Commingled Account would not be given 
publicity by the Bank except in connection with the promotion of its 
fiduciary services in general and the Bank would not advertise or 
publicize the Commingled Account as such. Participations in the 
Commingled Account are to be made available only on the premises of the 
Bank (including its branches), or to persons who are already customers 
of the Bank in other connections, or in response to unsolicited 
requests.

    (d) Such information indicated further that participations would be 
received by the bank as agent, under a broad authorization signed by the 
customer, substantially equivalent to the power of attorney under which 
customers currently deposit their funds for individual investment, and 
that the participations would not be received ``in trust.''
    (e) The Board understood that Account would be required to comply 
with certain requirements of the Federal securities laws not applicable 
to an ordinary common trust fund operated by a bank. In particular, 
supervision of Account would be in the hands of a committee to be 
initially appointed by the bank, but subsequently elected by 
participants having a majority of the units of participation in Account. 
At least one member of the committee would be entirely independent of 
the bank, but the remaining members would be officers in the trust 
department of the bank.
    (f) The committee would make a management agreement with the bank 
under which the bank would be responsible for managing Account's 
investments, have custody of its assets, and maintain its books and 
records. The management agreement would be renewed annually if approved 
by the committee, including a ``majority'' of the independent members, 
or by a vote of participants having a majority of the units of 
participation. The agreement would be terminable on 60 days' notice by 
the committee, by such a majority of the participants, or by the bank, 
and would terminate automatically if assigned by the bank.
    (g) It was understood also that the bank would receive as annual 
compensation for its services one-half of one percent of Account's 
average net assets. Account would also pay for its own independent 
professional services, including legal, auditing, and accounting 
services, as well as the cost of

[[Page 860]]

maintaining its registration and qualification under the Federal 
securities laws.
    (h) Initially, the assets of Account would be divided into units of 
participation of an arbitrary value, and each customer would be credited 
with a number of units proportionate to his investment. Subsequently, 
the assets of Account would be valued at regular intervals, and divided 
by the number of units outstanding. New investors would receive units at 
their current value, determined in this way, according to the amount 
invested. Each customer would receive a receipt evidencing the number of 
units to which he was entitled. The receipts themselves would be 
nontransferable, but it would be possible for a customer to arrange with 
Account for the transfer of his units to someone else. A customer could 
terminate his participation at any time and withdraw the current value 
of his units.
    (i) Section 32 of the Banking Act of 1933 provides in relevant part 
that:

    No officer, director, or employee of any corporation or 
unincorporated association, no partner or employee of any partnership, 
and no individual, primarily engaged in the issue, flotation, 
underwriting, public sale, or distribution, at wholesale or retail, or 
through syndicate participation, of stocks, bonds, or other similar 
securities, shall serve [at] the same time as an officer, director, or 
employee of any member bank * * *.

    (j) The Board concluded, based on its understanding of the proposal 
and on the general principles that have been developed in respect to the 
application of section 32, that the bank and Account would constitute a 
single entity for the purposes of section 32, at least so long as the 
operation of Account conformed to the representations made by the bank 
and outlined herein. Accordingly, the Board said that section 32 would 
not forbid officers of the bank to serve on Account's committee, since 
Account would be regarded as nothing more than an arm or department of 
the bank.
    (k) In conclusion, the Board called attention to section 21 of the 
Banking Act of 1933 which, briefly, forbids a securities firm or 
organization to engage in the business of receiving deposits, subject to 
certain exceptions. However, since section 21 is a criminal statute, the 
Board has followed the policy of not expressing views as to its meaning. 
(1934 Federal Reserve Bulletin 41, 543.) The Board, therefore, expressed 
no position with respect to whether the section might be held applicable 
to the establishment and operation of the proposed ``Commingled 
Investment Account.''

(12 U.S.C. 248(i))

[30 FR 12836, Oct. 8, 1965. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.411  Interlocking relationships between member bank and variable 

annuity insurance company.

    (a) The Board has recently been asked to consider whether section 32 
of the Banking Act of 1933 (12 U.S.C. 78) and this part prohibit 
interlocking service between member banks and (1) the board of managers 
of an accumulation fund, registered under the Investment Company Act of 
1940 (15 U.S.C. 80), that sells variable annuities and (2) the board of 
directors of the insurance company, of which the accumulation fund is a 
``separate account,'' but as to which the insurance company is the 
sponsor, investment advisor, underwriter, and distributor. Briefly, a 
variable annuity is one providing for annuity payment varying in 
accordance with the changing values of a portfolio of securities.
    (b) Section 32 provides in relevant part that:

    No officer, director, or employee of any corporation or 
unincorporated association, no partner or employee of any partnership, 
and no individual, primarily engaged in the issue, flotation, 
underwriting, public sale, or distribution, at wholesale or retail, or 
through syndicate participation, of stocks, bonds, or other similar 
securities, shall serve [at] the same time as an officer, director, or 
employee of any member bank * * *.

    (c) For many years, the Board's position has been that an open-end 
investment company (or mutual fund) is ``primarily engaged in the issue 
* * * public sale, or distribution * * * of securities'' since the 
issuance and sale of its stock is essential to the maintenance of the 
company's size and to the continuance of its operations without

[[Page 861]]

substantial contraction, and that section 32 of the Banking Act of 1933 
prohibits an officer, director, or employee of any such company from 
serving at the same time as an officer, director, or employee of any 
member bank. (1951 Federal Reserve Bulletin 645; Sec. 218.101.)
    (d) For reasons similar to those stated by the U.S. Supreme Court in 
Securities and Exchange Commission v. Variable Annuity Life Insurance 
Company of America, 359 U.S. 65 (1959), the Board concluded that there 
is no meaningful basis for distinguishing a variable annuity interest 
from a mutual fund share for section 32 purposes and that, therefore, 
variable annuity interests should also be regarded as ``other similar 
securities'' within the prohibition of the statute and regulation.
    (e) The Board concluded also that, since the accumulation fund, like 
a mutual fund, must continually issue and sell its investment units in 
order to avoid the inevitable contraction of its activities as it makes 
annuity payments or redeems variable annuity units, the accumulation 
fund is ``primarily engaged'' for section 32 purposes. The Board further 
concluded that the insurance company was likewise ``primarily engaged'' 
for the purposes of the statute since it had no significant revenue 
producing operations other than as underwriter and distributor of the 
accumulation fund's units and investment advisor to the fund.
    (f) Although it was clear, therefore, that section 32 prohibits any 
officers, directors, and employees of member banks from serving in any 
such capacity with the insurance company or accumulation fund, the Board 
also considered whether members of the board of managers of the 
accumulation fund are ``officers, directors, or employees'' within such 
prohibition. The functions of the board of managers, who are elected by 
the variable annuity contract owners, are, with the approval of the 
variable annuity contract owners, to select annually an independent 
public accountant, execute annually an agreement providing for 
investment advisory services, and recommend any changes in the 
fundamental investment policy of the accumulation fund. In addition, the 
Board of managers has sole authority to execute an agreement providing 
for sales and administrative services and to authorize all investments 
of the assets of the accumulation fund in accordance with its 
fundamental investment policy. In the opinion of the Board of Governors, 
the board of managers of the accumulation fund performs functions 
essentially the same as those performed by classes of persons as to whom 
the prohibition of section 32 was specifically directed and, 
accordingly, are within the prohibitions of the statute.

(12 U.S.C. 248(i))

[33 FR 12886, Sept. 12, 1968. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.412  Interlocking relationships between member bank and insurance 

company-mutual fund complex.

    (a) The Board has been asked whether section 32 of the Banking Act 
of 1933 and this part prohibited interlocking service between member 
banks and (1) the advisory board of a newly organized open-end 
investment company (mutual fund), (2) the fund's incorporated investment 
manager-advisor, (3) the insurance company sponsoring and apparently 
controlling the fund.
    (b) X Fund, Inc. (``Fund''), the mutual fund, was closely related to 
X Life Insurance Company (``Insurance Company''), as well as to the 
incorporated manager and investment advisor to Fund (``Advisors''), and 
the corporation serving as underwriter for Fund (``Underwriters''). The 
same persons served as principal officers and directors of Insurance 
Company, Fund, Advisors, and Underwriters. In addition, several 
directors of member banks served as directors of Insurance Company and 
of Advisors and as members of the Advisory Board of Fund, and additional 
directors of member banks had been named only as members of the Advisory 
Board. All outstanding shares of Advisors and of Underwriters were 
apparently owned by Insurance Company.
    (c) Section 32 provides in relevant part that:

    No officer, director, or employee of any corporation * * * primarily 
engaged in the issue, flotation, underwriting, public sale, or 
distribution at wholesale or retail, or through syndicate participation, 
of stocks, bonds, or other similar securities, shall serve

[[Page 862]]

[at] the same time as an officer, director, or employee of any member 
bank * * *.

    (d) The Board of Governors reaffirmed its earlier position that an 
open-end investment company is ``primarily engaged'' in activities 
described in section 32 ``even though the shares are sold to the public 
through independent organizations with the result that the investment 
company does not derive any direct profit from the sales.'' (1951 
Federal Reserve Bulletin 654, Sec. 218.101.) Accordingly, the Board 
concluded that Fund must be regarded as so engaged, even though its 
shares were underwritten and distributed by Underwriters.
    (e) As directors of the member banks involved in the inquiry were 
not officers, directors, or employees of either Fund or Underwriters, 
the relevant questions were whether--(1) Advisors, and (2) Insurance 
Company, should be regarded as being functionally and structurally so 
closely allied with Fund that they should be treated as one with it in 
determining the applicability of section 32. An additional question was 
whether members of the Advisory Board are ``officers, directors, or 
employees'' of Fund within the prohibition of the statute.
    (f) Interlocking service with Advisory Board: The function of the 
Advisory Board was merely to make suggestions and to counsel with Fund's 
Board of Directors in regard to investment policy. The Advisory Board 
had no authority to make binding recommendations in any area, and it did 
not serve in any sense as a check on the authority of the Board of 
Directors. Indeed, the Fund's bylaws provided that the Advisory Board 
``shall have no power or authority to make any contract or incur any 
liability whatever or to take any action binding upon the Corporation, 
the Officers, the Board of Directors or the Stockholders.'' Members of 
the Advisory Board were appointed by the Board of Directors of Fund, 
which could remove any member of the Advisory Board at any time. None of 
the principal officers of Fund or of Underwriters were members of the 
Advisory Board; and the compensation of its members was expected to be 
nominal.
    (g) The Board of Governors concluded that members of the Advisory 
Board need not be regarded as ``officers, directors, or employees'' of 
Fund or of Underwriters for purposes of section 32, and that the 
statute, therefore, did not prohibit officers, directors, or employees 
of member banks from serving as members of the Advisory Board.
    (h) Interlocking service with Advisors: The principal officers and 
several of the directors of Advisors were identical with both those of 
Fund and of Underwriters. Entire management and investment 
responsibility for Fund had been placed, by contract, with Advisors, 
subject only to a review authority in the Board of Directors of Fund. 
Advisors also supplied office space for the conduct of Fund's affairs, 
and compensated members of the Advisory Board who are also officers or 
directors of Advisors. Moreover, it appeared that Advisors was created 
for the sole purpose of servicing Fund, and its activities were to be 
limited to that function.
    (i) In the view of the Board of Governors, the structural and 
functional identity of Fund and Advisors was such that they were to be 
regarded as a single entity for purposes of section 32, and, 
accordingly, officers, directors, and employees of member banks were 
prohibited by section 32 from serving in any such capacity with such 
entity.
    (j) Interlocking service with Insurance Company: It was clear that 
Insurance Company was not as yet ``primarily engaged'' in business of a 
kind described in section 32 with respect to the shares of the newly 
created Fund sponsored by Insurance Company, since the issue and sale of 
such shares had not yet commenced. Nor did it appear that Insurance 
Company would be so engaged in the preliminary stages of Fund's 
existence, when the disproportion between the insurance business of 
Insurance Company and the sale of Fund shares would be very great. 
However, it was also clear that if Fund was successfully launched, its 
activities would rather quickly reach a stage where a serious question 
would arise as to the applicability of the section 32 prohibition.
    (k) An estimate supplied to the Board indicated that 100,000 shares 
of Fund might be sold annually to produce, based on then current values, 
annual

[[Page 863]]

gross sales receipts of over $1 million. Insurance Company's total gross 
income for its last fiscal year was almost $10 million. On this basis, 
about one-tenth of the annual gross income of the Insurance Company-Fund 
complex (more than one-tenth, if income from investments of Insurance 
Company was eliminated) would be derived from sales of Fund shares. 
Although total sales of shares of Fund during the first year might not 
approximate expectations, it was assumed that if the estimate or 
projection was correct, the annual rate of sale might well rise to that 
level before the end of the first year of operation.
    (l) It appeared that net income of Insurance Company from Fund's 
operations would be minimal for the foreseeable future. However, it was 
understood that Insurance Company's chief reason for launching Fund was 
to provide salesmen for Insurance Company (who were to be the only 
sellers of shares of Fund, and most of whom, Insurance Company hoped, 
would qualify to sell those shares), with a ``package'' of mutual fund 
shares and life insurance policies that would provide increased 
competitive strength in a highly competitive field.
    (m) The Board concluded that Insurance Company would be ``primarily 
engaged'' in issuing or distributing shares of Fund within the meaning 
of section 32 by not later than the time of realization of the 
aforementioned estimated annual rate of sale, and possibly before. As 
indicated in Board of Governors v. Agnew, 329 U.S. 441 at 446, the 
prohibition of the statute applies if the section 32 business involved 
is a ``substantial'' activity of the company.
    (n) This, the Board observed, was not to suggest that officers, 
directors, or employees of Insurance Company who are also directors of 
member banks would be likely, as individuals, to use their positions 
with the banks to further sales of Fund's shares. However, as the 
Supreme Court pointed out in the Agnew case, section 32 is a 
``preventive or prophylactic measure.'' The fact that the individuals 
involved ``have been scrupulous in their relationships'' to the banks in 
question ``is immaterial.''

(12 U.S.C. 248(i))

[33 FR 13001, Sept. 14, 1968. Redesignated at 61 FR 57289, Nov. 6, 1996]



Sec. 250.413  ``Bank-eligible'' securities activities.

    Section 32 of the Glass-Steagall Act (12 U.S.C. 78) prohibits any 
officer, director, or employee of any corporation or unincorporated 
association, any partner or employee of any partnership, and any 
individual, primarily engaged in the issue, flotation, underwriting, 
public sale, or distribution, at wholesale or retail, or through 
syndicate participation, of stocks, bonds, or other similar securities, 
from serving at the same time as an officer, director, or employee of 
any member bank of the Federal Reserve System. The Board is of the 
opinion that to the extent that a company, other entity or person is 
engaged in securities activities that are expressly authorized for a 
state member bank under section 16 of the Glass-Steagall Act (12 U.S.C. 
24(7), 335), the company, other entity or individual is not engaged in 
the types of activities described in section 32. In addition, a 
securities broker who is engaged solely in executing orders for the 
purchase and sale of securities on behalf of others in the open market 
is not engaged in the business referred to in section 32.

[Reg. R, 61 FR 57289, Nov. 6, 1996]



PART 261_RULES REGARDING AVAILABILITY OF INFORMATION--Table of Contents




                      Subpart A_General Provisions

Sec.
261.1 Authority, purpose, and scope.
261.2 Definitions.
261.3 Custodian of records; certification; service; alternative 
          authority.

    Subpart B_Published Information and Records Available to Public; 
                         Procedures for Requests

261.10 Published information.
261.11 Records available for public inspection and copying.
261.12 Records available to public upon request.
261.13 Processing requests.

[[Page 864]]

261.14 Exemptions from disclosure.
261.15 Request for confidential treatment.
261.16 Request for access to confidential commercial or financial 
          information.
261.17 Fee schedules; waiver of fees.

    Subpart C_Confidential Information Made Available to Supervised 
     Institutions, Financial Institution Supervisory Agencies, Law 
        Enforcement Agencies, and Others in Certain Circumstances

261.20 Confidential supervisory information made available to supervised 
          financial institutions and financial institution supervisory 
          agencies.
261.21 Confidential information made available to law enforcement 
          agencies and other nonfinancial institution supervisory 
          agencies.
261.22 Other disclosure of confidential supervisory information.
261.23 Subpoenas, orders compelling production and other process.

    Authority: 5 U.S.C. 552; 12 U.S.C. 248(i) and (k), 321 et seq., 611 
et seq., 1442, 1817(a)(2)(A), 1817(a)(8), 1818(u) and (v), 1821(o), 
1821(t), 1830, 1844, 1951 et seq., 2601, 2801 et seq., 2901 et seq., 
3101 et seq., 3401 et seq.; 15 U.S.C. 77uuu(b), 78q(c)(3); 29 U.S.C. 
1204; 31 U.S.C. 5301 et seq.; 42 U.S.C. 3601; 44 U.S.C. 3510.

    Source: 53 FR 20815, June 7, 1988, unless otherwise noted.



                      Subpart A_General Provisions

    Source: 62 FR 54359, Oct. 20, 1997, unless otherwise noted.



Sec. 261.1  Authority, purpose, and scope.

    (a) Authority. (1) This part is issued by the Board of Governors of 
the Federal Reserve System (the Board) pursuant to the Freedom of 
Information Act, 5 U.S.C. 552; Sections 9, 11, and 25A of the Federal 
Reserve Act, 12 U.S.C. 248(i) and (k), 321 et seq., (including 326), 611 
et seq.; Section 22 of the Federal Home Loan Bank Act, 12 U.S.C 1442; 
the Federal Deposit Insurance Act, 12 U.S.C. 1817(a)(2)(A), 1817(a)(8), 
1818(u) and (v), 1821(o); section 5 of the Bank Holding Company Act, 12 
U.S.C. 1844; the Bank Secrecy Act, 12 U.S.C. 1951 et seq., and Chapter 
53 of Title 31; the Home Mortgage Disclosure Act, 12 U.S.C. 2801 et 
seq.; the Community Reinvestment Act, 12 U.S.C. 2901 et seq.; the 
International Banking Act, 12 U.S.C. 3101 et seq.; the Right to 
Financial Privacy Act, 12 U.S.C. 3401 et seq.; the Securities and 
Exchange Commission Authorization Act, 15 U.S.C. 77uuu(b), 78q(c)(3); 
the Employee Retirement Income Security Act, 29 U.S.C. 1204; the Money 
Laundering Suppression Act, 31 U.S.C. 5301, the Fair Housing Act, 42 
U.S.C. 3601; the Paperwork Reduction Act, 44 U.S.C. 3510; and any other 
applicable law that establishes a basis for the exercise of governmental 
authority by the Board.
    (2) This part establishes mechanisms for carrying out the Board's 
statutory responsibilities under statutes in paragraph (a)(1) of this 
section to the extent those responsibilities require the disclosure, 
production, or withholding of information. In this regard, the Board has 
determined that the Board, or its delegees, may disclose exempt 
information of the Board, in accordance with the procedures set forth in 
this part, whenever it is necessary or appropriate to do so in the 
exercise of any of the Board's supervisory or regulatory authorities, 
including but not limited to, authority granted to the Board in the 
Federal Reserve Act, 12 U.S.C. 221 et seq., the Bank Holding Company 
Act, 12 U.S.C. 1841 et seq., and the International Banking Act, 12 
U.S.C. 3101 et seq. The Board has determined that all such disclosures, 
made in accordance with the rules and procedures specified in this part, 
are authorized by law.
    (3) The Board has also determined that it is authorized by law to 
disclose information to a law enforcement or other federal or state 
government agency that has the authority to request and receive such 
information in carrying out its own statutory responsibilities, or in 
response to a valid order of a court of competent jurisdiction or of a 
duly constituted administrative tribunal.
    (b) Purpose. This part sets forth the categories of information made 
available to the public, the procedures for obtaining documents and 
records, the procedures for limited release of exempt and confidential 
supervisory information, and the procedures for protecting confidential 
business information.
    (c) Scope. (1) This subpart A contains general provisions and 
definitions of terms used in this part.

[[Page 865]]

    (2) Subpart B of this part implements the Freedom of Information Act 
(FOIA) (5 U.S.C. 552).
    (3) Subpart C of this part sets forth:
    (i) The kinds of exempt information made available to supervised 
institutions, supervisory agencies, law enforcement agencies, and others 
in certain circumstances;
    (ii) The procedures for disclosure; and
    (iii) The procedures with respect to subpoenas, orders compelling 
production, and other process.

[62 FR 54359, Oct. 20, 1997; 62 FR 62508, Nov. 24, 1997]



Sec. 261.2  Definitions.

    For purposes of this part:
    (a) Board's official files means the Board's central records.
    (b) Commercial use request refers to a request from or on behalf of 
one who seeks information for a use or purpose that furthers the 
commercial, trade, or profit interests of the requester or the person on 
whose behalf the request is made.
    (c)(1) Confidential supervisory information means:
    (i) Exempt information consisting of reports of examination, 
inspection and visitation, confidential operating and condition reports, 
and any information derived from, related to, or contained in such 
reports;
    (ii) Information gathered by the Board in the course of any 
investigation, suspicious activity report, cease-and-desist orders, 
civil money penalty enforcement orders, suspension, removal or 
prohibition orders, or other orders or actions under the Financial 
Institutions Supervisory Act of 1966, Pub.L. 89-695, 80 Stat. 1028 
(codified as amended in scattered sections of 12 U.S.C.), the Bank 
Holding Company Act of 1956, 12 U.S.C. 1841 et seq.,the Federal Reserve 
Act, 12 U.S.C. 221 et seq., the International Banking Act of 1978, 
Pub.L. 95-369, 92 Stat. 607 (codified as amended in scattered sections 
of 12 U.S.C.), and the International Lending Supervision Act of 1983, 12 
U.S.C. 3901 et seq.; except--
    (A) Such final orders, amendments, or modifications of final orders, 
or other actions or documents that are specifically required to be 
published or made available to the public pursuant to 12 U.S.C. 1818(u), 
or other applicable law, including the record of litigated proceedings; 
and
    (B) The public section of Community Reinvestment Act examination 
reports, pursuant to 12 U.S.C. 2906(b); and
    (iii) Any documents prepared by, on behalf of, or for the use of the 
Board, a Federal Reserve Bank, a federal or state financial institutions 
supervisory agency, or a bank or bank holding company or other 
supervised financial institution.
    (2) Confidential supervisory information does not include documents 
prepared by a supervised financial institution for its own business 
purposes and that are in its possession.
    (d) Direct costs mean those expenditures that the Board actually 
incurs in searching for, reviewing, and duplicating documents in 
response to a request made under Sec. 261.12.
    (e) Duplication refers to the process of making a copy of a document 
in response to a request for disclosure of records or for inspection of 
original records that contain exempt material or that otherwise cannot 
be inspected directly. Among others, such copies may take the form of 
paper, microform, audiovisual materials, or machine-readable 
documentation (e.g., magnetic tape or disk).
    (f) Educational institution refers to a preschool, a public or 
private elementary or secondary school, or an institution of 
undergraduate higher education, graduate higher education, professional 
education, or an institution of vocational education, which operates a 
program of scholarly research.
    (g) Exempt information means information that is exempt from 
disclosure under Sec. 261.14.
    (h) Noncommercial scientific institution refers to an institution 
that is not operated on a ``commercial'' basis (as that term is used in 
this section) and that is operated solely for the purpose of conducting 
scientific research, the results of which are not intended to promote 
any particular product or industry.
    (i)(1) Records of the Board include:
    (i) In written form, or in nonwritten or machine-readable form; all 
information coming into the possession and under the control of the 
Board, any

[[Page 866]]

Board member, any Federal Reserve Bank, or any officer, employee, or 
agent of the Board or of any Federal Reserve Bank, in the performance of 
functions for or on behalf of the Board that constitute part of the 
Board's official files; or
    (ii) That are maintained for administrative reasons in the regular 
course of business in official files in any division or office of the 
Board or any Federal Reserve Bank in connection with the transaction of 
any official business.
    (2) Records of the Board does not include personal files of Board 
members and employees; tangible exhibits, formulas, designs, or other 
items of valuable intellectual property; extra copies of documents and 
library and museum materials kept solely for reference or exhibition 
purposes; unaltered publications otherwise available to the public in 
Board publications, libraries, or established distribution systems.
    (j) Report of examination means the report prepared by the Board, or 
other federal or state financial institution supervisory agency, 
concerning the examination of a financial institution, and includes 
reports of inspection and reports of examination of U.S. branches or 
agencies of foreign banks and representative offices of foreign 
organizations, and other institutions examined by the Federal Reserve 
System.
    (k) Report of inspection means the report prepared by the Board 
concerning its inspection of a bank holding company and its bank and 
nonbank subsidiaries.
    (l) Representative of the news media refers to any person actively 
gathering news for an entity that is organized and operated to publish 
or broadcast news to the public.
    (1) The term ``news'' means information that is about current events 
or that would be of current interest to the public.
    (2) Examples of news media entities include, but are not limited to, 
television or radio stations broadcasting to the public at large, and 
publishers of periodicals (but only in those instances when they can 
qualify as disseminators of ``news'') who make their products available 
for purchase or subscription by the general public.
    (3) ``Freelance'' journalists may be regarded as working for a news 
organization if they can demonstrate a solid basis for expecting 
publication through that organization, even though they are not actually 
employed by it.
    (m)(1) Review refers to the process of examining documents, located 
in response to a request for access, to determine whether any portion of 
a document is exempt information. It includes doing all that is 
necessary to excise the documents and otherwise to prepare them for 
release.
    (2) Review does not include time spent resolving general legal or 
policy issues regarding the application of exemptions.
    (n)(1) Search means a reasonable search, by manual or automated 
means, of the Board's official files and any other files containing 
Board records as seem reasonably likely in the particular circumstances 
to contain information of the kind requested. For purposes of computing 
fees under Sec. 261.17, search time includes all time spent looking for 
material that is responsive to a request, including line-by-line 
identification of material within documents. Such activity is distinct 
from ``review'' of material to determine whether the material is exempt 
from disclosure.
    (2) Search does not mean or include research, creation of any 
document, or extensive modification of an existing program or system 
that would significantly interfere with the operation of the Board's 
automated information systems.
    (o) Supervised financial institution includes a bank, bank holding 
company (including subsidiaries), U.S. branch or agency of a foreign 
bank, or any other institution that is supervised by the Board.



Sec. 261.3  Custodian of records; certification; service; alternative 

authority.

    (a) Custodian of records. The Secretary of the Board (Secretary) is 
the official custodian of all Board records, including records that are 
in the possession or control of the Board, any Federal Reserve Bank, or 
any Board or Reserve Bank employee.

[[Page 867]]

    (b) Certification of record. The Secretary may certify the 
authenticity of any Board record, or any copy of such record, for any 
purpose, and for or before any duly constituted federal or state court, 
tribunal, or agency.
    (c) Service of subpoenas or other process. Subpoenas or other 
judicial or administrative process, demanding access to any Board 
records or making any claim against the Board, shall be addressed to and 
served upon the Secretary of the Board at the Board's office at 20th and 
C Streets, N.W., Washington, D.C. 20551. Neither the Board nor the 
Secretary are agents for service of process on behalf of any employee in 
respect of purely private legal disputes, except as specifically 
provided by law.
    (d) Alternative authority. Any action or determination required or 
permitted by this part to be done by the Secretary, the General Counsel, 
or the Director of any Division may be done by any employee who has been 
duly designated for this purpose by the Secretary, General Counsel, or 
the appropriate Director.



    Subpart B_Published Information and Records Available to Public; 

                         Procedures for Requests

    Source: 62 FR 54359, 54361, Oct. 20, 1997, unless otherwise noted.



Sec. 261.10  Published information.

    (a) Federal Register. The Board publishes in the Federal Register 
for the guidance of the public:
    (1) Descriptions of the Board's central and field organization;
    (2) Statements of the general course and method by which the Board's 
functions are channeled and determined, including the nature and 
requirements of procedures;
    (3) Rules of procedure, descriptions of forms available and the 
place where they may be obtained, and instructions on the scope and 
contents of all papers, reports, and examinations;
    (4) Substantive rules, interpretations of general applicability, and 
statements of general policy;
    (5) Every amendment, revision, or repeal of the foregoing in 
paragraphs (a)(1) through (a)(4) of this section;
    (6) Notices of proposed rulemaking;
    (7) Notices of applications received under the Bank Holding Company 
Act of 1956 (12 U.S.C. 1841 et seq.) and the Change in Bank Control Act 
(12 U.S.C. 1817);
    (8) Notices of all Board meetings, pursuant to the Government in the 
Sunshine Act (5 U.S.C. 552b);
    (9) Notices identifying the Board's systems of records, pursuant to 
the Privacy Act of 1974 (5 U.S.C. 552a); and
    (10) Notices of agency data collection forms being reviewed under 
the Paperwork Reduction Act (5 U.S.C. 3501 et seq.).
    (b) Board's Reports to Congress. The Board's annual report to 
Congress pursuant to the Federal Reserve Act (12 U.S.C. 247), which is 
made public upon its submission to Congress, contains a full account of 
the Board's operations during the year, the policy actions by the 
Federal Open Market Committee, an economic review of the year, and 
legislative recommendations to Congress. The Board also makes periodic 
reports to Congress under certain statutes, including but not limited to 
the Freedom of Information Act (5 U.S.C. 552); the Government in the 
Sunshine Act (5 U.S.C. 552b); the Full Employment and Balanced Growth 
Act of 1978 (12 U.S.C. 225a); and the Privacy Act (5 U.S.C. 552a).
    (c) Federal Reserve Bulletin. This publication is issued monthly and 
contains economic and statistical information, articles relating to the 
economy or Board activities, and descriptions of recent actions by the 
Board.
    (d) Other published information. Among other things, the Board 
publishes the following information:
    (1) Weekly publications. The Board issues the following publications 
weekly:
    (i) A statement showing the condition of each Federal Reserve Bank 
and a consolidated statement of the condition of all Federal Reserve 
Banks, pursuant to 12 U.S.C. 248(a);
    (ii) An index of applications received and the actions taken on the 
applications, as well as other matters issued,

[[Page 868]]

adopted, or promulgated by the Board; and
    (iii) A statement showing changes in the structure of the banking 
industry resulting from mergers and the establishment of branches.
    (2) Press releases. The Board frequently issues statements to the 
press and public regarding monetary and credit actions, regulatory 
actions, actions taken on certain types of applications, and other 
matters.
    (3) Call Report and other data. Certain data from Reports of 
Condition and Income submitted to the Board are available through the 
National Technical Information Service and may be obtained by the 
procedure described in Sec. 261.11(c)(2).
    (4) Federal Reserve Regulatory Service. This is a multivolume 
looseleaf service published by the Board, containing statutes, 
regulations, interpretations, rulings, staff opinions, and procedural 
rules under which the Board operates. Portions of the service are also 
published as separate looseleaf handbooks relating to consumer and 
community affairs, monetary policy and reserve requirements, payments 
systems, and securities credit transactions. The service and each 
handbook contain subject and citation indexes, are updated monthly, and 
may be subscribed to on a yearly basis.
    (e) Index to Board actions. The Board's Freedom of Information 
Office maintains an index to Board actions, which is updated weekly and 
provides identifying information about any matters issued, adopted, and 
promulgated by the Board since July 4, 1967. Copies of the index may be 
obtained upon request to the Freedom of Information Office subject to 
the current schedule of fees in Sec. 261.17.
    (f) Obtaining Board publications. The Publications Services Section 
maintains a list of Board publications that are available to the public. 
In addition, a partial list of publications is published in the Federal 
Reserve Bulletin. All publications issued by the Board, including 
available back issues, may be obtained from Publications Services, Board 
of Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, N.W., Washington, D.C. 20551 (pedestrian entrance is on C 
Street, N.W.). Subscription or other charges may apply to some 
publications.



Sec. 261.11  Records available for public inspection and copying.

    (a) Types of records made available. Unless they were published 
promptly and made available for sale or without charge, the following 
records shall be made available for inspection and copying at the 
Freedom of Information Office:
    (1) Final opinions, including concurring and dissenting opinions, as 
well as final orders and written agreements, made in the adjudication of 
cases;
    (2) Statements of policy and interpretations adopted by the Board 
that are not published in the Federal Register;
    (3) Administrative staff manuals and instructions to staff that 
affect the public;
    (4) Copies of all records released to any person under Sec. 261.12 
that, because of the nature of their subject matter, the Board has 
determined are likely to be requested again;
    (5) A general index of the records referred to in paragraph (a)(4) 
of this section; and
    (6) The public section of Community Reinvestment Act examination 
reports.
    (b) Reading room procedures. (1) Information available under this 
section is available for inspection and copying, from 9:00 a.m. to 5:00 
p.m. weekdays, at the Freedom of Information Office of the Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, N.W., Washington, D.C. 20551 (the pedestrian entrance is on C 
Street, N.W.).
    (2) The Board may determine that certain classes of publicly 
available filings shall be made available for inspection and copying 
only at the Federal Reserve Bank where those records are filed.
    (c) Electronic records. (1) Except as set forth in paragraph (c)(2) 
of this section, information available under this section that was 
created by the Board on or after November 1, 1996, shall also be 
available on the Board's internet site (which can be found at http://
www.bog.frb.fed.us).

[[Page 869]]

    (2) NTIS. The publicly available portions of Reports of Condition 
and Income of individual banks and certain other data files produced by 
the Board are distributed by the National Technical Information Service. 
Requests for these public reports should be addressed to: Sales Office, 
National Technical Information Service, U.S. Department of Commerce, 
5285 Port Royal Road, Springfield, Virginia 22161, (703) 487-4650.
    (3) Privacy protection. The Board may delete identifying details 
from any record to prevent a clearly unwarranted invasion of personal 
privacy.



Sec. 261.12  Records available to public upon request.

    (a) Types of records made available. All records of the Board that 
are not available under Sec. Sec. 261.10 and 261.11 shall be made 
available upon request, pursuant to the procedures and exceptions in 
this Subpart B.
    (b) Procedures for requesting records. (1) A request for 
identifiable records shall reasonably describe the records in a way that 
enables the Board's staff to identify and produce the records with 
reasonable effort and without unduly burdening or significantly 
interfering with any of the Board's operations.
    (2) The request shall be submitted in writing to the Freedom of 
Information Office, Board of Governors of the Federal Reserve System, 
20th & C Street, N.W., Washington, D.C. 20551; or sent by facsimile to 
the Freedom of Information Office, (202) 872-7562 or 7565. The request 
shall be clearly marked FREEDOM OF INFORMATION ACT REQUEST.
    (3) A request may not be combined with any other request to the 
Board except for a request under 12 CFR 261a.3(a) (Rules Regarding 
Access to and Review of Personal Information under the Privacy Act of 
1974) and a request made under Sec. 261.22(b).
    (c) Contents of request. The request shall contain the following 
information:
    (1) The name and address of the requester, and the telephone number 
at which the requester can be reached during normal business hours;
    (2) Whether the requested information is intended for commercial 
use, and whether the requester is an educational or noncommercial 
scientific institution, or news media representative;
    (3) A statement agreeing to pay the applicable fees, or a statement 
identifying any desired fee limitation, or a request for a waiver or 
reduction of fees that satisfies Sec. 261.17(f); and
    (4) If the request is being made in connection with on-going 
litigation, a statement indicating whether the requester will seek 
discretionary release of exempt information from the General Counsel 
upon denial of the request by the Secretary. A requester who intends to 
make such a request to the General Counsel may also address the factors 
set forth in Sec. 261.22(b).
    (d) Defective requests. The Board need not accept or process a 
request that does not reasonably describe the records requested or that 
does not otherwise comply with the requirements of this section. The 
Board may return a defective request, specifying the deficiency. The 
requester may submit a corrected request, which will be treated as a new 
request.
    (e) Oral requests. The Freedom of Information Office may honor an 
oral request for records, but if the requester is dissatisfied with the 
Board's response and wishes to seek review, the requester must submit a 
written request, which shall be treated as an initial request.

[62 FR 54362, Oct. 20, 1997; 62 FR 62508, Nov. 24, 1997]



Sec. 261.13  Processing requests.

    (a) Receipt of requests. Upon receipt of any request that satisfies 
Sec. 261.12(b), the Freedom of Information Office shall assign the 
request to the appropriate processing schedule, pursuant to paragraph 
(b) of this section. The date of receipt for any request, including one 
that is addressed incorrectly or that is referred to the Board by 
another agency or by a Federal Reserve Bank, is the date the Freedom of 
Information Office actually receives the request.
    (b) Multitrack processing. (1) The Board provides different levels 
of processing for categories of requests under this section. Requests 
for records that are readily identifiable by the Freedom

[[Page 870]]

of Information Office and that have already been cleared for public 
release may qualify for fast-track processing. All other requests shall 
be handled under normal processing procedures, unless expedited 
processing has been granted pursuant to paragraph (c)(2) of this 
section.
    (2) The Freedom of Information Office will make the determination 
whether a request qualifies for fast-track processing. A requester may 
contact the Freedom of Information Office to learn whether a particular 
request has been assigned to fast-track processing. If the request has 
not qualified for fast-track processing, the requester will be given an 
opportunity to limit the request in order to qualify for fast-track 
processing. Limitations of requests must be in writing.
    (c) Expedited processing. When a person requesting expedited access 
to records has demonstrated a compelling need for the records, or when 
the Board has determined to expedite the response, the Board shall 
process the request as soon as practicable.
    (1) To demonstrate a compelling need for expedited processing, the 
requester shall provide a certified statement, a sample of which may be 
obtained from the Freedom of Information Office. The statement, which 
must be certified to be true and correct to the best of the requester's 
knowledge and belief, shall demonstrate that:
    (i) The failure to obtain the records on an expedited basis could 
reasonably be expected to pose an imminent threat to the life or 
physical safety of an individual; or
    (ii) The requester is a representative of the news media, as defined 
in Sec. 261.2, and there is urgency to inform the public concerning 
actual or alleged Board activity.
    (2) In response to a request for expedited processing, the Secretary 
shall notify a requester of the determination within ten calendar days 
of receipt of the request. If the Secretary denies a request for 
expedited processing, the requester may file an appeal pursuant to the 
procedures set forth in paragraph (i) of this section, and the Board 
shall respond to the appeal within ten working days after the appeal was 
received by the Board.
    (d) Priority of responses. The Secretary will assign responsible 
staff to process particular requests. The Freedom of Information Office 
will normally process requests in the order they are received in the 
separate processing tracks, except when expedited processing is granted. 
However, in the Secretary's discretion, or upon a court order in a 
matter to which the Board is a party, a particular request may be 
processed out of turn.
    (e) Time limits. The time for response to requests shall be 20 
working days, except:
    (1) In the case of expedited treatment under paragraph (c) of this 
section;
    (2) Where the running of such time is suspended for payment of fees 
pursuant to Sec. 261.17(b)(2);
    (3) In unusual circumstances, as defined in 5 U.S.C. 552(a)(6)(B). 
In such circumstances, the time limit may be extended for a period of 
time not to exceed:
    (i) 10 working days as provided by written notice to the requester, 
setting forth the reasons for the extension and the date on which a 
determination is expected to be dispatched; or
    (ii) Such alternative time period as mutually agreed to by the 
Freedom of Information Office and the requester when the Freedom of 
Information Office notifies the requester that the request cannot be 
processed in the specified time limit.
    (f) Response to request. In response to a request that satisfies 
Sec. 261.12(b), an appropriate search shall be conducted of records of 
the Board in existence on the date of receipt of the request, and a 
review made of any responsive information located. The Secretary shall 
notify the requester of:
    (1) The Board's determination of the request;
    (2) The reasons for the determination;
    (3) The amount of information withheld;
    (4) The right of the requester to appeal to the Board any denial or 
partial denial, as specified in paragraph (i) of this section; and
    (5) In the case of a denial of a request, the name and title or 
position of the person responsible for the denial.

[[Page 871]]

    (g) Referral to another agency. To the extent a request covers 
documents that were created by, obtained from, or classified by another 
agency, the Board may refer the request to that agency for a response 
and inform the requester promptly of the referral.
    (h) Providing responsive records. (1) Copies of requested records 
shall be sent to the requester by regular U.S. mail to the address 
indicated in the request, unless the requester elects to take delivery 
of the documents at the Freedom of Information Office or makes other 
acceptable arrangements, or the Board deems it appropriate to send the 
documents by another means.
    (2) The Board shall provide a copy of the record in any form or 
format requested if the record is readily reproducible by the Board in 
that form or format, but the Board need not provide more than one copy 
of any record to a requester.
    (i) Appeal of denial of request. Any person denied access to Board 
records requested under Sec. 261.12 may file a written appeal with the 
Board, as follows:
    (1) The appeal shall prominently display the phrase FREEDOM OF 
INFORMATION ACT APPEAL on the first page, and shall be addressed to the 
Freedom of Information Office, Board of Governors of the Federal Reserve 
System, 20th & C Street, N.W., Washington, D.C. 20551; or sent by 
facsimile to the Freedom of Information Office, (202) 872-7562 or 7565.
    (2) An initial request for records may not be combined in the same 
letter with an appeal.
    (3) The appeal shall be filed within 10 working days of the date on 
which the denial was issued, or the date on which documents in partial 
response to the request were transmitted to the requester, whichever is 
later. The Board may consider an untimely appeal if:
    (i) It is accompanied by a written request for leave to file an 
untimely appeal; and
    (ii) The Board determines, in its discretion and for good and 
substantial cause shown, that the appeal should be considered.
    (4) The Board shall make a determination regarding any appeal within 
20 working days of actual receipt of the appeal by the Freedom of 
Information Office, and the determination letter shall notify the 
appealing party of the right to seek judicial review.
    (5) The Secretary may reconsider a denial being appealed if 
intervening circumstances or additional facts not known at the time of 
the denial come to the attention of the Secretary while an appeal is 
pending.



Sec. 261.14  Exemptions from disclosure.

    (a) Types of records exempt from disclosure. Pursuant to 5 U.S.C. 
552(b), the following records of the Board are exempt from disclosure 
under this part:
    (1) National defense. Any information that is specifically 
authorized under criteria established by an Executive Order to be kept 
secret in the interest of national defense or foreign policy and is in 
fact properly classified pursuant to the Executive Order.
    (2) Internal personnel rules and practices. Any information related 
solely to the internal personnel rules and practices of the Board.
    (3) Statutory exemption. Any information specifically exempted from 
disclosure by statute (other than 5 U.S.C. 552b), if the statute:
    (i) Requires that the matters be withheld from the public in such a 
manner as to leave no discretion on the issue; or
    (ii) Establishes particular criteria for withholding or refers to 
particular types of matters to be withheld.
    (4) Trade secrets; commercial or financial information. Any matter 
that is a trade secret or that constitutes commercial or financial 
information obtained from a person and that is privileged or 
confidential.
    (5) Inter- or intra-agency memorandums. Information contained in 
inter- or intra-agency memorandums or letters that would not be 
available by law to a party (other than an agency) in litigation with an 
agency, including, but not limited to:
    (i) Memorandums;
    (ii) Reports;
    (iii) Other documents prepared by the staffs of the Board or Federal 
Reserve Banks; and
    (iv) Records of deliberations of the Board and of discussions at 
meetings of the Board, any Board committee, or Board staff, that are not 
subject to 5

[[Page 872]]

U.S.C. 552b (the Government in the Sunshine Act).
    (6) Personnel and medical files. Any information contained in 
personnel and medical files and similar files the disclosure of which 
would constitute a clearly unwarranted invasion of personal privacy.
    (7) Information compiled for law enforcement purposes. Any records 
or information compiled for law enforcement purposes, to the extent 
permitted under 5 U.S.C. 552(b)(7); including information relating to 
administrative enforcement proceedings of the Board.
    (8) Examination, inspection, operating, or condition reports, and 
confidential supervisory information. Any matter that is contained in or 
related to examination, operating, or condition reports prepared by, on 
behalf of, or for the use of an agency responsible for the regulation or 
supervision of financial institutions, including a state financial 
institution supervisory agency.
    (b) Segregation of nonexempt information. The Board shall provide 
any reasonably segregable portion of a record that is requested after 
deleting those portions that are exempt under this section.
    (c) Discretionary release. (1) Except where disclosure is expressly 
prohibited by statute, regulation, or order, the Board may release 
records that are exempt from mandatory disclosure whenever the Board or 
designated Board members, the Secretary of the Board, the General 
Counsel of the Board, the Director of the Division of Banking 
Supervision and Regulation, or the appropriate Federal Reserve Bank, 
acting pursuant to this part or 12 CFR part 265, determines that such 
disclosure would be in the public interest.
    (2) The Board may make any exempt information furnished in 
connection with an application for Board approval of a transaction 
available to the public in accordance with Sec. 261.12, and without 
prior notice and to the extent it deems necessary, may comment on such 
information in any opinion or statement issued to the public in 
connection with a Board action to which such information pertains.
    (d) Delayed release. Publication in the Federal Register or 
availability to the public of certain information may be delayed if 
immediate disclosure would likely:
    (1) Interfere with accomplishing the objectives of the Board in the 
discharge of its statutory functions;
    (2) Interfere with the orderly conduct of the foreign affairs of the 
United States;
    (3) Permit speculators or others to gain unfair profits or other 
unfair advantages by speculative trading in securities or otherwise;
    (4) Result in unnecessary or unwarranted disturbances in the 
securities markets;
    (5) Interfere with the orderly execution of the objectives or 
policies of other government agencies; or
    (6) Impair the ability to negotiate any contract or otherwise harm 
the commercial or financial interest of the United States, the Board, 
any Federal Reserve Bank, or any department or agency of the United 
States.
    (e) Prohibition against disclosure. Except as provided in this part, 
no officer, employee, or agent of the Board or any Federal Reserve Bank 
shall disclose or permit the disclosure of any unpublished information 
of the Board to any person (other than Board or Reserve Bank officers, 
employees, or agents properly entitled to such information for the 
performance of official duties).



Sec. 261.15  Request for confidential treatment.

    (a) Submission of request. Any submitter of information to the Board 
who desires confidential treatment pursuant to 5 U.S.C. 552(b)(4) and 
Sec. 261.14 (a)(4) shall file a request for confidential treatment with 
the Board (or in the case of documents filed with a Federal Reserve 
Bank, with that Federal Reserve Bank) at the time the information is 
submitted or a reasonable time after submission.
    (b) Form of request. Each request for confidential treatment shall 
state in reasonable detail the facts supporting the request and its 
legal justification. Conclusory statements that release of the 
information would cause competitive harm generally will not be 
considered sufficient to justify confidential treatment.

[[Page 873]]

    (c) Designation and separation of confidential material. All 
information considered confidential by a submitter shall be clearly 
designated CONFIDENTIAL in the submission and separated from information 
for which confidential treatment is not requested. Failure to segregate 
confidential information from other material may result in release of 
the nonsegregated material to the public without notice to the 
submitter.
    (d) Exceptions. This section does not apply to:
    (1) Data collected on forms that are approved pursuant to the 
Paperwork Reduction Act (44 U.S.C. 3501 et seq.) and are deemed 
confidential by the Board. Any such form deemed confidential by the 
Board shall so indicate on the face of the form or in its instructions. 
The data may, however, be disclosed in aggregate form in such a manner 
that individual company data is not disclosed or derivable.
    (2) Any comments submitted by a member of the public on applications 
and regulatory proposals being considered by the Board, unless the Board 
or the Secretary determines that confidential treatment is warranted.
    (3) A determination by the Board to comment upon information 
submitted to the Board in any opinion or statement issued to the public 
as described in Sec. 261.14(c).
    (e) Special procedures. The Board may establish special procedures 
for particular documents, filings, or types of information by express 
provisions in this part or by instructions on particular forms that are 
approved by the Board. These special procedures shall take precedence 
over this section.



Sec. 261.16  Request for access to confidential commercial or financial 

information.

    (a) Request for confidential information. A request by a submitter 
for confidential treatment of any information shall be considered in 
connection with a request for access to that information. At their 
discretion, appropriate Board or staff members (including Federal 
Reserve Bank staff) may act on the request for confidentiality prior to 
any request for access to the documents.
    (b) Notice to the submitter. When a request for access is received 
pursuant to the Freedom of Information Act (5 U.S.C. 552):
    (1) The Secretary shall notify a submitter of the request, if:
    (i) The submitter requested confidential treatment of the 
information pursuant to 5 U.S.C. 552(b)(4); and
    (ii) The request by the submitter for confidential treatment was 
made within 10 years preceding the date of the request for access.
    (2) Absent a request for confidential treatment, the Secretary may 
notify a submitter of a request for access to information provided by 
the submitter if the Secretary reasonably believes that disclosure of 
the information may cause substantial competitive harm to the submitter.
    (3) The notice given to the submitter shall:
    (i) Be given as soon as practicable after receipt of the request for 
access;
    (ii) Describe the request; and
    (iii) Give the submitter a reasonable opportunity, not to exceed ten 
working days from the date of notice, to submit written objections to 
disclosure of the information.
    (c) Exceptions to notice to submitter. Notice to the submitter need 
not be given if:
    (1) The Secretary determines that the request for access should be 
denied;
    (2) The requested information lawfully has been made available to 
the public;
    (3) Disclosure of the information is required by law (other than 5 
U.S.C. 552); or
    (4) The submitter's claim of confidentiality under 5 U.S.C. 
552(b)(4) appears obviously frivolous or has already been denied by the 
Secretary, except that in this last instance the Secretary shall give 
the submitter written notice of the determination to disclose the 
information at least five working days prior to disclosure.
    (d) Notice to requester. At the same time the Secretary notifies the 
submitter, the Secretary also shall notify the requester that the 
request is subject to the provisions of this section.
    (e) Written objections by submitter. Upon receipt of notice of a 
request for

[[Page 874]]

access to its information, the submitter may provide written objections 
to release of the information. Such objections shall state whether the 
information was provided voluntarily or involuntarily to the Board.
    (1) If the information was voluntarily provided to the Board, the 
submitter shall provide detailed facts showing that the information is 
customarily withheld from the public.
    (2) If the information was not provided voluntarily to the Board, 
the submitter shall provide detailed facts and arguments showing:
    (i) The likelihood of substantial harm that would be caused to the 
submitter's competitive position; or
    (ii) That release of the information would impair the Board's 
ability to obtain necessary information in the future.
    (f) Determination by Secretary. The Secretary's determination 
whether or not to disclose any information for which confidential 
treatment has been requested pursuant to this section shall be 
communicated to the submitter and the requester immediately. If the 
Secretary determines to disclose the information and the submitter has 
objected to such disclosure pursuant to paragraph (e) of this section, 
the Secretary shall provide the submitter with the reasons for 
disclosure, and shall delay disclosure for ten working days from the 
date of the determination.
    (g) Notice of lawsuit. (1) The Secretary shall promptly notify any 
submitter of information covered by this section of the filing of any 
suit against the Board to compel disclosure of such information.
    (2) The Secretary shall promptly notify the requester of any suit 
filed against the Board to enjoin the disclosure of any documents 
requested by the requester.



Sec. 261.17  Fee schedules; waiver of fees.

    (a) Fee schedules. The fees applicable to a request for records 
pursuant to Sec. Sec. 261.11 and 261.12 are set forth in appendix A to 
this section. These fees cover only the full allowable direct costs of 
search, duplication, and review. No fees will be charged where the 
average cost of collecting the fee (calculated at $5.00) exceeds the 
amount of the fee.
    (b) Payment procedures. The Secretary may assume that a person 
requesting records pursuant to Sec. 261.12 will pay the applicable 
fees, unless the request includes a limitation on fees to be paid or 
seeks a waiver or reduction of fees pursuant to paragraph (f) of this 
section.
    (1) Advance notification of fees. If the estimated charges are 
likely to exceed $100, the Freedom of Information Office shall notify 
the requester of the estimated amount, unless the requester has 
indicated a willingness to pay fees as high as those anticipated. Upon 
receipt of such notice, the requester may confer with the Freedom of 
Information Office to reformulate the request to lower the costs. The 
time period for responding to requests under Sec. 261.13(e), and the 
processing of the request will be suspended until the requester agrees 
to pay the applicable fees.
    (2) Advance payment. The Secretary may require advance payment of 
any fee estimated to exceed $250. The Secretary may also require full 
payment in advance where a requester has previously failed to pay a fee 
in a timely fashion. The time period for responding to requests under 
Sec. 261.13(e), and the processing of the request will be suspended 
until the Freedom of Information Office receives the required payment.
    (3) Late charges. The Secretary may assess interest charges when fee 
payment is not made within 30 days of the date on which the billing was 
sent. Interest is at the rate prescribed in 31 U.S.C. 3717 and accrues 
from the date of the billing.
    (c) Categories of uses. The fees assessed depend upon the intended 
use for the records requested. In determining which category is 
appropriate, the Secretary shall look to the intended use set forth in 
the request for records. Where a requester's description of the use is 
insufficient to make a determination, the Secretary may seek additional 
clarification before categorizing the request.
    (1) Commercial use. The fees for search, duplication, and review 
apply when records are requested for commercial use.

[[Page 875]]

    (2) Educational, research, or media use. The fees for duplication 
apply when records are not sought for commercial use, and the requester 
is a representative of the news media or an educational or noncommercial 
scientific institution, whose purpose is scholarly or scientific 
research. The first 100 pages of duplication, however, will be provided 
free.
    (3) All other uses. For all other requests, the fees for document 
search and duplication apply. The first two hours of search time and the 
first 100 pages of duplication, however, will be provided free.
    (d) Nonproductive search. Fees for search and review may be charged 
even if no responsive documents are located or if the request is denied.
    (e) Aggregated requests. A requester may not file multiple requests 
at the same time, solely in order to avoid payment of fees. If the 
Secretary reasonably believes that a requester is separating a request 
into a series of requests for the purpose of evading the assessment of 
fees, the Secretary may aggregate any such requests and charge 
accordingly. It is considered reasonable for the Secretary to presume 
that multiple requests of this type made within a 30-day period have 
been made to avoid fees.
    (f) Waiver or reduction of fees. A request for a waiver or reduction 
of the fees, and the justification for the waiver, shall be included 
with the request for records to which it pertains. If a waiver is 
requested and the requester has not indicated in writing an agreement to 
pay the applicable fees if the waiver request is denied, the time for 
response to the request for documents, as set forth in Sec. 261.13(e), 
shall not begin until a waiver has been granted; or if the waiver is 
denied, until the requester has agreed to pay the applicable fees.
    (1) Standards for determining waiver or reduction. The Secretary 
shall grant a waiver or reduction of fees where it is determined both 
that disclosure of the information is in the public interest because it 
is likely to contribute significantly to public understanding of the 
operation or activities of the government, and that the disclosure of 
information is not primarily in the commercial interest of the 
requester. In making this determination, the following factors shall be 
considered:
    (i) Whether the subject of the records concerns the operations or 
activities of the government;
    (ii) Whether disclosure of the information is likely to contribute 
significantly to public understanding of government operations or 
activities;
    (iii) Whether the requester has the intention and ability to 
disseminate the information to the public;
    (iv) Whether the information is already in the public domain;
    (v) Whether the requester has a commercial interest that would be 
furthered by the disclosure; and, if so,
    (vi) Whether the magnitude of the identified commercial interest of 
the requester is sufficiently large, in comparison with the public 
interest in disclosure, that disclosure is primarily in the commercial 
interest of the requester.
    (2) Contents of request for waiver. A request for a waiver or 
reduction of fees shall include:
    (i) A clear statement of the requester's interest in the documents;
    (ii) The use proposed for the documents and whether the requester 
will derive income or other benefit for such use;
    (iii) A statement of how the public will benefit from such use and 
from the Board's release of the documents;
    (iv) A description of the method by which the information will be 
disseminated to the public; and
    (v) If specialized use of the information is contemplated, a 
statement of the requester's qualifications that are relevant to that 
use.
    (3) Burden of proof. The burden shall be on the requester to present 
evidence or information in support of a request for a waiver or 
reduction of fees.
    (4) Determination by Secretary. The Secretary shall make a 
determination on the request for a waiver or reduction of fees and shall 
notify the requester accordingly. A denial may be appealed to the Board 
in accordance with Sec. 261.13(i).
    (g) Employee requests. In connection with any request by an 
employee,

[[Page 876]]

former employee, or applicant for employment, for records for use in 
prosecuting a grievance or complaint of discrimination against the 
Board, fees shall be waived where the total charges (including charges 
for information provided under the Privacy Act of 1974 (5 U.S.C. 552a) 
are $50 or less; but the Secretary may waive fees in excess of that 
amount.
    (h) Special services. The Secretary may agree to provide, and set 
fees to recover the costs of, special services not covered by the 
Freedom of Information Act, such as certifying records or information 
and sending records by special methods such as express mail or overnight 
delivery.

    Appendix A to Sec.  261.17--Freedom of Information Fee Schedule
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Duplication:
  Photocopy, per standard page................................     $0.10
  Paper copies of microfiche, per frame.......................       .10
  Duplicate microfiche, per microfiche........................       .35
Search and review:
  Clerical/Technical, hourly rate.............................     20.00
  Professional/Supervisory, hourly rate.......................     38.00
  Manager/Senior Professional, hourly rate....................     65.00
Computer search and production:
  Computer operator search, hourly rate.......................     32.00
  Tapes (cassette) per tape...................................      6.00
  Tapes (cartridge), per tape.................................      9.00
  Tapes (reel), per tape......................................     18.00
  Diskettes (3\1/2\), per diskette.................      4.00
  Diskettes (5\1/4\), per diskette.................      5.00
  Computer Output (PC), per minute............................       .10
  Computer Output (mainframe).................................     (\1\)
------------------------------------------------------------------------
\1\ Actual cost.


[62 FR 54365, Oct. 20, 1997; 62 FR 62508, Nov. 24, 1997]



    Subpart C_Confidential Information Made Available to Supervised 

     Institutions, Financial Institution Supervisory Agencies, Law 

        Enforcement Agencies, and Others in Certain Circumstances



Sec. 261.20  Confidential supervisory information made available to supervised 

financial institutions and financial institution supervisory agencies.

    (a) Disclosure of confidential supervisory information to supervised 
financial institutions. Confidential supervisory information concerning 
a supervised bank, bank holding company (including subsidiaries), U.S. 
branch or agency of a foreign bank, or other institution examined by the 
Federal Reserve System (``supervised financial institution'') may be 
made available by the Board or the appropriate Federal Reserve Bank to 
the supervised financial institution.
    (b) Disclosure of confidential supervisory information by supervised 
financial institution--(1) Parent bank holding company, directors, 
officers, and employees. Any supervised financial institution lawfully 
in possession of confidential supervisory information of the Board 
pursuant to this section may disclose such information, or portions 
thereof, to its directors, officers, and employees, and to its parent 
bank holding company and its directors, officers, and employees.
    (2) Certified public accountants and legal counsel. Any supervised 
financial institution lawfully in possession of confidential supervisory 
information of the Board pursuant to this section may disclose such 
information, or portions thereof, to any certified public accountant or 
legal counsel employed by the supervised financial institution, subject 
to the following conditions:
    (i) Certified public accountants or legal counsel shall review the 
confidential supervisory information only on the premises of the 
supervised financial institution, and shall not make or retain any 
copies of such information;
    (ii) The certified public accountants or legal counsel shall not 
disclose the confidential supervisory information for any purpose 
without the prior written approval of the Board's General Counsel except 
as necessary to provide advice to the supervised financial institution, 
its parent bank holding company, or the officers, directors, and 
employees of such supervised financial institution and parent bank 
holding company.
    (c) Disclosure upon request to Federal financial institution 
supervisory agencies. Upon requests, the Director of the Division of 
Banking Supervision and Regulation or the appropriate Federal Reserve 
Bank, may make available to the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, and the Federal Home Loan Bank

[[Page 877]]

Board and their regional offices and representatives, confidential 
supervisory information and other appropriate information (such as 
confidential operating and condition reports) relating to a bank, bank 
holding company (including subsidiaries), U.S. branch or agency of a 
foreign bank, or other supervised financial institution.
    (d) Disclosure upon request to state financial institution 
supervisory agencies. Upon requests, the Director of the Division of 
Banking Supervision and Regulation or the appropriate Federal Reserve 
Bank may make available confidential supervisory information and other 
appropriate information (such as confidential operating and condition 
reports) relating to a bank, bank holding company (including 
subsidiaries), U.S. branch or agency of a foreign bank, or other 
supervised financial institution to:
    (1) A state financial institution supervisory agency having direct 
supervisory authority over such supervised financial institution; or
    (2) A state financial institution supervisory agency not having 
direct supervisory authority over such supervised financial institution 
if the requesting agency has entered into an information sharing 
agreement with the appropriate Federal Reserve Bank and the information 
to be provided concerns a supervised financial institution that has 
acquired or has applied to acquire a financial institution subject to 
that agency's direct supervisory authority.
    (e) Discretionary disclosures. The Board may determine, from time to 
time, to authorize other disclosures of confidential information as 
necessary.
    (f) Conditions and limitations. The Board may impose any conditions 
or limitations on disclosure under this section that it determines are 
necessary to effect the purposes of this regulation.
    (g) Other disclosure prohibited. All confidential supervisory 
information or other information made available under this section shall 
remain the property of the Board. No supervised financial institution, 
financial institution supervisory agency, person, or any other party to 
whom the information is made available, or any other officer, director, 
employee or agent thereof, may disclose such information without the 
prior written permission of the Board's General Counsel except in 
published statistical material that does not disclose, either directly 
or when used in conjunction with publicly available information, the 
affairs of any individual, corporation, or other entity. No person 
obtaining access to confidential supervisory information pursuant to 
this section may make a personal copy of any such information; and no 
person may remove confidential supervisory information from the premises 
of the institution or agency in possession of such information except as 
permitted by specific language in this regulation or by the Board.
    (h) Disclosure of Foreign Bank Confidential Report of Operations--
(1) Availability of Foreign Bank Confidential Report of Operations to 
Bank Supervisory Agencies. Notwithstanding any other provision of this 
regulation, any Confidential Report of Operations (Form F.R. 2068) of a 
foreign banking organization may, upon written request to and approval 
by the Director of the Division of Banking Supervision and Regulation 
(or his delegee), and with the concurrence of the General Counsel (or 
his delegee), be made available for inspection to another bank 
supervisory authority having general supervision of any United States 
branch, agency, subsidiary bank or commercial lending company of the 
foreign banking organization, only for use where necessary in the 
performance of official duties. These reports shall be made available 
for inspection by authorized persons only on Federal Reserve premises 
under the same procedures as apply to personnel of the Federal Reserve 
System. All reports made available under this paragraph shall remain the 
property of the Board; and no person, agency or authority who obtains 
access to any such report, or any officer, director, or employee 
thereof, shall publish, publicize, or otherwise disclose any information 
contained in the report to any person.
    (2) Restrictions on disclosure by Federal Reserve System employees. 
It is the Board's policy that the confidentiality of a foreign banking 
organization's Confidential Report of Operations

[[Page 878]]

(Form F.R. 2068) should be maintained at all times. Except as provided 
by paragraph (h)(1) of this section, information submitted to the Board 
as part of any Confidential Report of Operations is not available for 
public inspection by any person other than an officer, employee, or 
agent of the Board or of a Federal Reserve Bank properly entitled to 
such information in the performance of such person's official duties. 
Any employee that violates this section by releasing such a report to 
any unauthorized person may be subject to disciplinary action under 12 
CFR 264.735-5 (Rules of Employee Responsibilities and Conduct).

[53 FR 20815, June 7, 1988. Redesignated at 62 FR 54359, Oct. 20, 1997]



Sec. 261.21  Confidential information made available to law enforcement 

agencies and other nonfinancial institution supervisory agencies.

    (a) Disclosure upon request. Upon written request, the Board may 
make available to appropriate law enforcement agencies and to other 
nonfinancial institution supervisory agencies for use where necessary in 
the performance of official duties, reports of examination and 
inspection, confidential supervisory information, and other confidential 
documents and information of the Board concerning banks, bank holding 
companies and their subsidiaries, U.S. branches and agencies of foreign 
banks, and other examined institutions.
    (b) Eligibility. Federal, state, and local law enforcement agencies 
and other nonfinancial institution supervisory agencies may file written 
requests with the Board for access to confidential documents and 
information under this section of the regulation. Properly accredited 
foreign law enforcement agencies and other foreign government agencies 
may also file written requests with the Board.
    (c) Contents of request. To obtain access to confidential documents 
or information under this section of the regulation, the head of the law 
enforcement agency or nonfinancial institution supervisory agency (or 
their designees) shall address a letter request to the Board's General 
Counsel, specifying:
    (1) The particular information, kinds of information, and where 
possible, the particular documents to which access is sought;
    (2) The reasons why such information cannot be obtained from the 
examined institution in question rather than from the Board;
    (3) A statement of the law enforcement purpose or other purpose for 
which the information shall be used;
    (4) Whether the requested disclosure is permitted or restricted in 
any way by applicable law or regulation;
    (5) A commitment that the information requested shall not be 
disclosed to any person outside the agency without the written 
permission of the Board or its General Counsel; and
    (6) If the document or information requested includes customer 
account information subject to the Right to Financial Privacy Act, as 
amended (12 U.S.C. 3401 et seq.), a statement that such customer account 
information need not be provided, or a statement as to why the Act does 
not apply to the request, or a certification that the requesting agency 
has complied with the requirements of the Act.
    (d) Action on request. (1) The General Counsel shall review each 
request and may approve the request upon determining that:
    (i) The request complies with this section;
    (ii) The information is needed in connection with a formal 
investigation or other official duties of the requesting agency;
    (iii) Satisfactory assurances of confidentiality have been given; 
and
    (iv) No law prohibits the requested disclosure.
    (2) The General Counsel may impose any conditions or limitations on 
disclosure that the General Counsel determines to be necessary to effect 
the purposes of this regulation or to insure compliance with applicable 
laws or regulations.
    (e) Federal and state grand jury, criminal trial, and government 
administrative subpoenas. The Board's General Counsel shall review and 
may approve the disclosure of confidential information pursuant to 
Federal and state grand jury, criminal trial, and government 
administrative subpoenas. The General

[[Page 879]]

Counsel may impose such conditions or limitations on disclosure under 
this section that the General Counsel determines are necessary to effect 
the purposes of this regulation, to insure compliance with applicable 
laws or regulations, or to protect the confidentiality of the Board's 
information.
    (f) Requests for testimony or interviews. Government agencies 
seeking to obtain testimony or interviews from current and former 
Federal Reserve System staff concerning any confidential information of 
the Board shall use the procedures set out in paragraph (c) of this 
section.
    (g) Other disclosure prohibited. All reports and information made 
available under this section remain the property of the Board, and 
except as otherwise provided in this regulation, no person, agency, or 
authority to whom the information is made available, or any officer, 
director, or employee thereof, may disclose any such information except 
in published statistical material that does not disclose, either 
directly or when used in conjunction with publicly available 
information, the affairs of any individual or corporation.

[53 FR 20815, June 7, 1988. Redesignated at 62 FR 54359, Oct. 20, 1997]



Sec. 261.22  Other disclosure of confidential supervisory information.

    (a) Board policy. It is the Board's policy regarding confidential 
supervisory information that such information is confidential and 
privileged. Accordingly, the Board will not normally disclose this 
information to the public. The Board, when considering a request for 
disclosure of confidential supervisory information under this section, 
will not authorize disclosure unless the person requesting disclosure is 
able to show a substantial need for such information that outweighs the 
need to maintain confidentiality.
    (b) Requests for disclosure--(1) Requests from litigants for 
information or testimony. Any person (except agencies identified in 
Sec. Sec. 261.20 and 261.21 of this regulation) seeking access to 
confidential supervisory information or seeking to obtain the testimony 
of present or former Board or Reserve Bank employees on matters 
involving confidential supervisory information of the Board, whether by 
deposition or otherwise, for use in litigation before a court, board, 
commission, or agency, shall file a written request with the General 
Counsel of the Board. The request shall describe:
    (i) The particular information, kinds of information, and where 
possible, the particular documents to which access is sought;
    (ii) The judicial or administrative action for which the 
confidential supervisory information is sought;
    (iii) The relationship of the confidential supervisory information 
to the issues or matters raised by the judicial or administrative 
action;
    (iv) The requesting person's need for the information;
    (v) The reason why the requesting person cannot obtain the 
information sought from any other source; and
    (vi) A commitment to obtain a protective order acceptable to the 
Board from the judicial or administrative tribunal hearing the action 
preserving the confidentiality of any information that is provided.
    (2) All other requests. Any other person (except agencies identified 
in Sec. Sec. 261.20 and 261.21 of this regulation) seeking access to 
confidential supervisory information for any other purpose shall file a 
written request with the General Counsel of the Board. A request under 
this paragraph (b)(2) shall describe the purpose for which such 
disclosure is sought.
    (c) Action on request--(1) Determination of approval. The General 
Counsel of the Board may approve a request made under this section 
provided that he or she determines that:
    (i) The person making the request has shown a substantial need for 
confidential supervisory information that outweighs the need to maintain 
confidentiality; and
    (ii) Disclosure is consistent with the supervisory and regulatory 
responsibilities and policies of the Board.
    (2) Conditions or limitations. The General Counsel of the Board may, 
in approving a request, impose such conditions or limitations on use of 
any information disclosed as is deemed necessary to protect the 
confidentiality of the Board's information.

[[Page 880]]

    (d) Exhaustion of administrative remedies for discovery purposes in 
civil, criminal, or administrative action. Action on a request under 
this section by the General Counsel of the Board shall exhaust 
administrative remedies for discovery purposes in any civil, criminal, 
or administrative proceeding. A request made pursuant to Sec. 261.12 of 
this regulation does not exhaust administrative remedies for discovery 
purposes. Therefore, it is not necessary to file a request pursuant to 
Sec. 261.12 to exhaust administrative remedies under this section.
    (e) Other disclosure prohibited. All confidential supervisory 
information made available under this section shall remain the property 
of the Board. Any person in possession of such information shall not use 
or disclose such information for any purpose other than that authorized 
by the General Counsel of the Board without his or her prior written 
approval.

[53 FR 20815, June 7, 1988. Redesignated at 62 FR 54359, Oct. 20, 1997; 
corrected at 62 FR 62508, Nov. 24, 1997]



Sec. 261.23  Subpoenas, orders compelling production, and other process.

    (a) Advice by person served. Any person (including any officers, 
employee, or agent of the Board or any Federal Reserve Bank) who has 
documents or information of the Board that may not be disclosed and who 
is served with a subpoena, order, or other judicial or administrative 
process requiring his or her personal attendance as a witness or 
requiring the production of documents or information in any proceeding, 
shall:
    (1) Promptly inform the Board's General Counsel of the service and 
all relevant facts, including the documents and information requested, 
and any facts of assistance to the Board in determining whether the 
material requested should be made available; and
    (2) At the appropriate time inform the court or tribunal that issued 
the process and the attorney for the party at whose instance the process 
was issued of the substance of these rules.
    (b) Appearance by person served. Unless the Board has authorized 
disclosure of the information requested, any person who has Board 
information that may not be disclosed, and who is required to respond to 
a subpoena or other legal process, shall attend at the time and place 
required and decline to disclose or to give any testimony with respect 
to the information, basing such refusal upon the provisions of this 
regulation. If the court or other body orders the disclosure of the 
information or the giving of testimony, the person having the 
information shall continue to decline to disclose the information and 
shall promptly report the facts to the Board for such action as the 
Board may deem appropriate.

[53 FR 20815, June 7, 1988. Redesignated at 62 FR 54359, Oct. 20, 1997]



PART 261a_RULES REGARDING ACCESS TO PERSONAL INFORMATION UNDER THE PRIVACY ACT 

OF 1974--Table of Contents




                      Subpart A_General Provisions

Sec.
261a.1 Authority, purpose and scope.
261a.2 Definitions.
261a.3 Custodian of records; delegations of authority.
261a.4 Fees.

 Subpart B_Procedures for Requests by Individual to Whom Record Pertains

261a.5 Request for access to record.
261a.6 Board procedures for responding to request for access.
261a.7 Special procedures for medical records.
261a.8 Request for amendment of record.
261a.9 Board review of request for amendment of record.
261a.10 Appeal of adverse determination of request for access or 
          amendment.

  Subpart C_Disclosure to Person Other Than Individual to Whom Record 
                                Pertains

261a.11 Restrictions on disclosure.
261a.12 Exceptions.

                        Subpart D_Exempt Records

261a.13 Exemptions.

    Authority: 5 U.S.C. 552a.

    Source: 60 FR 3341, Jan. 17, 1995, unless otherwise noted.

[[Page 881]]



                      Subpart A_General Provisions



Sec. 261a.1  Authority, purpose and scope.

    (a) Authority. This part is issued by the Board of Governors of the 
Federal Reserve System (the Board) pursuant to the Privacy Act of 1974 
(5 U.S.C. 552a).
    (b) Purpose. The purpose of this part is to implement the provisions 
of the Privacy Act of 1974 (5 U.S.C. 552a) with regard to the 
maintenance, protection, disclosure, and amendment of records contained 
within systems of records maintained by the Board.
    (c) Scope. This part covers requests for access to, or amendment of, 
records concerning individuals that are contained in systems of records 
maintained by the Board.



Sec. 261a.2  Definitions.

    For the purposes of this part, the following definitions apply:
    (a) Business day means any day except Saturday, Sunday or a legal 
Federal holiday.
    (b) Designated system of records means a system of records 
maintained by the Board that has been listed in the Federal Register 
pursuant to the requirements of 5 U.S.C. 552a(e).
    (c) Guardian means the parent of a minor, or the legal guardian of 
any individual who has been declared to be incompetent due to physical 
or mental incapacity or age by a court of competent jurisdiction.
    (d) Individual means a natural person who is either a citizen of the 
United States or an alien lawfully admitted for permanent residence.
    (e) Maintain includes maintain, collect, use, disseminate, or 
control.
    (f) Record means any item, collection, or grouping of information 
about an individual maintained by the Board that contains the 
individual's name, or the identifying number, symbol, or other 
identifying particular assigned to the individual, such as a 
fingerprint, voice print, or photograph.
    (g) Routine use means, with respect to disclosure of a record, the 
use of such record for a purpose that is compatible with the purpose for 
which it was collected or created.
    (h) System of records means a group of any records under the control 
of the Board from which information is retrieved by the name of the 
individual or by some identifying number, symbol, or other identifying 
particular assigned to the individual.



Sec. 261a.3  Custodian of records; delegations of authority.

    (a) Custodian of records. The Secretary of the Board is the official 
custodian of all records of the Board in the possession or control of 
the Board.
    (b) Delegated authority of Secretary. With regard to this 
regulation, the Secretary of the Board is delegated the authority to:
    (1) Respond to requests for access or amendment to records contained 
in a system of records, except for such requests regarding systems of 
records maintained by the Board's Office of the Inspector General (OIG);
    (2) Approve the publication of new systems of records and amend 
existing systems of records, except systems of records exempted pursuant 
to Sec. Sec. 261a.13(b), (c) and (d);
    (3) File the biennial reports required by the Privacy Act.
    (c) Delegated authority of designee. Any action or determination 
required or permitted by this part to be done by the Secretary of the 
Board may be done by an Associate Secretary or other responsible 
employee of the Board who has been duly designated for this purpose by 
the Secretary.
    (d) Delegated authority of Inspector General. With regard to systems 
of records maintained by the OIG, the Inspector General is delegated the 
authority to respond to requests for access or amendment.



Sec. 261a.4  Fees.

    (a) Copies of records. Copies of records requested pursuant to Sec. 
261a.5 of this part shall be provided at the same cost charged for 
duplication of records and/or production of computer output under the 
Board's Rules Regarding Availability of Information, Sec. 261.10 of 
this part.
    (b) No fee. Documents may be furnished without charge where total 
charges are less than $5.
    (c) Waiver of fees. In connection with any request by an employee, 
former

[[Page 882]]

employee, or applicant for employment, for records for use in 
prosecuting a grievance or complaint of discrimination against the 
Board, fees shall be waived where the total charges (including charges 
for information provided under the Freedom of Information Act) are $50 
or less; but the Secretary may waive fees in excess of that amount.



 Subpart B_Procedures for Requests by Individual to Whom Record Pertains



Sec. 261a.5  Request for access to record.

    (a) Procedures for making request. (1) Any individual (or guardian 
of an individual) other than a current Board employee desiring to learn 
of the existence of, or to gain access to, his or her record in a 
designated system of records shall submit a request in writing to the 
Secretary of the Board, Board of Governors of the Federal Reserve 
System, 20th and Constitution Avenue NW., Washington, DC 20551.
    (2) A request by a current Board employee for that employee's own 
personnel records may be made in person during regular business hours at 
the Division of Human Resources, Board of Governors of the Federal 
Reserve System, 20th and Constitution Avenue NW., Washington, DC 20551.
    (3) A request by a current Board employee for information other than 
personnel information may be made in person during regular business 
hours at the Freedom of Information Office, Board of Governors of the 
Federal Reserve System, 20th and Constitution Avenue NW., Washington, DC 
20551.
    (4) Requests for information contained in a system of records 
maintained by the Board's OIG shall be submitted in writing to the 
Inspector General, Board of Governors of the Federal Reserve System, 
20th and Constitution Avenue NW., Washington, DC 20551.
    (b) Contents of request. A request made pursuant to paragraph (a) of 
this section shall include the following:
    (1) A statement that it is made pursuant to the Privacy Act of 1974;
    (2) The name of the system of records expected to contain the record 
requested or a concise description of such system of records.
    (3) Necessary information to verify the identity of the requester 
pursuant to paragraph (c) of this section; and
    (4) Any other information that may assist in the rapid 
identification of the record for which access is being requested (e.g., 
maiden name, dates of employment, etc.).
    (c) Verification of identity. The Board shall require proof of 
identity from a requester and reserves the right to determine the 
adequacy of such proof. In general, the following shall be considered 
adequate proof of identity:
    (1) For a current Board employee, his or her Board identification 
card; or
    (2) For an individual other than a current Board employee, either:
    (i) Two forms of identification, one of which has a picture of the 
individual requesting access; or
    (ii) A notarized statement attesting to the identity of the 
requester.
    (d) Verification of identity not required. No verification of 
identity shall be required of individuals seeking access to records that 
are otherwise available to any person under 5 U.S.C. 552, Freedom of 
Information Act.
    (e) Request for accounting of previous disclosures. An individual 
making a request pursuant to paragraph (a) of this section may also 
include a request for an accounting (pursuant to 5 U.S.C. 552a(c)) of 
previous disclosures of records pertaining to such individual in a 
designated system of records.



Sec. 261a.6  Board procedures for responding to request for access.

    (a) Compliance with Freedom of Information Act. Every request made 
pursuant to Sec. 261a.5 of this part shall also be handled by the Board 
as a request for information pursuant to the Freedom of Information Act 
(5 U.S.C. 552), except that the time limits set forth in paragraph (b) 
of this section and the fees specified in Sec. 261a.4 of this part 
shall apply to such requests.
    (b) Time limits. Every request made pursuant to Sec. 261a.5 of this 
part shall be acknowledged or, where practicable, substantially 
responded to within 10 business days from receipt of the request.
    (c) Disclosure. (1) Information to be disclosed pursuant to this 
part and the Privacy Act, except for information

[[Page 883]]

maintained by the Board's OIG, shall be made available for inspection 
and copying during regular business hours at the Board's Freedom of 
Information Office.
    (2) Information to be disclosed that is maintained by the Board's 
OIG shall be made available for inspection and copying at the OIG.
    (3) When the requested record cannot reasonably be put into a form 
for individual inspection (e.g., computer tapes), or when the requester 
asks that the information be forwarded, copies of such information shall 
be mailed to the requester.
    (4) Access to or copies of requested information shall be promptly 
provided after the acknowledgement as provided in paragraph (b) of this 
section, unless good cause for delay is communicated to the requester.
    (d) Other authorized presence. The requester of information may be 
accompanied in the inspection of that information by a person of the 
requester's own choosing upon the requester's submission of a written 
and signed statement authorizing the presence of such person.
    (e) Denial of request. A denial of a request made pursuant to Sec. 
261a.5 of this part shall include a statement of the reason(s) for 
denial and the procedures for appealing the denial.



Sec. 261a.7  Special procedures for medical records.

    Medical or psychological records requested pursuant to Sec. 261a.5 
of this part shall be disclosed directly to the requester unless such 
disclosure could, in the judgment of the Privacy Officer, in 
consultation with the Board's physician, have an adverse effect upon the 
requester. Upon such determination, the information shall be transmitted 
to a licensed physician named by the requester, who will disclose those 
records to the requester in a manner the physician deems appropriate.



Sec. 261a.8  Request for amendment of record.

    (a) Procedures for making request. (1) An individual desiring to 
amend a record in a designated system of records that pertains to him or 
her shall submit a request in writing to the Secretary of the Board (or 
to the Inspector General for records in a system of records maintained 
by the OIG) in an envelope clearly marked ``Privacy Act Amendment 
Request.''
    (2) Each request for amendment of a record shall:
    (i) Identify the system of records containing the record for which 
amendment is requested;
    (ii) Specify the portion of that record requested to be amended; and
    (iii) Describe the nature of and reasons for each requested 
amendment.
    (3) Each request for amendment of a record shall be subject to 
verification of identity under the procedures set forth in Sec. 
261a.5(c) of this part, unless such verification has already been made 
in a related request for access or amendment.
    (b) Burden of proof. The request for amendment of a record shall set 
forth the reasons the individual believes the record is not accurate, 
relevant, timely, or complete. The burden of proof for demonstrating the 
appropriateness of the requested amendment rests with the requester, and 
the requester shall provide relevant and convincing evidence in support 
of the request.



Sec. 261a.9  Board review of request for amendment of record.

    (a) Time limits. The Board shall acknowledge a request for amendment 
of a record within 10 business days of receipt of the request. Such 
acknowledgement may request additional information necessary for a 
determination on the request for amendment. To the extent possible, a 
determination upon a request to amend a record shall be made within 10 
business days after receipt of the request.
    (b) Contents of response to request for amendment. The response to a 
request for amendment shall include the following:
    (1) The decision to grant or deny, in whole or in part, the request 
for amendment; and
    (2) If the request is denied:
    (i) The reasons for denial of any portion of the request for 
amendment;
    (ii) The requester's right to appeal any denial; and
    (iii) The procedures for appealing the denial to the appropriate 
official.

[[Page 884]]



Sec. 261a.10  Appeal of adverse determination of request for access or 

amendment.

    (a) Appeal. A requester may appeal a denial of a request made 
pursuant to Sec. 261a.5 or Sec. 261a.8 of this part to the Board, or 
any official designated by the chairman of the Board, within 10 business 
days of issuance of notification of denial. The appeal shall:
    (1) Be made in writing to the Secretary of the Board, with the words 
``PRIVACY ACT APPEAL'' written prominently on the first page;
    (2) Specify the previous background of the request; and
    (3) Provide reasons why the initial denial is believed to be in 
error.
    (b) Determination. The Board or an official designated by the 
Chairman of the Board shall make a determination with respect to such 
appeal not later than 30 business days from its receipt, unless the time 
is extended for good cause shown.
    (1) If the Board or designated official grants an appeal regarding a 
request for amendment, the Board shall take the necessary steps to amend 
the record, and, when appropriate and possible, notify prior recipients 
of the record of the Board's action.
    (2) If the Board or designated official denies an appeal, the Board 
shall inform the requester of such determination, give a statement of 
the reasons therefor, and inform the requester of the right of judicial 
review of the determination.
    (c) Statement of disagreement. (1) Upon receipt of a denial of an 
appeal regarding a request for amendment, the requester may file a 
concise statement of disagreement with the denial. Such statement shall 
be maintained with the record the requester sought to amend, and any 
disclosure of the record shall include a copy of the statement of 
disagreement.
    (2) When practicable and appropriate, the Board shall provide a copy 
of the statement of disagreement to any person or other agency to whom 
the record was previously disclosed.



  Subpart C_Disclosure to Person Other Than Individual to Whom Record 
                                Pertains



Sec. 261a.11  Restrictions on disclosure.

    No record contained in a designated system of records shall be 
disclosed to any person or agency without the prior written consent of 
the individual to whom the record pertains unless the disclosure is 
authorized by Sec. 261a.12 of this part.



Sec. 261a.12  Exceptions.

    The restrictions on disclosure in Sec. 261a.11 of this part do not 
apply to any disclosure:
    (a) To those officers and employees of the Board who have a need for 
the record in the performance of their duties;
    (b) That is required under the Freedom of Information Act (5 U.S.C. 
552);
    (c) For a routine use listed with respect to a designated system of 
records;
    (d) To the Bureau of the Census for purposes of planning or carrying 
out a census or survey or related activity pursuant to the provisions of 
title 13 of the United States Code;
    (e) To a recipient who has provided the Board with advance adequate 
written assurance that the record will be used solely as a statistical 
research or reporting record, and the record is to be transferred in a 
form that is not individually identifiable;
    (f) To the National Archives of the United States as a record that 
has sufficient historical or other value to warrant its continued 
preservation by the United States government, or for evaluation by the 
administrator of General Services or his designee to determine whether 
the record has such value;
    (g) To another agency or to an instrumentality of any governmental 
jurisdiction within or under the control of the United States for a 
civil or criminal law enforcement activity if the activity is authorized 
by law, and if the head of the agency or instrumentality has made a 
written request to the Board specifying the particular portion desired 
and the law enforcement activity for which the record is sought;

[[Page 885]]

    (h) To a person pursuant to a showing of compelling circumstances 
affecting the health or safety of an individual if upon such disclosure 
notification is transmitted to the last known address of such 
individual;
    (i) To either House of Congress, or, to the extent of matter within 
its jurisdiction, any committee or subcommittee thereof, any joint 
committee of Congress or subcommittee of any such joint committee;
    (j) To the Comptroller General, or any of his authorized 
representatives, in the course of the performance of the duties of the 
General Accounting Office;
    (k) Pursuant to the order of a court of competent jurisdiction; or
    (l) To a consumer reporting agency in accordance with 31 U.S.C. 
3711(f).



                        Subpart D_Exempt Records



Sec. 261a.13  Exemptions.

    (a) Information compiled for civil action. Nothing in this 
regulation shall allow an individual access to any information compiled 
in reasonable anticipation of a civil action or proceeding.
    (b) Law enforcement information. Pursuant to section (k)(2) of the 
Privacy Act of 1974 (5 U.S.C. 552a(k)(2)), the Board has deemed it 
necessary to exempt certain designated systems of records maintained by 
the Board from the requirements of the Privacy Act concerning access to 
accountings of disclosures and to records, maintenance of only relevant 
and necessary information in files, and certain publication provisions, 
respectively, 5 U.S.C. 552a (c)(3), (d), (e)(1), (e)(4)(G), (H) and (I), 
and (f), and Sec. Sec. 261a.5, 261a.7 and 261a.8 of this part. 
Accordingly, the following designated systems of records are exempt from 
these provisions, but only to the extent that they contain investigatory 
materials compiled for law enforcement purposes:
    (1) BGFRS-1 Recruiting and Placement Records.
    (2) BGFRS-2 Personnel Background Investigation Reports.
    (3) BGFRS-4 General Personnel Records.
    (4) BGFRS-5 EEO Discrimination Complaint File.
    (5) BGFRS-9 Consultant and Staff Associate File.
    (6) BGFRS-18 Consumer Complaint Information System.
    (7) BGFRS-21 Supervisory Tracking and Reference System.
    (8) BGFRS/OIG-1 OIG Investigatory Records.
    (9) BGFRS-31 Protective Information System.
    (10) BGFRS--32 Visitor Log.
    (c) Confidential references. Pursuant to section (k)(5) of the 
Privacy Act of 1974 (5 U.S.C. 552a(k)(5)), the Board has deemed it 
necessary to exempt certain designated systems of records maintained by 
the Board from the requirements of the Privacy Act concerning access to 
accountings of disclosures and to records, maintenance of only relevant 
and necessary information in files, and certain publication provisions, 
respectively 5 U.S.C. 552a(c)b(3), (d), (e)(1), (e)(4)(G), (H) and (I), 
and (f), and Sec. Sec. 261a.5, 261a.7 and 261a.8 of this part. 
Accordingly, the following systems of records are exempt from these 
provisions, but only to the extent that they contain investigatory 
material compiled to determine an individual's suitability, eligibility, 
and qualifications for Board employment or access to classified 
information, and the disclosure of such material would reveal the 
identity of a source who furnished information to the Board under a 
promise of confidentiality.
    (1) BGFRS-1 Recruiting and Placement Records.
    (2) BGFRS-2 Personnel Background Investigation Reports.
    (3) BGFRS-4 General Personnel Records.
    (4) BGFRS-9 Consultant and Staff Associate File.
    (5) BGFRS-10 General File on Board Members.
    (6) BGFRS-11 Official General Files.
    (7) BGFRS-13 General File of Examiners and Assistant Examiners at 
Federal Reserve Banks.
    (8) BGFRS-14 General File of Federal Reserve Bank and Branch 
Directors.
    (9) BGFRS-15 General Files of Federal Reserve Agents, Alternates and 
Representatives at Federal Reserve Banks.

[[Page 886]]

    (10) BGFRS/OIG-2 OIG Personnel Records.
    (11) BGFRS-25 Multi-rater Feedback Records.
    (d) Criminal law enforcement information. Pursuant to 5 U.S.C. 
552a(j)(2), the Board has determined that portions of the OIG 
Investigatory Records (BGFRS/OIG-1) shall be exempt from any part of the 
Privacy Act (5 U.S.C. 552a), except the provisions regarding disclosure, 
the requirement to keep an accounting, certain publication requirements, 
certain requirements regarding the proper maintenance of systems of 
records, and the criminal penalties for violation of the Privacy Act, 
respectively, 5 U.S.C. 552a (b), (c)(1), and (2), (e)(4) (A) through 
(F), (e)(6), (e)(7), (e)(9), (e)(10), (e)(11) and (i). This designated 
system of records is maintained by the OIG, a Board component that 
performs as its principal function an activity pertaining to the 
enforcement of criminal laws. The exempt portions of the records consist 
of:
    (1) Information compiled for the purpose of identifying individual 
criminal offenders and alleged offenders;
    (2) Information compiled for the purpose of a criminal 
investigation, including reports of informants and investigators, and 
associated with an identifiable individual; or
    (3) Reports identifiable to an individual compiled at any stage of 
the process of enforcement of the criminal laws from arrest or 
indictment through release from supervision.

[60 FR 3341, Jan. 17, 1995, as amended at 65 FR 34392, May 30, 2000; 66 
FR 19718, Apr. 17, 2001; 66 FR 20863, Apr. 25, 2001; 67 FR 44526, July 
3, 2002]



PART 261b_RULES REGARDING PUBLIC OBSERVATION OF MEETINGS--Table of Contents




Sec.
261b.1 Basis and scope.
261b.2 Definitions.
261b.3 Conduct of agency business.
261b.4 Meetings open to public observation.
261b.5 Exemptions.
261b.6 Public announcement of meetings.
261b.7 Meetings closed to public observation under expedited procedures.
261b.8 Meetings closed to public observation under regular procedures.
261b.9 Changes with respect to publicly announced meeting.
261b.10 Certification of General Counsel.
261b.11 Transcripts, recordings, and minutes.
261b.12 Procedures for inspection and obtaining copies of transcriptions 
          and minutes.
261b.13 Fees.

    Authority: 5 U.S.C. 552b.

    Source: 42 FR 13297, Mar. 10, 1977, unless otherwise noted.



Sec. 261b.1  Basis and scope.

    This part is issued by the Board of Governors of the Federal Reserve 
System (``the Board'') under section 552b of title 5 of the United 
States Code, the Government in the Sunshine Act (``the Act''), to carry 
out the policy of the Act that the public is entitled to the fullest 
practicable information regarding the decision making processes of the 
Board while at the same time preserving the rights of individuals and 
the ability of the Board to carry out its responsibilities. These 
regulations fulfill the requirement of subsection (g) of the Act that 
each agency subject to the provisions of the Act shall promulgate 
regulations to implement the open meeting requirements of subsections 
(b) through (f) of the Act.



Sec. 261b.2  Definitions.

    For purposes of this part, the following definitions shall apply:
    (a) The term agency means the Board and subdivisions thereof.
    (b) The term subdivision means any group composed of two or more 
Board members that is authorized to act on behalf of the Board.
    (c) The term meeting means the deliberations of at least the number 
of individual agency members required to take action on behalf of the 
agency where such deliberations determine or result in the joint conduct 
or disposition of official Board business, but does not include (1) 
deliberations required or permitted by subsections (d) or (e) of the 
Act, or (2) the conduct or disposition of official agency business by 
circulating written material to individual members.
    (d) The term number of individual agency members required to take 
action on behalf of the agency means in the case of the Board, a 
majority of its

[[Page 887]]

members except that (1) Board determination of the ratio of reserves 
against deposits under section 19(b) of the Federal Reserve Act requires 
the vote of four members, (2) Board action with respect to advances, 
discounts and rediscounts under sections 10(a), 11(b), and 13(3) of the 
Federal Reserve Act requires the vote of five members and (3) Board 
action with respect to the percentage of individual member bank capital 
and surplus which may be represented by loans secured by stock and bond 
collateral under section 11(m) of the Federal Reserve Act requires the 
vote of six members. In the case of subdivisions of the Board, the term 
means the number of members constituting a quorum of the designated 
subdivision.
    (e) The term member means a member of the Board appointed under 
section 10 of the Federal Reserve Act. In the case of certain Board 
proceedings pursuant to 12 U.S.C. 1818(e), the Comptroller of the 
Currency is entitled to sit as a member of the Board and for these 
proceedings he shall be deemed a member for the purposes of this part. 
In the case of any subdivision of the Board, the term member means a 
member of the Board designated to serve on that subdivision.
    (f) The term public observation means that the public shall have the 
right to listen and observe but not to record any of the meetings by 
means of cameras or electronic or other recording devices unless 
approval in advance is obtained from the Public Affairs Office of the 
Board and shall not have the right to participate in the meeting, unless 
participation is provided for in the Board's Rules of Procedure.
    (g) The term Federal agency means an agency as defined in 5 U.S.C. 
551(1).
    (h) Committee means the Action Committee established pursuant to 12 
CFR 265.1a(c).

[42 FR 13297, Mar. 10, 1977, as amended at 43 FR 34481, Aug. 4, 1978]



Sec. 261b.3  Conduct of agency business.

    Members shall not jointly conduct or dispose of official agency 
business other than in accordance with this part.



Sec. 261b.4  Meetings open to public observation.

    (a) Except as provided in Sec. 261b.5, every portion of every 
meeting of the agency shall be open to public observation.
    (b) Copies of staff documents considered in connection with agency 
discussion of agenda items for a meeting that is open to public 
observation shall be made available for distribution to members of the 
public attending the meeting, in accordance with the provisions of 12 
CFR part 261.
    (c) The agency will maintain a complete electronic recording 
adequate to record fully the proceedings of each meeting or portion of a 
meeting open to public observation. Cassettes will be available for 
listening in the Freedom of Information Office, and copies may be 
ordered for $5 per cassette by telephoning or by writing Freedom of 
Information Office, Board of Governors of the Federal Reserve System, 
Washington, DC 20551.
    (d) The agency will maintain mailing lists of names and addresses of 
all persons who wish to receive copies of agency announcements of 
meetings open to public observation. Requests for announcements may be 
made by telephoning or by writing Freedom of Information Office, Board 
of Governors of the Federal Reserve System, Washington, DC 20551.

[44 FR 11750, Mar. 2, 1979]



Sec. 261b.5  Exemptions.

    (a) Except in a case where the agency finds that the public interest 
requires otherwise, the agency may close a meeting or a portion or 
portions of a meeting under the procedures specified in Sec. 261b.7 or 
Sec. 261b.8 of this part, and withhold information under the provisions 
of Sec. Sec. 261b.6, 261b.7, 261b.8, or 261b.11 of this part, where the 
agency properly determines that such meeting or portion or portions of 
its meeting or the disclosure of such information is likely to:
    (1) Disclose matters that are (i) specifically authorized under 
criteria established by an Executive order to be kept secret in the 
interests of national defense or foreign policy, and (ii) in

[[Page 888]]

fact properly classified pursuant to such Executive order;
    (2) Relate solely to internal personnel rules and practices;
    (3) Disclose matters specifically exempted from disclosure by 
statute (other than section 552 of title 5 of the United States Code), 
provided that such statute (i) requires that the matters be withheld 
from the public in such a manner as to leave no discretion on the issue, 
or (ii) establishes particular criteria for withholding or refers to 
particular types of matters to be withheld;
    (4) Disclose trade secrets and commercial or financial information 
obtained from a person and privileged or confidential;
    (5) Involve accusing any person of a crime, or formally censuring 
any person;
    (6) Disclose information of a personal nature where disclosure would 
constitute a clearly unwarranted invasion of personal privacy;
    (7) Disclose investigatory records compiled for law enforcement 
purposes, or information which if written would be contained in such 
records, but only to the extent that the production of such records or 
information would--
    (i) Interfere with enforcement proceedings,
    (ii) Deprive a person of a right to a fair trial or an impartial 
adjudication,
    (iii) Constitute an unwarranted invasion of personal privacy,
    (iv) Disclose the identity of a confidential source and, in the case 
of a record compiled by a criminal law enforcement authority in the 
course of a criminal investigation, or by a Federal agency conducting a 
lawful national security intelligence investigation, confidential 
information furnished only by the confidential source,
    (v) Disclose investigative techniques and procedures, or
    (vi) Endanger the life or physical safety of law enforcement 
personnel;
    (8) Disclose information contained in or related to examination, 
operating, or condition reports prepared by, on behalf of, or for the 
use of the Board or other Federal agency responsible for the regulation 
or supervision of financial institutions;
    (9) Disclose information the premature disclosure of which would--
    (i) Be likely to (A) lead to significant speculation in currencies, 
securities, or commodities, or (B) significantly endanger the stability 
of any financial institution; or
    (ii) Be likely to significantly frustrate implementation of a 
proposed action, except that paragraph (a)(9)(ii) of this section shall 
not apply in any instance where the Board has already disclosed to the 
public the content or nature of its proposed action, or where the Board 
is required by law to make such disclosure on its own initiative prior 
to taking final action on such proposal; or
    (10) Specifically concern the issuance of a subpoena, participation 
in a civil action or proceeding, an action in a foreign court or 
international tribunal, or an arbitration, or the initiation, conduct, 
or disposition of a particular case of formal agency adjudication 
pursuant to the procedures in section 554 of title 5 of the United 
States Code or otherwise involving a determination on the record after 
opportunity for a hearing.



Sec. 261b.6  Public announcement of meetings.

    (a) Except as otherwise provided by the Act, public announcement of 
meetings open to public observation and meetings to be partially or 
completely closed to public observation pursuant to Sec. 261b.8 of this 
part will be made at least one week in advance of the meeting. Except to 
the extent such information is determined to be exempt from disclosure 
under Sec. 261b.5 of this part, each such public announcement will 
state the time, place and subject matter of the meeting, whether it is 
to be open or closed to the public, and the name and phone number of the 
official designated to respond to requests for information about the 
meeting.
    (b) If a majority of the members of the agency determines by a 
recorded vote that agency business requires that a meeting covered by 
paragraph (a) of this section be called at a date earlier than that 
specified in paragraph (a) of this section, the agency will make a 
public announcement of the information specified in paragraph (a) of 
this

[[Page 889]]

section at the earliest practicable time.
    (c) Changes in the subject matter of a publicly announced meeting, 
or in the determination to open or close a publicly announced meeting or 
any portion of a publicly announced meeting to public observation, or in 
the time or place of a publicly announced meeting made in accordance 
with the procedures specified in Sec. 261b.9 of this part will be 
publicly announced at the earliest practicable time.
    (d) Public announcements required by this section will be posted at 
the Board's Public Affairs Office and Freedom of Information Office and 
may be made available by other means or at other locations as may be 
desirable.
    (e) Immediately following each public announcement required by this 
section, notice of the time, place and subject matter of a meeting, 
whether the meeting is open or closed, any change in one of the 
preceding announcements and the name and telephone number of the 
official designated by the Board to respond to requests about the 
meeting, shall also be submitted for publication in the Federal 
Register.



Sec. 261b.7  Meetings closed to public observation under expedited procedures.

    (a) Since the Board and the Committee qualifies for the use of 
expedited procedures under subsection (d)(4) of the Act, meetings or 
portions thereof exempt under paragraph (a)(4), (a)(8), (a)(9)(i) or 
(a)(10) of Sec. 261b.5 of this part, will be closed to public 
observation under the expedited procedures of this section. Following 
are examples of types of items that, absent compelling contrary 
circumstances, will qualify for these exemptions: Matters relating to a 
specific bank or bank holding company, such as bank branches or mergers, 
bank holding company formations, or acquisition of an additional bank or 
acquisition or de novo undertaking of a permissible nonbanking activity; 
bank regulatory matters, such as applications for membership, issuance 
of capital notes and investment in bank premises; foreign banking 
matters; bank supervisory and enforcement matters, such as cease-and-
desist and officer removal proceedings; monetary policy matters, such as 
discount rates, use of the discount window, changes in the limitations 
on payment of interest on time and savings accounts, and changes in 
reserve requirements or margin regulations.
    (b) At the beginning of each meeting, a portion or portions of which 
is closed to public observation under expedited procedures pursuant to 
this section, a recorded vote of the members present will be taken to 
determine whether a majority of the members of the agency votes to close 
such meeting of portions of such meeting to public observation.
    (c) A copy of the vote, reflecting the vote of each member, and 
except to the extent such information is determined to be exempt from 
disclosure under Sec. 261b.5, a public announcement of the time, place 
and subject matter of the meeting or each closed portion thereof, will 
be made available at the earliest practicable time at the Board's Public 
Affairs Office and Freedom of Information Office.

[42 FR 13297, Mar. 10, 1977, as amended at 43 FR 34481, Aug. 4, 1978]



Sec. 261b.8  Meetings closed to public observation under regular procedures.

    (a) A meeting or a portion of a meeting will be closed to public 
observation under regular procedures, or information as to such meeting 
or portion of a meeting will be withheld only by recorded vote of a 
majority of the members of the agency when it is determined that the 
meeting or the portion of the meeting or the withholding of information 
qualifies for exemption under Sec. 261b.5. Votes by proxy are not 
allowed.
    (b) Except as provided in subsection (c) of this section, a separate 
vote of the members of the agency will be taken with respect to the 
closing or the withholding of information as to each meeting or portion 
thereof which is proposed to be closed to public observation or with 
respect to which information is proposed to be withheld pursuant to this 
section.
    (c) A single vote may be taken with respect to a series of meetings, 
a portion or portions of which are proposed to be closed to public 
observation or

[[Page 890]]

with respect to any information concerning such series of meetings 
proposed to be withheld, so long as each meeting or portion thereof in 
such series involves the same particular matters and is scheduled to be 
held no more than thirty days after the initial meeting in such series.
    (d) Whenever any person's interests may be directly affected by a 
portion of a meeting for any of the reasons referred to in exemption 
(a)(5), (a)(6) or (a)(7) of Sec. 261b.5 of this part, such person may 
request in writing to the Secretary of the Board that such portion of 
the meeting be closed to public observation. The Secretary, or in his or 
her absence, the Acting Secretary of the Board, will transmit the 
request to the members and upon the request of any one of them a 
recorded vote will be taken whether to close such meeting to public 
observation.
    (e) Within one day of any vote taken pursuant to paragraphs (a) 
through (d) of this section, the agency will make publicly available at 
the Board's Public Affairs Office and Freedom of Information Office a 
written copy of such vote reflecting the vote of each member on the 
question. If a meeting or a portion of a meeting is to be closed to 
public observation, the agency, within one day of the vote taken 
pursuant to paragraphs (a) through (d) of this section, will make 
publicly available at the Board's Public Affairs Office and Freedom of 
Information Office a full, written explanation of its action closing the 
meeting or portion of the meeting together with a list of all persons 
expected to attend the meeting and their affiliation, except to the 
extent such information is determined by the agency to be exempt from 
disclosure under subsection (c) of the Act and Sec. 261b.5 of this 
part.
    (f) Any person may request in writing to the Secretary of the Board 
that an announced closed meeting, or portion of the meeting, be held 
open to public observation. The Secretary, or in his or her absence, the 
Acting Secretary of the Board, will transmit the request to the members 
of the Board and upon the request of any member a recorded vote will be 
taken whether to open such meeting to public observation.

[42 FR 13297, Mar. 10, 1977, as amended at 44 FR 11750, Mar. 2, 1979]



Sec. 261b.9  Changes with respect to publicly announced meeting.

    The subject matter of a meeting or the determination to open or 
close a meeting or a portion of a meeting to public observation may be 
changed following public announcement under Sec. 261b.6 only if a 
majority of the members of the agency determines by a recorded vote that 
agency business so requires and that no earlier announcement of the 
change was possible. Public announcement of such change and the vote of 
each member upon such change will be made pursuant to Sec. 261b.6(c). 
Changes in time, including postponements and cancellations of a publicly 
announced meeting or portion of a meeting or changes in the place of a 
publicly announced meeting will be publicly announced pursuant to Sec. 
261b.6(c) by the Secretary of the Board or, in the Secretary's absence, 
the Acting Secretary of the Board.



Sec. 261b.10  Certification of General Counsel.

    Before every meeting or portion of a meeting closed to public 
observation under Sec. 261b.7 or 261b.8 of this part, the General 
Counsel, or in the General Counsel's absence, the Acting General 
Counsel, shall publicly certify whether or not in his or her opinion the 
meeting may be closed to public observation and shall state each 
relevant exemptive provision. A copy of such certification, together 
with a statement from the presiding officer of the meeting setting forth 
the time and place of the meeting and the persons present, will be 
retained for the time prescribed in Sec. 261b.11(d).



Sec. 261b.11  Transcripts, recordings, and minutes.

    (a) The agency will maintain a complete transcript or electronic 
recording or transcription thereof adequate to record fully the 
proceedings of each meeting or portion of a meeting closed to public 
observation pursuant to exemption (a)(1), (a)(2), (a)(3), (a)(4), 
(a)(5), (a)(6), (a)(7) or (a)(9)(ii) of Sec. 261b.5

[[Page 891]]

of this part. Transcriptions of recordings will disclose the identity of 
each speaker.
    (b) The agency will maintain either such a transcript, recording or 
transcription thereof, or a set of minutes that will fully and clearly 
describe all matters discussed and provide a full and accurate summary 
of any actions taken and the reasons therefor, including a description 
of each of the views expressed on any item and the record of any roll 
call vote (reflecting the vote of each member on the question), for 
meetings or portions of meetings closed to public observation pursuant 
to exemptions (a)(8), (a)(9)(A) or (a)(10) of Sec. 261b.5 of this part. 
The minutes will identify all documents considered in connection with 
any action taken.
    (c) Transcripts, recordings or transcriptions thereof, or minutes 
will promptly be made available to the public in the Freedom of 
Information Office except for such item or items of such discussion or 
testimony as may be determined to contain information that may be 
withheld under subsection (c) of the Act and Sec. 261b.5 of this part.
    (d) A complete verbatim copy of the transcript, a complete copy of 
the minutes, or a complete electronic recording or verbatim copy of a 
transcription thereof of each meeting or portion of a meeting closed to 
public observation will be maintained for a period of at least two years 
or one year after the conclusion of any agency proceeding with respect 
to which the meeting or portion thereof was held, whichever occurs 
later.



Sec. 261b.12  Procedures for inspection and obtaining copies of transcriptions 

and minutes.

    (a) Any person may inspect or copy a transcript, a recording or 
transcription of a recording, or minutes described in Sec. 261b.11(c) 
of this part.
    (b) Requests for copies of transcripts, recordings or transcriptions 
of recordings, or minutes described in Sec. 261b.11(c) of this part 
shall specify the meeting or the portion of meeting desired and shall be 
submitted in writing to the Secretary of the Board, Board of Governors 
of the Federal Reserve System, Washington, DC 20551. Copies of documents 
identified in minutes may be made available to the public upon request 
under the provisions of 12 CFR part 261 (Rules Regarding Availability of 
Information).



Sec. 261b.13  Fees.

    (a) Copies of transcripts, recordings or transcriptions of 
recordings, or minutes requested pursuant to section Sec. 261b.12(b) of 
this part will be provided at the cost of 10[cent] per standard page for 
photocopying or at a cost not to exceed the actual cost of printing, 
typing, or otherwise preparing such copies.
    (b) Documents may be furnished without charge where total charges 
are less than $2.



PART 262_RULES OF PROCEDURE--Table of Contents




Sec.
262.1 Basis and scope.
262.2 Procedure for regulations.
262.3 Applications.
262.4 Adjudication with formal hearing.
262.5 Appearance and practice.
262.6 Forms.
262.7-262.24 [Reserved]
262.25 Policy statement regarding notice of applications; timeliness of 
          comments; informal meetings.

    Authority: 5 U.S.C. 552, 12 U.S.C. 321, 1828(c), and 1842.

    Source: 38 FR 6807, Mar. 13, 1973, unless otherwise noted.



Sec. 262.1  Basis and scope.

    This part is issued pursuant to section 552 of title 5 of the United 
States Code, which requires that every agency shall publish in the 
Federal Register statements of the general course and method by which 
its functions are channeled and determined, rules of procedure, and 
descriptions of forms available or the places at which forms may be 
obtained.



Sec. 262.2  Procedure for regulations.

    (a) Notice. Notices of proposed regulations of the Board of 
Governors of the Federal Reserve System (the ``Board'') or amendments 
thereto are published in the Federal Register, except as specified in 
paragraph (e) of this section or otherwise excepted by law. Such notices 
include a statement of the terms of the proposed regulations or 
amendments and a description of the

[[Page 892]]

subjects and issues involved; but the giving of such notices does not 
necessarily indicate the Board's final approval of any feature of any 
such proposal. The notices also include a reference to the authority for 
the proposed regulations or amendments and a statement of the time, 
place, and nature of public participation.
    (b) Public participation. The usual method of public submission of 
data, views, or arguments is in writing. It is ordinarily preferable 
that they be sent to the Secretary of the Board, Washington, DC 20551, 
with copies to the appropriate Federal Reserve Bank. The locations of 
the 12 Federal Reserve Banks and the boundaries of the Federal Reserve 
districts are shown in the appendix to the Board's rules of 
organization. Such material will be made available for inspection and 
copying upon request, except as provided in Sec. 261.6(b) of this 
chapter regarding availability of information.
    (c) Preparation of draft and action by Board. In the light of 
consideration of all relevant matter presented or ascertained, the 
appropriate division of the Board's staff, in collaboration with other 
divisions, prepares drafts of proposed regulations or amendments, and 
the staff submits them to the Board. The Board takes such action as it 
deems appropriate in the public interest. Any other documents that may 
be necessary to carry out any decision by the Board in the matter are 
usually prepared by the Legal Division, in collaboration with the other 
divisions of the staff.
    (d) Effective dates. Any substantive regulation or amendment thereto 
issued by the Board is published not less than 30 days prior to the 
effective date thereof, except as specified in paragraph (e) of this 
section or as otherwise excepted by law.
    (e) Exceptions as to notice or effective date. In certain 
situations, notice and public participation with respect to proposed 
regulations may be impracticable, unnecessary, contrary to the public 
interest, or otherwise not required in the public interest, or there may 
be reason and good cause in the public interest why the effective date 
should not be deferred for 30 days. The reason or reasons in such cases 
usually are that such notice, public participation, or deferment of 
effective date would prevent the action from becoming effective as 
promptly as necessary in the public interest, would permit speculators 
or others to reap unfair profits or to interfere with the Board's 
actions taken with a view to accommodating commerce and business and 
with regard to their bearing upon the general credit situation of the 
country, would provoke other consequences contrary to the public 
interest, would unreasonably interfere with the Board's necessary 
functions with respect to management or personnel, would not aid the 
persons affected, or would otherwise serve no useful purpose. The 
following may be mentioned as some examples of situations in which 
advance notice or deferred effective date, or both, will ordinarily be 
omitted in the public interest: The review and determination of discount 
rates established by Federal Reserve Banks, and changes in general 
requirements regarding reserves of member banks, maximum interest rates 
on time and savings deposits, or credit for purchasing or carrying 
securities.

[38 FR 6807, Mar. 13, 1973, as amended at 54 FR 33183, Aug. 14, 1989]



Sec. 262.3  Applications.

    (a) Forms. Any application, request, or petition (hereafter referred 
to as ``application'') for the approval, authority, determination, or 
permission of the Board with respect to any action for which such 
approval, authority, determination, or permission is required by law or 
regulation of the Board (including actions authorized to be taken by a 
Federal Reserve Bank or others on behalf of the Board pursuant to 
authority delegated under Part 265 of this chapter) shall be submitted 
in accordance with the pertinent form, if any, prescribed by the Board. 
Copies of any such form and details regarding information to be included 
therein may be obtained from any Federal Reserve Bank. Any application 
for which no form is prescribed should be signed by the person making 
the application or by his duly authorized agent, should state the facts 
involved, the action requested, and the applicant's interest in the 
matter, and should indicate the

[[Page 893]]

reasons why the application should be granted. Applications for access 
to, or copying of, records of the Board should be submitted as provided 
in Sec. 261.9(a) of this chapter.
    (b) Notice of applications. (1)(i) In the case of applications,
    (A) By a State member bank for the establishment of a domestic 
branch or other facility that would be authorized to receive deposits,
    (B) To become a bank holding company (except as provided in 12 CFR 
225.15), and
    (C) By a bank holding company to acquire ownership or control of 
shares or assets of a bank, or to merge or consolidate with any other 
bank holding company,

the applicant shall cause to be published a notice in the form 
prescribed by the Board.
    (ii) The notice shall be placed in the classified advertising legal 
notices section of the newspaper, and must provide an opportunity for 
the public to give written comment on the application to the appropriate 
Federal Reserve Bank for the period specified in Regulation H (12 CFR 
part 208) in the case of applications specified in Sec. 
262.3(b)(1)(i)(A), and for at least thirty days after the date of 
publication in the case of applications specified in Sec. 
262.3(b)(1)(i)(B) and (C). Within 7 days of publication, the applicant 
shall submit its application to the appropriate Reserve Bank for 
acceptance along with a copy of the notice. If the Reserve Bank has not 
accepted the application as complete within ninety days of the date of 
publication of the notice, the applicant may be required to republish 
notice of the application. Such notice shall be published in a newspaper 
of general circulation in--
    (A) [Reserved]
    (B) The community or communities in which the head office of the 
bank and the proposed branch or other facility (other than an electronic 
funds transfer facility) are located in the case of an application for 
the establishment of a domestic branch or other facility that would be 
authorized to receive deposits, other than an application incidental to 
an application by a bank for merger, consolidation, or acquisition of 
assets or assumption of liabilities,
    (C) The community or communities in which the head office of the 
bank, the office to be closed, and the office to be opened are located 
in the case of an application for the relocation of a domestic branch 
office,
    (D) The community or communities in which the head office of each of 
the banks to be party to the merger, consolidation, or acquisition of 
assets or assumption of liabilities are located in the case of an 
application by a bank for merger, consolidation, or acquisition of 
assets or assumption of liabilities, or
    (E) The community or communities in which the head offices of the 
largest subsidiary bank, if any, or an applicant and of each bank, 
shares of which are to be directly or indirectly acquired, are located 
in the case of applications under section 3 of the Bank Holding Company 
Act.
    (2) In addition to the foregoing notice, an applicant, in the case 
of an application to relocate a domestic branch office or other facility 
that would be authorized to receive deposits, shall post in a 
conspicuous public place in the lobby of the office to be closed a 
notice containing the information specified in Sec. 262.3(b)(1). Such 
notice should be posted on the date of the notice required by Sec. 
262.3(b)(1).
    (3) In the case of an application for a merger, consolidation, or 
acquisition of assets or assumption of liabilities, if the acquiring, 
assuming, or resulting bank is to be a State member bank, the applicant 
shall cause to be published notice in the form prescribed by the Board. 
The notice shall be published in a newspaper of general circulation in 
the community or communities in which the head office of each of the 
banks to be a party to the merger, consolidation, or acquisition of 
assets or assumption of liabilities is located. The notice shall be 
published on at least three occasions at appropriate intervals. The last 
publication of the notice shall appear at least thirty days after the 
first publication. The notice must provide an opportunity for the public 
to give written comment on the application to the appropriate Federal 
Reserve Bank for at least thirty days after the date of the first 
publication of

[[Page 894]]

the notice. Within seven days of publication of notice for the first 
time, the applicant shall submit its application to the appropriate 
Reserve Bank for acceptance, along with a copy of the notice. If the 
Reserve Bank has not accepted the application as complete within ninety 
days of the date of the first publication of the notice, the applicant 
may be required to republish notice of the application.
    (c) Filing of applications. Any application should be sent to the 
Federal Reserve Bank of the district in which the head office of the 
parent banking organization is located, except as otherwise specified on 
application forms, and that Bank will forward it to the Board when 
appropriate; however, in the case of foreign banking organization, as 
defined in Sec. 211.23(a)(2) of this chapter, applications shall be 
sent to the Federal Reserve Bank of the district in which the operations 
of the organization's subsidiary banks are principally conducted. In the 
case of a foreign banking organization that is not a bank holding 
company but that has one or more branches, agencies, or commercial 
lending companies in any State of the United States or the District of 
Columbia, applications shall be sent to the Federal Reserve Bank of the 
district in which the organization's banking assets are the largest. 
Applications of a member bank subsidiary, however, should be filed with 
the Reserve Bank of the district in which the member bank is located.
    (d) Analysis by staff. In every case, the Reserve Bank makes such 
investigation as may be necessary, and, except when acting pursuant to 
delegated authority, reports the relevant facts, with its 
recommendation, to the Board. In the light of consideration of all 
relevant matter presented or ascertained, the Board's staff prepares and 
submits to the Board comments on the subject.
    (e) Submission of comments and requests for hearing. The Board is 
only required to consider a comment or a request for a hearing with 
respect to an application or notice if it is in writing and received by 
the Secretary of the Board or the appropriate Federal Reserve Bank on or 
before the latest date prescribed in any notice with respect to the 
application or notice, or where no such date is prescribed, on or before 
the 30th day after the date notice is first published. Similarly, the 
Board will consider comments on an application from the Attorney General 
or a banking supervisory authority to which notification of receipt of 
an application has been given, only if such comment is received by the 
Secretary of the Board within 30 days of the date of the letter giving 
such notification. Any comment on an application or notice that requests 
a hearing must include a statement of why a written presentation would 
not suffice in lieu of a hearing, identifying specifically any questions 
of fact that are in dispute and summarizing the evidence that would be 
presented at a hearing. In every case where a timely comment or request 
for hearing is received as provided herein, a copy of such comment or 
request shall be forwarded promptly to the applicant for its response. 
The Board will consider the applicant's response only if it is in 
writing and sent to the Secretary of the Board on or before eight 
business days after the date of the letter by which it is forwarded to 
the applicant. At the same time it transmits its response to the Board, 
the applicant should transmit a copy of its response to the person or 
supervisory authority making such comment or requesting a hearing. 
Notwithstanding the foregoing, the Board may, in its sole discretion and 
without notifying the parties, take into consideration the substance of 
comments with respect to an application, (but not requests for hearing) 
that are not received within the time periods provided herein.
    (f) Action on applications. The Board takes such action as it deems 
appropriate in the public interest. Such documents as may be necessary 
to carry out any decision by the Board are prepared by the Board's 
staff. With respect to actions taken by a Federal Reserve Bank on behalf 
of the Board under delegated authority, statements and necessary 
documents are prepared by the staff of such Federal Reserve Bank.
    (g) Notice of action. Prompt notice is given to the applicant of the 
granting or denial in whole or in part of any application. In the case 
of a denial, except in affirming a prior denial or

[[Page 895]]

where the denial is self-explanatory, such notice is accompanied by a 
simple statement of the grounds for such action.
    (h) Action at Board's initiative. When the Board, without receiving 
an application, takes action with respect to any matter as to which 
opportunity for hearing is not required by statute or Board regulation, 
similar procedure is followed, including investigations, reports, and 
recommendations by the Board's staff and by the Reserve Banks, where 
appropriate.
    (i) General procedures for bank holding company and merger 
applications. In addition to procedures applicable under other 
provisions of this part, the following procedures are applicable in 
connection with the Board's consideration of applications under sections 
3 and 4 of the Bank Holding Company Act of 1956 (12 U.S.C. 1842 and 
1843), hereafter referred to as ``section 3 applications'' or ``section 
4 applications,'' and of applications under section 18(c) of the Federal 
Deposit Insurance Act (12 U.S.C. 1823), hereafter called ``merger 
applications.'' Except as otherwise indicated, the following procedures 
apply to all such applications.
    (1) The Board issues each week a list that identifies section 3 and 
section 4 and merger applications received and acted upon during the 
preceding week by the Board or the Reserve Banks pursuant to delegated 
authority. Notice of receipt of all section 3 applications and of 
section 4(c)(8) applications acted on by the Board is published in the 
Federal Register.
    (2) If a hearing is required by law or if the Board determines that 
a formal hearing for the purpose of taking evidence is desirable, the 
Board issues an order for such a hearing, and a notice thereof is 
published in the Federal Register. Any such formal hearing is conducted 
by an administrative law judge in accordance with subparts A and B of 
the Board's Rules of Practice for Hearings (part 263 of this chapter).
    (3) In any case in which a formal hearing is not ordered by the 
Board, the Board may afford the applicant and other properly interested 
persons (including Governmental agencies) an opportunity to present 
views orally before the Board or its designated representative. Unless 
otherwise ordered by the Board, any such oral presentation is public and 
notice of such public proceeding is published in the Federal Register.
    (4) Each action taken by the Board on an application is embodied in 
an order that indicates the votes of members of the Board. The order 
either contains reasons for the Board's action (i.e., an expanded order) 
or is accompanied by a statement of the reasons for the Board's action. 
Both the order and any accompanying statement are released to the press. 
Each order accompanied by a statement and any order of general interest, 
together with a list of other orders, are published in the Federal 
Reserve Bulletin. Action by a Reserve Bank under delegated authority as 
provided for under part 265 of this chapter is reflected in a letter of 
notification to the applicant.
    (5) Unless the Board shall otherwise direct, each section 3 and 
section 4 and merger application is made available for inspection by the 
public except for portions thereof as to which the Board determines that 
nondisclosure is warranted under section 552(b) of title 5 of the United 
States Code.
    (j) Special procedures for certain applications. The following types 
of applications require procedures exclusive of, or in addition to, 
those described in paragraphs (i)(1) through (5) of this section.
    (1) Special rules pertaining to section 3 and merger applications 
follow:
    (i) Each order of the Board and each letter of notification by a 
Reserve Bank acting pursuant to delegated authority approving a section 
3 application includes, pursuant to the Act approved July 1, 1966 (12 
U.S.C. 1849(b)), a requirement that the transaction approved shall not 
be consummated before the 30th calendar day following the date of such 
order.
    (ii) Each order of the Board approving a merger application 
includes, pursuant to the Act approved February 21, 1966 (12 U.S.C. 
1828(c)(6)), a requirement that the transaction approved shall not be 
consummated before the 30th calendar day following the date of such 
order, except as the Board may otherwise determine pursuant to emergency

[[Page 896]]

situations as to which the Act permits consummation at earlier dates.
    (iii) Each order or each letter of notification approving an 
application also includes, as a condition of approval, a requirement 
that the transaction approved shall be consummated within 3 months and, 
in the case of acquisition by a holding company of stock of a newly 
organized bank, a requirement that such bank shall be opened for 
business within 6 months, but such periods may be extended for good 
cause by the Board (or by the appropriate Federal Reserve Bank where 
authority to grant such extensions is delegated to the Reserve Bank).
    (2) For special rules governing procedures for section 4 
applications, refer to Sec. 225.23 of this chapter.
    (3)-(4) [Reserved]
    (5) For special rules governing procedures for section 4(c)(13) 
applications, refer to Sec. 225.4(f) of this chapter.
    (k) Reconsideration of certain Board actions. The Board may 
reconsider any action taken by it on an application upon receipt by the 
Secretary of the Board of a written request for reconsideration from any 
party to such application, on or before the 15th day after the effective 
date of the Board's action. Such request should specify the reasons why 
the Board should reconsider its action, and present relevant facts that 
for good cause shown, were not previously presented to the Board. Within 
10 days of receipt of such a request, the General Counsel, acting 
pursuant to delegated authority (12 CFR 265.2(b)(7)), shall determine 
whether or not the request for reconsideration should be granted, and 
shall notify all parties to the application orally by telephone of this 
determination within 10 days. Such notification will be confirmed 
promptly in writing. In the exercise of this authority, the General 
Counsel shall confer with the Directors of other interested Divisions of 
the Board or their designees. Notwithstanding the foregoing, the Board 
may, on its own motion if it deems reconsideration appropriate, elect to 
reconsider its action with respect to any application, and the parties 
to such application shall be notified by the Secretary of the Board of 
its election as provided above. If it is determined that the Board 
should reconsider its action with respect to an application, such action 
will be stayed and will not be final until the Board has acted on the 
application upon reconsideration. If appropriate, notice of 
reconsideration of an application will be published promptly in the 
Federal Register.
    (l) Waiver. The Board, or the officer or Reserve Bank authorized to 
approve an application, may waive or modify any procedural requirements 
for that application prescribed or cited in this section and may excuse 
any failure to comply with them upon a finding that immediate action on 
the application is necessary to prevent the probable failure of a bank 
or company or that an emergency exists requiring expeditious action.

(12 U.S.C. 1842(a), 1843, and 1844(b), 12 U.S.C. 1828(c), 321 and 
248(i))

[38 FR 6807, Mar. 13, 1973]

    Editorial Note: For Federal Register citations affecting Sec. 
262.3, see the List of CFR Sections Affected, which appears in the 
Finding Aids section of the printed volume and on GPO Access.



Sec. 262.4  Adjudication with formal hearing.

    In connection with adjudication with respect to which a formal 
hearing is required by law or is ordered by the Board, the procedure is 
set forth in part 263 of this chapter, entitled ``Rules of Practice for 
Formal Hearings.''



Sec. 262.5  Appearance and practice.

    Appearance and practice before the Board in all matters are governed 
by Sec. 263.3 of this chapter.



Sec. 262.6  Forms.

    Necessary forms to be used in connection with applications and other 
matters are available at the Federal Reserve Banks. A list of all such 
forms, which is reviewed and revised periodically, may be obtained from 
any Federal Reserve Bank.
    (a) This action is taken pursuant to and in accordance with the 
provisions of section 552 of title 5 of the United States Code.
    (b) The provisions of section 553 of title 5, United States Code, 
relating to notice and public participation and to

[[Page 897]]

deferred effective dates, are not followed in connection with the 
adoption of this action, because the rules involved are procedural in 
nature and accordingly do not constitute substantive rules subject to 
the requirements of such section.



Sec. Sec. 262.7-262.24  [Reserved]



Sec. 262.25  Policy statement regarding notice of applications; timeliness of 

comments; informal meetings.

    (a) Notice of applications. A bank or company applying to the Board 
for a deposit-taking facility must first publish notice of its 
application in local newspapers. This requirement, found in Sec. 
262.3(b)(1) of the Board's Rules of Procedure covers applications under 
the Bank Holding Company Act and Bank Merger Act, as well as 
applications for membership in the Federal Reserve System and for new 
branches of State member banks. Notices of these applications are 
published in newspapers of general circulation in the communities where 
the applicant intends to do business as well as in the community where 
the applicant's head office is located. These notices are important in 
calling the public's attention to an applicant's plans and giving the 
public a chance to comment on these plans. To improve the effectiveness 
of the notices, the Board has supplemented its notice procedures as 
follows.
    (1) The Board has adopted standard forms of notice for use by 
applicants that will specify the exact date on which the comment period 
on the application ends, which may not be less than thirty calendar days 
from the date of publication of the notice. The newspaper forms also 
provide the name and telephone number of the Community Affairs Officer 
of the appropriate Reserve Bank as the person to call to obtain more 
information about submitting comments on an application. In general, the 
Community Affairs Officer will be available to answer questions of a 
general nature concerning the submission of comments and the processing 
of applications.
    (2) The Board also publishes notice of bank holding company 
applications for bank acquisitions (but not for bank mergers or 
branches) in the Federal Register after the application is received and 
the Community Affairs Officer can provide the exact date on which this 
comment period ends. (The Federal Register comment period will generally 
end after the date specified in the newspaper notice.)
    (3) In addition to the formal newspaper and Federal Register notices 
discussed above, each Reserve Bank publishes a weekly list of 
applications submitted to the Reserve Bank for which newspaper notices 
have been published. Any person or organization may arrange to have the 
list mailed to them regularly, or may request particular lists, by 
contacting the Reserve Bank's Community Affairs Officer. Each Reserve 
Bank's list includes only applications submitted to that particular 
Reserve Bank, and persons or groups should request lists from each 
Reserve Bank having jurisdiction over applications in which they may be 
interested. Since the lists are prepared as a courtesy by the Reserve 
Bank, and are not intended to replace any formal notice required by 
statute or regulation, the Reserve Banks and the Board do not assume 
responsibility for errors or omissions. In addition, the weekly lists 
prepared by Reserve Banks include certain applications by bank holding 
companies for nonbank acquisitions filed with the Reserve Bank.
    (4) With respect to applications by bank holding companies to engage 
de novo in nonbank activities or make acquisitions of nonbank firms, the 
Board publishes notice of most of these applications in the Federal 
Register when the applications are filed. Notice of certain small 
acquisitions may be published in a newspaper of general circulation in 
the area(s) to be served. While applications for nonbanking activities 
are not covered by the provisions of the Community Reinvestment Act or 
the notice provisions of Sec. 262.3 of the Board's Rules of Procedure, 
the provisions of this Statement apply to such applications.
    (b) Timeliness of comments. (1) All comments must be actually 
received by the Board or the Reserve Bank on or before the last date of 
the comment period specified in the notice. Where more than one notice 
is published with respect to an application, comments must be received 
on or before the last

[[Page 898]]

date of the latest comment period. The Board's Rules allow it to 
disregard comments received after the comment period expires. In 
particular, Sec. 262.3(e) of the Board's Rules of Procedure states that 
the Board will not consider comments on an application that are not 
received on or before the expiration of the comment period. Thus, a 
commenter who fails to comment on an application within the specified 
comment period (or any extension) may be precluded from participating in 
the consideration of the application.
    (2) In cases where a commenter for good cause is unable to send its 
comment within the specified comment period, Sec. 265.2(a)(10) of the 
Board's Rules Regarding Delegation of Authority (12 CFR 265.2(a)(10)) 
allows the Secretary of the Board to grant requests for an extension of 
the period. Under this provision, upon receipt of a request received on 
or before the expiration of the comment period, the Secretary may grant 
a brief extension upon clear demonstration of hardship or other 
meritorious reason for seeking additional time.
    (c) Private meetings. When a timely protest to approval of an 
application is received, the Reserve Bank may arrange a meeting between 
the applicant and the protestant to clarify and narrow the issues, and 
to provide a forum for the resolution of differences between the 
protestant and the applicant. If the Reserve Bank decides that a private 
meeting would be appropriate, the Reserve Bank will arrange a private 
meeting soon after the receipt of a protest and the applicant's 
response, if any, to the protest. In scheduling the meeting, the Reserve 
Bank will consider convenience to the parties with respect to the time 
and place of the meeting. A decision to hold a private meeting will not 
preclude the Reserve Bank or the Board from holding a public meeting or 
other proceeding if it is deemed appropriate.
    (d) Public meetings. The Board's General Counsel (in consultation 
with the Reserve Bank and the directors of other interested divisions of 
the Board) may order that a public meeting or other proceeding be held 
if requested by the applicant or a protestant who files a timely 
protest, or if such a proceeding appears appropriate. In most instances, 
the determination to order a public meeting will be made after a private 
meeting has been held; however, where appropriate a public meeting may 
be convened immediately after receipt of the protest and the applicant's 
response, if any. Additional information may be requested prior to 
making a determination to convene a public meeting. In these cases, a 
determination will be made within ten days from the date all relevant 
information is received. The public meeting will be scheduled as soon as 
possible, but in no event, later than 30 days after the decision to hold 
the proceeding is made. The purpose of the public meeting will be to 
elicit information, to clarify factual issues related to the application 
and to provide an opportunity for interested individuals to provide 
testimony. The Board has adopted the following guidelines to be used for 
convening public meetings, although specific provisions may be altered 
by the General Counsel if circumstances warrant.
    (1) Requesting a public meeting. A meeting may be requested by a 
person or an organization objecting to the application during the 
comment period, and by the applicant during the period within which it 
must respond to comments. Such a request must be timely and in writing.
    (i) A protest does not have to be filed in a legal brief or other 
format in order for a public meeting to be granted. The Community 
Affairs Officer at the Reserve Bank will be available to assist any 
member of the public regarding the types of information generally 
included in protests; the format generally used by protestants; and any 
other specific questions about the procedures of the Federal Reserve 
System regarding protested applications.
    (ii) In general, a protest should identify the protestant, state the 
basis for objection to approval of the application, and provide 
available written evidence to support the objection. Objections to 
approval of an application must relate to the factors that the Board is 
authorized to consider in acting on an application. Generally, these 
factors relate to the financial and managerial resources of the 
companies and

[[Page 899]]

banks involved, the effects of the proposal on competition, and the 
convenience and needs of the communities to be served by the companies 
and banks involved. If a public meeting is requested, the protest should 
indicate that there are members of the public who wish to speak on the 
issues in a public forum.
    (iii) The protest will be transmitted by the Reserve Bank to the 
applicant, and the applicant will generally be allowed eight business 
days to respond in writing to the protest.
    (2) Arranging the public meeting. Public meetings will be arranged 
and presided over by a representative of the Federal Reserve System 
(``Presiding Officer''). In determining the time and place for the 
public meeting, such factors as convenience to the parties, the number 
of people expected to attend the meeting, access to public 
transportation and possible after-hour security problems will be taken 
into account.
    (3) Conducting the public meeting. Prior to the meeting, all 
necessary steps will be taken to ensure that the meeting is conducted 
appropriately, including scheduling of witnesses, submission of written 
materials and other arrangements. In conducting the public meeting the 
Presiding Officer will have the authority and discretion to ensure that 
the meeting proceeds in a fair and orderly manner. Generally, the public 
meeting will consist of opening and closing remarks by the Presiding 
Officer, a presentation by the protestant and a presentation by the 
applicant. An official transcript will be made of the proceedings and 
entered into the record. The conclusion of the public meeting normally 
marks the close of the public portion of the record on the application.
    (4) Notification of Board decision on the application. After a 
decision is made on the application, and the applicant is notified of 
the decision, staff will notify the protestant by telephone. This 
notification will be confirmed promptly in writing. As set forth in 
Sec. 262.3(k) of the Board's Rules of Procedure (12 CFR 262.3(k)) or 
Sec. 265.3 of the Board's Rules Regarding Delegation of Authority (12 
CFR 265.3), a party to the application may request reconsideration of 
the Board's order, or review of the Reserve Bank's decision.

[49 FR 5603, Feb. 14, 1984, as amended at 57 FR 41642, Sept. 11, 1992]



PART 263_RULES OF PRACTICE FOR HEARINGS--Table of Contents




            Subpart A_Uniform Rules of Practice and Procedure

Sec.
263.1 Scope.
263.2 Rules of construction.
263.3 Definitions.
263.4 Authority of the Board.
263.5 Authority of the administrative law judge.
263.6 Appearance and practice in adjudicatory proceedings.
263.7 Good faith certification.
263.8 Conflicts of interest.
263.9 Ex parte communications.
263.10 Filing of papers.
263.11 Service of papers.
263.12 Construction of time limits.
263.13 Change of time limits.
263.14 Witness fees and expenses.
263.15 Opportunity for informal settlement.
263.16 The Board's right to conduct examination.
263.17 Collateral attacks on adjudicatory proceeding.
263.18 Commencement of proceeding and contents of notice.
263.19 Answer.
263.20 Amended pleadings.
263.21 Failure to appear.
263.22 Consolidation and severance of actions.
263.23 Motions.
263.24 Scope of document discovery.
263.25 Request for document discovery from parties.
263.26 Document subpoenas to nonparties.
263.27 Deposition of witness unavailable for hearing.
263.28 Interlocutory review.
263.29 Summary disposition.
263.30 Partial summary disposition.
263.31 Scheduling and prehearing conferences.
263.32 Prehearing submissions.
263.33 Public hearings.
263.34 Hearing subpoenas.
263.35 Conduct of hearings.
263.36 Evidence.
263.37 Post-hearing filings.
263.38 Recommended decision and filing of record.
263.39 Exceptions to recommended decision.
263.40 Review by the Board.
263.41 Stays pending judicial review.

[[Page 900]]

       Subpart B_Board Local Rules Supplementing the Uniform Rules

263.50 Purpose and scope.
263.51 Definitions.
263.52 Address for filing.
263.53 Discovery depositions.
263.54 Delegation to the Office of Financial Institution Adjudication.
263.55 Board as Presiding Officer.
263.56 Initial Licensing Proceedings.

 Subpart C_Rules and Procedures for Assessment and Collection of Civil 
                             Money Penalties

263.60 Scope.
263.61 Opportunity for informal proceeding.
263.62 Relevant considerations for assessment of civil penalty.
263.63 Assessment order.
263.64 Payment of civil penalty.
263.65 Civil penalty inflation adjustments.

Subpart D_Rules and Procedures Applicable to Suspension or Removal of an 
    Institution-Affiliated Party Where a Felony is Charged or Proven

263.70 Purpose and scope.
263.71 Notice or order of suspension, removal, or prohibition.
263.72 Request for informal hearing.
263.73 Order for informal hearing.
263.74 Decision of the Board.

   Subpart E_Procedures for Issuance and Enforcement of Directives To 
                        Maintain Adequate Capital

263.80 Purpose and scope.
263.81 Definitions.
263.82 Establishment of minimum capital levels.
263.83 Issuance of capital directives.
263.84 Enforcement of directive.
263.85 Establishment of increased capital level for specific 
          institutions.

                   Subpart F_Practice Before the Board

263.90 Scope.
263.91 Censure, suspension or debarment.
263.92 Definitions.
263.93 Eligibility to practice.
263.94 Conduct warranting sanctions.
263.95 Initiation of disciplinary proceeding.
263.96 Conferences.
263.97 Proceedings under this subpart.
263.98 Effect of suspension, debarment or censure.
263.99 Petition for reinstatement.

 Subpart G_Rules Regarding Claims Under the Equal Access to Justice Act

263.100 Authority and scope.
263.101 Standards for awards.
263.102 Prevailing party.
263.103 Eligibility of applicants.
263.104 Application for awards.
263.105 Statement of net worth.
263.106 Measure of awards.
263.107 Statement of fees and expenses.
263.108 Responses to application.
263.109 Further proceedings.
263.110 Recommended decision.
263.111 Action by the Board.

 Subpart H_Issuance and Review of Orders Pursuant to Prompt Corrective 
         Action Provisions of the Federal Deposit Insurance Act

263.201 Scope.
263.202 Directives to take prompt regulatory action.
263.203 Procedures for reclassifying a state member bank based on 
          criteria other than capital.
263.204 Order to dismiss a director or senior executive officer.
263.205 Enforcement of directives.

Subpart I_Submission and Review of Safety and Soundness Compliance Plans 
   and Issuance of Orders To Correct Safety and Soundness Deficiencies

263.300 Scope.
263.301 Purpose.
263.302 Determination and notification of failure to meet safety and 
          soundness standard and request for compliance plan.
263.303 Filing of safety and soundness compliance plan.
263.304 Issuance of orders to correct deficiencies and to take or 
          refrain from taking other actions.
263.305 Enforcement of orders.

    Subpart J_Removal, Suspension, and Debarment of Accountants From 
                        Performing Audit Services

263.400 Scope.
263.401 Definitions.
263.402 Removal, suspension, or debarment.
263.403 Automatic removal, suspension, and debarment.
263.404 Notice of removal, suspension, or debarment.
263.405 Petition for reinstatement.

    Authority: 5 U.S.C. 504; 12 U.S.C. 248, 324, 504, 505, 1817(j), 
1818, 1820(k), 1828(c), 1831o, 1831p-1, 1847(b), 1847(d), 1884(b), 
1972(2)(F), 3105, 3107, 3108, 3907, 3909; 15 U.S.C. 21, 78o-4, 78o-5, 
78u-2; and 28 U.S.C. 2461 note.

    Source: 56 FR 38052, Aug. 9, 1991, unless otherwise noted.

[[Page 901]]



            Subpart A_Uniform Rules of Practice and Procedure



Sec. 263.1  Scope.

    This subpart prescribes Uniform Rules of practice and procedure 
applicable to adjudicatory proceedings required to be conducted on the 
record after opportunity for hearing under the following statutory 
provisions:
    (a) Cease-and-desist proceedings under section 8(b) of the Federal 
Deposit Insurance Act (``FDIA'') (12 U.S.C. 1818(b));
    (b) Removal and prohibition proceedings under section 8(e) of the 
FDIA (12 U.S.C. 1818(e));
    (c) Change-in-control proceedings under section 7(j)(4) of the FDIA 
(12 U.S.C. 1817(j)(4)) to determine whether the Board of Governors of 
the Federal Reserve System (``Board'') should issue an order to approve 
or disapprove a person's proposed acquisition of a state member bank or 
bank holding company;
    (d) Proceedings under section 15C(c)(2) of the Securities Exchange 
Act of 1934 (``Exchange Act'') (15 U.S.C. 78o-5), to impose sanctions 
upon any government securities broker or dealer or upon any person 
associated or seeking to become associated with a government securities 
broker or dealer for which the Board is the appropriate agency;
    (e) Assessment of civil money penalties by the Board against 
institutions, institution-affiliated parties, and certain other persons 
for which the Board is the appropriate agency for any violation of:
    (1) Any provision of the Bank Holding Company Act of 1956, as 
amended (``BHC Act''), or any order or regulation issued thereunder, 
pursuant to 12 U.S.C. 1847(b) and (d);
    (2) Sections 19, 22, 23A and 23B of the Federal Reserve Act 
(``FRA''), or any regulation or order issued thereunder and certain 
unsafe or unsound practices or breaches of fiduciary duty, pursuant to 
12 U.S.C. 504 and 505;
    (3) Section 9 of the FRA pursuant to 12 U.S.C. 324;
    (4) Section 106(b) of the Bank Holding Company Act Amendments of 
1970 and certain unsafe or unsound practices or breaches of fiduciary 
duty, pursuant to 12 U.S.C. 1972(2)(F);
    (5) Any provision of the Change in Bank Control Act of 1978, as 
amended, or any regulation or order issued thereunder and certain unsafe 
or unsound practices or breaches of fiduciary duty, pursuant to 12 
U.S.C. 1817(j)(16);
    (6) Any provision of the International Lending Supervision Act of 
1983 (``ILSA'') or any rule, regulation or order issued thereunder, 
pursuant to 12 U.S.C. 3909;
    (7) Any provision of the International Banking Act of 1978 (``IBA'') 
or any rule, regulation or order issued thereunder, pursuant to 12 
U.S.C. 3108;
    (8) Certain provisions of the Exchange Act, pursuant to section 21B 
of the Exchange Act (15 U.S.C. 78u-2);
    (9) Section 1120 of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (12 U.S.C. 3349), or any order or regulation 
issued thereunder;
    (10) The terms of any final or temporary order issued under section 
8 of the FDIA or of any written agreement executed by the Board, the 
terms of any condition imposed in writing by the Board in connection 
with the grant of an application or request, and certain unsafe or 
unsound practices or breaches of fiduciary duty or law or regulation 
pursuant to 12 U.S.C. 1818(i)(2);
    (11) Any provision of law referenced in section 102(f) of the Flood 
Disaster Protection Act of 1973 (42 U.S.C. 4012a(f)) or any order or 
regulation issued thereunder; and
    (12) Any provision of law referenced in 31 U.S.C. 5321 or any order 
or regulation issued thereunder;
    (f) Remedial action under section 102(g) of the Flood Disaster 
Protection Act of 1973 (42 U.S.C. 4012a(g));
    (g) Removal, prohibition, and civil monetary penalty proceedings 
under section 10(k) of the FDI Act (12 U.S.C. 1820(k)) for violations of 
the special post-employment restrictions imposed by that section; and
    (h) This subpart also applies to all other adjudications required by 
statute to be determined on the record after

[[Page 902]]

opportunity for an agency hearing, unless otherwise specifically 
provided for in the Local Rules.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20341, May 6, 1996; 70 
FR 69638, Nov. 17, 2005]



Sec. 263.2  Rules of construction.

    For purposes of this subpart:
    (a) Any term in the singular includes the plural, and the plural 
includes the singular, if such use would be appropriate;
    (b) Any use of a masculine, feminine, or neuter gender encompasses 
all three, if such use would be appropriate;
    (c) The term counsel includes a non-attorney representative; and
    (d) Unless the context requires otherwise, a party's counsel of 
record, if any, may, on behalf of that party, take any action required 
to be taken by the party.



Sec. 263.3  Definitions.

    For purposes of this subpart, unless explicitly stated to the 
contrary:
    (a) Administrative law judge means one who presides at an 
administrative hearing under authority set forth at 5 U.S.C. 556.
    (b) Adjudicatory proceeding means a proceeding conducted pursuant to 
these rules and leading to the formulation of a final order other than a 
regulation.
    (c) Decisional employee means any member of the Board's or 
administrative law judge's staff who has not engaged in an investigative 
or prosecutorial role in a proceeding and who may assist the Agency or 
the administrative law judge, respectively, in preparing orders, 
recommended decisions, decisions, and other documents under the Uniform 
Rules.
    (d) Enforcement Counsel means any individual who files a notice of 
appearance as counsel on behalf of the Board in an adjudicatory 
proceeding.
    (e) Final order means an order issued by the Board with or without 
the consent of the affected institution or the institution-affiliated 
party, that has become final, without regard to the pendency of any 
petition for reconsideration or review.
    (f) Institution includes: (1) Any bank as that term is defined in 
section 3(a) of the FDIA (12 U.S.C. 1813(a));
    (2) Any bank holding company or any subsidiary (other than a bank) 
of a bank holding company as those terms are defined in the BHC Act (12 
U.S.C. 1841 et seq.);
    (3) Any organization operating under section 25 of the FRA (12 
U.S.C. 601 et seq.);
    (4) Any foreign bank or company to which section 8 of the IBA (12 
U.S.C. 3106), applies or any subsidiary (other than a bank) thereof; and
    (5) Any Federal agency as that term is defined in section 1(b) of 
the IBA (12 U.S.C. 3101(5)).
    (g) Institution-affiliated party means any institution-affiliated 
party as that term is defined in section 3(u) of the FDIA (12 U.S.C. 
1813(u)).
    (h) Local Rules means those rules promulgated by the Board in this 
part other than subpart A.
    (i) OFIA means the Office of Financial Institution Adjudication, the 
executive body charged with overseeing the administration of 
administrative enforcement proceedings for the Board, the Office of 
Comptroller of the Currency (the OCC), the Federal Deposit Insurance 
Corporation (the FDIC), the Office of Thrift Supervision (the OTS), and 
the National Credit Union Administration (the NCUA).
    (j) Party means the Board and any person named as a party in any 
notice.
    (k) Person means an individual, sole proprietor, partnership, 
corporation, unincorporated association, trust, joint venture, pool, 
syndicate, agency or other entity or organization, including an 
institution as defined in paragraph (f) of this section.
    (l) Respondent means any party other than the Board.
    (m) Uniform Rules means those rules in subpart A of this part that 
are common to the Board, the OCC, the FDIC, the OTS and the NCUA.
    (n) Violation includes any action (alone or with another or others) 
for or toward causing, bringing about, participating in, counseling, or 
aiding or abetting a violation.

[[Page 903]]



Sec. 263.4  Authority of the Board.

    The Board may, at any time during the pendency of a proceeding, 
perform, direct the performance of, or waive performance of, any act 
which could be done or ordered by the administrative law judge.



Sec. 263.5  Authority of the administrative law judge.

    (a) General rule. All proceedings governed by this part shall be 
conducted in accordance with the provisions of chapter 5 of title 5 of 
the United States Code. The administrative law judge shall have all 
powers necessary to conduct a proceeding in a fair and impartial manner 
and to avoid unnecessary delay.
    (b) Powers. The administrative law judge shall have all powers 
necessary to conduct the proceeding in accordance with paragraph (a) of 
this section, including the following powers:
    (1) To administer oaths and affirmations;
    (2) To issue subpoenas, subpoenas duces tecum, and protective 
orders, as authorized by this part, and to quash or modify any such 
subpoenas and orders;
    (3) To receive relevant evidence and to rule upon the admission of 
evidence and offers of proof;
    (4) To take or cause depositions to be taken as authorized by this 
subpart;
    (5) To regulate the course of the hearing and the conduct of the 
parties and their counsel;
    (6) To hold scheduling and/or pre-hearing conferences as set forth 
in Sec. 263.31;
    (7) To consider and rule upon all procedural and other motions 
appropriate in an adjudicatory proceeding, provided that only the Board 
shall have the power to grant any motion to dismiss the proceeding or to 
decide any other motion that results in a final determination of the 
merits of the proceeding;
    (8) To prepare and present to the Board a recommended decision as 
provided herein;
    (9) To recuse himself or herself by motion made by a party or on his 
or her own motion;
    (10) To establish time, place and manner limitations on the 
attendance of the public and the media for any public hearing; and
    (11) To do all other things necessary and appropriate to discharge 
the duties of a presiding officer.



Sec. 263.6  Appearance and practice in adjudicatory proceedings.

    (a) Appearance before the Board or an administrative law judge--(1) 
By attorneys. Any member in good standing of the bar of the highest 
court of any state, commonwealth, possession, territory of the United 
States, or the District of Columbia may represent others before the 
Board if such attorney is not currently suspended or debarred from 
practice before the Board.
    (2) By non-attorneys. An individual may appear on his or her own 
behalf; a member of a partnership may represent the partnership; a duly 
authorized officer, director, or employee of any government unit, 
agency, institution, corporation or authority may represent that unit, 
agency, institution, corporation or authority if such officer, director, 
or employee is not currently suspended or debarred from practice before 
the Board.
    (3) Notice of appearance. Any individual acting as counsel on behalf 
of a party, including the Board, shall file a notice of appearance with 
OFIA at or before the time that individual submits papers or otherwise 
appears on behalf of a party in the adjudicatory proceeding. The notice 
of appearance must include a written declaration that the individual is 
currently qualified as provided in paragraph (a)(1) or (a)(2) of this 
section and is authorized to represent the particular party. By filing a 
notice of appearance on behalf of a party in an adjudicatory proceeding, 
the counsel agrees and represents that he or she is authorized to accept 
service on behalf of the represented party and that, in the event of 
withdrawal from representation, he or she will, if required by the 
administrative law judge, continue to accept service until new counsel 
has filed a notice of appearance or until the represented party 
indicates that he or she will proceed on a pro se basis.
    (b) Sanctions. Dilatory, obstructionist, egregious, contemptuous or 
contumacious conduct at any phase of

[[Page 904]]

any adjudicatory proceeding may be grounds for exclusion or suspension 
of counsel from the proceeding.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20341, May 6, 1996]



Sec. 263.7  Good faith certification.

    (a) General requirement. Every filing or submission of record 
following the issuance of a notice shall be signed by at least one 
counsel of record in his or her individual name and shall state that 
counsel's address and telephone number. A party who acts as his or her 
own counsel shall sign his or her individual name and state his or her 
address and telephone number on every filing or submission of record.
    (b) Effect of signature. (1) The signature of counsel or a party 
shall constitute a certification that: the counsel or party has read the 
filing or submission of record; to the best of his or her knowledge, 
information, and belief formed after reasonable inquiry, the filing or 
submission of record is well-grounded in fact and is warranted by 
existing law or a good faith argument for the extension, modification, 
or reversal of existing law; and the filing or submission of record is 
not made for any improper purpose, such as to harass or to cause 
unnecessary delay or needless increase in the cost of litigation.
    (2) If a filing or submission of record is not signed, the 
administrative law judge shall strike the filing or submission of 
record, unless it is signed promptly after the omission is called to the 
attention of the pleader or movant.
    (c) Effect of making oral motion or argument. The act of making any 
oral motion or oral argument by any counsel or party constitutes a 
certification that to the best of his or her knowledge, information, and 
belief formed after reasonable inquiry, his or her statement is well-
grounded in fact and is warranted by existing law or a good faith 
argument for the extension, modification, or reversal of existing law, 
and is not made for any improper purpose, such as to harass or to cause 
unnecessary delay or needless increase in the cost of litigation.



Sec. 263.8  Conflicts of interest.

    (a) Conflict of interest in representation. No person shall appear 
as counsel for another person in an adjudicatory proceeding if it 
reasonably appears that such representation may be materially limited by 
that counsel's responsibilities to a third person or by the counsel's 
own interests. The administrative law judge may take corrective measures 
at any stage of a proceeding to cure a conflict of interest in 
representation, including the issuance of an order limiting the scope of 
representation or disqualifying an individual from appearing in a 
representative capacity for the duration of the proceeding.
    (b) Certification and waiver. If any person appearing as counsel 
represents two or more parties to an adjudicatory proceeding or also 
represents a non-party on a matter relevant to an issue in the 
proceeding, counsel must certify in writing at the time of filing the 
notice of appearance required by Sec. 263.6(a):
    (1) That the counsel has personally and fully discussed the 
possibility of conflicts of interest with each such party and non-party; 
and
    (2) That each such party and non-party waives any right it might 
otherwise have had to assert any known conflicts of interest or to 
assert any non-material conflicts of interest during the course of the 
proceeding.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20342, May 6, 1996]



Sec. 263.9  Ex parte communications.

    (a) Definition--(1) Ex parte communication means any material oral 
or written communication relevant to the merits of an adjudicatory 
proceeding that was neither on the record nor on reasonable prior notice 
to all parties that takes place between:
    (i) An interested person outside the Board (including such person's 
counsel); and
    (ii) The administrative law judge handling that proceeding, a member 
of the Board, or a decisional employee.
    (2) Exception. A request for status of the proceeding does not 
constitute an ex parte communication.
    (b) Prohibition of ex parte communications. From the time the notice 
is

[[Page 905]]

issued by the Board until the date that the Board issues its final 
decision pursuant to Sec. 263.40(c):
    (1) No interested person outside the Federal Reserve System shall 
make or knowingly cause to be made an ex parte communication to a member 
of the Board, the administrative law judge, or a decisional employee; 
and
    (2) A member of the Board, administrative law judge, or decisional 
employee shall not make or knowingly cause to be made to any interested 
person outside the Federal Reserve System any ex parte communication.
    (c) Procedure upon occurrence of ex parte communication. If an ex 
parte communication is received by the administrative law judge, a 
member of the Board or any other person identified in paragraph (a) of 
this section, that person shall cause all such written communications 
(or, if the communication is oral, a memorandum stating the substance of 
the communication) to be placed on the record of the proceeding and 
served on all parties. All other parties to the proceeding shall have an 
opportunity, within ten days of receipt of service of the ex parte 
communication, to file responses thereto and to recommend any sanctions, 
in accordance with paragraph (d) of this section, that they believe to 
be appropriate under the circumstances.
    (d) Sanctions. Any party or his or her counsel who makes a 
prohibited ex parte communication, or who encourages or solicits another 
to make any such communication, may be subject to any appropriate 
sanction or sanctions imposed by the Board or the administrative law 
judge including, but not limited to, exclusion from the proceedings and 
an adverse ruling on the issue which is the subject of the prohibited 
communication.
    (e) Separation of functions. Except to the extent required for the 
disposition of ex parte matters as authorized by law, the administrative 
law judge may not consult a person or party on any matter relevant to 
the merits of the adjudication, unless on notice and opportunity for all 
parties to participate. An employee or agent engaged in the performance 
of investigative or prosecuting functions for the Board in a case may 
not, in that or a factually related case, participate or advise in the 
decision, recommended decision, or agency review of the recommended 
decision under Sec. 263.40, except as witness or counsel in public 
proceedings.

[56 FR 38052, Aug. 9, 1991, as amended at 59 FR 65245, Dec. 19, 1994]



Sec. 263.10  Filing of papers.

    (a) Filing. Any papers required to be filed, excluding documents 
produced in response to a discovery request pursuant to Sec. Sec. 
263.25 and 263.26, shall be filed with OFIA, except as otherwise 
provided.
    (b) Manner of filing. Unless otherwise specified by the Board or the 
administrative law judge, filing may be accomplished by:
    (1) Personal service;
    (2) Delivering the papers to a reliable commercial courier service, 
overnight delivery service, or to the U.S. Post Office for Express Mail 
delivery;
    (3) Mailing the papers by first class, registered, or certified 
mail; or
    (4) Transmission by electronic media, only if expressly authorized, 
and upon any conditions specified, by the Board or the administrative 
law judge. All papers filed by electronic media shall also concurrently 
be filed in accordance with paragraph (c) of this section.
    (c) Formal requirements as to papers filed--(1) Form. All papers 
filed must set forth the name, address, and telephone number of the 
counsel or party making the filing and must be accompanied by a 
certification setting forth when and how service has been made on all 
other parties. All papers filed must be double-spaced and printed or 
typewritten on 8 1/2 x 11 inch paper, and must be clear and legible.
    (2) Signature. All papers must be dated and signed as provided in 
Sec. 263.7.
    (3) Caption. All papers filed must include at the head thereof, or 
on a title page, the name of the Board and of the filing party, the 
title and docket number of the proceeding, and the subject of the 
particular paper.
    (4) Number of copies. Unless otherwise specified by the Board, or 
the administrative law judge, an original and one copy of all documents 
and papers shall be filed, except that only one copy of transcripts of 
testimony and exhibits shall be filed.

[[Page 906]]



Sec. 263.11  Service of papers.

    (a) By the parties. Except as otherwise provided, a party filing 
papers shall serve a copy upon the counsel of record for all other 
parties to the proceeding so represented, and upon any party not so 
represented.
    (b) Method of service. Except as provided in paragraphs (c)(2) and 
(d) of this section, a serving party shall use one or more of the 
following methods of service:
    (1) Personal service;
    (2) Delivering the papers to a reliable commercial courier service, 
overnight delivery service, or to the U.S. Post Office for Express Mail 
delivery;
    (3) Mailing the papers by first class, registered, or certified 
mail; or
    (4) Transmission by electronic media, only if the parties mutually 
agree. Any papers served by electronic media shall also concurrently be 
served in accordance with the requirements of Sec. 263.10(c).
    (c) By the Board or the administrative law judge. (1) All papers 
required to be served by the Board or the administrative law judge upon 
a party who has appeared in the proceeding in accordance with Sec. 
263.6, shall be served by any means specified in paragraph (b) of this 
section.
    (2) If a party has not appeared in the proceeding in accordance with 
Sec. 263.6, the Board or the administrative law judge shall make 
service by any of the following methods:
    (i) By personal service;
    (ii) If the person to be served is an individual, by delivery to a 
person of suitable age and discretion at the physical location where the 
individual resides or works;
    (iii) If the person to be served is a corporation or other 
association, by delivery to an officer, managing or general agent, or to 
any other agent authorized by appointment or by law to receive service 
and, if the agent is one authorized by statute to receive service and 
the statute so requires, by also mailing a copy to the party;
    (iv) By registered or certified mail addressed to the person's last 
known address; or
    (v) By any other method reasonably calculated to give actual notice.
    (d) Subpoenas. Service of a subpoena may be made:
    (1) By personal service;
    (2) If the person to be served is an individual, by delivery to a 
person of suitable age and discretion at the physical location where the 
individual resides or works;
    (3) By delivery to an agent, which, in the case of a corporation or 
other association, is delivery to an officer, managing or general agent, 
or to any other agent authorized by appointment or by law to receive 
service and, if the agent is one authorized by statute to receive 
service and the statute so requires, by also mailing a copy to the 
party;
    (4) By registered or certified mail addressed to the person's last 
known address; or
    (5) By any other method as is reasonably calculated to give actual 
notice.
    (e) Area of service. Service in any state, territory, possession of 
the United States, or the District of Columbia, on any person or company 
doing business in any state, territory, possession of the United States, 
or the District of Columbia, or on any person as otherwise provided by 
law, is effective without regard to the place where the hearing is held, 
provided that if service is made on a foreign bank in connection with an 
action or proceeding involving one or more of its branches or agencies 
located in any state, territory, possession of the United States, or the 
District of Columbia, service shall be made on at least one branch or 
agency so involved.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20342, May 6, 1996]



Sec. 263.12  Construction of time limits.

    (a) General rule. In computing any period of time prescribed by this 
subpart, the date of the act or event that commences the designated 
period of time is not included. The last day so computed is included 
unless it is a Saturday, Sunday, or Federal holiday. When the last day 
is a Saturday, Sunday, or Federal holiday, the period runs until the end 
of the next day that is not a Saturday, Sunday, or Federal holiday. 
Intermediate Saturdays, Sundays, and Federal holidays are included in 
the computation of time. However, when the time period within which an 
act is to

[[Page 907]]

be performed is ten days or less, not including any additional time 
allowed for in paragraph (c) of this section, intermediate Saturdays, 
Sundays, and Federal holidays are not included.
    (b) When papers are deemed to be filed or served. (1) Filing and 
service are deemed to be effective:
    (i) In the case of personal service or same-day commercial courier 
delivery, upon actual service;
    (ii) In the case of overnight commercial delivery service, U.S. 
Express Mail delivery, or first class, registered, or certified mail, 
upon deposit in or delivery to an appropriate point of collection;
    (iii) In the case of transmission by electronic media, as specified 
by the authority receiving the filing, in the case of filing, and as 
agreed among the parties, in the case of service.
    (2) The effective filing and service dates specified in paragraph 
(b)(1) of this section may be modified by the Board or administrative 
law judge in the case of filing or by agreement of the parties in the 
case of service.
    (c) Calculation of time for service and filing of responsive papers. 
Whenever a time limit is measured by a prescribed period from the 
service of any notice or paper, the applicable time limits are 
calculated as follows:
    (1) If service is made by first class, registered, or certified 
mail, add three calendar days to the prescribed period;
    (2) If service is made by express mail or overnight delivery 
service, add one calendar day to the prescribed period; or
    (3) If service is made by electronic media transmission, add one 
calendar day to the prescribed period, unless otherwise determined by 
the Board or the administrative law judge in the case of filing, or by 
agreement among the parties in the case of service.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20342, May 6, 1996]



Sec. 263.13  Change of time limits.

    Except as otherwise provided by law, the administrative law judge 
may, for good cause shown, extend the time limits prescribed by the 
Uniform Rules or by any notice or order issued in the proceedings. After 
the referral of the case to the Board pursuant to Sec. 263.38, the 
Board may grant extensions of the time limits for good cause shown. 
Extensions may be granted at the motion of a party after notice and 
opportunity to respond is afforded all non-moving parties or sua sponte 
by the Board or the administrative law judge.



Sec. 263.14  Witness fees and expenses.

    Witnesses subpoenaed for testimony or depositions shall be paid the 
same fees for attendance and mileage as are paid in the United States 
district courts in proceedings in which the United States is a party, 
provided that, in the case of a discovery subpoena addressed to a party, 
no witness fees or mileage need be paid. Fees for witnesses shall be 
tendered in advance by the party requesting the subpoena, except that 
fees and mileage need not be tendered in advance where the Board is the 
party requesting the subpoena. The Board shall not be required to pay 
any fees to, or expenses of, any witness not subpoenaed by the Board.



Sec. 263.15  Opportunity for informal settlement.

    Any respondent may, at any time in the proceeding, unilaterally 
submit to Enforcement Counsel written offers or proposals for settlement 
of a proceeding, without prejudice to the rights of any of the parties. 
No such offer or proposal shall be made to any Board representative 
other than Enforcement Counsel. Submission of a written settlement offer 
does not provide a basis for adjourning or otherwise delaying all or any 
portion of a proceeding under this part. No settlement offer or 
proposal, or any subsequent negotiation or resolution, is admissible as 
evidence in any proceeding.



Sec. 263.16  The Board's right to conduct examination.

    Nothing contained in this subpart limits in any manner the right of 
the Board or any Federal Reserve Bank to conduct any examination, 
inspection, or visitation of any institution or institution-affiliated 
party, or the right of the Board or any Federal Reserve Bank to conduct 
or continue any form of investigation authorized by law.

[56 FR 38052, Aug. 9, 1991; 56 FR 60056, Nov. 27, 1991]

[[Page 908]]



Sec. 263.17  Collateral attacks on adjudicatory proceeding.

    If an interlocutory appeal or collateral attack is brought in any 
court concerning all or any part of an adjudicatory proceeding, the 
challenged adjudicatory proceeding shall continue without regard to the 
pendency of that court proceeding. No default or other failure to act as 
directed in the adjudicatory proceeding within the times prescribed in 
this subpart shall be excused based on the pendency before any court of 
any interlocutory appeal or collateral attack.



Sec. 263.18  Commencement of proceeding and contents of notice.

    (a) Commencement of proceeding. (1)(i) Except for change-in-control 
proceedings under section 7(j)(4) of the FDIA (12 U.S.C. 1817(j)(4)), a 
proceeding governed by this subpart is commenced by issuance of a notice 
by the Board.
    (ii) The notice must be served by the Board upon the respondent and 
given to any other appropriate financial institution supervisory 
authority where required by law.
    (iii) The notice must be filed with OFIA.
    (2) Change-in-control proceedings under section 7(j)(4) of the FDIA 
(12 U.S.C. 1817(j)(4)) commence with the issuance of an order by the 
Board.
    (b) Contents of notice. The notice must set forth:
    (1) The legal authority for the proceeding and for the Board's 
jurisdiction over the proceeding;
    (2) A statement of the matters of fact or law showing that the Board 
is entitled to relief;
    (3) A proposed order or prayer for an order granting the requested 
relief;
    (4) The time, place, and nature of the hearing as required by law or 
regulation;
    (5) The time within which to file an answer as required by law or 
regulation;
    (6) The time within which to request a hearing as required by law or 
regulation; and
    (7) That the answer and/or request for a hearing shall be filed with 
OFIA.



Sec. 263.19  Answer.

    (a) When. Within 20 days of service of the notice, respondent shall 
file an answer as designated in the notice. In a civil money penalty 
proceeding, respondent shall also file a request for a hearing within 20 
days of service of the notice.
    (b) Content of answer. An answer must specifically respond to each 
paragraph or allegation of fact contained in the notice and must admit, 
deny, or state that the party lacks sufficient information to admit or 
deny each allegation of fact. A statement of lack of information has the 
effect of a denial. Denials must fairly meet the substance of each 
allegation of fact denied; general denials are not permitted. When a 
respondent denies part of an allegation, that part must be denied and 
the remainder specifically admitted. Any allegation of fact in the 
notice which is not denied in the answer must be deemed admitted for 
purposes of the proceeding. A respondent is not required to respond to 
the portion of a notice that constitutes the prayer for relief or 
proposed order. The answer must set forth affirmative defenses, if any, 
asserted by the respondent.
    (c) Default--(1) Effect of failure to answer. Failure of a 
respondent to file an answer required by this section within the time 
provided constitutes a waiver of his or her right to appear and contest 
the allegations in the notice. If no timely answer is filed, Enforcement 
Counsel may file a motion for entry of an order of default. Upon a 
finding that no good cause has been shown for the failure to file a 
timely answer, the administrative law judge shall file with the Board a 
recommended decision containing the findings and the relief sought in 
the notice. Any final order issued by the Board based upon a 
respondent's failure to answer is deemed to be an order issued upon 
consent.
    (2) Effect of failure to request a hearing in civil money penalty 
proceedings. If respondent fails to request a hearing as required by law 
within the time provided, the notice of assessment constitutes a final 
and unappealable order.



Sec. 263.20  Amended pleadings.

    (a) Amendments. The notice or answer may be amended or supplemented 
at

[[Page 909]]

any stage of the proceeding. The respondent must answer an amended 
notice within the time remaining for the respondent's answer to the 
original notice, or within ten days after service of the amended notice, 
whichever period is longer, unless the Board or administrative law judge 
orders otherwise for good cause.
    (b) Amendments to conform to the evidence. When issues not raised in 
the notice or answer are tried at the hearing by express or implied 
consent of the parties, they will be treated in all respects as if they 
had been raised in the notice or answer, and no formal amendments are 
required. If evidence is objected to at the hearing on the ground that 
it is not within the issues raised by the notice or answer, the 
administrative law judge may admit the evidence when admission is likely 
to assist in adjudicating the merits of the action and the objecting 
party fails to satisfy the administrative law judge that the admission 
of such evidence would unfairly prejudice that party's action or defense 
upon the merits. The administrative law judge may grant a continuance to 
enable the objecting party to meet such evidence.

[61 FR 20342, May 6, 1996]



Sec. 263.21  Failure to appear.

    Failure of a respondent to appear in person at the hearing or by a 
duly authorized counsel constitutes a waiver of respondent's right to a 
hearing and is deemed an admission of the facts as alleged and consent 
to the relief sought in the notice. Without further proceedings or 
notice to the respondent, the administrative law judge shall file with 
the Board a recommended decision containing the findings and the relief 
sought in the notice.



Sec. 263.22  Consolidation and severance of actions.

    (a) Consolidation. (1) On the motion of any party, or on the 
administrative law judge's own motion, the administrative law judge may 
consolidate, for some or all purposes, any two or more proceedings, if 
each such proceeding involves or arises out of the same transaction, 
occurrence or series of transactions or occurrences, or involves at 
least one common respondent or a material common question of law or 
fact, unless such consolidation would cause unreasonable delay or 
injustice.
    (2) In the event of consolidation under paragraph (a)(1) of this 
section, appropriate adjustment to the prehearing schedule shall be made 
to avoid unnecessary expense, inconvenience, or delay.
    (b) Severance. The administrative law judge may, upon the motion of 
any party, sever the proceeding for separate resolution of the matter as 
to any respondent only if the administrative law judge finds that:
    (1) Undue prejudice or injustice to the moving party would result 
from not severing the proceeding; and
    (2) Such undue prejudice or injustice would outweigh the interests 
of judicial economy and expedition in the complete and final resolution 
of the proceeding.



Sec. 263.23  Motions.

    (a) In writing. (1) Except as otherwise provided herein, an 
application or request for an order or ruling must be made by written 
motion.
    (2) All written motions must state with particularity the relief 
sought and must be accompanied by a proposed order.
    (3) No oral argument may be held on written motions except as 
otherwise directed by the administrative law judge. Written memoranda, 
briefs, affidavits or other relevant material or documents may be filed 
in support of or in opposition to a motion.
    (b) Oral motions. A motion may be made orally on the record unless 
the administrative law judge directs that such motion be reduced to 
writing.
    (c) Filing of motions. Motions must be filed with the administrative 
law judge, except that following the filing of the recommended decision, 
motions must be filed with the Board.
    (d) Responses. (1) Except as otherwise provided herein, within ten 
days after service of any written motion, or within such other period of 
time as may be established by the administrative law judge or the Board, 
any party may file a written response to a motion. The administrative 
law judge shall not rule on any oral or written motion before

[[Page 910]]

each party has had an opportunity to file a response.
    (2) The failure of a party to oppose a written motion or an oral 
motion made on the record is deemed a consent by that party to the entry 
of an order substantially in the form of the order accompanying the 
motion.
    (e) Dilatory motions. Frivolous, dilatory or repetitive motions are 
prohibited. The filing of such motions may form the basis for sanctions.
    (f) Dispositive motions. Dispositive motions are governed by 
Sec. Sec. 263.29 and 263.30.



Sec. 263.24  Scope of document discovery.

    (a) Limits on discovery. (1) Subject to the limitations set out in 
paragraphs (b), (c), and (d) of this section, a party to a proceeding 
under this subpart may obtain document discovery by serving a written 
request to produce documents. For purposes of a request to produce 
documents, the term ``documents'' may be defined to include drawings, 
graphs, charts, photographs, recordings, data stored in electronic form, 
and other data compilations from which information can be obtained, or 
translated, if necessary, by the parties through detection devices into 
reasonably usable form, as well as written material of all kinds.
    (2) Discovery by use of deposition is governed by Sec. 263.53 of 
subpart B of this part.
    (3) Discovery by use of interrogatories is not permitted.
    (b) Relevance. A party may obtain document discovery regarding any 
matter, not privileged, that has material relevance to the merits of the 
pending action. Any request to produce documents that calls for 
irrelevant material, that is unreasonable, oppressive, excessive in 
scope, unduly burdensome, or repetitive of previous requests, or that 
seeks to obtain privileged documents will be denied or modified. A 
request is unreasonable, oppressive, excessive in scope or unduly 
burdensome if, among other things, it fails to include justifiable 
limitations on the time period covered and the geographic locations to 
be searched, the time provided to respond in the request is inadequate, 
or the request calls for copies of documents to be delivered to the 
requesting party and fails to include the requestor's written agreement 
to pay in advance for the copying, in accordance with Sec. 263.25.
    (c) Privileged matter. Privileged documents are not discoverable. 
Privileges include the attorney-client privilege, work-product 
privilege, any government's or government agency's deliberative-process 
privilege, and any other privileges the Constitution, any applicable act 
of Congress, or the principles of common law provide.
    (d) Time limits. All discovery, including all responses to discovery 
requests, shall be completed at least 20 days prior to the date 
scheduled for the commencement of the hearing. No exceptions to this 
time limit shall be permitted, unless the administrative law judge finds 
on the record that good cause exists for waiving the requirements of 
this paragraph.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20342, May 6, 1996]



Sec. 263.25  Request for document discovery from parties.

    (a) General rule. Any party may serve on any other party a request 
to produce for inspection any discoverable documents that are in the 
possession, custody, or control of the party upon whom the request is 
served. The request must identify the documents to be produced either by 
individual item or by category, and must describe each item and category 
with reasonable particularity. Documents must be produced as they are 
kept in the usual course of business or must be organized to correspond 
with the categories in the request.
    (b) Production or copying. The request must specify a reasonable 
time, place, and manner for production and performing any related acts. 
In lieu of inspecting the documents, the requesting party may specify 
that all or some of the responsive documents be copied and the copies 
delivered to the requesting party. If copying of fewer than 250 pages is 
requested, the party to whom the request is addressed shall bear the 
cost of copying and shipping charges. If a party requests 250 pages or 
more of copying, the requesting party shall pay for the copying and 
shipping charges. Copying charges are the current per-

[[Page 911]]

page copying rate imposed by 12 CFR Part 261 implementing the Freedom of 
Information Act (5 U.S.C. 552). The party to whom the request is 
addressed may require payment in advance before producing the documents.
    (c) Obligation to update responses. A party who has responded to a 
discovery request with a response that was complete when made is not 
required to supplement the response to include documents thereafter 
acquired, unless the responding party learns that:
    (1) The response was materially incorrect when made; or
    (2) The response, though correct when made, is no longer true and a 
failure to amend the response is, in substance, a knowing concealment.
    (d) Motions to limit discovery. (1) Any party that objects to a 
discovery request may, within ten days of being served with such 
request, file a motion in accordance with the provisions of Sec. 263.23 
to strike or otherwise limit the request. If an objection is made to 
only a portion of an item or category in a request, the portion objected 
to shall be specified. Any objections not made in accordance with this 
paragraph and Sec. 263.23 are waived.
    (2) The party who served the request that is the subject of a motion 
to strike or limit may file a written response within five days of 
service of the motion. No other party may file a response.
    (e) Privilege. At the time other documents are produced, the 
producing party must reasonably identify all documents withheld on the 
grounds of privilege and must produce a statement of the basis for the 
assertion of privilege. When similar documents that are protected by 
deliberative process, attorney-work-product, or attorney-client 
privilege are voluminous, these documents may be identified by category 
instead of by individual document. The administrative law judge retains 
discretion to determine when the identification by category is 
insufficient.
    (f) Motions to compel production. (1) If a party withholds any 
documents as privileged or fails to comply fully with a discovery 
request, the requesting party may, within ten days of the assertion of 
privilege or of the time the failure to comply becomes known to the 
requesting party, file a motion in accordance with the provisions of 
Sec. 263.23 for the issuance of a subpoena compelling production.
    (2) The party who asserted the privilege or failed to comply with 
the request may file a written response to a motion to compel within 
five days of service of the motion. No other party may file a response.
    (g) Ruling on motions. After the time for filing responses pursuant 
to this section has expired, the administrative law judge shall rule 
promptly on all motions filed pursuant to this section. If the 
administrative law judge determines that a discovery request, or any of 
its terms, calls for irrelevant material, is unreasonable, oppressive, 
excessive in scope, unduly burdensome, or repetitive of previous 
requests, or seeks to obtain privileged documents, he or she may deny or 
modify the request, and may issue appropriate protective orders, upon 
such conditions as justice may require. The pendency of a motion to 
strike or limit discovery or to compel production is not a basis for 
staying or continuing the proceeding, unless otherwise ordered by the 
administrative law judge. Notwithstanding any other provision in this 
part, the administrative law judge may not release, or order a party to 
produce, documents withheld on grounds of privilege if the party has 
stated to the administrative law judge its intention to file a timely 
motion for interlocutory review of the administrative law judge's order 
to produce the documents, and until the motion for interlocutory review 
has been decided.
    (h) Enforcing discovery subpoenas. If the administrative law judge 
issues a subpoena compelling production of documents by a party, the 
subpoenaing party may, in the event of noncompliance and to the extent 
authorized by applicable law, apply to any appropriate United States 
district court for an order requiring compliance with the subpoena. A 
party's right to seek court enforcement of a subpoena shall not in any 
manner limit the sanctions that may be imposed by the administrative

[[Page 912]]

law judge against a party who fails to produce subpoenaed documents.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20343, May 6, 1996]



Sec. 263.26  Document subpoenas to nonparties.

    (a) General rules. (1) Any party may apply to the administrative law 
judge for the issuance of a document discovery subpoena addressed to any 
person who is not a party to the proceeding. The application must 
contain a proposed document subpoena and a brief statement showing the 
general relevance and reasonableness of the scope of documents sought. 
The subpoenaing party shall specify a reasonable time, place, and manner 
for making production in response to the document subpoena.
    (2) A party shall only apply for a document subpoena under this 
section within the time period during which such party could serve a 
discovery request under Sec. 263.24(d). The party obtaining the 
document subpoena is responsible for serving it on the subpoenaed person 
and for serving copies on all parties. Document subpoenas may be served 
in any state, territory, or possession of the United States, the 
District of Columbia, or as otherwise provided by law.
    (3) The administrative law judge shall promptly issue any document 
subpoena requested pursuant to this section. If the administrative law 
judge determines that the application does not set forth a valid basis 
for the issuance of the subpoena, or that any of its terms are 
unreasonable, oppressive, excessive in scope, or unduly burdensome, he 
or she may refuse to issue the subpoena or may issue it in a modified 
form upon such conditions as may be consistent with the Uniform Rules.
    (b) Motion to quash or modify. (1) Any person to whom a document 
subpoena is directed may file a motion to quash or modify such subpoena, 
accompanied by a statement of the basis for quashing or modifying the 
subpoena. The movant shall serve the motion on all parties, and any 
party may respond to such motion within ten days of service of the 
motion.
    (2) Any motion to quash or modify a document subpoena must be filed 
on the same basis, including the assertion of privilege, upon which a 
party could object to a discovery request under Sec. 263.25(d), and 
during the same time limits during which such an objection could be 
filed.
    (c) Enforcing document subpoenas. If a subpoenaed person fails to 
comply with any subpoena issued pursuant to this section or any order of 
the administrative law judge which directs compliance with all or any 
portion of a document subpoena, the subpoenaing party or any other 
aggrieved party may, to the extent authorized by applicable law, apply 
to an appropriate United States district court for an order requiring 
compliance with so much of the document subpoena as the administrative 
law judge has not quashed or modified. A party's right to seek court 
enforcement of a document subpoena shall in no way limit the sanctions 
that may be imposed by the administrative law judge on a party who 
induces a failure to comply with subpoenas issued under this section.



Sec. 263.27  Deposition of witness unavailable for hearing.

    (a) General rules. (1) If a witness will not be available for the 
hearing, a party desiring to preserve that witness's testimony for the 
record may apply in accordance with the procedures set forth in 
paragraph (a)(2) of this section, to the administrative law judge for 
the issuance of a subpoena, including a subpoena duces tecum, requiring 
the attendance of the witness at a deposition. The administrative law 
judge may issue a deposition subpoena under this section upon a showing 
that:
    (i) The witness will be unable to attend or may be prevented from 
attending the hearing because of age, sickness or infirmity, or will 
otherwise be unavailable;
    (ii) The witness's unavailability was not procured or caused by the 
subpoenaing party;
    (iii) The testimony is reasonably expected to be material; and
    (iv) Taking the deposition will not result in any undue burden to 
any other party and will not cause undue delay of the proceeding.
    (2) The application must contain a proposed deposition subpoena and 
a

[[Page 913]]

brief statement of the reasons for the issuance of the subpoena. The 
subpoena must name the witness whose deposition is to be taken and 
specify the time and place for taking the deposition. A deposition 
subpoena may require the witness to be deposed at any place within the 
country in which that witness resides or has a regular place of 
employment or such other convenient place as the administrative law 
judge shall fix.
    (3) Any requested subpoena that sets forth a valid basis for its 
issuance must be promptly issued, unless the administrative law judge on 
his or her own motion, requires a written response or requires 
attendance at a conference concerning whether the requested subpoena 
should be issued.
    (4) The party obtaining a deposition subpoena is responsible for 
serving it on the witness and for serving copies on all parties. Unless 
the administrative law judge orders otherwise, no deposition under this 
section shall be taken on fewer than ten days' notice to the witness and 
all parties. Deposition subpoenas may be served in any state, territory, 
possession of the United States, or the District of Columbia, on any 
person or company doing business in any state, territory, possession of 
the United States, or the District of Columbia, or as otherwise 
permitted by law.
    (b) Objections to deposition subpoenas. (1) The witness and any 
party who has not had an opportunity to oppose a deposition subpoena 
issued under this section may file a motion with the administrative law 
judge to quash or modify the subpoena prior to the time for compliance 
specified in the subpoena, but not more than ten days after service of 
the subpoena.
    (2) A statement of the basis for the motion to quash or modify a 
subpoena issued under this section must accompany the motion. The motion 
must be served on all parties.
    (c) Procedure upon deposition. (1) Each witness testifying pursuant 
to a deposition subpoena must be duly sworn, and each party shall have 
the right to examine the witness. Objections to questions or documents 
must be in short form, stating the grounds for the objection. Failure to 
object to questions or documents is not deemed a waiver except where the 
ground for the objection might have been avoided if the objection had 
been timely presented. All questions, answers, and objections must be 
recorded.
    (2) Any party may move before the administrative law judge for an 
order compelling the witness to answer any questions the witness has 
refused to answer or submit any evidence the witness has refused to 
submit during the deposition.
    (3) The deposition must be subscribed by the witness, unless the 
parties and the witness, by stipulation, have waived the signing, or the 
witness is ill, cannot be found, or has refused to sign. If the 
deposition is not subscribed by the witness, the court reporter taking 
the deposition shall certify that the transcript is a true and complete 
transcript of the deposition.
    (d) Enforcing subpoenas. If a subpoenaed person fails to comply with 
any order of the administrative law judge which directs compliance with 
all or any portion of a deposition subpoena under paragraph (b) or 
(c)(3) of this section, the subpoenaing party or other aggrieved party 
may, to the extent authorized by applicable law, apply to an appropriate 
United States district court for an order requiring compliance with the 
portions of the subpoena that the administrative law judge has ordered 
enforced. A party's right to seek court enforcement of a deposition 
subpoena in no way limits the sanctions that may be imposed by the 
administrative law judge on a party who fails to comply with, or 
procures a failure to comply with, a subpoena issued under this section.



Sec. 263.28  Interlocutory review.

    (a) General rule. The Board may review a ruling of the 
administrative law judge prior to the certification of the record to the 
Board only in accordance with the procedures set forth in this section 
and Sec. 263.23.
    (b) Scope of review. The Board may exercise interlocutory review of 
a ruling of the administrative law judge if the Board finds that:
    (1) The ruling involves a controlling question of law or policy as 
to which

[[Page 914]]

substantial grounds exist for a difference of opinion;
    (2) Immediate review of the ruling may materially advance the 
ultimate termination of the proceeding;
    (3) Subsequent modification of the ruling at the conclusion of the 
proceeding would be an inadequate remedy; or
    (4) Subsequent modification of the ruling would cause unusual delay 
or expense.
    (c) Procedure. Any request for interlocutory review shall be filed 
by a party with the administrative law judge within ten days of his or 
her ruling and shall otherwise comply with Sec. 263.23. Any party may 
file a response to a request for interlocutory review in accordance with 
Sec. 263.23(d). Upon the expiration of the time for filing all 
responses, the administrative law judge shall refer the matter to the 
Board for final disposition.
    (d) Suspension of proceeding. Neither a request for interlocutory 
review nor any disposition of such a request by the Board under this 
section suspends or stays the proceeding unless otherwise ordered by the 
administrative law judge or the Board.



Sec. 263.29  Summary disposition.

    (a) In general. The administrative law judge shall recommend that 
the Board issue a final order granting a motion for summary disposition 
if the undisputed pleaded facts, admissions, affidavits, stipulations, 
documentary evidence, matters as to which official notice may be taken, 
and any other evidentiary materials properly submitted in connection 
with a motion for summary disposition show that:
    (1) There is no genuine issue as to any material fact; and
    (2) The moving party is entitled to a decision in its favor as a 
matter of law.
    (b) Filing of motions and responses. (1) Any party who believes that 
there is no genuine issue of material fact to be determined and that he 
or she is entitled to a decision as a matter of law may move at any time 
for summary disposition in its favor of all or any part of the 
proceeding. Any party, within 20 days after service of such a motion, or 
within such time period as allowed by the administrative law judge, may 
file a response to such motion.
    (2) A motion for summary disposition must be accompanied by a 
statement of the material facts as to which the moving party contends 
there is no genuine issue. Such motion must be supported by documentary 
evidence, which may take the form of admissions in pleadings, 
stipulations, depositions, investigatory depositions, transcripts, 
affidavits and any other evidentiary materials that the moving party 
contends support his or her position. The motion must also be 
accompanied by a brief containing the points and authorities in support 
of the contention of the moving party. Any party opposing a motion for 
summary disposition must file a statement setting forth those material 
facts as to which he or she contends a genuine dispute exists. Such 
opposition must be supported by evidence of the same type as that 
submitted with the motion for summary disposition and a brief containing 
the points and authorities in support of the contention that summary 
disposition would be inappropriate.
    (c) Hearing on motion. At the request of any party or on his or her 
own motion, the administrative law judge may hear oral argument on the 
motion for summary disposition.
    (d) Decision on motion. Following receipt of a motion for summary 
disposition and all responses thereto, the administrative law judge 
shall determine whether the moving party is entitled to summary 
disposition. If the administrative law judge determines that summary 
disposition is warranted, the administrative law judge shall submit a 
recommended decision to that effect to the Board. If the administrative 
law judge finds that no party is entitled to summary disposition, he or 
she shall make a ruling denying the motion.



Sec. 263.30  Partial summary disposition.

    If the administrative law judge determines that a party is entitled 
to summary disposition as to certain claims only, he or she shall defer 
submitting a recommended decision as to those claims. A hearing on the 
remaining issues must be ordered. Those claims for which the 
administrative law judge

[[Page 915]]

has determined that summary disposition is warranted will be addressed 
in the recommended decision filed at the conclusion of the hearing.



Sec. 263.31  Scheduling and prehearing conferences.

    (a) Scheduling conference. Within 30 days of service of the notice 
or order commencing a proceeding or such other time as parties may 
agree, the administrative law judge shall direct counsel for all parties 
to meet with him or her in person at a specified time and place prior to 
the hearing or to confer by telephone for the purpose of scheduling the 
course and conduct of the proceeding. This meeting or telephone 
conference is called a ``scheduling conference.'' The identification of 
potential witnesses, the time for and manner of discovery, and the 
exchange of any prehearing materials including witness lists, statements 
of issues, stipulations, exhibits and any other materials may also be 
determined at the scheduling conference.
    (b) Prehearing conferences. The administrative law judge may, in 
addition to the scheduling conference, on his or her own motion or at 
the request of any party, direct counsel for the parties to meet with 
him or her (in person or by telephone) at a prehearing conference to 
address any or all of the following:
    (1) Simplification and clarification of the issues;
    (2) Stipulations, admissions of fact, and the contents, authenticity 
and admissibility into evidence of documents;
    (3) Matters of which official notice may be taken;
    (4) Limitation of the number of witnesses;
    (5) Summary disposition of any or all issues;
    (6) Resolution of discovery issues or disputes;
    (7) Amendments to pleadings; and
    (8) Such other matters as may aid in the orderly disposition of the 
proceeding.
    (c) Transcript. The administrative law judge, in his or her 
discretion, may require that a scheduling or prehearing conference be 
recorded by a court reporter. A transcript of the conference and any 
materials filed, including orders, becomes part of the record of the 
proceeding. A party may obtain a copy of the transcript at his or her 
expense.
    (d) Scheduling or prehearing orders. At or within a reasonable time 
following the conclusion of the scheduling conference or any prehearing 
conference, the administrative law judge shall serve on each party an 
order setting forth any agreements reached and any procedural 
determinations made.



Sec. 263.32  Prehearing submissions.

    (a) Within the time set by the administrative law judge, but in no 
case later than 14 days before the start of the hearing, each party 
shall serve on every other party, his or her:
    (1) Prehearing statement;
    (2) Final list of witnesses to be called to testify at the hearing, 
including name and address of each witness and a short summary of the 
expected testimony of each witness;
    (3) List of the exhibits to be introduced at the hearing along with 
a copy of each exhibit; and
    (4) Stipulations of fact, if any.
    (b) Effect of failure to comply. No witness may testify and no 
exhibits may be introduced at the hearing if such witness or exhibit is 
not listed in the prehearing submissions pursuant to paragraph (a) of 
this section, except for good cause shown.



Sec. 263.33  Public hearings.

    (a) General rule. All hearings shall be open to the public, unless 
the Board, in the Board's discretion, determines that holding an open 
hearing would be contrary to the public interest. Within 20 days of 
service of the notice or, in the case of change-in-control proceedings 
under section 7(j)(4) of the FDIA (12 U.S.C. 1817(j)(4)), within 20 days 
from service of the hearing order, any respondent may file with the 
Board a request for a private hearing, and any party may file a reply to 
such a request. A party must serve on the administrative law judge a 
copy of any request or reply the party files with the Board. The form 
of, and procedure for, these requests and replies are governed by Sec. 
263.23. A party's failure to file a request or a reply constitutes a 
waiver of any objections regarding

[[Page 916]]

whether the hearing will be public or private.
    (b) Filing document under seal. Enforcement Counsel, in his or her 
discretion, may file any document or part of a document under seal if 
disclosure of the document would be contrary to the public interest. The 
administrative law judge shall take all appropriate steps to preserve 
the confidentiality of such documents or parts thereof, including 
closing portions of the hearing to the public.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20343, May 6, 1996]



Sec. 263.34  Hearing subpoenas.

    (a) Issuance. (1) Upon application of a party showing general 
relevance and reasonableness of scope of the testimony or other evidence 
sought, the administrative law judge may issue a subpoena or a subpoena 
duces tecum requiring the attendance of a witness at the hearing or the 
production of documentary or physical evidence at the hearing. The 
application for a hearing subpoena must also contain a proposed subpoena 
specifying the attendance of a witness or the production of evidence 
from any state, territory, or possession of the United States, the 
District of Columbia, or as otherwise provided by law at any designated 
place where the hearing is being conducted. The party making the 
application shall serve a copy of the application and the proposed 
subpoena on every other party.
    (2) A party may apply for a hearing subpoena at any time before the 
commencement of a hearing. During a hearing, a party may make an 
application for a subpoena orally on the record before the 
administrative law judge.
    (3) The administrative law judge shall promptly issue any hearing 
subpoena requested pursuant to this section. If the administrative law 
judge determines that the application does not set forth a valid basis 
for the issuance of the subpoena, or that any of its terms are 
unreasonable, oppressive, excessive in scope, or unduly burdensome, he 
or she may refuse to issue the subpoena or may issue it in a modified 
form upon any conditions consistent with this subpart. Upon issuance by 
the administrative law judge, the party making the application shall 
serve the subpoena on the person named in the subpoena and on each 
party.
    (b) Motion to quash or modify. (1) Any person to whom a hearing 
subpoena is directed or any party may file a motion to quash or modify 
the subpoena, accompanied by a statement of the basis for quashing or 
modifying the subpoena. The movant must serve the motion on each party 
and on the person named in the subpoena. Any party may respond to the 
motion within ten days of service of the motion.
    (2) Any motion to quash or modify a hearing subpoena must be filed 
prior to the time specified in the subpoena for compliance, but not more 
than ten days after the date of service of the subpoena upon the movant.
    (c) Enforcing subpoenas. If a subpoenaed person fails to comply with 
any subpoena issued pursuant to this section or any order of the 
administrative law judge which directs compliance with all or any 
portion of a document subpoena, the subpoenaing party or any other 
aggrieved party may seek enforcement of the subpoena pursuant to Sec. 
263.26(c).

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20343, May 6, 1996]



Sec. 263.35  Conduct of hearings.

    (a) General rules. (1) Hearings shall be conducted so as to provide 
a fair and expeditious presentation of the relevant disputed issues. 
Each party has the right to present its case or defense by oral and 
documentary evidence and to conduct such cross examination as may be 
required for full disclosure of the facts.
    (2) Order of hearing. Enforcement Counsel shall present its case-in-
chief first, unless otherwise ordered by the administrative law judge, 
or unless otherwise expressly specified by law or regulation. 
Enforcement Counsel shall be the first party to present an opening 
statement and a closing statement, and may make a rebuttal statement 
after the respondent's closing statement. If there are multiple 
respondents, respondents may agree among themselves as to their order of 
presentation of their cases, but if they do not agree

[[Page 917]]

the administrative law judge shall fix the order.
    (3) Examination of witnesses. Only one counsel for each party may 
conduct an examination of a witness, except that in the case of 
extensive direct examination, the administrative law judge may permit 
more than one counsel for the party presenting the witness to conduct 
the examination. A party may have one counsel conduct the direct 
examination and another counsel conduct re-direct examination of a 
witness, or may have one counsel conduct the cross examination of a 
witness and another counsel conduct the re-cross examination of a 
witness.
    (4) Stipulations. Unless the administrative law judge directs 
otherwise, all stipulations of fact and law previously agreed upon by 
the parties, and all documents, the admissibility of which have been 
previously stipulated, will be admitted into evidence upon commencement 
of the hearing.
    (b) Transcript. The hearing must be recorded and transcribed. The 
reporter will make the transcript available to any party upon payment by 
that party to the reporter of the cost of the transcript. The 
administrative law judge may order the record corrected, either upon 
motion to correct, upon stipulation of the parties, or following notice 
to the parties upon the administrative law judge's own motion.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20343, May 6, 1996]



Sec. 263.36  Evidence.

    (a) Admissibility. (1) Except as is otherwise set forth in this 
section, relevant, material, and reliable evidence that is not unduly 
repetitive is admissible to the fullest extent authorized by the 
Administrative Procedure Act and other applicable law.
    (2) Evidence that would be admissible under the Federal Rules of 
Evidence is admissible in a proceeding conducted pursuant to this 
subpart.
    (3) Evidence that would be inadmissible under the Federal Rules of 
Evidence may not be deemed or ruled to be inadmissible in a proceeding 
conducted pursuant to this subpart if such evidence is relevant, 
material, reliable and not unduly repetitive.
    (b) Official notice. (1) Official notice may be taken of any 
material fact which may be judicially noticed by a United States 
district court and any material information in the official public 
records of any Federal or state government agency.
    (2) All matters officially noticed by the administrative law judge 
or Board shall appear on the record.
    (3) If official notice is requested or taken of any material fact, 
the parties, upon timely request, shall be afforded an opportunity to 
object.
    (c) Documents. (1) A duplicate copy of a document is admissible to 
the same extent as the original, unless a genuine issue is raised as to 
whether the copy is in some material respect not a true and legible copy 
of the original.
    (2) Subject to the requirements of paragraph (a) of this section, 
any document, including a report of examination, supervisory activity, 
inspection or visitation, prepared by an appropriate Federal financial 
institution regulatory agency or state regulatory agency, is admissible 
either with or without a sponsoring witness.
    (3) Witnesses may use existing or newly created charts, exhibits, 
calendars, calculations, outlines or other graphic material to 
summarize, illustrate, or simplify the presentation of testimony. Such 
materials may, subject to the administrative law judge's discretion, be 
used with or without being admitted into evidence.
    (d) Objections. (1) Objections to the admissibility of evidence must 
be timely made and rulings on all objections must appear on the record.
    (2) When an objection to a question or line of questioning 
propounded to a witness is sustained, the examining counsel may make a 
specific proffer on the record of what he or she expected to prove by 
the expected testimony of the witness, either by representation of 
counsel or by direct interrogation of the witness.
    (3) The administrative law judge shall retain rejected exhibits, 
adequately marked for identification, for the record, and transmit such 
exhibits to the Board.
    (4) Failure to object to admission of evidence or to any ruling 
constitutes a waiver of the objection.

[[Page 918]]

    (e) Stipulations. The parties may stipulate as to any relevant 
matters of fact or the authentication of any relevant documents. Such 
stipulations must be received in evidence at a hearing, and are binding 
on the parties with respect to the matters therein stipulated.
    (f) Depositions of unavailable witnesses. (1) If a witness is 
unavailable to testify at a hearing, and that witness has testified in a 
deposition to which all parties in a proceeding had notice and an 
opportunity to participate, a party may offer as evidence all or any 
part of the transcript of the deposition, including deposition exhibits, 
if any.
    (2) Such deposition transcript is admissible to the same extent that 
testimony would have been admissible had that person testified at the 
hearing, provided that if a witness refused to answer proper questions 
during the depositions, the administrative law judge may, on that basis, 
limit the admissibility of the deposition in any manner that justice 
requires.
    (3) Only those portions of a deposition received in evidence at the 
hearing constitute a part of the record.



Sec. 263.37  Post-hearing filings.

    (a) Proposed findings and conclusions and supporting briefs. (1) 
Using the same method of service for each party, the administrative law 
judge shall serve notice upon each party, that the certified transcript, 
together with all hearing exhibits and exhibits introduced but not 
admitted into evidence at the hearing, has been filed. Any party may 
file with the administrative law judge proposed findings of fact, 
proposed conclusions of law, and a proposed order within 30 days 
following service of this notice by the administrative law judge or 
within such longer period as may be ordered by the administrative law 
judge.
    (2) Proposed findings and conclusions must be supported by citation 
to any relevant authorities and by page references to any relevant 
portions of the record. A post-hearing brief may be filed in support of 
proposed findings and conclusions, either as part of the same document 
or in a separate document. Any party who fails to file timely with the 
administrative law judge any proposed finding or conclusion is deemed to 
have waived the right to raise in any subsequent filing or submission 
any issue not addressed in such party's proposed finding or conclusion.
    (b) Reply briefs. Reply briefs may be filed within 15 days after the 
date on which the parties' proposed findings, conclusions, and order are 
due. Reply briefs must be strictly limited to responding to new matters, 
issues, or arguments raised in another party's papers. A party who has 
not filed proposed findings of fact and conclusions of law or a post-
hearing brief may not file a reply brief.
    (c) Simultaneous filing required. The administrative law judge shall 
not order the filing by any party of any brief or reply brief in advance 
of the other party's filing of its brief.

[56 FR 38052, Aug. 9, 1991, as amended at 61 FR 20344, May 6, 1996]



Sec. 263.38  Recommended decision and filing of record.

    (a) Filing of recommended decision and record. Within 45 days after 
expiration of the time allowed for filing reply briefs under Sec. 
263.37(b), the administrative law judge shall file with and certify to 
the Board, for decision, the record of the proceeding. The record must 
include the administrative law judge's recommended decision, recommended 
findings of fact, recommended conclusions of law, and proposed order; 
all prehearing and hearing transcripts, exhibits, and rulings; and the 
motions, briefs, memoranda, and other supporting papers filed in 
connection with the hearing. The administrative law judge shall serve 
upon each party the recommended decision, findings, conclusions, and 
proposed order.
    (b) Filing of index. At the same time the administrative law judge 
files with and certifies to the Board for final determination the record 
of the proceeding, the administrative law judge shall furnish to the 
Board a certified index of the entire record of the proceeding. The 
certified index shall include, at a minimum, an entry for each paper, 
document or motion filed with the administrative law judge in the 
proceeding, the date of the filing, and the identity of the filer. The 
certified index shall also include an exhibit index containing, at a 
minimum, an

[[Page 919]]

entry consisting of exhibit number and title or description for: Each 
exhibit introduced and admitted into evidence at the hearing; each 
exhibit introduced but not admitted into evidence at the hearing; each 
exhibit introduced and admitted into evidence after the completion of 
the hearing; and each exhibit introduced but not admitted into evidence 
after the completion of the hearing.

[61 FR 20344, May 6, 1996]



Sec. 263.39  Exceptions to recommended decision.

    (a) Filing exceptions. Within 30 days after service of the 
recommended decision, findings, conclusions, and proposed order under 
Sec. 263.38, a party may file with the Board written exceptions to the 
administrative law judge's recommended decision, findings, conclusions 
or proposed order, to the admission or exclusion of evidence, or to the 
failure of the administrative law judge to make a ruling proposed by a 
party. A supporting brief may be filed at the time the exceptions are 
filed, either as part of the same document or in a separate document.
    (b) Effect of failure to file or raise exceptions. (1) Failure of a 
party to file exceptions to those matters specified in paragraph (a) of 
this section within the time prescribed is deemed a waiver of objection 
thereto.
    (2) No exception need be considered by the Board if the party taking 
exception had an opportunity to raise the same objection, issue, or 
argument before the administrative law judge and failed to do so.
    (c) Contents. (1) All exceptions and briefs in support of such 
exceptions must be confined to the particular matters in, or omissions 
from, the administrative law judge's recommendations to which that party 
takes exception.
    (2) All exceptions and briefs in support of exceptions must set 
forth page or paragraph references to the specific parts of the 
administrative law judge's recommendations to which exception is taken, 
the page or paragraph references to those portions of the record relied 
upon to support each exception, and the legal authority relied upon to 
support each exception.



Sec. 263.40  Review by the Board.

    (a) Notice of submission to the Board. When the Board determines 
that the record in the proceeding is complete, the Board shall serve 
notice upon the parties that the proceeding has been submitted to the 
Board for final decision.
    (b) Oral argument before the Board. Upon the initiative of the Board 
or on the written request of any party filed with the Board within the 
time for filing exceptions, the Board may order and hear oral argument 
on the recommended findings, conclusions, decision, and order of the 
administrative law judge. A written request by a party must show good 
cause for oral argument and state reasons why arguments cannot be 
presented adequately in writing. A denial of a request for oral argument 
may be set forth in the Board's final decision. Oral argument before the 
Board must be on the record.
    (c) Agency final decision. (1) Decisional employees may advise and 
assist the Board in the consideration and disposition of the case. The 
final decision of the Board will be based upon review of the entire 
record of the proceeding, except that the Board may limit the issues to 
be reviewed to those findings and conclusions to which opposing 
arguments or exceptions have been filed by the parties.
    (2) The Board shall render a final decision within 90 days after 
notification of the parties that the case has been submitted for final 
decision, or 90 days after oral argument, whichever is later, unless the 
Board orders that the action or any aspect thereof be remanded to the 
administrative law judge for further proceedings. Copies of the final 
decision and order of the Board shall be served upon each party to the 
proceeding, upon other persons required by statute, and, if directed by 
the Board or required by statute, upon any appropriate state or Federal 
supervisory authority.



Sec. 263.41  Stays pending judicial review.

    The commencement of proceedings for judicial review of a final 
decision and order of the Board may not, unless specifically ordered by 
the Board or a reviewing court, operate as a stay of any order issued by 
the Board. The

[[Page 920]]

Board may, in its discretion, and on such terms as it finds just, stay 
the effectiveness of all or any part of its order pending a final 
decision on a petition for review of that order.



       Subpart B_Board Local Rules Supplementing the Uniform Rules



Sec. 263.50  Purpose and scope.

    (a) This subpart prescribes the rules of practice and procedure 
governing formal adjudications set forth in Sec. 263.50(b) of this 
subpart, and supplements the rules of practice and procedure contained 
in subpart A of this part.
    (b) The rules and procedures of this subpart and subpart A of this 
part shall apply to the formal adjudications set forth in Sec. 263.1 of 
subpart A and to the following adjudications:
    (1) Suspension of a member bank from use of credit facilities of the 
Federal Reserve System under section 4 of the FRA (12 U.S.C. 301);
    (2) Termination of a bank's membership in the Federal Reserve System 
under section 9 of the FRA (12 U.S.C. 327);
    (3) Issuance of a cease-and-desist order under section 11 of the 
Clayton Act (15 U.S.C. 21);
    (4) Adjudications under sections 2, 3, or 4 of the BHC Act (12 
U.S.C. 1841, 1842, or 1843);
    (5) Formal adjudications on bank merger applications under section 
18(c) of the FDIA (12 U.S.C. 1828(c));
    (6) Issuance of a divestiture order under section 5(e) of the BHC 
Act (12 U.S.C. 1844(e));
    (7) Imposition of sanctions upon any municipal securities dealer for 
which the Board is the appropriate regulatory agency, or upon any person 
associated or seeking to become associated with such a municipal 
securities dealer, under section 15B(c)(5) of the Exchange Act (15 
U.S.C. 78o-4);
    (8) Proceedings where the Board otherwise orders that a formal 
hearing be held;
    (9) Termination of the activities of a state branch, state agency, 
or commercial lending company subsidiary of a foreign bank in the United 
States, pursuant to section 7(e) of the IBA (12 U.S.C. 3105(d));
    (10) Termination of the activities of a representative office of a 
foreign bank in the United States, pursuant to section 10(b) of the IBA 
(12 U.S.C. 3107(b));
    (11) Issuance of a prompt corrective action directive to a member 
bank under section 38 of the FDI Act (12 U.S.C. 1831o);
    (12) Reclassification of a member bank on grounds of unsafe or 
unsound condition under section 38(g)(1) of the FDI Act (12 U.S.C. 
1831o(g)(1));
    (13) Reclassification of a member bank on grounds of unsafe and 
unsound practice under section 38(g)(1) of the FDI Act (12 U.S.C. 
1831o(g)(1)); and
    (14) Issuance of an order requiring a member bank to dismiss a 
director or senior executive officer under section 38 (e)(5) and 
38(f)(2) (F)(ii) of the FDI Act (12 U.S.C. 1831o(e)(5) and 1831o(f)(2) 
(F)(ii)).

[56 FR 38052, Aug. 9, 1991, as amended at 57 FR 13001, Apr. 15, 1992; 57 
FR 44888, Sept. 29, 1992]



Sec. 263.51  Definitions.

    As used in subparts B through G of this part:
    (a) Secretary means the Secretary of the Board of Governors of the 
Federal Reserve System;
    (b) Member bank means any bank that is a member of the Federal 
Reserve System.
    (c) Institution has the same meaning as that assigned to it in Sec. 
263.3(f) of subpart A, and includes any foreign bank with a 
representative office in the United States.

[56 FR 38052, Aug. 9, 1991, as amended at 57 FR 13001, Apr. 15, 1992; 58 
FR 6363, Jan. 28, 1993]



Sec. 263.52  Address for filing.

    All papers to be filed with the Board shall be filed with the 
Secretary of the Board of Governors of the Federal Reserve System, 
Washington, DC 20551.



Sec. 263.53  Discovery depositions.

    (a) In general. In addition to the discovery permitted in subpart A 
of this part, limited discovery by means of depositions shall be allowed 
for individuals with knowledge of facts material to the proceeding that 
are not protected from discovery by any applicable privilege, and of 
identified expert

[[Page 921]]

witnesses. Except in unusual cases, accordingly, depositions will be 
permitted only of individuals identified as hearing witnesses, including 
experts. All discovery depositions must be completed within the time set 
forth in Sec. 263.24(d).
    (b) Application. A party who desires to take a deposition of any 
other party's proposed witnesses, shall apply to the administrative law 
judge for the issuance of a deposition subpoena or subpoena duces tecum. 
The application shall state the name and address of the proposed 
deponent, the subject matter of the testimony expected from the deponent 
and its relevancy to the proceeding, and the address of the place and 
the time, no sooner than ten days after the service of the subpoena, for 
the taking of the deposition. Any such application shall be treated as a 
motion subject to the rules governing motions practice set forth in 
Sec. 263.23.
    (c) Issuance of subpoena. The administrative law judge shall issue 
the requested deposition subpoena or subpoena duces tecum upon a finding 
that the application satisfies the requirements of this section and of 
Sec. 263.24. If the administrative law judge determines that the taking 
of the deposition or its proposed location is, in whole or in part, 
unnecessary, unreasonable, oppressive, excessive in scope or unduly 
burdensome, he or she may deny the application or may grant it upon such 
conditions as justice may require. The party obtaining the deposition 
subpoena or subpoena duces tecum shall be responsible for serving it on 
the deponent and all parties to the proceeding in accordance with Sec. 
263.11.
    (d) Motion to quash or modify. A person named in a deposition 
subpoena or subpoena duces tecum may file a motion to quash or modify 
the subpoena or for the issuance of a protective order. Such motions 
must be filed within ten days following service of the subpoena, but in 
all cases at least five days prior to the commencement of the scheduled 
deposition. The motion must be accompanied by a statement of the reasons 
for granting the motion and a copy of the motion and the statement must 
be served on the party which requested the subpoena. Only the party 
requesting the subpoena may file a response to a motion to quash or 
modify, and any such response shall be filed within five days following 
service of the motion.
    (e) Enforcement of a deposition subpoena. Enforcement of a 
deposition subpoena shall be in accordance with the procedures set forth 
in Sec. 263.27(d).
    (f) Conduct of the deposition. The deponent shall be duly sworn, and 
each party shall have the right to examine the deponent with respect to 
all non-privileged, relevant and material matters. Objections to 
questions or evidence shall be in the short form, stating the ground for 
the objection. Failure to object to questions or evidence shall not be 
deemed a waiver except where the grounds for the objection might have 
been avoided if the objection had been timely presented. The discovery 
deposition shall be transcribed or otherwise recorded as agreed among 
the parties.
    (g) Protective orders. At any time during the taking of a discovery 
deposition, on the motion of any party or of the deponent, the 
administrative law judge may terminate or limit the scope and manner of 
the deposition upon a finding that grounds exist for such relief. 
Grounds for terminating or limiting the taking of a discovery deposition 
include a finding that the discovery deposition is being conducted in 
bad faith or in such a manner as to:
    (1) Unreasonably annoy, embarrass, or oppress the deponent;
    (2) Unreasonably probe into privilege, irrelevant or immaterial 
matters; or
    (3) Unreasonably attempt to pry into a party's preparation for 
trial.



Sec. 263.54  Delegation to the Office of Financial Institution Adjudication.

    Unless otherwise ordered by the Board, administrative adjudications 
subject to subpart A of this part shall be conducted by an 
administrative law judge of OFIA.



Sec. 263.55  Board as Presiding Officer.

    The Board may, in its discretion, designate itself, one or more of 
its members, or an authorized officer, to act as presiding officer in a 
formal hearing. In such a proceeding, proposed findings and conclusions, 
briefs, and other submissions by the parties permitted in

[[Page 922]]

subpart A shall be filed with the Secretary for consideration by the 
Board. Sections 263.38 and 263.39 of subpart A will not apply to 
proceedings conducted under this section.



Sec. 263.56  Initial Licensing Proceedings.

    Proceedings with respect to applications for initial licenses shall 
include, but not be limited to, applications for Board approval under 
section 3 of the BHC Act and such proceedings as may be ordered by the 
Board with respect to applications under section 18(c) of the FDIA. In 
such initial licensing proceedings, the procedures set forth in subpart 
A of this part shall apply, except that the Board may designate a Board 
Counsel to represent the Board in a nonadversary capacity for the 
purpose of developing for the record information relevant to the issues 
to be determined by the Presiding Officer and the Board. In such 
proceedings, Board Counsel shall be considered to be a decisional 
employee for purposes of Sec. Sec. 263.9 and 263.40 of subpart A.



 Subpart C_Rules and Procedures for Assessment and Collection of Civil 
                             Money Penalties



Sec. 263.60  Scope.

    The Uniform Rules set forth in subpart A of this part shall govern 
the procedures for assessment of civil money penalties, except as 
otherwise provided in this subpart.



Sec. 263.61  Opportunity for informal proceeding.

    In the sole discretion of the Board's General Counsel, the General 
Counsel may, prior to the issuance by the Board of a notice of 
assessment of civil penalty, advise the affected person that the 
issuance of a notice of assessment of civil penalty is being considered 
and the reasons and authority for the proposed assessment. The General 
Counsel may provide the person an opportunity to present written 
materials or request a conference with members of the Board's staff to 
show that the penalty should not be assessed or, if assessed, should be 
reduced in amount.



Sec. 263.62  Relevant considerations for assessment of civil penalty.

    In determining the amount of the penalty to be assessed, the Board 
shall take into account the appropriateness of the penalty with respect 
to the financial resources and good faith of the person charged, the 
gravity of the misconduct, the history of previous misconduct, the 
economic benefit derived by the person from the misconduct, and such 
other matters as justice may require.



Sec. 263.63  Assessment order.

    (a) In the event of consent to an assessment by the person 
concerned, or if, upon the record made at an administrative hearing, the 
Board finds that the grounds for having assessed the penalty have been 
established, the Board may issue a final order of assessment of civil 
penalty. In its final order, the Board may modify the amount of the 
penalty specified in the notice of assessment.
    (b) An assessment order is effective immediately upon issuance, or 
upon such other date as may be specified therein, and shall remain 
effective and enforceable until it is stayed, modified, terminated, or 
set aside by action of the Board or a reviewing court.



Sec. 263.64  Payment of civil penalty.

    (a) The date designated in the notice of assessment for payment of 
the civil penalty will normally be 60 days from the issuance of the 
notice. If, however, the Board finds in a specific case that the 
purposes of the authorizing statute would be better served if the 60-day 
period is changed, the Board may shorten or lengthen the period or make 
the civil penalty payable immediately upon receipt of the notice of 
assessment. If a timely request for a formal hearing to challenge an 
assessment of civil penalty is filed, payment of the penalty shall not 
be required unless and until the Board issues a final order of 
assessment following the hearing. If an assessment order is issued, it 
will specify the date by which the civil penalty should be paid or 
collected.
    (b) Checks in payment of civil penalties should be made payable to 
the ``Board of Governors of the Federal Reserve System.'' Upon 
collection, the

[[Page 923]]

Board shall forward the amount of the penalty to the Treasury of the 
United States.



Sec. 263.65  Civil penalty inflation adjustments.

    (a) Inflation adjustments. In accordance with the Federal Civil 
Penalties Inflation Adjustment Act of 1990 (28 U.S.C. 2461 note), the 
Board has set forth in paragraph (b) of this section adjusted maximum 
penalty amounts for each civil money penalty provided by law within its 
jurisdiction. The adjusted civil penalty amounts provided in paragraph 
(b) of this section replace only the amounts published in the statutes 
authorizing the assessment of penalties and the previously-adjusted 
amounts adopted as of October 12, 2004, October 12, 2000, and October 
24, 1996. The authorizing statutes contain the complete provisions under 
which the Board may seek a civil money penalty. The increased penalty 
amounts apply only to violations occurring after the effective date of 
this rule.
    (b) Maximum civil money penalties. The maximum civil money penalties 
as set forth in the referenced statutory sections are as follows:
    (1) 12 U.S.C. 324:
    (i) Inadvertently late or misleading reports, inter alia--$2,200.
    (ii) Other late or misleading reports, inter alia--$32,000.
    (iii) Knowingly or recklessly false or misleading reports, inter 
alia--$1,375,000.
    (2) 12 U.S.C. 504, 505, 1817(j)(16), 1818(i)(2) and 1972(2)(F):
    (i) First tier--$7,500.
    (ii) Second tier--$37,500.
    (iii) Third tier--$1,375,000.
    (3) 12 U.S.C. 1820(k)(6)(A)(ii)--$275,000.
    (4) 12 U.S.C. 1832(c)--$1,100.
    (5) 12 U.S.C. 1847(b), 3110(a)--$37,500.
    (6) 12 U.S.C. 1847(d), 3110(c):
    (i) First tier--$2,200.
    (ii) Second tier--$32,000.
    (iii) Third tier--$1,375,000.
    (7) 12 U.S.C. 334, 374a, 1884--$110.
    (8) 12 U.S.C. 3909(d)--$1,100.
    (9) 15 U.S.C. 78u-2:
    (i) 15 U.S.C. 78u-2(b)(1)--$7,500 for a natural person and $70,000 
for any other person.
    (ii) 15 U.S.C. 78u-2(b)(2)--$70,000 for a natural person and 
$350,000 for any other person.
    (iii) 15 U.S.C. 78u-2(b)(3)--$140,000 for a natural person and 
$675,000 for any other person.
    (10) 42 U.S.C. 4012a(f)(5):
    (i) For each violation--$385.
    (ii) For the total amount of penalties assessed under 42 U.S.C 
4012a(f)(5) against an institution or enterprise during any calendar 
year--$135,000.

[73 FR 58032, Oct. 6, 2008]



Subpart D_Rules and Procedures Applicable to Suspension or Removal of an 

    Institution-Affiliated Party Where a Felony is Charged or Proven



Sec. 263.70  Purpose and scope.

    The rules and procedures set forth in this subpart apply to informal 
hearings afforded to any institution-affiliated party for whom the Board 
is the appropriate regulatory agency, who has been suspended or removed 
from office or prohibited from further participation in any manner in 
the conduct of the institution's affairs by a notice or order issued by 
the Board upon the grounds set forth in section 8(g) of the FDIA (12 
U.S.C. 1818(g)).



Sec. 263.71  Notice or order of suspension, removal, or prohibition.

    (a) Grounds. The Board may suspend an institution-affiliated party 
from office or prohibit an institution-affiliated party from further 
participation in any manner in the conduct of an institution's affairs 
when the person is charged in any information, indictment, or complaint 
authorized by a United States attorney with the commission of, or 
participation in, a crime involving dishonesty or breach of trust that 
is punishable by imprisonment for a term exceeding one year under State 
or Federal law. The Board may remove an institution-affiliated party 
from office or prohibit an institution-affiliated party from further 
participation in any manner in the conduct of an institution's affairs 
when the person is convicted of such an offense and the conviction is 
not subject to further direct appellate review. The Board may

[[Page 924]]

suspend or remove an institution-affiliated party or prohibit an 
institution-affiliated party from participation in an institution's 
affairs in these circumstances if the Board finds that continued service 
to the financial institution or participation in its affairs by the 
institution-affiliated party may pose a threat to the interests of the 
institution's depositors or may threaten to impair public confidence in 
the financial institution.
    (b) Contents. The Board commences a suspension, removal, or 
prohibition action under this subpart with the issuance, and service 
upon an institution-affiliated party, of a notice of suspension from 
office, or order of removal from office, or notice or order of 
prohibition from participation in the financial institution's affairs. 
Such a notice or order shall indicate the basis for the suspension, 
removal, or prohibition and shall inform the institution-affiliated 
party of the right to request in writing, within 30 days of service of 
the notice or order, an opportunity to show at an informal hearing that 
continued service to, or participation in the conduct of the affairs of, 
the financial institution does not and is not likely to pose a threat to 
the interests of the financial institution's depositors or threaten to 
impair public confidence in the financial institution. Failure to file a 
timely request for an informal hearing shall be deemed to be a waiver of 
the right to request such a hearing. A notice of suspension or 
prohibition shall remain in effect until the criminal charge upon which 
the notice is based is finally disposed of or until the notice is 
terminated by the Board.
    (c) Service. The notice or order shall be served upon the affiliated 
financial institution concerned, whereupon the institution-affiliated 
party shall immediately cease service to the financial institution or 
further participation in any manner in the conduct of the affairs of the 
financial institution. A notice or order of suspension, removal, or 
prohibition may be served by any of the means authorized for service 
under Sec. 263.11(c)(2) of subpart A.



Sec. 263.72  Request for informal hearing.

    An institution-affiliated party who is suspended or removed from 
office or prohibited from participation in the institution's affairs may 
request an informal hearing within 30 days of service of the notice or 
order. The request shall be filed in writing with the Secretary, Board 
of Governors of the Federal Reserve System, Washington, DC 20551. The 
request shall state with particularity the relief desired and the 
grounds therefor and shall include, when available, supporting evidence 
in the form of affidavits. If the institution-affiliated party desires 
to present oral testimony or witnesses at the hearing, the institution-
affiliated party must include a request to do so with the request for 
informal hearing. The request to present oral testimony or witnesses 
shall specify the names of the witnesses and the general nature of their 
expected testimony.



Sec. 263.73  Order for informal hearing.

    (a) Issuance of hearing order. Upon receipt of a timely request for 
an informal hearing, the Secretary shall promptly issue an order 
directing an informal hearing to commence within 30 days of the receipt 
of the request. At the request of the institution-affiliated party, the 
Secretary may order the hearing to commence at a time more than 30 days 
after the receipt of the request for hearing. The hearing shall be held 
in Washington, DC, or at such other place as may be designated by the 
Secretary, before presiding officers designated by the Secretary to 
conduct the hearing. The presiding officers normally will include 
representatives from the Board's Legal Division and the Division of 
Banking Supervision and Regulation and from the appropriate Federal 
Reserve Bank.
    (b) Waiver of oral hearing. A institution-affiliated party may waive 
in writing his or her right to an oral hearing and instead elect to have 
the matter determined by the Board solely on the basis of written 
submissions.
    (c) Hearing procedures. (1) The institution-affiliated party may 
appear at the hearing personally, through counsel, or personally with 
counsel. The institution-affiliated party shall have the right to 
introduce relevant written materials and to present an oral argument. 
The institution-affiliated party may introduce oral testimony and

[[Page 925]]

present witnesses only if expressly authorized by the Board or the 
Secretary. Except as provided in Sec. 263.11, the adjudicative 
procedures of the Administrative Procedure Act (5 U.S.C. 554-557) and of 
subpart A of this part shall not apply to the informal hearing ordered 
under this subpart unless the Board orders that subpart A of this part 
applies.
    (2) The informal hearing shall be recorded and a transcript shall be 
furnished to the institution-affiliated party upon request and after the 
payment of the cost thereof. Witnesses need not be sworn, unless 
specifically requested by a party or the presiding officers. The 
presiding officers may ask questions of any witness.
    (3) The presiding officers may order the record to be kept open for 
a reasonable period following the hearing (normally five business days), 
during which time additional submissions to the record may be made. 
Thereafter, the record shall be closed.
    (d) Authority of presiding officers. In the course of or in 
connection with any proceeding under this subpart, the Board or the 
presiding officers are authorized to administer oaths and affirmations, 
to take or cause to be taken depositions, to issue, quash or modify 
subpoenas and subpoenas duces tecum, and, for the enforcement thereof, 
to apply to an appropriate United States district court. All action 
relating to depositions and subpoenas shall be in accordance with the 
rules provided in Sec. Sec. 263.34 and 263.53.
    (e) Recommendation of presiding officers. The presiding officers 
shall make a recommendation to the Board concerning the notice or order 
of suspension, removal, or prohibition within 20 calendar days following 
the close of the record on the hearing.



Sec. 263.74  Decision of the Board.

    (a) Within 60 days following the close of the record on the hearing, 
or receipt of written submissions where a hearing has been waived, the 
Board shall notify the institution-affiliated party whether the notice 
of suspension or prohibition will be continued, terminated, or otherwise 
modified, or whether the order of removal or prohibition will be 
rescinded or otherwise modified. The notification shall contain a 
statement of the basis for any adverse decision by the Board. In the 
case of a decision favorable to the institution-affiliated party, the 
Board shall take prompt action to rescind or otherwise modify the order 
of suspension, removal or prohibition.
    (b) In deciding the question of suspension, removal, or prohibition 
under this subpart, the Board shall not rule on the question of the 
guilt or innocence of the individual with respect to the crime with 
which the individual has been charged.



   Subpart E_Procedures for Issuance and Enforcement of Directives To 

                        Maintain Adequate Capital



Sec. 263.80  Purpose and scope.

    This subpart establishes procedures under which the Board may issue 
a directive or take other action to require a state member bank or a 
bank holding company to achieve and maintain adequate capital.



Sec. 263.81  Definitions.

    (a) Bank holding company means any company that controls a bank as 
defined in section 2 of the BHC Act, 12 U.S.C. 1841, and in the Board's 
Regulation Y (12 CFR 225.2(b)) or any direct or indirect subsidiary 
thereof other than a bank subsidiary as defined in section 2(c) of the 
BHC Act, 12 U.S.C. 1841(c), and in the Board's Regulation Y (12 CFR 
225.2(a)).
    (b) Capital Adequacy Guidelines means those guidelines for bank 
holding companies and state member banks contained in appendices A and D 
to the Board's Regulation Y (12 CFR part 225), and in appendix A to the 
Board's Regulation H (12 CFR part 208), or any succeeding capital 
guidelines promulgated by the Board.
    (c) Directive means a final order issued by the Board pursuant to 
ILSA (12 U.S.C. 3907(b)(2)) requiring a state member bank or bank 
holding company to increase capital to or maintain capital at the 
minimum level set forth in the Board's Capital Adequacy Guidelines or as 
otherwise established under procedures described in Sec. 263.85 of this 
subpart.

[[Page 926]]

    (d) State member bank means any state-chartered bank that is a 
member of the Federal Reserve System.



Sec. 263.82  Establishment of minimum capital levels.

    The Board has established minimum capital levels for state member 
banks and bank holding companies in its Capital Adequacy Guidelines. The 
Board may set higher capital levels as necessary and appropriate for a 
particular state member bank or bank holding company based upon its 
financial condition, managerial resources, prospects, or similar 
factors, pursuant to the procedures set forth in Sec. 263.85 of this 
subpart.



Sec. 263.83  Issuance of capital directives.

    (a) Notice of intent to issue directive. If a state member bank or 
bank holding company is operating with less than the minimum level of 
capital established in the Board's Capital Adequacy Guidelines, or as 
otherwise established under the procedures described in Sec. 263.85 of 
this subpart, the Board may issue and serve upon such state member bank 
or bank holding company written notice of the Board's intent to issue a 
directive to require the bank or bank holding company to achieve and 
maintain adequate capital within a specified time period.
    (b) Contents of notice. The notice of intent to issue a directive 
shall include:
    (1) The required minimum level of capital to be achieved or 
maintained by the institution;
    (2) Its current level of capital;
    (3) The proposed increase in capital needed to meet the minimum 
requirements;
    (4) The proposed date or schedule for meeting these minimum 
requirements;
    (5) When deemed appropriate, specific details of a proposed plan for 
meeting the minimum capital requirements; and
    (6) The date for a written response by the bank or bank holding 
company to the proposed directive, which shall be at least 14 days from 
the date of issuance of the notice unless the Board determines a shorter 
period is necessary because of the financial condition of the bank or 
bank holding company.
    (c) Response to notice. The bank or bank holding company may file a 
written response to the notice within the time period set by the Board. 
The response may include:
    (1) An explanation why a directive should not be issued;
    (2) Any proposed modification of the terms of the directive;
    (3) Any relevant information, mitigating circumstances, 
documentation or other evidence in support of the institution's position 
regarding the proposed directive; and
    (4) The institution's plan for attaining the required level of 
capital.
    (d) Failure to file response. Failure by the bank or bank holding 
company to file a written response to the notice of intent to issue a 
directive within the specified time period shall constitute a waiver of 
the opportunity to respond and shall constitute consent to the issuance 
of such directive.
    (e) Board consideration of response. After considering the response 
of the bank or bank holding company, the Board may:
    (1) Issue the directive as originally proposed or in modified form;
    (2) Determine not to issue a directive and so notify the bank or 
bank holding company; or
    (3) Seek additional information or clarification of the response by 
the bank or bank holding company.
    (f) Contents of directive. Any directive issued by the Board may 
order the bank or bank holding company to:
    (1) Achieve or maintain the minimum capital requirement established 
pursuant to the Board's Capital Adequacy Guidelines or the procedures in 
Sec. 263.85 of this subpart by a certain date;
    (2) Adhere to a previously submitted plan or submit for approval and 
adhere to a plan for achieving the minimum capital requirement by a 
certain date;
    (3) Take other specific action as the Board directs to achieve the 
minimum capital levels, including requiring a reduction of assets or 
asset growth or restriction on the payment of dividends; or
    (4) Take any combination of the above actions.

[[Page 927]]

    (g) Request for reconsideration of directive. Any state member bank 
or bank holding company, upon a change in circumstances, may request the 
Board to reconsider the terms of a directive and may propose changes in 
the plan under which it is operating to meet the required minimum 
capital level. The directive and plan continue in effect while such 
request is pending before the Board.



Sec. 263.84  Enforcement of directive.

    (a) Judicial and administrative remedies. (1) Whenever a bank or 
bank holding company fails to follow a directive issued under this 
subpart, or to submit or adhere to a capital adequacy plan as required 
by such directive, the Board may seek enforcement of the directive, 
including the capital adequacy plan, in the appropriate United State 
district court, pursuant to section 908 (b)(2)(B)(ii) of ILSA (12 U.S.C. 
3907(b)(2)(B)(ii)) and to section 8(i) of the FDIA (12 U.S.C. 1818(i)), 
in the same manner and to the same extent as if the directive were a 
final cease-and-desist order.
    (2) The Board, pursuant to section 910(d) of ILSA (12 U.S.C. 
3909(d)), may also assess civil money penalties for violation of the 
directive against any bank or bank holding company and any institution-
affiliated party of the bank or bank holding company, in the same manner 
and to the same extent as if the directive were a final cease-and-desist 
order.
    (b) Other enforcement actions. A directive may be issued separately, 
in conjunction with, or in addition to any other enforcement actions 
available to the Board, including issuance of cease-and-desist orders, 
the approval or denial of applications or notices, or any other actions 
authorized by law.
    (c) Consideration in application proceedings. In acting upon any 
application or notice submitted to the Board pursuant to any statute 
administered by the Board, the Board may consider the progress of a 
state member bank or bank holding company or any subsidiary thereof in 
adhering to any directive or capital adequacy plan required by the Board 
pursuant to this subpart, or by any other appropriate banking 
supervisory agency pursuant to ILSA. The Board shall consider whether 
approval or a notice of intent not to disapprove would divert earnings, 
diminish capital, or otherwise impede the bank or bank holding company 
in achieving its required minimum capital level or complying with its 
capital adequacy plan.



Sec. 263.85  Establishment of increased capital level for specific 

institutions.

    (a) Establishment of capital levels for specific institutions. The 
Board may establish a capital level higher than the minimum specified in 
the Board's Capital Adequacy Guidelines for a specific bank or bank 
holding company pursuant to:
    (1) A written agreement or memorandum of understanding between the 
Board or the appropriate Federal Reserve Bank and the bank or bank 
holding company;
    (2) A temporary or final cease-and-desist order issued pursuant to 
section 8(b) or (c) of the FDIA (12 U.S.C. 1818(b) or (c));
    (3) A condition for approval of an application or issuance of a 
notice of intent not to disapprove a proposal;
    (4) Or other similar means; or
    (5) The procedures set forth in paragraph (b) of this section.
    (b) Procedure to establish higher capital requirement--(1) Notice. 
When the Board determines that capital levels above those in the Board's 
Capital Adequacy Guidelines may be necessary and appropriate for a 
particular bank or bank holding company under the circumstances, the 
Board shall give the bank or bank holding company notice of the proposed 
higher capital requirement and shall permit the bank or bank holding 
company an opportunity to comment upon the proposed capital level, 
whether it should be required and, if so, under what time schedule. The 
notice shall contain the Board's reasons for proposing a higher level of 
capital.
    (2) Response. The bank or bank holding company shall be allowed at 
least 14 days to respond, unless the Board determines that a shorter 
period is necessary because of the financial condition of the bank or 
bank holding company. Failure by the bank or bank

[[Page 928]]

holding company to file a written response to the notice within the time 
set by the Board shall constitute a waiver of the opportunity to respond 
and shall constitute consent to issuance of a directive containing the 
required minimum capital level.
    (3) Board decision. After considering the response of the 
institution, the Board may issue a written directive to the bank or bank 
holding company setting an appropriate capital level and the date on 
which this capital level will become effective. The Board may require 
the bank or bank holding company to submit and adhere to a plan for 
achieving such higher capital level as the Board may set.
    (4) Enforcement of higher capital level. The Board may enforce the 
capital level established pursuant to the procedures described in this 
section and any plan submitted to achieve that capital level through the 
procedures set forth in Sec. 263.84 of this subpart.



                   Subpart F_Practice Before the Board



Sec. 263.90  Scope.

    This subpart prescribes rules relating to general practice before 
the Board on one's own behalf or in a representational capacity, 
including the circumstances under which disciplinary sanctions--censure, 
suspension, or debarment--may be imposed upon persons appearing in a 
representational capacity, including attorneys and accountants, but not 
including employees of the Board. These disciplinary sanctions, which 
continue in effect beyond the duration of a specific proceeding, 
supplement the provisions of Sec. 263.6(b) of subpart A, which address 
control of a specific proceeding.



Sec. 263.91  Censure, suspension or debarment.

    The Board may censure an individual or suspend or debar such 
individual from practice before the Board if he or she engages, or has 
engaged, in conduct warranting sanctions as set forth in Sec. 263.94; 
refuses to comply with the rules and regulations in this part; or with 
intent to defraud in any manner, willfully and knowingly deceives, 
misleads, or threatens any client or prospective client. The suspension 
or debarment of an individual shall be initiated only upon a finding by 
the Board that the conduct that forms the basis for the disciplinary 
action is egregious.



Sec. 263.92  Definitions.

    (a) As used in this subpart, the following terms shall have the 
meaning given in this section unless the context otherwise requires.
    (b)(1) Practice before the Board includes any matters connected with 
presentations to the Board or to any of its officers or employees 
relating to a client's rights, privileges or liabilities under laws or 
regulations administered by the Board. Such matters include, but are not 
limited to, the preparation of any statement, opinion or other paper or 
document by an attorney, accountant, or other licensed professional 
which is filed with, or submitted to, the Board, on behalf of another 
person in, or in connection with, any application, notification, report 
or document; the representation of a person at conferences, hearings and 
meetings; and the transaction of other business before the Board on 
behalf of another person.
    (2) Practice before the Board does not include work prepared for an 
institution solely at its request for use in the ordinary course of its 
business.
    (c) Attorney means any individual who is a member in good standing 
of the bar of the highest court of any state, possession, territory, 
commonwealth, or the District of Columbia.
    (d) Accountant means any individual who is duly qualified to 
practice as a certified public accountant or a public accountant in any 
state, possession, territory, commonwealth, or the District of Columbia.



Sec. 263.93  Eligibility to practice.

    (a) Attorneys. Any attorney who is qualified to practice as an 
attorney and is not currently under suspension or debarment pursuant to 
this subpart may practice before the Board.
    (b) Accountants. Any accountant who is qualified to practice as a 
certified public accountant or public accountant and is not currently 
under suspension or debarment by the Board may practice before the 
Board.

[[Page 929]]



Sec. 263.94  Conduct warranting sanctions.

    Conduct for which an individual may be censured, debarred or 
suspended from practice before the Board includes, but is not limited 
to:
    (a) Willfully or recklessly violating or willfully or recklessly 
aiding and abetting the violation of any provision of the Federal 
banking or applicable securities laws or the rules and regulations 
thereunder or conviction of any offense involving dishonesty or breach 
of trust;
    (b) Knowingly or recklessly giving false or misleading information, 
or participating in any way in the giving of false information to the 
Board or to any Board officer or employee, or to any tribunal authorized 
to pass upon matters administered by the Board in connection with any 
matter pending or likely to be pending before it. The term 
``information'' includes facts or other statements contained in 
testimony, financial statements, applications, affidavits, declarations, 
or any other document or written or oral statement;
    (c) Directly or indirectly attempting to influence, or offering or 
agreeing to attempt to influence, the official action of any officer or 
employee of the Board by the use of threats, false accusations, duress 
or coercion, by the offer of any special inducement or promise of 
advantage or by the bestowing of any gift, favor, or thing of value;
    (d) Disbarment or suspension from practice as an attorney, or 
debarment or suspension from practice as a certified public accountant 
or public accountant, by any duly constituted authority of any state, 
possession, commonwealth, or the District of Columbia for the conviction 
of a felony or misdemeanor involving personal dishonesty or breach of 
trust in matters relating to the supervisory responsibilities of the 
Board, where the conviction has not been reversed on appeal;
    (e) Knowingly aiding or abetting another individual to practice 
before the Board during that individual's period of suspension, 
debarment, or ineligibility;
    (f) Contemptuous conduct in connection with practice before the 
Board, and knowingly making false accusations and statements, or 
circulating or publishing malicious or libelous matter;
    (g) Suspension or debarment from practice before the OCC, the FDIC, 
the OTS, the Securities and Exchange Commission, the NCUA, or any other 
Federal agency based on matters relating to the supervisory 
responsibilities of the Board;
    (h) Willful or knowing violation of any of the regulations contained 
in this part.

[56 FR 38052, Aug. 9, 1991, as amended at 68 FR 48267, Aug. 13, 2003]



Sec. 263.95  Initiation of disciplinary proceeding.

    (a) Receipt of information. An individual, including any employee of 
the Board, who has reason to believe that an individual practicing 
before the Board in a representative capacity has engaged in any conduct 
that would serve as a basis for censure, suspension or debarment under 
Sec. 263.94, may make a report thereof and forward it to the Board.
    (b) Censure without formal proceeding. Upon receipt of information 
regarding an individual's qualification to practice before the Board, 
the Board may, after giving the individual notice and opportunity to 
respond, censure such individual.
    (c) Institution of formal disciplinary proceeding. When the Board 
has reason to believe that any individual who practices before the Board 
in a representative capacity has engaged in conduct that would serve as 
a basis for censure, suspension or debarment under Sec. 263.94 the 
Board may, after giving the individual notice and opportunity to 
respond, institute a formal disciplinary proceeding against such 
individual. The proceeding shall be conducted pursuant to Sec. 263.97 
and shall be initiated by a complaint issued by the Board that names the 
individual as a respondent. Except in cases when time, the nature of the 
proceeding, or the public interest do not permit, a proceeding under 
this section shall not be instituted until the respondent has been 
informed, in writing, of the facts or conduct which warrant institution 
of a proceeding and the respondent has been accorded the opportunity to 
comply with all lawful requirements or

[[Page 930]]

take whatever action may be necessary to remedy the conduct that is the 
basis for the initiation of the proceeding.



Sec. 263.96  Conferences.

    (a) General. The Board's staff may confer with a proposed respondent 
concerning allegations of misconduct or other grounds for censure, 
debarment or suspension, regardless of whether a proceeding for 
debarment or suspension has been instituted. If a conference results in 
a stipulation in connection with a proceeding in which the individual is 
the respondent, the stipulation may be entered in the record at the 
request of either party to the proceeding.
    (b) Resignation or voluntary suspension. In order to avoid the 
institution of, or a decision in, a debarment or suspension proceeding, 
a person who practices before the Board may consent to suspension from 
practice. At the discretion of the Board, the individual may be 
suspended or debarred in accordance with the consent offered.



Sec. 263.97  Proceedings under this subpart.

    Except as otherwise provided in this subpart, any hearing held under 
this subpart shall be held before an administrative law judge of the 
OFIA pursuant to procedures set forth in subparts A and B of this part. 
The Board shall appoint a person to represent the Board in the hearing. 
Any person having prior involvement in the matter which is the basis for 
the suspension or debarment proceeding shall be disqualified from 
representing the Board in the hearing. The hearing shall be closed to 
the public unless the Board, sua sponte or on the request of a party, 
otherwise directs. The administrative law judge shall refer a 
recommended decision to the Board, which shall issue the final decision 
and order. In its final decision and order, the Board may censure, debar 
or suspend an individual, or take such other disciplinary action as the 
Board deems appropriate.



Sec. 263.98  Effect of suspension, debarment or censure.

    (a) Debarment. If the final order against the respondent is for 
debarment, the individual will not thereafter be permitted to practice 
before the Board unless otherwise permitted to do so by the Board 
pursuant to Sec. 263.99 of this subpart.
    (b) Suspension. If the final order against the respondent is for 
suspension, the individual will not thereafter be permitted to practice 
before the Board during the period of suspension.
    (c) Censure. If the final order against the respondent is for 
censure, the individual may be permitted to practice before the Board, 
but such individual's future representations may be subject to 
conditions designed to promote high standards of conduct. If a written 
letter of censure is issued, a copy will be maintained in the Board's 
files.
    (d) Notice of debarment or suspension. Upon the issuance of a final 
order for suspension or debarment, the Board shall give notice of the 
order to appropriate officers and employees of the Board, to interested 
departments and agencies of the Federal Government, and to the 
appropriate authorities of the State in which any debarred or suspended 
individual is or was licensed to practice.



Sec. 263.99  Petition for reinstatement.

    The Board may entertain a petition for reinstatement from any person 
debarred from practice before the Board. The Board shall grant 
reinstatement only if the Board finds that the petitioner is likely to 
act in accordance with the regulations in this part, and that granting 
reinstatement would not be contrary to the public interest. Any request 
for reinstatement shall be limited to written submissions unless the 
Board, in its discretion, affords the petitioner an informal hearing.



 Subpart G_Rules Regarding Claims Under the Equal Access to Justice Act



Sec. 263.100  Authority and scope.

    This subpart implements the provisions of the Equal Access to 
Justice Act (5 U.S.C. 504) as they apply to formal adversary 
adjudications before the Board. The types of proceedings covered by this 
subpart are listed in Sec. Sec. 263.1 and 263.50.

[[Page 931]]



Sec. 263.101  Standards for awards.

    A respondent in a covered proceeding that prevails on the merits of 
that proceeding against the Board, and that is eligible under this 
subpart as defined in Sec. 263.103, may receive an award for fees and 
expenses incurred in the proceeding unless the position of the Board 
during the proceeding was substantially justified or special 
circumstances make an award unjust. The position of the Board includes, 
in addition to the position taken by the Board in the adversary 
proceeding, the action or failure to act by the Board upon which the 
adversary proceeding was based. An award will be reduced or denied if 
the applicant has unduly or unreasonably protracted the proceedings.



Sec. 263.102  Prevailing party.

    Only an eligible applicant that prevailed on the merits of an 
adversary proceeding may qualify for an award under this subpart.



Sec. 263.103  Eligibility of applicants.

    (a) General rule. To be eligible for an award under this subpart, an 
applicant must have been named as a party to the adjudicatory proceeding 
and show that it meets all other conditions of eligibility set forth in 
paragraphs (b) and (c) of this section.
    (b) Types of eligible applicant. An applicant is eligible for an 
award only if it meets at least one of the following descriptions:
    (1) An individual with a net worth of not more than $2 million at 
the time the adversary adjudication was initiated;
    (2) Any sole owner of an unincorporated business, or any 
partnership, corporation, associations, unit of local government or 
organization, the net worth of which did not exceed $7,000,000 and which 
did not have more than 500 employees at the time the adversary 
adjudication was initiated;
    (3) A charitable or other tax-exempt organization described in 
section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) 
with not more than 500 employees at the time the adversary proceeding 
was initiated; or
    (4) A cooperative association as defined in section 15(a) of the 
Agricultural Marketing Act (12 U.S.C. 1141j(a)) with not more than 500 
employees at the time the adversary proceeding was initiated.
    (c) Factors to be considered. In determining the eligibility of an 
applicant:
    (1) An applicant who owns an unincorporated business shall be 
considered as an individual rather than a sole owner of an 
unincorporated business if the issues on which he or she prevailed are 
related to personal interests rather than to business interests.
    (2) An applicant's net worth includes the value of any assets 
disposed of for the purpose of meeting an eligibility standard and 
excludes the value of any obligations incurred for this purpose. 
Transfers of assets or obligations incurred for less than reasonably 
equivalent value will be presumed to have been made for this purpose.
    (3) The net worth of a financial institution shall be established by 
the net worth information reported in conformity with applicable 
instructions and guidelines on the financial institution's financial 
report to its supervisory agency for the last reporting date before the 
initiation of the adversary proceeding. A bank holding company's net 
worth will be considered on a consolidated basis even if the bank 
holding company is not required to file its regulatory reports to the 
Board on a consolidated basis.
    (4) The employees of an applicant include all those persons who were 
regularly providing services for remuneration for the applicant, under 
its direction and control, on the date the adversary proceeding was 
initiated. Part-time employees are counted on a proportional basis.
    (5) The net worth and number of employees of the applicant and all 
of its affiliates shall be aggregated to determine eligibility. As used 
in this subpart, affiliates are: Individuals, corporations, and entities 
that directly or indirectly or acting through one or more entities 
control at least 25% of the voting shares of the applicant, and 
corporations and entities of which the applicant directly or indirectly 
owns or controls at least 25% of the voting shares. The Board may 
determine, in light of the actual relationship among the affiliated 
entities, that aggregation

[[Page 932]]

with regard to one or more of the applicant's affiliates would be unjust 
and contrary to the purposes of this subpart and decline to aggregate 
the net worth and employees of such affiliate; alternatively, the Board 
may determine that financial relationships of the applicant other than 
those described in this paragraph constitute special circumstances that 
would make an award unjust.



Sec. 263.104  Application for awards.

    (a) Time to file. An application and any other pleading or document 
related to the application may be filed with the Board whenever the 
applicant has prevailed in the proceeding within 30 days after service 
of the final order of the Board disposing of the proceeding.
    (b) Contents. An application for an award of fees and expenses under 
this subpart shall contain:
    (1) The name of the applicant and an identification of the 
proceeding;
    (2) A showing that the applicant has prevailed, and an 
identification of the way in which the applicant believes that the 
position of the Board in the proceeding was not substantially justified;
    (3) If the applicant is not an individual, a statement of the number 
of its employees on the date the proceeding was initiated;
    (4) A description of any affiliated individuals or entities, as 
defined in Sec. 263.103(c)(5), or a statement that none exist;
    (5) A declaration that the applicant, together with any affiliates, 
had a net worth not more than the maximum set forth in Sec. 263.103(b) 
as of the date the proceeding was initiated, supported by a net worth 
statement conforming to the requirements of Sec. 263.105;
    (6) A statement of the amount of fees and expenses for which an 
award is sought conforming to Sec. 263.107; and
    (7) Any other matters that the applicant wishes the Board to 
consider in determining whether and in what amount an award should be 
made.
    (c) Verification. The application shall be signed by the applicant 
or an authorized officer of or attorney for the applicant. It shall also 
contain or be accompanied by a written verification under oath or under 
penalty of perjury that the information provided in the application and 
supporting documents is true and correct.
    (d) Service. The application and related documents shall be served 
on all parties to the adversary proceeding in accordance with Sec. 
263.11, except that statements of net worth shall be served only on 
counsel for the Board.
    (e) Presiding officer. Upon receipt of an application, the Board 
shall, if feasible, refer the matter to the administrative law judge who 
heard the underlying adversary proceeding.



Sec. 263.105  Statement of net worth.

    (a) General rule. A statement of net worth shall be filed with the 
application for an award of fees. The statement shall reflect the net 
worth of the applicant and all affiliates of the applicant, as specified 
in Sec. 263.103(c)(5). In all cases, the administrative law judge or 
the Board may call for additional information needed to establish the 
applicant's net worth as of the initiation of the proceeding.
    (b) Contents. (1) Except as otherwise provided herein, the statement 
of net worth may be in any form convenient to the applicant which fully 
discloses all the assets and liabilities of the applicant and all the 
assets and liabilities of its affiliates, as of the time of the 
initiation of the adversary adjudication. Unaudited financial statements 
are acceptable for individual applicants as long as the statement 
provides a reliable basis for evaluation, unless the administrative law 
judge or the Board otherwise requires. Financial statements or reports 
filed with or reported to a Federal or State agency, prepared before the 
initiation of the adversary proceeding for other purposes, and accurate 
as of a date not more than three months prior to the initiation of the 
proceeding, shall be acceptable in establishing net worth as of the time 
of the initiation of the proceeding, unless the administrative law judge 
or the Board otherwise requires.
    (2) In the case of applicants or affiliates that are not banks, net 
worth shall be considered for the purposes of this subpart to be the 
excess of total assets over total liabilities, as of the date the 
underlying proceeding was initiated, except as adjusted under

[[Page 933]]

Sec. 263.103(c)(5). The net worth of a bank holding company shall be 
considered on a consolidated basis. Assets and liabilities of 
individuals shall include those beneficially owned.
    (3) If the applicant or any of its affiliates is a bank, the portion 
of the statement of net worth which relates to the bank shall consist of 
a copy of the bank's last Consolidated Report of Condition and Income 
filed before the initiation of the adversary adjudication. Net worth 
shall be considered for the purposes of this subpart to be the total 
equity capital (or, in the case of mutual savings banks, the total 
surplus accounts) as reported, in conformity with applicable 
instructions and guidelines, on the bank's Consolidated Report of 
Condition and Income filed for the last reporting date before the 
initiation of the proceeding.
    (c) Statement confidential. Unless otherwise ordered by the Board or 
required by law, the statement of net worth shall be for the 
confidential use of the Board, counsel for the Board, and the 
administrative law judge.



Sec. 263.106  Measure of awards.

    (a) General rule. Awards shall be based on rates customarily charged 
by persons engaged in the business of acting as attorneys, agents, and 
expert witnesses, provided that no award under this subpart for the fee 
of an attorney or agent shall exceed $75 per hour. No award to 
compensate an expert witness shall exceed the highest rate at which the 
Board pays expert witnesses. An award may include the reasonable 
expenses of the attorney, agent, or expert witness as a separate item, 
if the attorney, agent, or expert witness ordinarily charges clients 
separately for such expenses.
    (b) Determination of reasonableness of fees. In determining the 
reasonableness of the fee sought for an attorney, agent, or expert 
witness, subject to the limits set forth above, the administrative law 
judge shall consider the following:
    (1) If the attorney, agent, or expert witness is in private 
practice, his or her customary fee for like services;
    (2) The prevailing rate for similar services in the community in 
which the attorney, agent, or expert witness ordinarily performs 
services;
    (3) The time actually spent in the representation of the applicant;
    (4) The time reasonably spent in light of the difficulty or 
complexity of the issues in the proceeding; and
    (5) Such other factors as may bear on the value of the services 
provided.
    (c) Awards for studies. The reasonable cost of any study, analysis, 
test, project, or similar matter prepared on behalf of an applicant may 
be awarded to the extent that the charge for the service does not exceed 
the prevailing rate payable for similar services, and the study or other 
matter was necessary solely for preparation of the applicant's case and 
not otherwise required by law or sound business or financial practice.



Sec. 263.107  Statement of fees and expenses.

    The application shall be accompanied by a statement fully 
documenting the fees and expenses for which an award is sought. A 
separate itemized statement shall be submitted for each professional 
firm or individual whose services are covered by the application, 
showing the hours spent in work in connection with the proceeding by 
each individual, a description of the specific services performed, the 
rate at which each fee has been computed, any expenses for which 
reimbursement is sought, the total amount claimed, and the total amount 
paid or payable by the applicant or by any other person or entity for 
the services performed. The administrative law judge or the Board may 
require the applicant to provide vouchers, receipts, or other 
substantiation for any expenses claimed.



Sec. 263.108  Responses to application.

    (a) By counsel for the Board. (1) Within 20 days after service of an 
application, counsel for the Board may file an answer to the 
application.
    (2) The answer shall explain in detail any objections to the award 
requested and identify the facts relied on in support of the Board's 
position. If the answer is based on any alleged facts not already in the 
record of the proceeding,

[[Page 934]]

the answer shall include either supporting affidavits or a request for 
further proceedings under Sec. 263.109, or both.
    (b) Reply to answer. The applicant may file a reply only if the 
Board has addressed in its answer any of the following issues: that the 
position of the agency was substantially justified, that the applicant 
unduly protracted the proceedings, or that special circumstances make an 
award unjust. Any reply authorized by this section shall be filed within 
15 days of service of the answer. If the reply is based on any alleged 
facts not already in the record of the proceeding, the reply shall 
include either supporting affidavits or a request for further 
proceedings under Sec. 263.109, or both.
    (c) Additional response. Additional filings in the nature of 
pleadings may be submitted only by leave of the administrative law 
judge.



Sec. 263.109  Further proceedings.

    (a) General rule. The determination of a recommended award shall be 
made by the administrative law judge on the basis of the written record 
of the adversary adjudication, including any supporting affidavits 
submitted in connection with the application, unless, on the motion of 
either the applicant or Board counsel, or sua sponte, the administrative 
law judge or the Board orders further proceedings to amplify the record 
such as an informal conference, oral argument, additional written 
submissions, or an evidentiary hearing. Such further proceedings shall 
be held only when necessary for full and fair resolution of the issues 
arising from the application and shall be conducted promptly and 
expeditiously.
    (b) Request for further proceedings. A request for further 
proceedings under this section shall specifically identify the 
information sought or the issues in dispute and shall explain why 
additional proceedings are necessary.
    (c) Hearing. The administrative law judge shall hold an oral 
evidentiary hearing only on disputed issues of material fact which 
cannot be adequately resolved through written submissions.



Sec. 263.110  Recommended decision.

    The administrative law judge shall file with the Board a recommended 
decision on the fee application not later than 30 days after the 
submission of all pleadings and evidentiary material concerning the 
application. The recommended decision shall include written proposed 
findings and conclusions on the applicant's eligibility and its status 
as a prevailing party and, if applicable, an explanation of the reasons 
for any difference between the amount requested and the amount of the 
recommended award. The recommended decision shall also include, if at 
issue, proposed findings as to whether the Board's position was 
substantially justified, whether the applicant unduly protracted the 
proceedings, or whether special circumstances make an award unjust. The 
administrative law judge shall file the record of the proceeding on the 
fee application upon the filing of the recommended decision and, at the 
same time, serve upon each party a copy of the recommended decision, 
findings, conclusions, and proposed order.



Sec. 263.111  Action by the Board.

    (a) Exceptions to recommended decision. Within 20 days after service 
of the recommended decision, findings, conclusions, and proposed order, 
the applicant or counsel for the Board may file written exceptions 
thereto. A supporting brief may also be filed.
    (b) Decision by the Board. The Board shall render its decision 
within 90 days after it has notified the parties that the matter has 
been received for decision. The Board shall serve copies of the decision 
and order of the Board upon the parties. Judicial review of the decision 
and order may be obtained as provided in 5 U.S.C. 504(c)(2).



 Subpart H_Issuance and Review of Orders Pursuant to Prompt Corrective 

         Action Provisions of the Federal Deposit Insurance Act

    Source: 57 FR 44888, Sept. 29, 1992, unless otherwise noted.

[[Page 935]]



Sec. 263.201  Scope.

    (a) The rules and procedures set forth in this subpart apply to 
state member banks, companies that control state member banks or are 
affiliated with such banks, and senior executive officers and directors 
of state member banks that are subject to the provisions of section 38 
of the Federal Deposit Insurance Act (section 38) and subpart D of part 
208 of this chapter.
    (b) [Reserved]

[57 FR 44888, Sept. 29, 1992, as amended at 63 FR 58621, Nov. 2, 1998]



Sec. 263.202  Directives to take prompt regulatory action.

    (a) Notice of intent to issue directive--(1) In general. The Board 
shall provide an undercapitalized, significantly undercapitalized, or 
critically undercapitalized state member bank or, where appropriate, any 
company that controls the bank, prior written notice of the Board's 
intention to issue a directive requiring such bank or company to take 
actions or to follow proscriptions described in section 38 that are 
within the Board's discretion to require or impose under section 38 of 
the FDI Act, including sections 38(e)(5), (f)(2), (f)(3), or (f)(5). The 
bank shall have such time to respond to a proposed directive as provided 
by the Board under paragraph (c) of this section.
    (2) Immediate issuance of final directive. If the Board finds it 
necessary in order to carry out the purposes of section 38 of the FDI 
Act, the Board may, without providing the notice prescribed in paragraph 
(a)(1) of this section, issue a directive requiring a state member bank 
or any company that controls a state member bank immediately to take 
actions or to follow proscriptions described in section 38 that are 
within the Board's discretion to require or impose under section 38 of 
the FDI Act, including section 38(e)(5), (f)(2), (f)(3), or (f)(5). A 
bank or company that is subject to such an immediately effective 
directive may submit a written appeal of the directive to the Board. 
Such an appeal must be received by the Board within 14 calendar days of 
the issuance of the directive, unless the Board permits a longer period. 
The Board shall consider any such appeal, if filed in a timely matter, 
within 60 days of receiving the appeal. During such period of review, 
the directive shall remain in effect unless the Board, in its sole 
discretion, stays the effectiveness of the directive.
    (b) Contents of notice. A notice of intention to issue a directive 
shall include:
    (1) A statement of the bank's capital measures and capital levels;
    (2) A description of the restrictions, prohibitions, or affirmative 
actions that the Board proposes to impose or require;
    (3) The proposed date when such restrictions or prohibitions would 
be effective or the proposed date for completion of such affirmative 
actions; and
    (4) The date by which the bank or company subject to the directive 
may file with the Board a written response to the notice.
    (c) Response to notice--(1) Time for response. A bank or company may 
file a written response to a notice of intent to issue a directive 
within the time period set by the Board. The date shall be at least 14 
calendar days from the date of the notice unless the Board determines 
that a shorter period is appropriate in light of the financial condition 
of the bank or other relevant circumstances.
    (2) Content of response. The response should include:
    (i) An explanation why the action proposed by the Board is not an 
appropriate exercise of discretion under section 38;
    (ii) Any recommended modification of the proposed directive; and
    (iii) Any other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the position of the bank 
or company regarding the proposed directive.
    (d) Board consideration of response. After considering the response, 
the Board may:
    (1) Issue the directive as proposed or in modified form;
    (2) Determine not to issue the directive and so notify the bank or 
company; or
    (3) Seek additional information or clarification of the response 
from the

[[Page 936]]

bank or company, or any other relevant source.
    (e) Failure to file response. Failure by a bank or company to file 
with the Board, within the specified time period, a written response to 
a proposed directive shall constitute a waiver of the opportunity to 
respond and shall constitute consent to the issuance of the directive.
    (f) Request for modification or rescission of directive. Any bank or 
company that is subject to a directive under this subpart may, upon a 
change in circumstances, request in writing that the Board reconsider 
the terms of the directive, and may propose that the directive be 
rescinded or modified. Unless otherwise ordered by the Board, the 
directive shall continue in place while such request is pending before 
the Board.



Sec. 263.203  Procedures for reclassifying a state member bank based on 

criteria other than capital.

    (a) Reclassification based on unsafe or unsound condition or 
practice--(1) Issuance of notice of proposed reclassification--(i) 
Grounds for reclassification. (A) Pursuant to Sec. 208.43(c) of 
Regulation H (12 CFR 208.43(c)), the Board may reclassify a well 
capitalized bank as adequately capitalized or subject an adequately 
capitalized or undercapitalized institution to the supervisory actions 
applicable to the next lower capital category if:
    (1) The Board determines that the bank is in unsafe or unsound 
condition; or
    (2) The Board deems the bank to be engaged in an unsafe or unsound 
practice and not to have corrected the deficiency.
    (B) Any action pursuant to this paragraph (a)(1)(i) shall 
hereinafter be referred to as ``reclassification.''
    (ii) Prior notice to institution. Prior to taking action pursuant to 
Sec. 208.33(c) of this chapter, the Board shall issue and serve on the 
bank a written notice of the Board's intention to reclassify the bank.
    (2) Contents of notice. A notice of intention to reclassify a bank 
based on unsafe or unsound condition shall include:
    (i) A statement of the bank's capital measures and capital levels 
and the category to which the bank would be reclassified;
    (ii) The reasons for reclassification of the bank;
    (iii) The date by which the bank subject to the notice of 
reclassification may file with the Board a written appeal of the 
proposed reclassification and a request for a hearing, which shall be at 
least 14 calendar days from the date of service of the notice unless the 
Board determines that a shorter period is appropriate in light of the 
financial condition of the bank or other relevant circumstances.
    (3) Response to notice of proposed reclassification. A bank may file 
a written response to a notice of proposed reclassification within the 
time period set by the Board. The response should include:
    (i) An explanation of why the bank is not in unsafe or unsound 
condition or otherwise should not be reclassified;
    (ii) Any other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the position of the bank 
or company regarding the reclassification.
    (4) Failure to file response. Failure by a bank to file, within the 
specified time period, a written response with the Board to a notice of 
proposed reclassification shall constitute a waiver of the opportunity 
to respond and shall constitute consent to the reclassification.
    (5) Request for hearing and presentation of oral testimony or 
witnesses. The response may include a request for an informal hearing 
before the Board or its designee under this section. If the bank desires 
to present oral testimony or witnesses at the hearing, the bank shall 
include a request to do so with the request for an informal hearing. A 
request to present oral testimony or witnesses shall specify the names 
of the witnesses and the general nature of their expected testimony. 
Failure to request a hearing shall constitute a waiver of any right to a 
hearing, and failure to request the opportunity to present oral 
testimony or witnesses shall constitute a waiver of any right to present 
oral testimony or witnesses.

[[Page 937]]

    (6) Order for informal hearing. Upon receipt of a timely written 
request that includes a request for a hearing, the Board shall issue an 
order directing an informal hearing to commence no later than 30 days 
after receipt of the request, unless the bank requests a later date. The 
hearing shall be held in Washington, DC or at such other place as may be 
designated by the Board, before a presiding officer(s) designated by the 
Board to conduct the hearing.
    (7) Hearing procedures. (i) The bank shall have the right to 
introduce relevant written materials and to present oral argument at the 
hearing. The bank may introduce oral testimony and present witnesses 
only if expressly authorized by the Board or the presiding officer(s). 
Neither the provisions of the Administrative Procedure Act (5 U.S.C. 
554-557) governing adjudications required by statute to be determined on 
the record nor the Uniform Rules of Practice and Procedure in subpart A 
of this part apply to an informal hearing under this section unless the 
Board orders that such procedures shall apply.
    (ii) The informal hearing shall be recorded, and a transcript shall 
be furnished to the bank upon request and payment of the cost thereof. 
Witnesses need not be sworn, unless specifically requested by a party or 
the presiding officer(s). The presiding officer(s) may ask questions of 
any witness.
    (iii) The presiding officer(s) may order that the hearing be 
continued for a reasonable period (normally five business days) 
following completion of oral testimony or argument to allow additional 
written submissions to the hearing record.
    (8) Recommendation of presiding officers. Within 20 calendar days 
following the date the hearing and the record on the proceeding are 
closed, the presiding officer(s) shall make a recommendation to the 
Board on the reclassification.
    (9) Time for decision. Not later than 60 calendar days after the 
date the record is closed or the date of the response in a case where no 
hearing was requested, the Board will decide whether to reclassify the 
bank and notify the bank of the Board's decision.
    (b) Request for rescission of reclassification. Any bank that has 
been reclassified under this section, may, upon a change in 
circumstances, request in writing that the Board reconsider the 
reclassification, and may propose that the reclassification be rescinded 
and that any directives issued in connection with the reclassification 
be modified, rescinded, or removed. Unless otherwise ordered by the 
Board, the bank shall remain subject to the reclassification and to any 
directives issued in connection with that reclassification while such 
request is pending before the Board.

[57 FR 44888, Sept. 29, 1992, as amended at 63 FR 58621, Nov. 2, 1998]



Sec. 263.204  Order to dismiss a director or senior executive officer.

    (a) Service of notice. When the Board issues and serves a directive 
on a state member bank pursuant to Sec. 263.202 requiring the bank to 
dismiss from office any director or senior executive officer under 
section 38(f) (2) (F) (ii) of the FDI Act, the Board shall also serve a 
copy of the directive, or the relevant portions of the directive where 
appropriate, upon the person to be dismissed.
    (b) Response to directive--(1) Request for reinstatement. A director 
or senior executive officer who has been served with a directive under 
paragraph (a) of this section (Respondent) may file a written request 
for reinstatement. The request for reinstatement shall be filed within 
10 calendar days of the receipt of the directive by the Respondent, 
unless further time is allowed by the Board at the request of the 
Respondent.
    (2) Contents of request; informal hearing. The request for 
reinstatement shall include reasons why the Respondent should be 
reinstated, and may include a request for an informal hearing before the 
Board or its designee under this section. If the Respondent desires to 
present oral testimony or witnesses at the hearing, the Respondent shall 
include a request to do so with the request for an informal hearing. The 
request to present oral testimony or witnesses shall specify the names 
of the witnesses and the general nature of their expected testimony. 
Failure to request a hearing shall constitute a waiver of any right to a 
hearing and failure to request the opportunity to

[[Page 938]]

present oral testimony or witnesses shall constitute a waiver of any 
right or opportunity to present oral testimony or witnesses.
    (3) Effective date. Unless otherwise ordered by the Board, the 
dismissal shall remain in effect while a request for reinstatement is 
pending.
    (c) Order for informal hearing. Upon receipt of a timely written 
request from a Respondent for an informal hearing on the portion of a 
directive requiring a bank to dismiss from office any director or senior 
executive officer, the Board shall issue an order directing an informal 
hearing to commence no later than 30 days after receipt of the request, 
unless the Respondent requests a later date. The hearing shall be held 
in Washington, DC, or at such other place as may be designated by the 
Board, before a presiding officer(s) designated by the Board to conduct 
the hearing.
    (d) Hearing procedures. (1) A Respondent may appear at the hearing 
personally or through counsel. A Respondent shall have the right to 
introduce relevant written materials and to present oral argument. A 
Respondent may introduce oral testimony and present witnesses only if 
expressly authorized by the Board or the presiding officer(s). Neither 
the provisions of the Administrative Procedure Act governing 
adjudications required by statute to be determined on the record nor the 
Uniform Rules of Practice and Procedure in subpart A of this part apply 
to an informal hearing under this section unless the Board orders that 
such procedures shall apply.
    (2) The informal hearing shall be recorded, and a transcript shall 
be furnished to the Respondent upon request and payment of the cost 
thereof. Witnesses need not be sworn, unless specifically requested by a 
party or the presiding officer(s). The presiding officer(s) may ask 
questions of any witness.
    (3) The presiding officer(s) may order that the hearing be continued 
for a reasonable period (normally five business days) following 
completion of oral testimony or argument to allow additional written 
submissions to the hearing record.
    (e) Standard for review. A Respondent shall bear the burden of 
demonstrating that his or her continued employment by or service with 
the bank would materially strengthen the bank's ability:
    (1) To become adequately capitalized, to the extent that the 
directive was issued as a result of the bank's capital level or failure 
to submit or implement a capital restoration plan; and
    (2) To correct the unsafe or unsound condition or unsafe or unsound 
practice, to the extent that the directive was issued as a result of 
classification of the bank based on supervisory criteria other than 
capital, pursuant to section 38(g) of the FDI Act.
    (f) Recommendation of presiding officers. Within 20 calendar days 
following the date the hearing and the record on the proceeding are 
closed, the presiding officer(s) shall make a recommendation to the 
Board concerning the Respondent's request for reinstatement with the 
bank.
    (g) Time for decision. Not later than 60 calendar days after the 
date the record is closed or the date of the response in a case where no 
hearing was requested, the Board shall grant or deny the request for 
reinstatement and notify the Respondent of the Board's decision. If the 
Board denies the request for reinstatement, the Board shall set forth in 
the notification the reasons for the Board's action.



Sec. 263.205  Enforcement of directives.

    (a) Judicial remedies. Whenever a state member bank or company that 
controls a state member bank fails to comply with a directive issued 
under section 38, the Board may seek enforcement of the directive in the 
appropriate United States district court pursuant to section 8(i) (1) of 
the FDI Act.
    (b) Administrative remedies--(1) Failure to comply with directive. 
Pursuant to section 8(i) (2) (A) of the FDI Act, the Board may assess a 
civil money penalty against any state member bank or company that 
controls a state member bank that violates or otherwise fails to comply 
with any final directive issued under section 38 and against any 
institution-affiliated party who participates in such violation or 
noncompliance.

[[Page 939]]

    (2) Failure to implement capital restoration plan. The failure of a 
bank to implement a capital restoration plan required under section 38, 
subpart D of Regulation H (12 CFR part 208, subpart D), or this subpart, 
or the failure of a company having control of a bank to fulfill a 
guarantee of a capital restoration plan made pursuant to section 38 (e) 
(2) of the FDI Act shall subject the bank or company to the assessment 
of civil money penalties pursuant to section 8(i) (2) (A) of the FDI 
Act.
    (c) Other enforcement action. In addition to the actions described 
in paragraphs (a) and (b) of this section, the Board may seek 
enforcement of the provisions of section 38 or subpart B of Regulation H 
(12 CFR part 208, subpart B) through any other judicial or 
administrative proceeding authorized by law.

[57 FR 44888, Sept. 29, 1992, as amended at 63 FR 58621, Nov. 2, 1998]



Subpart I_Submission and Review of Safety and Soundness Compliance Plans 

   and Issuance of Orders To Correct Safety and Soundness Deficiencies

    Source: 60 FR 35682, July 10, 1995, unless otherwise noted.



Sec. 263.300  Scope.

    The rules and procedures set forth in this subpart apply to State 
member banks that are subject to the provisions of section 39 of the 
Federal Deposit Insurance Act (section 39) (12 U.S.C. 1831p-1).



Sec. 263.301  Purpose.

    Section 39 of the FDI Act requires the Board to establish safety and 
soundness standards. Pursuant to section 39, a bank may be required to 
submit a compliance plan if it is not in compliance with a safety and 
soundness standard established by guideline under section 39(a) or (b). 
An enforceable order under section 8 may be issued if, after being 
notified that it is in violation of a safety and soundness standard 
established under section 39, the bank fails to submit an acceptable 
compliance plan or fails in any material respect to implement an 
accepted plan. This subpart establishes procedures for requiring 
submission of a compliance plan and issuing an enforceable order 
pursuant to section 39.



Sec. 263.302  Determination and notification of failure to meet safety and 

soundness standard and request for compliance plan.

    (a) Determination. The Board may, based upon an examination, 
inspection, or any other information that becomes available to the 
Board, determine that a bank has failed to satisfy the safety and 
soundness standards contained in the Interagency Guidelines Establishing 
Standards for Safety and Soundness or the Interagency Guidelines 
Establishing Standards for Safeguarding Customer Information, set forth 
in appendices D-1 and D-2 to part 208 of this chapter, respectively.
    (b) Request for compliance plan. If the Board determines that a 
State member bank has failed a safety and soundness standard pursuant to 
paragraph (a) of this section, the Board may request, by letter or 
through a report of examination, the submission of a compliance plan, 
and the bank shall be deemed to have notice of the request three days 
after mailing of the letter by the Board or delivery of the report of 
examination.

[60 FR 35682, July 10, 1995, as amended at 63 FR 55488, Oct. 15, 1998; 
66 FR 8637, Feb. 1, 2001]



Sec. 263.303  Filing of safety and soundness compliance plan.

    (a) Schedule for filing compliance plan--(1) In general. A State 
member bank shall file a written safety and soundness compliance plan 
with the Board within 30 days of receiving a request for a compliance 
plan pursuant to Sec. 263.302(b), unless the Board notifies the bank in 
writing that the plan is to be filed within a different period.
    (2) Other plans. If a State member bank is obligated to file, or is 
currently operating under, a capital restoration plan submitted pursuant 
to section 38 of the FDI Act (12 U.S.C. 1831o), a cease-and-desist order 
entered into pursuant to section 8 of the FDI Act, a formal or informal 
agreement, or a response to a report of examination or

[[Page 940]]

report of inspection, it may, with the permission of the Board, submit a 
compliance plan under this section as part of that plan, order, 
agreement, or response, subject to the deadline provided in paragraph 
(a)(1) of this section.
    (b) Contents of plan. The compliance plan shall include a 
description of the steps the State member bank will take to correct the 
deficiency and the time within which those steps will be taken.
    (c) Review of safety and soundness compliance plans. Within 30 days 
after receiving a safety and soundness compliance plan under this 
subpart, the Board shall provide written notice to the bank of whether 
the plan has been approved or seek additional information from the bank 
regarding the plan. The Board may extend the time within which notice 
regarding approval of a plan will be provided.
    (d) Failure to submit or implement a compliance plan--(1) 
Supervisory actions. If a State member bank fails to submit an 
acceptable plan within the time specified by the Board or fails in any 
material respect to implement a compliance plan, then the Board shall, 
by order, require the bank to correct the deficiency and may take 
further actions provided in section 39(e)(2)(B). Pursuant to section 
39(e)(3), the Board may be required to take certain actions if the bank 
commenced operations or experienced a change in control within the 
previous 24-month period, or the bank experienced extraordinary growth 
during the previous 18-month period.
    (2) Extraordinary growth. For purposes of paragraph (d)(1) of this 
section, extraordinary growth means an increase in assets of more than 
7.5 percent during any quarter within the 18-month period preceding the 
issuance of a request for submission of a compliance plan, by a bank 
that is not well capitalized for purposes of section 38 of the FDI Act. 
For purposes of calculating an increase in assets, assets acquired 
through merger or acquisition approved pursuant to the Bank Merger Act 
(12 U.S.C. 1828(c)) will be excluded.
    (e) Amendment of compliance plan. A State member bank that has filed 
an approved compliance 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 compliance plan as previously approved.



Sec. 263.304  Issuance of orders to correct deficiencies and to take or 

refrain from taking other actions.

    (a) Notice of intent to issue order--(1) In general. The Board shall 
provide a bank prior written notice of the Board's intention to issue an 
order requiring the bank to correct a safety and soundness deficiency or 
to take or refrain from taking other actions pursuant to section 39 of 
the FDI Act. The bank shall have such time to respond to a proposed 
order as provided by the Board under paragraph (c) of this section.
    (2) Immediate issuance of final order. If the Board finds it 
necessary in order to carry out the purposes of section 39 of the FDI 
Act, the Board may, without providing the notice prescribed in paragraph 
(a)(1) of this section, issue an order requiring a bank immediately to 
take actions to correct a safety and soundness deficiency or take or 
refrain from taking other actions pursuant to section 39. A State member 
bank that is subject to such an immediately effective order may submit a 
written appeal of the order to the Board. Such an appeal must be 
received by the Board within 14 calendar days of the issuance of the 
order, unless the Board permits a longer period. The Board shall 
consider any such appeal, if filed in a timely matter, within 60 days of 
receiving the appeal. During such period of review, the order shall 
remain in effect unless the Board, in its sole discretion, stays the 
effectiveness of the order.
    (b) Contents of notice. A notice of intent to issue an order shall 
include:
    (1) A statement of the safety and soundness deficiency or 
deficiencies that have been identified at the bank;
    (2) A description of any restrictions, prohibitions, or affirmative 
actions that the Board proposes to impose or require;
    (3) The proposed date when such restrictions or prohibitions would 
be effective or the proposed date for completion of any required action; 
and

[[Page 941]]

    (4) The date by which the bank subject to the order may file with 
the Board a written response to the notice.
    (c) Response to notice--(1) Time for response. A bank may file a 
written response to a notice of intent to issue an order within the time 
period set by the Board. Such a response must be received by the Board 
within 14 calendar days from the date of the notice unless the Board 
determines that a different period is appropriate in light of the safety 
and soundness of the bank or other relevant circumstances.
    (2) Contents of response. The response should include:
    (i) An explanation why the action proposed by the Board is not an 
appropriate exercise of discretion under section 39;
    (ii) Any recommended modification of the proposed order; and
    (iii) Any other relevant information, mitigating circumstances, 
documentation, or other evidence in support of the position of the bank 
regarding the proposed order.
    (d) Agency consideration of response. After considering the 
response, the Board may:
    (1) Issue the order as proposed or in modified form;
    (2) Determine not to issue the order and so notify the bank; or
    (3) Seek additional information or clarification of the response 
from the bank, or any other relevant source.
    (e) Failure to file response. Failure by a bank to file with the 
Board, within the specified time period, a written response to a 
proposed order shall constitute a waiver of the opportunity to respond 
and shall constitute consent to the issuance of the order.
    (f) Request for modification or rescission of order. Any bank that 
is subject to an order under this subpart may, upon a change in 
circumstances, request in writing that the Board reconsider the terms of 
the order, and may propose that the order be rescinded or modified. 
Unless otherwise ordered by the Board, the order shall continue in place 
while such request is pending before the Board.



Sec. 263.305  Enforcement of orders.

    (a) Judicial remedies. Whenever a State member bank fails to comply 
with an order issued under section 39, the Board may seek enforcement of 
the order in the appropriate United States district court pursuant to 
section 8(i)(1) of the FDI Act.
    (b) Failure to comply with order. Pursuant to section 8(i)(2)(A) of 
the FDI Act, the Board may assess a civil money penalty against any 
State member bank that violates or otherwise fails to comply with any 
final order issued under section 39 and against any institution-
affiliated party who participates in such violation or noncompliance.
    (c) Other enforcement action. In addition to the actions described 
in paragraphs (a) and (b) of this section, the Board may seek 
enforcement of the provisions of section 39 or this part through any 
other judicial or administrative proceeding authorized by law.



    Subpart J_Removal, Suspension, and Debarment of Accountants From 

                        Performing Audit Services

    Source: 68 FR 48267, Aug. 13, 2003, unless otherwise noted.



Sec. 263.400  Scope.

    This subpart, which implements section 36(g)(4) of the Federal 
Deposit Insurance Act (FDIA)(12 U.S.C. 1831m(g)(4)), provides rules and 
procedures for the removal, suspension, or debarment of independent 
public accountants and their accounting firms from performing 
independent audit and attestation services for insured state member 
banks and for bank holding companies required by section 36 of the FDIA 
(12 U.S.C. 1831m).



Sec. 263.401  Definitions.

    As used in this subpart, the following terms shall have the meaning 
given below unless the context requires otherwise:
    (a) Accounting firm means a corporation, proprietorship, 
partnership, or other business firm providing audit services.
    (b) Audit services means any service required to be performed by an 
independent public accountant by section

[[Page 942]]

36 of the FDIA and 12 CFR part 363, including attestation services. 
Audit services include any service performed with respect to the holding 
company of an insured bank that is used to satisfy requirements imposed 
by section 36 or part 363 on that bank.
    (c) Banking organization means an insured state member bank or a 
bank holding company that obtains audit services that are used to 
satisfy requirements imposed by section 36 or part 363 on an insured 
subsidiary bank of that holding company.
    (d) Independent public accountant (accountant) means any individual 
who performs or participates in providing audit services.



Sec. 263.402  Removal, suspension, or debarment.

    (a) Good cause for removal, suspension, or debarment--(1) 
Individuals. The Board may remove, suspend, or debar an independent 
public accountant from performing audit services for banking 
organizations that are subject to section 36 of the FDIA, if, after 
notice of and opportunity for hearing in the matter, the Board finds 
that the accountant:
    (i) Lacks the requisite qualifications to perform audit services;
    (ii) Has knowingly or recklessly engaged in conduct that results in 
a violation of applicable professional standards, including those 
standards and conflict of interest provisions applicable to accountants 
through the Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat. 745 
(2002) (Sarbanes-Oxley Act), and developed by the Public Company 
Accounting Oversight Board and the Securities and Exchange Commission;
    (iii) Has engaged in negligent conduct in the form of:
    (A) A single instance of highly unreasonable conduct that results in 
a violation of applicable professional standards in circumstances in 
which an accountant knows, or should know, that heightened scrutiny is 
warranted; or
    (B) Repeated instances of unreasonable conduct, each resulting in a 
violation of applicable professional standards, that indicate a lack of 
competence to perform audit services;
    (iv) Has knowingly or recklessly given false or misleading 
information, or knowingly or recklessly participated in any way in the 
giving of false or misleading information, to the Board or any officer 
or employee of the Board;
    (v) Has engaged in, or aided and abetted, a material and knowing or 
reckless violation of any provision of the Federal banking or securities 
laws or the rules and regulations thereunder, or any other law;
    (vi) Has been removed, suspended, or debarred from practice before 
any Federal or state agency regulating the banking, insurance, or 
securities industries, other than by an action listed in Sec. 263.403, 
on grounds relevant to the provision of audit services; or
    (vii) Is suspended or debarred for cause from practice as an 
accountant by any duly constituted licensing authority of any state, 
possession, commonwealth, or the District of Columbia.
    (2) Accounting firms. If the Board determines that there is good 
cause for the removal, suspension, or debarment of a member or employee 
of an accounting firm under paragraph (a)(1) of this section, the Board 
also may remove, suspend, or debar such firm or one or more offices of 
such firm. In considering whether to remove, suspend, or debar a firm or 
an office thereof, and the term of any sanction against a firm under 
this section, the Board may consider, for example:
    (i) The gravity, scope, or repetition of the act or failure to act 
that constitutes good cause for removal, suspension, or debarment;
    (ii) The adequacy of, and adherence to, applicable policies, 
practices, or procedures for the accounting firm's conduct of its 
business and the performance of audit services;
    (iii) The selection, training, supervision, and conduct of members 
or employees of the accounting firm involved in the performance of audit 
services;
    (iv) The extent to which managing partners or senior officers of the 
accounting firm have participated, directly, or indirectly through 
oversight or review, in the act or failure to act; and
    (v) The extent to which the accounting firm has, since the 
occurrence of the act or failure to act, implemented

[[Page 943]]

corrective internal controls to prevent its recurrence.
    (3) Limited scope orders. An order of removal, suspension (including 
an immediate suspension), or debarment may, at the discretion of the 
Board, be made applicable to a particular banking organization or class 
of banking organizations.
    (4) Remedies not exclusive. The remedies provided in this subpart 
are in addition to any other remedies the Board may have under any other 
applicable provisions of law, rule, or regulation.
    (b) Proceedings to remove, suspend, or debar--(1) Initiation of 
formal removal, suspension, or debarment proceedings. The Board may 
initiate a proceeding to remove, suspend, or debar an accountant or 
accounting firm from performing audit services by issuing a written 
notice of intention to take such action that names the individual or 
firm as a respondent and describes the nature of the conduct that 
constitutes good cause for such action.
    (2) Hearing under paragraph (b) of this section. An accountant or 
firm named as a respondent in the notice issued under paragraph (b)(1) 
of this section may request a hearing on the allegations in the notice. 
Hearings conducted under this paragraph shall be conducted in the same 
manner as other hearings under the Uniform Rules of Practice and 
Procedure (12 CFR part 263, subpart A).
    (c) Immediate suspension from performing audit services--(1) In 
general. If the Board serves a written notice of intention to remove, 
suspend, or debar an accountant or accounting firm from performing audit 
services, the Board may, with due regard for the public interest and 
without a preliminary hearing, immediately suspend such accountant or 
firm from performing audit services for banking organizations, if the 
Board:
    (i) Has a reasonable basis to believe that the accountant or firm 
has engaged in conduct (specified in the notice served on the accountant 
or firm under paragraph (b) of this section) that would constitute 
grounds for removal, suspension, or debarment under paragraph (a) of 
this section;
    (ii) Determines that immediate suspension is necessary to avoid 
immediate harm to an insured depository institution or its depositors or 
to the depository system as a whole; and
    (iii) Serves such respondent with written notice of the immediate 
suspension.
    (2) Procedures. An immediate suspension notice issued under this 
paragraph will become effective upon service. Such suspension will 
remain in effect until the date the Board dismisses the charges 
contained in the notice of intention, or the effective date of a final 
order of removal, suspension, or debarment issued by the Board to the 
respondent.
    (3) Petition to stay. Any accountant or firm immediately suspended 
from performing audit services in accordance with paragraph (c)(1) of 
this section may, within 10 calendar days after service of the notice of 
immediate suspension, file with the Secretary, Board of Governors of the 
Federal Reserve System, Washington, DC 20551 for a stay of such 
immediate suspension. If no petition is filed within 10 calendar days, 
the immediate suspension shall remain in effect.
    (4) Hearing on petition. Upon receipt of a stay petition, the 
Secretary will designate a presiding officer who shall fix a place and 
time (not more than 10 calendar days after receipt of the petition, 
unless extended at the request of petitioner) at which the immediately 
suspended party may appear, personally or through counsel, to submit 
written materials and oral argument. Any Board employee engaged in 
investigative or prosecuting functions for the Board in a case may not, 
in that or a factually related case, serve as a presiding officer or 
participate or advise in the decision of the presiding officer or of the 
Board, except as witness or counsel in the proceeding. In the sole 
discretion of the presiding officer, upon a specific showing of 
compelling need, oral testimony of witnesses may also be presented. In 
hearings held pursuant to this paragraph there shall be no discovery and 
the provisions of Sec. Sec. 263.6 through 263.12, 263.16, and 263.21 of 
this part shall apply.
    (5) Decision on petition. Within 30 calendar days after the hearing, 
the presiding officer shall issue a decision. The presiding officer will 
grant a stay

[[Page 944]]

upon a demonstration that a substantial likelihood exists of the 
respondent's success on the issues raised by the notice of intention and 
that, absent such relief, the respondent will suffer immediate and 
irreparable injury, loss, or damage. In the absence of such a 
demonstration, the presiding officer will notify the parties that the 
immediate suspension will be continued pending the completion of the 
administrative proceedings pursuant to the notice.
    (6) Review of presiding officer's decision. The parties may seek 
review of the presiding officer's decision by filing a petition for 
review with the presiding officer within 10 calendar days after service 
of the decision. Replies must be filed within 10 calendar days after the 
petition filing date. Upon receipt of a petition for review and any 
reply, the presiding officer shall promptly certify the entire record to 
the Board. Within 60 calendar days of the presiding officer's 
certification, the Board shall issue an order notifying the affected 
party whether or not the immediate suspension should be continued or 
reinstated. The order shall state the basis of the Board's decision.



Sec. 263.403  Automatic removal, suspension, and debarment.

    (a) An independent public accountant or accounting firm may not 
perform audit services for banking organizations if the accountant or 
firm:
    (1) Is subject to a final order of removal, suspension, or debarment 
(other than a limited scope order) issued by the Federal Deposit 
Insurance Corporation, the Office of the Comptroller of the Currency, or 
the Office of Thrift Supervision under section 36 of the FDIA;
    (2) Is subject to a temporary suspension or permanent revocation of 
registration or a temporary or permanent suspension or bar from further 
association with any registered public accounting firm issued by the 
Public Company Accounting Oversight Board or the Securities and Exchange 
Commission under sections 105(c)(4)(A) or (B) of the Sarbanes-Oxley Act 
of 2002 (15 U.S.C. 7215(c)(4)(A) or (B)); or
    (3) Is subject to an order of suspension or denial of the privilege 
of appearing or practicing before the Securities and Exchange 
Commission.
    (b) Upon written request, the Board, for good cause shown, may grant 
written permission to such accountant or firm to perform audit services 
for banking organizations. The request shall contain a concise statement 
of the action requested. The Board may require the applicant to submit 
additional information.



Sec. 263.404  Notice of removal, suspension, or debarment.

    (a) Notice to the public. Upon the issuance of a final order for 
removal, suspension, or debarment of an independent public accountant or 
accounting firm from providing audit services, the Board shall make the 
order publicly available and provide notice of the order to the other 
Federal banking agencies.
    (b) Notice to the Board by accountants and firms. An accountant or 
accounting firm that provides audit services to a banking organization 
must provide the Board with written notice of:
    (1) Any currently effective order or other action described in 
Sec. Sec. 263.402(a)(1)(vi) through (a)(1)(vii) or Sec. Sec. 
263.403(a)(2) through (a)(3); and
    (2) Any currently effective action by the Public Company Accounting 
Oversight Board under sections 105(c)(4)(C) or (G) of the Sarbanes-Oxley 
Act of 2002 (15 U.S.C. 7215(c)(4)(C) or (G)).
    (c) Timing of notice. Written notice required by this paragraph 
shall be given no later than 15 calendar days following the effective 
date of an order or action, or 15 calendar days before an accountant or 
firm accepts an engagement to provide audit services, whichever date is 
earlier.



Sec. 263.405  Petition for reinstatement.

    (a) Form of petition. Unless otherwise ordered by the Board, a 
petition for reinstatement by an independent public accountant, an 
accounting firm, or an office of a firm that was removed, suspended, or 
debarred under Sec. 263.402 may be made in writing at any time. The 
request shall contain a concise statement of the action requested. The 
Board may require the petitioner to submit additional information.

[[Page 945]]

    (b) Procedure. A petitioner for reinstatement under this section 
may, in the sole discretion of the Board, be afforded a hearing. The 
accountant or firm shall bear the burden of going forward with a 
petition and proving the grounds asserted in support of the petition. 
The Board may, in its sole discretion, direct that any reinstatement 
proceeding be limited to written submissions. The removal, suspension, 
or debarment shall continue until the Board, for good cause shown, has 
reinstated the petitioner or until the suspension period has expired. 
The filing of a petition for reinstatement shall not stay the 
effectiveness of the removal, suspension, or debarment of an accountant 
or firm.



PART 264_EMPLOYEE RESPONSIBILITIES AND CONDUCT--Table of Contents




    Authority: 5 U.S.C. 7301; 12 U.S.C. 244.



Sec. 264.101  Cross-reference to employees' ethical conduct standards and 

financial disclosure regulations.

    Employees of the Board of Governors of the Federal Reserve System 
(Board) are subject to the executive branch-wide standards of ethical 
conduct at 5 CFR part 2635 and the Board's regulation at 5 CFR part 
6801, which supplements the executive branch-wide standards, and the 
executive branch-wide financial disclosure regulation at 5 CFR part 
2634.

[61 FR 53830, Oct. 16, 1996]



PART 264a_POST-EMPLOYMENT RESTRICTIONS FOR SENIOR EXAMINERS--Table of Contents




Sec.
264a.1 What is the purpose and scope of this part?
264a.2 Who is considered a senior examiner of the Federal Reserve?
264a.3 What special post-employment restrictions apply to senior 
          examiners?
264a.4 When do these special restrictions become effective and may they 
          be waived?
264a.5 What are the penalties for violating these special post-
          employment restrictions?
264a.6 What other definitions and rules of construction apply for 
          purposes of this part?

    Authority: 12 U.S.C. 1820(k).

    Source: 70 FR 69638, Nov. 17, 2005, unless otherwise noted.



Sec. 264a.1  What is the purpose and scope of this part?

    This part identifies those officers and employees of the Federal 
Reserve that are subject to the special post-employment restrictions set 
forth in section 10(k) of the Federal Deposit Insurance Act (FDI Act) 
and implements those restrictions as they apply to officers and 
employees of the Federal Reserve.



Sec. 264a.2  Who is considered a senior examiner of the Federal Reserve?

    For purposes of this part, an officer or employee of the Federal 
Reserve is considered to be the ``senior examiner'' for a particular 
state member bank, bank holding company or foreign bank if--
    (a) The officer or employee has been authorized by the Board to 
conduct examinations or inspections on behalf of the Board;
    (b) The officer or employee has been assigned continuing, broad and 
lead responsibility for examining or inspecting the state member bank, 
bank holding company or foreign bank; and
    (c) The officer's or employee's responsibilities for examining, 
inspecting and supervising the state member bank, bank holding company 
or foreign bank--
    (1) Represent a substantial portion of the officer's or employee's 
assigned responsibilities; and
    (2) Require the officer or employee to interact routinely with 
officers or employees of the state member bank, bank holding company or 
foreign bank or its affiliates.



Sec. 264a.3  What special post-employment restrictions apply to senior 

examiners?

    (a) Senior Examiners of State Member Banks. An officer or employee 
of the Federal Reserve who serves as the senior examiner of a state 
member bank for two or more months during the last twelve months of such 
individual's employment with the Federal Reserve may not, within one 
year after leaving the employment of the Federal Reserve, knowingly 
accept compensation

[[Page 946]]

as an employee, officer, director or consultant from--
    (1) The state member bank; or
    (2) Any company (including a bank holding company) that controls the 
state member bank.
    (b) Senior Examiners of Bank Holding Companies. An officer or 
employee of the Federal Reserve who serves as the senior examiner of a 
bank holding company for two or more months during the last twelve 
months of such individual's employment with the Federal Reserve may not, 
within one year of leaving the employment of the Federal Reserve, 
knowingly accept compensation as an employee, officer, director or 
consultant from--
    (1) The bank holding company; or
    (2) Any depository institution that is controlled by the bank 
holding company.
    (c) Senior Examiners of Foreign Banks. An officer or employee of the 
Federal Reserve who serves as the senior examiner of a foreign bank for 
two or more months during the last twelve months of such individual's 
employment with the Federal Reserve may not, within one year of leaving 
the employment of the Federal Reserve, knowingly accept compensation as 
an employee, officer, director or consultant from--
    (1) The foreign bank; or
    (2) Any branch or agency of the foreign bank located in the United 
States; or
    (3) Any other depository institution controlled by the foreign bank.



Sec. 264a.4  When do these special restrictions become effective and may they 

be waived?

    The post-employment restrictions set forth in section 10(k) of the 
FDI Act and Sec. 264a.3 do not apply to any officer or employee of the 
Federal Reserve, or any former officer or employee of the Federal 
Reserve, if--
    (a) The individual ceased to be an officer or employee of the 
Federal Reserve before December 17, 2005; or
    (b) The Chairman of the Board of Governors certifies, in writing and 
on a case-by-case basis, that granting the individual a waiver of the 
restrictions would not affect the integrity of the Federal Reserve's 
supervisory program.



Sec. 264a.5  What are the penalties for violating these special post-

employment restrictions?

    (a) Penalties under section 10(k) of FDI Act.--A senior examiner of 
the Federal Reserve who, after leaving the employment of the Federal 
Reserve, violates the restrictions set forth in Sec. 264a.3 shall, in 
accordance with section 10(k)(6) of the FDI Act, be subject to one or 
both of the following penalties--
    (1) An order--
    (i) Removing the individual from office or prohibiting the 
individual from further participation in the affairs of the relevant 
state member bank, bank holding company, foreign bank or other 
depository institution or company for a period of up to five years; and
    (ii) Prohibiting the individual from participating in the affairs of 
any insured depository institution for a period of up to five years; 
and/or
    (2) A civil monetary penalty of not more than $250,000.
    (b) Imposition of penalties. The penalties described in paragraph 
(a) of this section shall be imposed by the appropriate Federal banking 
agency as determined under section 10(k)(6) of the FDI Act, which may be 
an agency other than the Federal Reserve.
    (c) Scope of prohibition orders. Any senior examiner who is subject 
to an order issued under paragraph (a) of this section shall, as 
required by section 10(k)(6)(B) of the FDI Act, be subject to paragraphs 
(6) and (7) of section 8(e) of the FDI Act in the same manner and to the 
same extent as a person subject to an order issued under section 8(e).
    (d) Procedures. The procedures applicable to actions under paragraph 
(a) of this section are provided in section 10(k)(6) of the FDI Act.
    (e) Other penalties. The penalties set forth in paragraph (a) of 
this section are not exclusive, and a senior examiner who violates the 
restrictions in Sec. 264a.3 also may be subject to other 
administrative, civil or criminal remedies or penalties as provided in 
law.



Sec. 264a.6  What other definitions and rules of construction apply for 

purposes of this part?

    For purposes of this part--

[[Page 947]]

    (a) Bank holding company means any company that controls a bank (as 
provided in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 
1841 et seq.)).
    (b) A person shall be deemed to act as a consultant for a bank or 
other company only if such person works directly on matters for, or on 
behalf of, such bank or other company.
    (c) Control has the meaning given in section 2 of the Bank Holding 
Company Act.
    (d) Depository institution has the meaning given in section 3 of the 
FDI Act and includes an uninsured branch or agency of a foreign bank, if 
such branch or agency is located in any State.
    (e) Federal Reserve means the Board of Governors of the Federal 
Reserve System and the Federal Reserve Banks.
    (f) Foreign bank means any foreign bank or company described in 
section 8(a) of the International Banking Act of 1978 (12 U.S.C. 
3106(a)).
    (g) Insured depository institution has the meaning given in section 
3 of the FDI Act.



PART 264b_RULES REGARDING FOREIGN GIFTS AND DECORATIONS--Table of Contents




Sec.
264b.1 Purpose and scope.
264b.2 Definitions.
264b.3 Restrictions on acceptance of gifts and decorations.
264b.4 Gifts of minimal value.
264b.5 Gifts of more than minimal value.
264b.6 Requirements for gifts of more than minimal value.
264b.7 Decorations.
264b.8 Disposition or retention of gifts and decorations deposited with 
          the Office of the Secretary.
264b.9 Enforcement.
264b.10 Certain grants excluded.

    Authority: 5 U.S.C. 552, 7342; 12 U.S.C. 248(i).

    Source: 68 FR 68721, Dec. 10, 2003, unless otherwise noted.



Sec. 264b.1  Purpose and scope.

    These rules govern when Board employees, their spouses, and their 
dependents may accept and retain gifts and decorations from foreign 
governments under the Foreign Gifts and Decorations Act of 1966, as 
amended (5 U.S.C. 7342) (``Act'').



Sec. 264b.2  Definitions.

    When used in this part, the following terms have the meanings 
indicated:
    (a) Board employees means:
    (1) Members of the Board of Governors of the Federal Reserve System 
(``Board''), officers, and other employees of the Board, including 
experts or consultants while employed by, and acting on behalf of, the 
Board; and
    (2) Spouses (unless separated) or dependents (within the meaning of 
section 152 of the Internal Revenue Code of 1986 (26 U.S.C. 152)) of 
such persons.
    (b) Foreign government means:
    (1) Any unit of foreign governmental authority, including any 
foreign national, State, local, or municipal government;
    (2) Any international or multinational organization whose membership 
is composed of any unit of foreign government as described in paragraph 
(b)(1) of this section; and
    (3) Any agent or representative of any such unit or organization, 
while acting as such.
    (c) Gift means a tangible or intangible present (other than a 
decoration) tendered by, or received from, a foreign government.
    (d) Decoration means an order, device, medal, badge, insignia, 
emblem, or award tendered by, or received from, a foreign government.
    (e) Minimal value means retail value in the United States at the 
time of acceptance of $285 or less as of January 1, 2002, and at 3-year 
intervals thereafter, as redefined in regulations prescribed by the 
Administrator of General Services, in consultation with the Secretary of 
State, to reflect changes in the consumer price index for the 
immediately preceding 3-year period.
    (f) Administrative Governor means the Board member serving as the 
Administrative Governor and includes persons designated by the 
Administrative Governor to exercise the authority granted under this 
part in the governor's absence.

[[Page 948]]



Sec. 264b.3  Restrictions on acceptance of gifts and decorations.

    (a) Board employees are prohibited from requesting or otherwise 
encouraging the tender of a gift or decoration from a foreign 
government.
    (b) Board employees are prohibited from accepting a gift or 
decoration from a foreign government, except in accordance with this 
part.



Sec. 264b.4  Gifts of minimal value.

    (a) Board employees may accept and retain a gift of minimal value 
tendered and received as a souvenir or mark of courtesy. If more than 
one tangible gift is presented at or marks an event, the value of all 
such gifts must not exceed ``minimal value.'' If tangible gifts are 
presented at or mark separate events, their value must not exceed 
``minimal value'' for each event, but may exceed ``minimal value'' for 
all events, even if the events occur on the same day.
    (b) Board employees may determine at the time a gift is offered 
whether it is of minimal value, or they may submit an accepted gift as 
soon as practicable to the Office of the Secretary for valuation.
    (c) Disagreements over whether a gift is of minimal value will be 
resolved by an independent appraisal under procedures established by the 
Office of the Secretary.



Sec. 264b.5  Gifts of more than minimal value.

    (a) Educational scholarships or medical treatment. Board employees 
may accept and retain gifts of more than minimal value when such gifts 
are in the nature of an educational scholarship or medical treatment.
    (b) Travel or travel expenses. Board employees may accept gifts of 
travel or expenses for travel taking place entirely outside the United 
States (such as transportation, food, and lodging) of more than minimal 
value if appropriate, consistent with the interests of the United 
States, and permitted by the Board under paragraph (b)(1) or (b)(2) of 
this section.
    (1) Board employees may accept gifts of travel or expenses for 
travel under paragraph (b) of this section in accordance with specific 
instructions of the Board, as evidenced by the prior approval of the 
Administrative Governor. Board employees must request prior approval 
under procedures established by the Office of the Secretary.
    (2) Board employees may accept gifts of travel or expenses for 
travel under paragraph (b) of this section without the prior approval of 
the Administrative Governor if such expenses are reported under Sec. 
264b.6(b) and the Administrative Governor approves their acceptance 
after the fact. Board employees must personally repay gifts of travel or 
expenses for travel of more than minimal value that are not approved by 
the Administrative Governor.
    (c) Other gifts. (1) Board employees may typically regard the 
refusal of gifts of more than minimal value at the inception (when 
offered or received without a prior offer) as consistent with the 
interests and general policy of the United States.
    (2) Board employees may accept gifts of more than minimal value when 
it appears that refusal would likely cause offense or embarrassment or 
otherwise adversely affect the foreign relations of the United States. 
Tangible gifts are considered to have been accepted on behalf of the 
United States and become the property of the United States on 
acceptance. Accordingly, they must be deposited and documented in 
accordance with Sec. 264b.6(a) and can only be returned or otherwise 
processed by the Office of the Secretary under Sec. 264b.8.



Sec. 264b.6  Requirements for gifts of more than minimal value.

    (a) Tangible gifts. Board employees must deposit tangible gifts of 
more than minimal value with the Office of the Secretary within 60 days 
of acceptance and assist in preparing a statement that contains the 
following information for each gift:
    (1) The name and position of the Board employee;
    (2) A brief description of the gift and the circumstances justifying 
acceptance;
    (3) The identity, if known, of the foreign government and the name 
and position of the individual who presented the gift;
    (4) The date of acceptance of the gift;

[[Page 949]]

    (5) The estimated value in the United States of the gift at the time 
of acceptance; and
    (6) The disposition or current location of the gift.
    (b) Travel or travel expenses without prior approval. Board 
employees who accept a gift of travel or expenses for travel under Sec. 
264b.5(b)(2) without the prior approval of the Administrative Governor 
must submit a report to the Office of the Secretary within 30 days of 
acceptance that contains the following information:
    (1) The name and position of the Board employee;
    (2) A brief description of the gift, including its estimated value, 
and the circumstances justifying acceptance; and
    (3) The identity, if known, of the foreign government and the name 
and position of the individual who presented the gift.
    (c) Reports to the Secretary of State. The Office of the Secretary 
must report the information contained in the statements described in 
paragraphs (a) and (b) of this section to the Secretary of State, who 
must publish in the Federal Register not later than January 31 of each 
year a comprehensive listing of all such statements for gifts of more 
than minimal value that were received by federal employees during the 
preceding year.



Sec. 264b.7  Decorations.

    (a) Board employees may accept, retain, and wear a decoration 
tendered or awarded by a foreign government in recognition of active 
field service in time of combat operations or for other outstanding or 
unusually meritorious performance, subject to the approval of the 
Administrative Governor. Requests for approval must be submitted to the 
Office of the Secretary and contain a statement of the circumstances 
surrounding the award and include any accompanying documentation. The 
recipient may retain the decoration pending action on the request.
    (b) Decorations accepted by Board employees without the approval of 
the Administrative Governor are considered to have been accepted on 
behalf of the United States and must be deposited within 60 days of the 
decoration's acceptance with the Office of the Secretary for disposition 
or retention under Sec. 264b.8.



Sec. 264b.8  Disposition or retention of gifts and decorations deposited with 

the Office of the Secretary.

    (a) The Office of the Secretary may dispose of gifts and decorations 
deposited under Sec. Sec. 264b.6(a) and 264b.7(b) by returning them to 
the donors or by handling them in accordance with instructions from the 
General Services Administration under applicable law.
    (b) The Office of the Secretary may approve and retain gifts and 
decorations deposited under Sec. Sec. 264b.6(a) and 264b.7(b) for 
official use. The Office of the Secretary must dispose of a gift within 
30 days of the termination of its official use in accordance with 
instructions from the General Services Administration under applicable 
law.



Sec. 264b.9  Enforcement.

    (a) The Administrative Governor, after consultation with the General 
Counsel, must report to the Attorney General cases in which there is 
reason to believe that a Board employee has violated the Act.
    (b) The Attorney General may bring a civil action in any district 
court of the United States against a Board employee who knowingly 
solicits or accepts a gift from a foreign government in violation of the 
Act, or who fails to deposit or report such a gift as required by the 
Act. The court may assess a maximum penalty of the retail value of a 
gift improperly solicited or received plus $5,000.



Sec. 264b.10  Certain grants excluded.

    This part does not apply to grants and other forms of assistance to 
which Sec. 108A of the Mutual Educational and Cultural Exchange Act of 
1961 applies. See 22 U.S.C. 2458a.



PART 265_RULES REGARDING DELEGATION OF AUTHORITY--Table of Contents




Sec.
265.1 Authority, purpose, and scope.
265.2 Delegation of functions generally.
265.3 Board review of delegated actions.
265.4 Functions delegated to Board members.

[[Page 950]]

265.5 Functions delegated to Secretary of the Board.
265.6 Functions delegated to General Counsel.
265.7 Functions delegated to Director of Division of Banking Supervision 
          and Regulation.
265.8 Functions delegated to the Staff Director of the Division of 
          International Finance.
265.9 Functions delegated to the Director of Division of Consumer and 
          Community Affairs.
265.10 Functions delegated to Secretary of Federal Open Market 
          Committee.
265.11 Functions delegated to Federal Reserve Banks.

    Authority: 12 U.S.C. 248(i) and (k).

    Source: 56 FR 25619, June 5, 1991, unless otherwise noted.



Sec. 265.1  Authority, purpose, and scope.

    (a) Pursuant to section 11(k) of the Federal Reserve Act (12 U.S.C. 
248(k)), the Board of Governors of the Federal Reserve System (the 
``Board'') may delegate, by published order or rule, any of its 
functions other than those relating to rulemaking or pertaining 
principally to monetary and credit policies to Board members and 
employees, Reserve Banks, or administrative law judges. Pursuant to 
section 11(i) of the Federal Reserve Act (12 U.S.C. 248(i)), the Board 
may make all rules and regulations necessary to enable it to effectively 
perform the duties, functions, or services specified in that Act. 
Pursuant to section 5(b) of the Bank Holding Company Act (12 U.S.C. 
1844(b)), the Board is authorized to issue such regulations and orders 
as may be necessary to enable it to administer and carry out the 
purposes of this Act and prevent evasions thereof. Other provisions of 
Federal law also may authorize specific delegations by the Board.
    (b) The Board's Rules Regarding Delegation of Authority (12 CFR part 
265) detail the responsibilities that the Board has delegated. The table 
of contents, titles, and headings that appear in these rules are used 
solely for their descriptive convenience. Section 265.4 addresses the 
specific functions delegated to Board members. The functions that have 
been delegated to Board employees are set forth in Sec. Sec. 265.5, 
265.6, 265.7, 265.8, and 265.9. The functions that have been delegated 
to the Secretary of the Federal Open Market Committee are set forth in 
Sec. 265.10. The functions that have been delegated to the Reserve 
Banks are set forth in Sec. 265.11. Provisions for review of any action 
taken pursuant to delegated authority are found in Sec. 265.3. Except 
as otherwise indicated in these rules, the Board will review a delegated 
action only if a Board member, at his or her own initiative, requests a 
review.



Sec. 265.2  Delegation of functions generally.

    (a) The Board has determined to delegate authority to exercise the 
functions described in this part.
    (b) The Chairman of the Board shall assign responsibility for 
performing such delegated functions.



Sec. 265.3  Board review of delegated actions.

    (a) Request by Board member. The Board shall review any action taken 
at a delegated level upon the vote of one member of the Board, either on 
the member's own initiative or on the basis of a petition for review by 
any person claiming to be adversely affected by the delegated action.
    (b) Petition for review. A petition for review of a delegated action 
must be received by the Secretary of the Board not later than the fifth 
day following the date of the delegated action.
    (c) Notice of review. The Secretary shall give notice of review by 
the Board of a delegated action to any person with respect to whom the 
action was taken not later than the tenth day following the date of the 
delegated action. Upon receiving notice, such person may not proceed 
further in reliance upon the delegated action until notified of the 
outcome of the review by the Board.
    (d) By action of a delegee. A delegee may submit any matter to the 
Board for determination if the delegee considers it appropriate because 
of the importance or complexity of the matter.



Sec. 265.4  Functions delegated to Board members.

    (a) Individual members. Any Board member designated by the Chairman 
is authorized:
    (1) Review of denial of access to Board records; FOIA. To review and 
determine

[[Page 951]]

an appeal of denial of access to Board records under the Freedom of 
Information Act (5 U.S.C. 552), the Privacy Act (5 U.S.C. 552a), and the 
Board's rules regarding such access (12 CFR parts 261 and 261a, 
respectively).
    (2) Approval of amendments to notice of charges or cease and desist 
orders. To approve (after receiving recommendations of the Director of 
the Division of Banking Supervision and Regulation and the General 
Counsel) amendments to any notice, temporary order, or proposed order 
previously approved by the Board in a specific formal enforcement matter 
(including a notice of charges or removal notice) or any proposed or 
temporary cease and desist order previously approved by the Board under 
12 U.S.C. 1818 (b) and (c).
    (3) Requests for permission to appeal rulings. (i) To act, when 
requested by the Secretary, upon any request under Sec. 263.10(e) of 
the Board's Rules of Practice for Hearings (12 CFR part 263) for special 
permission to appeal from a ruling of the presiding officer on any 
motion made at a hearing conducted under the rules, and if special 
permission is granted, the merits of the appeal shall be presented to 
the Board for decision.
    (ii) Notwithstanding Sec. 265.3 of this part, the denial of special 
permission to appeal a ruling may be reviewed by the Board only if a 
Board member requests a review within two days of the denial. No person 
claiming to be adversely affected by the denial shall have any right to 
petition the Board or any Board member for review or reconsideration of 
the denial.
    (4) Extension of time period for final Board action. To extend for 
an additional 180 days the 180-day period within which final Board 
action is required on an application pursuant to section 7(d) of the 
International Banking Act.
    (b) Three member Action Committee. Any three Board members 
designated from time to time by the Chairman (the ``Action Committee'') 
are authorized:
    (1) Absence of quorum. To act, upon certification by the Secretary 
of the Board of an absence of a quorum of the Board present in person, 
by unanimous vote on any matter that the Chairman has certified must be 
acted upon promptly in order to avoid delay that would be inconsistent 
with the public interest except for matters:
    (i) Relating to rulemaking;
    (ii) Pertaining principally to monetary and credit policies; and
    (iii) For which a statute expressly requires the affirmative vote of 
more than three Board members.
    (2) [Reserved]

[56 FR 25619, June 5, 1991, as amended at 56 FR 67154, Dec. 30, 1991; 62 
FR 14793, Mar. 28, 1997]



Sec. 265.5  Functions delegated to Secretary of the Board.

    The Secretary of the Board (or the Acting Secretary) is authorized:
    (a) Procedure--(1) Extension of time period for public participation 
in proposed regulations. To extend, when appropriate under the Board's 
Rules of Procedure (12 CFR 262.2 (a) and (b)), the time period for 
public participation with respect to proposed regulations of the Board.
    (2) Extension of time period in notices, orders, rules, or 
regulations. (i) To grant or deny requests to extend any time period in 
any notice, order, rule, or regulation of the Board relating to filing 
information, comments, opposition, briefs, exceptions, or other matters, 
in connection with any application, request or petition for the Board's 
approval, authority, determination, or permission, or any other action 
by the Board.
    (ii) Notwithstanding Sec. 265.3 of this part, no person claiming to 
be adversely affected by any such extension of time by the Secretary 
shall have the right to petition the Board or any Board member for 
review or reconsideration of the extension.
    (3) Conforming citations and references in Board rules and 
regulations. (i) To conform references to administrative positions or 
units in Board rules and regulations with changes in the administrative 
structure of the Board and in the government and agencies of the United 
States.
    (ii) To conform citations and references in Board rules and 
regulations with other regulatory or statutory changes adopted or 
promulgated by the Board or by the government or agencies of the United 
States.

[[Page 952]]

    (4) Technical corrections in Board rules and regulations. To make 
technical corrections, such as spelling, grammar, construction, and 
organization (including removal of obsolete provisions and consolidation 
of related provisions), to the Board's rules, regulations, and orders 
and other records of Board action but only with the concurrence of the 
Board's General Counsel.
    (b) Availability of information--(1) FOIA requests. To make 
available, upon request, information in Board records and consider 
requests for confidential treatment of information in Board records 
under the Freedom of Information Act (5 U.S.C. 552) and under the 
Board's Rules Regarding Availability of Information (12 CFR part 261).
    (2) Annual reports on Privacy Act. To approve annual reports 
required by the Privacy Act (5 U.S.C. 552a(p)) from the Board to the 
Office of Management and Budget for inclusion in the President's annual 
consolidated report to Congress.
    (3) Report on prime rate of commercial banks. To determine and 
report, under 26 U.S.C. (IRC) 6621, to the Secretary of the Treasury the 
average predominant prime rate quoted by commercial banks to large 
businesses.
    (c) Bank holding companies; Change in bank control; Mergers--(1) 
Reports on competitive factors in bank mergers. To furnish reports on 
competitive factors involved in a bank merger to the Comptroller of the 
Currency and the Federal Deposit Insurance Corporation under the 
provisions of the Federal Deposit Insurance Act (12 U.S.C. 1828(c)); The 
Bank Holding Company Act (12 U.S.C. 1842(a), 1843(c)(14)); the Bank 
Service Corporation Act (12 U.S.C. 1865(a), (b), 1867(d)); the Change in 
Bank Control Act (12 U.S.C. 1817(j)); and the Federal Reserve Act (12 
U.S.C. 321 et seq., 601-604a, 611 et seq.).
    (2) Reserve Bank director interlocks. To take actions the Reserve 
Bank could take except for the fact that the Reserve Bank may not act 
because a director, senior officer, or principal shareholder of any 
holding company, bank, or company involved in the transaction is a 
director of that Reserve Bank or branch of the Reserve Bank.
    (3) Application approval under section 5(d)(3) of the FDI Act. To 
approve applications pursuant to section 5(d)(3) of the Federal Deposit 
Insurance Act (12 U.S.C. 1815(d)(3)), in those cases in which the 
appropriate Federal Reserve Bank concludes that, because of unusual 
considerations, or for other good cause, it should not take action.
    (d) International banking--(1) Establishment of foreign branch or 
foreign agency or of Edge or Agreement Corporations. To approve, under 
sections 25 and 25A of the Federal Reserve Act (12 U.S.C. 601 and 604) 
and Regulation K (12 CFR part 211), the establishment, directly or 
indirectly, of a foreign branch or agency by a member bank or an Edge or 
Agreement Corporation if all of the following conditions are met:
    (i) The appropriate Reserve Bank and relevant divisions of the 
Board's staff recommend approval;
    (ii) No significant policy issue is raised on which the Board has 
not expressed its view; and
    (iii) The application is not for the applicant's first full-service 
branch in a foreign country.
    (2) Acquisition of foreign company or U.S. company financing 
exports. To grant, under sections 25 and 25A of the Federal Reserve Act 
(12 U.S.C. 601 and 604) and section 4(c)(13) of the Bank Holding Company 
Act (12 U.S.C. 1843(c)(13)) and the Board's Regulations K and Y (12 CFR 
parts 211 and 225), specific consent to the acquisition, either directly 
or indirectly, by a member bank, an Edge or Agreement corporation, or a 
bank holding company of stock of a company chartered under the laws of a 
foreign country or a company chartered under the laws of a state of the 
United States that is organized and operated for the purpose of 
financing exports from the United States, and to approve any such 
acquisition that may exceed the limitations of section 25A of the 
Federal Reserve Act based on the company's capital and surplus, if all 
of the following conditions are met:
    (i) The appropriate Reserve Bank and all relevant divisions of the 
Board's staff recommend approval;
    (ii) No significant policy issue is raised on which the Board has 
not expressed its view;

[[Page 953]]

    (iii) The acquisition does not result, either directly or 
indirectly, in the bank, corporation, or bank holding company acquiring 
effective control of the company, except that this condition need not be 
met if:
    (A) The company is to perform nominee, fiduciary, or other services 
incidental to the activities of a foreign branch or affiliate of the 
bank holding company, or corporation; or
    (B) The stock is being acquired from the parent bank or bank holding 
company, or subsidiary Edge or Agreement corporation, as the case may 
be, and the selling parent or subsidiary holds the stock with the 
consent of the Board pursuant to Regulations K and Y (12 CFR parts 211 
and 225).
    (3) Investments in Edge and Agreement Corporations. To approve an 
application by a member bank to invest more than 10 percent of capital 
and surplus in Edge and agreement corporation subsidiaries, provided 
that:
    (i) The member bank's total investment, including the retained 
earnings of the Edge and agreement corporation subsidiaries, does not 
exceed 20 percent of the bank's capital and surplus or would not exceed 
that level as a result of the proposal; and
    (ii) The proposal raises no significant policy or supervisory 
issues.
    (e) Member banks--(1) Waiver of penalty for early withdrawals of 
time deposits. To permit depository institutions to waive the penalty 
for early withdrawal of time deposits under section 19(j) of the Federal 
Reserve Act (12 U.S.C. 371b) and Sec. 204.2 of Regulation D (12 CFR 
part 204) if the following conditions are met:
    (i) The President declares an area of major disaster or emergency 
area pursuant to section 301 of the Disaster Relief Act of 1974 (42 
U.S.C. 5141);
    (ii) The waiver is limited to depositors suffering disaster or 
emergency related losses in the officially designated area; and
    (iii) The appropriate Reserve Bank and all relevant divisions of the 
Board's staff recommend approval.
    (2) [Reserved]
    (f) Location of institution. To determine the Federal Reserve 
District in which an institution is located pursuant to Sec. 
204.3(b)(2)(ii) of Regulation D (12 CFR part 204) or Sec. 209.15(b) of 
Regulation I (12 CFR part 209) if:
    (1) The relevant Federal Reserve Banks and the institution agree on 
the specific Reserve Bank in which the institution should hold stock or 
with which the institution should maintain reserve balances; and
    (2) The agreed-upon location does not raise any significant policy 
issues.

[56 FR 25619, June 5, 1991, as amended at 56 FR 67153, 67154, Dec. 30, 
1991; 58 FR 26509, May 4, 1993; 62 FR 34617, June 27, 1997; 66 FR 58655, 
Nov. 23, 2001]



Sec. 265.6  Functions delegated to General Counsel.

    The Board's general counsel (or the general counsel's delegee) is 
authorized:
    (a) Procedure--(1) Reconsideration of Board action. Pursuant to 
Sec. 262.3(i) of this chapter (Rules of Procedure) to determine whether 
or not to grant a request for reconsideration or whether to deny a 
request for stay of the effective date of any action taken by the Board 
with respect to an action as provided in that part.
    (2) Public meetings. To order, after consulting with the directors 
of other interested divisions of the Board and the appropriate Reserve 
Bank, that a public meeting or other proceeding be held, under Sec. 
262.25 of the Board's Rules of Procedure (12 CFR part 262), in 
connection with any application or notice filed with the Board, and to 
designate the presiding officer in the proceeding under terms and 
conditions the General Counsel deems appropriate.
    (3) Designation of Board counsel for hearings. To designate Board 
staff attorneys as Board counsel in any proceeding ordered by the Board 
in accordance with Sec. 263.6 of the Board's Rules of Practice for 
Hearings (12 CFR part 263).
    (4) Oaths, depositions, subpoenas. To take, or authorize designated 
persons to take, with the concurrence of the Director of the Division of 
Banking Supervision and Regulation, actions permitted under 12 U.S.C. 
1818(n), 1820(c), and 12 U.S.C. 1844(f), including administering oaths 
and affirmations, taking depositions, and issuing, revoking, quashing, 
or modifying subpoenas duces tecum.

[[Page 954]]

    (b) Availability of Information--(1) FOIA requests. To make 
available information of the Board of the nature and in the 
circumstances described in the Board's Rules Regarding Availability of 
Information (12 CFR part 261).
    (2) Disclosure to foreign authorities. To make the determinations 
required for disclosure of information to a foreign bank regulatory or 
supervisory authority, and to obtain, to the extent necessary, the 
agreement of such authority to maintain the confidentiality of such 
information to the extent possible under applicable law.
    (3) Assistance to foreign authorities. To approve requests for 
assistance from any foreign bank regulatory or supervisory authority 
that is conducting an investigation regarding violations of any law or 
regulation relating to banking matters or currency transactions 
administered or enforced by such authority, and to make the 
determinations required for any investigation or collection of 
information and evidence pertinent to such request. In deciding whether 
to approve requests for assistance under this paragraph, the General 
Counsel shall consider:
    (i) Whether the requesting authority has agreed to provide 
reciprocal assistance with respect to banking matters within the 
jurisdiction of any appropriate Federal banking agency;
    (ii) Whether compliance with the request would prejudice the public 
interest of the United States; and
    (iii) Whether the request is consistent with the requirement that 
the Board conduct any such investigation in compliance with the laws of 
the United States and the policies and procedures of the Board.
    (c) Bank holding companies; Change in bank control; Mergers--(1) 
Control determinations under section 2(g) of BHC Act. To determine 
whether a company that transfers shares under section 2(g) of the Bank 
Holding Company Act (12 U.S.C. 1841(g)) is incapable of controlling the 
transferee.
    (2) Control determinations under section 4(c)(8) of BHC Act. To 
determine, or issue an order for a hearing to determine, whether a 
company engaged in financial, fiduciary, or insurance activities falls 
within the exemption in section 4(c)(8) of the Bank Holding Company Act 
(12 U.S.C. 1843(c)(8)), permitting retention or acquisition of control 
thereof by a bank holding company.
    (3) Notices under CBC Act. To revoke acceptance of and return as 
incomplete a notice filed under the Change in Bank Control Act (12 
U.S.C. 1817(j)) or to extend the time during which action must be taken 
on a notice where the General Counsel determines, with the concurrence 
of the Director of the Division of Banking Supervision and Regulation, 
that the notice is materially incomplete under that Act or Regulation Y 
(12 CFR part 225) or contains material information that is substantially 
inaccurate.
    (4) Tax certifications. To make prior and final certification for 
federal tax purposes (26 U.S.C. (IRC) 1101-1103, 6158) with respect to 
distributions pursuant to the Bank Holding Company Act (12 U.S.C. 1841 
et seq.).
    (d) Management interlocks--(1) General exceptions. To grant 
exceptions from the prohibitions of Regulation L (12 CFR part 212) when 
the primary federal supervisor of the depository institution in need of 
management assistance approves.
    (2) Temporary exceptions. To grant requests, after consultation with 
the Director for the Division of Banking Supervision and Regulation, for 
temporary director interlocks under Regulation L (12 CFR part 212) for 
newly chartered banks, banks in low income areas, minority banks, 
women's banks, organizations experiencing conditions endangering their 
safety or soundness, organizations sponsoring a credit union, and 
organizations that lose thirty percent or more of their directors or 
management officials due to changes in circumstances.
    (e) Consent enforcement orders. With the concurrence of the director 
of the Board's Division of Banking Supervision and Regulation (or the 
Director's delegee):
    (1) To enter into a cease-and-desist order, removal and prohibition 
order, or civil money penalty assessment order with a bank holding 
company or any nonbanking subsidiary thereof, with a state member bank, 
or with any other person or entity subject to the Board's jurisdiction, 
when the order

[[Page 955]]

has been consented to by the institution or individual subject to the 
order;
    (2) To stay, modify, terminate, or suspend an order issued pursuant 
to paragraph (e)(1) of this section.
    (f) International banking--(1) After-the-fact applications. With the 
concurrence of the Board's Director of the Division of Banking 
Supervision and Regulation, to grant a request by a foreign bank to 
establish a branch, agency, commercial lending company, or 
representative office through certain acquisitions, mergers, 
consolidations, or similar transactions, in conjunction with which:
    (i) The foreign bank would be required to file an after-the-fact 
application for the Board's approval under Sec. 211.24(a)(6) of 
Regulation K (12 CFR 211.24(a)(6)); or
    (ii) The General Counsel may waive the requirement for an after-the-
fact application if:
    (A) The surviving foreign bank commits to wind down the U.S. 
operations of the acquired foreign bank; and
    (B) The merger or consolidation raises no significant policy or 
supervisory issues.
    (2) To modify the requirement that a foreign bank that has submitted 
an application or notice to establish a branch, agency, commercial 
lending company, or representative office pursuant to Sec. 211.24(a)(6) 
of Regulation K (12 CFR 211.24(a)(6)) shall publish notice of the 
application or notice in a newspaper of general circulation in the 
community in which the applicant or notificant proposes to engage in 
business, as provided in Sec. 211.24(b)(2) of Regulation K (12 CFR 
211.24(b)(2)).
    (3) With the concurrence of the Board's Director of the Division of 
Banking Supervision and Regulation, to grant a request for an exemption 
under section 4(c)(9) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(9)), provided that the request raises no significant policy or 
supervisory issues that the Board has not already considered.
    (4) To return applications and notices filed under the International 
Banking Act for informational deficits.
    (5) To determine that an entity qualifies as a ``special-purpose 
foreign government-owned bank'' for purposes of Sec. 211.24(d)(3) (12 
CFR 211.24(d)(3)).
    (g) Conflicts of interest waivers. To issue individual conflicts of 
interest waivers under 18 U.S.C. 208(b)(1) to employees and officials 
other than Board members.

[56 FR 25619, June 5, 1991, as amended at 56 FR 67154, Dec. 30, 1991; 57 
FR 6789, Feb. 28, 1992; 57 FR 13002, Apr. 15, 1992; 58 FR 6363, Jan. 28, 
1993; 58 FR 26509, May 4, 1993; 58 FR 53394, Oct. 15, 1993; 60 FR 10307, 
Feb. 24, 1995; 61 FR 13395, Mar. 27, 1996; 62 FR 45150, Aug. 26, 1997; 
66 FR 54397, Oct. 26, 2001]



Sec. 265.7  Functions delegated to Director of Division of Banking Supervision 

and Regulation.

    The Board's Director of the Division of Banking Supervision and 
Regulation (or the Director's delegee) is authorized:
    (a) Procedure--(1) Cease and desist orders. To refuse, with the 
prior concurrence of the appropriate Reserve Bank and the Board's 
General Counsel, an application to the Board to stay, modify, terminate, 
or set aside any effective cease and desist order previously issued by 
the Board under section 8(b) of the Federal Deposit Insurance Act (12 
U.S.C. 1818(b)), or any written agreement between the Board or the 
Reserve Bank and a bank holding company or any nonbanking subsidiary 
thereof or a state member bank.
    (2) Modification of commitments or conditions. To grant or deny 
requests for modifying, including extending the time for, performing a 
commitment or condition relied on by the Board or its delegee in taking 
any action under the Bank Holding Company Act, the Bank Merger Act, the 
Change in Bank Control Act of 1978, the Federal Reserve Act, or the 
International Banking Act. In acting on such requests, the Board's 
Director may take into account changed circumstances and good faith 
efforts to fulfill the commitments or conditions, and shall consult with 
the directors of other interested divisions where appropriate. The 
Board's Director may not take any action that would be inconsistent with 
or result in an evasion of the provisions of the Board's original 
action.
    (3) Notice of insufficient capital. To issue, with the concurrence 
of the Board's General Counsel, a notice that

[[Page 956]]

a state member bank or bank holding company has insufficient capital and 
which directs the bank or company to file with its regional Reserve Bank 
a capital improvement plan under subpart D of the Board's Rules of 
Practice for Hearings (12 CFR part 263).
    (4) Obtaining possession or control of securities; extending time 
period. To approve, under Sec. 403.5(g) of the Treasury Department 
regulations (17 CFR part 403) implementing the Government Securities Act 
of 1986, as amended (Pub. L. 95-571), the application of a member bank, 
a state branch or agency of a foreign bank, a foreign bank, or a 
commercial lending company owned or controlled by a foreign bank, to 
extend for one or more limited periods commensurate with the 
circumstances the 30-day time period specified in 17 CFR 
403.5(c)(1)(iii), provided the Director is satisfied that the applicant 
is acting in good faith and that exceptional circumstances warrant such 
action.
    (b) Availability of Information--(1) FOIA requests. To make 
available information of the Board of the nature and in the 
circumstances described in Sec. 261.11 of the Board's Rules Regarding 
Availability of Information (12 CFR part 261).
    (2) FOIA; Availability of information. To make available, under the 
Board's Rules Regarding Availability of Information (12 CFR part 261), 
reports and other information of the Board acquired pursuant to the 
Board's Regulations G, T, U, and X (12 CFR parts 207, 220, 221, 224) of 
the nature and in circumstances described in Sec. Sec. 261.8(a) (2) and 
(3) of these rules.
    (c) Bank holding companies; Change in bank control; Mergers--(1) 
Bank holding company registration forms and annual reports. To 
promulgate registration forms and annual reports and other forms for use 
in connection with the Bank Holding Company Act, after receiving 
clearance from the Office of Management and Budget (where necessary), 
under section 5 of the Bank Holding Company Act (12 U.S.C. 1844) and in 
accordance with 5 U.S.C. 553.
    (2) Emergency action. To take actions the Reserve Bank could take 
under this part at Sec. Sec. 265.11(c)(2)(ii) and 265.11(c)(3)(iii) if 
immediate or expeditious action is required to avert failure of a bank 
or savings association or because of an emergency pursuant to sections 
3(a) and 4(c)(8) of the Bank Holding Company Act (12 U.S.C. 1842(a), 
1843(c)(8)) on the Change in Bank Control Act (12 U.S.C. 1817(j)).
    (3) Waiver of notice. To waive, dispense with, modify or excuse the 
failure to comply with the requirement for publication and solicitation 
of public comment regarding a notice filed under the Change in Bank 
Control Act (12 U.S.C. 1817(j)), with the concurrence of the Board's 
General Counsel, provided a written finding is made that such disclosure 
would seriously threaten the safety or soundness of a bank holding 
company or a bank.
    (4) Notices for addition or change of directors or officers. Under 
section 914(a) of the Financial Institutions Reform, Recovery and 
Enforcement Act (12 U.S.C. 1831i) and subpart H of Regulation Y (12 CFR 
part 225), provided that no senior officer or director or proposed 
senior officer or director of the notificant is also a director of the 
Reserve Bank or a branch of the Reserve Bank:
    (i) To determine the informational sufficiency of notices filed 
pursuant to Sec. 225.72 of Regulation Y (12 CFR part 225); and
    (ii) To waive the prior notice requirements of that section.
    (5) ERISA violations. To provide the Department of Labor written 
notification of possible significant violations of the Employee 
Retirement Income Security Act (ERISA) by bank holding companies, in 
accordance with section 3004(b) of ERISA and the Interagency Agreement 
adopted to implement its provisions.
    (6) Appraisal not required. To determine pursuant to 12 CFR 
225.63(b)(12) that the services of an appraiser are not necessary in 
order to protect Federal financial and public policy interests in real 
estate-related financial transactions or to protect the safety and 
soundness of an institution.
    (d) International banking--(1) Foreign bank reports. To require 
submission of a report of condition respecting any foreign bank in which 
a member bank holds stock acquired under Sec. 211.5(b) of

[[Page 957]]

Regulation K (12 CFR part 211) and section 25 of the Federal Reserve Act 
(12 U.S.C. 602).
    (2) Edge corporation reports. To require submission and publication 
of reports by an Edge corporation under section 25A of the Federal 
Reserve Act (12 U.S.C. 625).
    (3) Capital stock of Edge corporation; articles of association; 
additional investments in Agreement corporation. To approve under 
sections 25 and 25A as of the Federal Reserve Act (12 U.S.C. 601 and 
604), increases and decreases in the capital stock of and amendments to 
the articles of association of an Edge corporation and additional 
investments by a member bank in the stock of an Agreement corporation.
    (4) Authority under general-consent and prior-notice procedures. (i) 
With regard to a prior notice to establish a branch in a foreign country 
under Sec. 211.3 of Regulation K (12 CFR 211.3):
    (A) To waive the notice period;
    (B) To suspend the notice period;
    (C) To determine not to object to the notice; or
    (D) To require the notificant to file an application for the Board's 
specific consent.
    (ii) With regard to a prior notice to make an investment under Sec. 
211.9(f) of Regulation K (12 CFR 211.9(f)):
    (A) To waive the notice period;
    (B) To suspend the notice period; or
    (C) To require the notificant to file an application for the Board's 
specific consent.
    (iii) With regard to a prior notice of a foreign bank to establish 
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR 
211.24(a)(2)(i)):
    (A) To waive the notice period;
    (B) To suspend the notice period; or
    (C) To require the notificant to file an application for the Board's 
specific consent.
    (iv) To suspend the ability:
    (A) Of a foreign banking organization to establish an office under 
the prior-notice procedures in Sec. 211.24(a)(2)(i) of Regulation K (12 
CFR 211.24(a)(2)(i)) or the general-consent procedures in Sec. 
211.24(a)(3) of Regulation K (12 CFR 211.24(a)(3));
    (B) Of a U.S. banking organization to establish a foreign branch 
under the prior-notice or general-consent procedures in Sec. 211.3(b) 
of Regulation K (12 CFR 211.3(b));
    (C) Of an investor to make investments under the general-consent or 
prior-notice procedures in Sec. 211.9 of Regulation K (12 CFR 211.9); 
and
    (D) Of an eligible investor to make an investment in an export 
trading company under the general-consent procedures in Sec. 211.34(b) 
of Regulation K (12 CFR 211.34(b)).
    (5) Investment by foreign subsidiaries in U.S. affiliates. To 
permit, after consultation with the Board's General Counsel, a foreign 
subsidiary of a bank holding company to invest in shares of a U.S. 
affiliate of the bank holding company where the investment is made as 
part of an internal corporate reorganization or an internal transfer of 
funds, subject to any conditions and terms the Director and General 
Counsel deem appropriate and consistent with the purposes of Regulation 
K (12 CFR part 211).
    (6) Allocated transfer risk reserves. To determine the need for 
establishing and the amount of any allocated transfer risk reserve 
against specific international assets, and notify the banking 
institutions of the determination and the amount of the reserve and 
whether the reserve may be reduced under subpart D of Regulation K (12 
CFR part 211).
    (7) Underwriting and dealing authority outside the United States; 
hedging techniques. To approve, under Sec. 211.5(d)(14) of Regulation K 
(12 CFR part 211):
    (i) Requests for authority to engage in the activities of 
underwriting, distributing, and dealing in shares outside the United 
States, provided that the Director has determined that the internal 
procedures and operations of the organization and the effect of the 
proposed activities on capital adequacy are consistent with approval.
    (ii) Hedging methods authorized under Sec. 211.5(d)(14)(iii)(A) of 
Regulation K (12 CFR part 211).
    (8) Conduct and coordination of examinations. To authorize the 
conduct of examinations of the U.S. offices and affiliates of foreign 
banks as provided in sections 7(c) and 10(c) of the IBA (12 U.S.C. 
3105(c), 3107(c)), and, where appropriate, to coordinate those 
examinations with examinations of the Office

[[Page 958]]

of the Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, and the state entity that is authorized to supervise or 
regulate a state branch, state agency, commercial lending company, or 
representative office.
    (9) Allowing use of general-consent procedures. To allow an investor 
that is not well-capitalized and well-managed to make investments under 
the general-consent procedures in Sec. 211.9 or 211.34(b) of Regulation 
K (12 CFR 211.9 or 211.34(b)), provided that:
    (i) The investor has implemented measures to become well-capitalized 
and well-managed;
    (ii) Granting such authority raises no significant policy or 
supervisory concerns; and
    (iii) Authority granted by the Director under this paragraph (d)(9) 
expires after one year, but may be renewed.
    (10) Exceeding general-consent investment limits. To allow an 
investor to exceed the general-consent investment limits under Sec. 
211.9 of Regulation K (12 CFR 211.9), provided that:
    (i) The investor demonstrates adequate financial and managerial 
strength;
    (ii) The investor's investment strategy is not unsafe or unsound;
    (iii) Granting such authority raises no significant policy or 
supervisory concerns; and
    (iv) Authority granted by the Director under this paragraph (d)(10) 
expires after one year, but may be renewed.
    (11) Approval of temporary U.S. offices. To allow a foreign bank to 
operate a temporary office in the United States, pursuant to Sec. 
211.24 of Regulation K (12 CFR 211.24), provided that:
    (i) There is no direct public access to such office, with respect to 
any branch or agency function; and
    (ii) The proposal raises no significant policy or supervisory 
issues.
    (12) With the concurrence of the General Counsel, to approve 
applications, notices, exemption requests, waivers and suspensions, and 
other related matters under Regulation K (12 CFR part 211), where such 
matters do not raise any significant policy or supervisory issues.
    (13) With the concurrence of the General Counsel, to approve:
    (i) The establishment by a bank holding company or member bank of an 
agreement corporation under section 25 of the Federal Reserve Act; and
    (ii) Any initial investment associated with the establishment of 
such agreement corporation.
    (14) With the concurrence of the General Counsel, to determine that 
an election by a foreign bank to become or to be treated as a financial 
holding company is effective, provided that:
    (i) The foreign bank meets the criteria for becoming or being 
treated as a financial holding company; and
    (ii) The election raised no significant policy or supervisory 
issues.
    (e) Member banks--(1) Membership certification to FDIC. Tocertify, 
under section 4(b) of the Federal Deposit Insurance Act (12 U.S.C. 
1814(b)), to the Federal Deposit Insurance Corporation that the factors 
specified in section 6 of the Act (12 U.S.C. 1816) were considered with 
respect to the admission of a state-chartered bank to Federal Reserve 
membership.
    (2) Dollar exchange. To permit any member bank to accept drafts or 
bill of exchange drawn upon it for the purpose of furnishing dollar 
exchange under section 13(12) of the Federal Reserve Act (12 U.S.C. 
373).
    (3) ERISA violations. To provide to the Department of Labor written 
notification of possible significant violations of the Employee 
Retirement Income Security Act (ERISA) by member banks, in accordance 
with section 3004(b) of ERISA and the Interagency Agreement adopted to 
implement its provisions.
    (4) Examiners. To select or approve the appointment of Federal 
Reserve examiners, assistant examiners, and special examiners for the 
purpose of making examinations for or by the direction of the Board 
under 12 U.S.C. 325, 338, 625, 1844(c), and 3105(b)(1).
    (5) Capital stock reduction; branch applications; declaration of 
dividends; investment in bank premises. To exercise the functions 
described in Sec. 265.11(e)(5), (11), and (12) of this part (reductions 
in capital, issuance of subordinated debt, and early retirement of 
subordinated debt) when the conditions specified in those sections 
preclude a Reserve Bank

[[Page 959]]

from acting on a member bank's request for action or when the Reserve 
Bank concludes that it should not take action, and to exercise the 
functions in Sec. 265.11(e)(3), (4), and (7) of this part (approving 
branch applications, declaration of dividends, and investment in bank 
premises) in cases in which the Reserve Bank concludes that it should 
not take action.
    (6) Security devices; Regulation P. To exercise the functions 
described in Sec. 265.11(e)(8) of this part in those cases in which the 
appropriate Reserve Bank concludes that it should not take action for 
good cause.
    (f) Securities--(1) Registration statements by member banks. Under 
section 12(g) of the Securities Exchange Act (15 U.S.C. 78l(g)):
    (i) To accelerate the effective date of a registration statement 
filed by a member bank with respect to its securities;
    (ii) To accelerate termination of the registration of a security 
that is no longer held of record by 300 persons; and
    (iii) To extent the time for filing a registration statement by a 
member bank.
    (2) Exemption from registration. To issue notices with respect to 
application by a statement member bank for exemption from registration 
under section 12(h) of the Securities Exchange Act (15 U.S.C. 78l(h)).
    (3) Accelerating registration of security on national securities 
exchange. To accelerate the effective date of an application by a state 
member bank for registration of a security on a national securities 
exchange under section 12(d) of the Securities Exchange Act (15 U.S.C. 
78l(d)).
    (4) Unlisted trading in security of state member bank. To issue 
notices with respect to an application by a national securities exchange 
for unlisted trading privileges in a security of a state member bank 
under section 12(f) of the Securities Exchange Act (15 U.S.C. 78l(f)).
    (5) Transfer agent registration; acceleration; withdrawal or 
cancellation. (i) To accelerate, under section 17A(c)(2) of the 
Securities Exchange Act of 1934, as amended (15 U.S.C. 78q-1), the 
effective date of a registration statement for transfer agent activities 
filed by a member bank or a subsidiary thereof, a bank holding company 
or a subsidiary thereof that is a bank as defined in section 3(a)(6) of 
the Act other than a bank specified in clause (i) or (iii) of section 
3(a)(34)(B) of the Act (15 U.S.C. 78c).
    (ii) To withdraw or cancel, under section 17A(c)(3)(C) of the 
Securities Exchange Act of 1934, as amended (15 U.S.C. 78q-1(c)(3)(C)), 
the transfer agent registration of a member bank or a subsidiary 
thereof, a bank holding company, or a subsidiary thereof that is a bank 
as defined in section 3(a)(6) of that Act other than a bank specified in 
clause (i) or (iii) of section 3(a)(34)(B) of the Act (15 U.S.C. 78c), 
that has filed a written notice of withdrawal with the Board or upon a 
finding that such transfer agent is no longer in existence or has ceased 
to do business as a transfer agent.
    (6) Proxy solicitation; financial statements. (i) To permit the 
mailing of proxy and other soliciting materials by a state member bank 
before the expiration of the time prescribed therein under Sec. 208.36 
of Regulation H (12 CFR part 208).
    (ii) To permit the omission of financial statements from reports by 
a state member bank, or to require other financial statements in 
addition to, or in substitution for, the statements required therein 
under Sec. 208.36 of Regulation H (12 CFR part 208).
    (7) Municipal securities dealers. Under section 23 of the Securities 
Exchange Act of 1934 (15 U.S.C. 78w).
    (i) To grant or deny requests for waiver of examination and waiting 
period requirements for municipal securities principals and 
representatives under Municipal Securities Rulemaking Board Rule G-3;
    (ii) To grant or deny requests for a determination that a natural 
person or municipal securities dealer subject to a statutory 
disqualification is qualified to act as a municipal securities 
representative or dealer under Municipal Securities Rulemaking Board 
Rule G-4;
    (iii) To approve or disapprove clearing arrangements under Municipal 
Securities Rulemaking Board Rule G-8, in connection with the 
administration of these rules for municipal securities

[[Page 960]]

dealers for which the Board is the appropriate regulatory agency under 
section 3(a)(34) of the Securities Exchange Act of 1934 (15 U.S.C. 
78c(a)(34)).
    (8) Making reports available to SEC. To make available, upon 
request, to the Securities and Exchange Commission reports of 
examination of transfer agents, clearing agencies, and municipal 
securities dealers for which the Board is the appropriate regulatory 
agency for use by the Commission in exercising its supervisory 
responsibilities under the Act under section 17(c)(3) of the Securities 
Exchange Act of 1934 (15 U.S.C. 78q(c)(3)).
    (9) Issuing examination manuals, forms, and other materials. To 
issue examination or inspection manuals, registration, report, 
agreement, and examination forms, guidelines, instructions, and other 
similar materials for use in administering sections 7, 8, 15B, and 
17A(c) of the Securities Exchange Act of 1934 (15 U.S.C. 78g, 78h, 78o-
4, and 78q-1).
    (10) Lists of OTC and foreign margin stocks. To approve issuance of 
the lists of OTC margin stocks and foreign margin stocks and add, omit, 
or remove any stock in circumstances indicating that such change is 
necessary or appropriate in the public interest under Sec. 207.6(d) of 
Regulation G (12 CFR part 207), Sec. 220.17(f) of Regulation T (12 CFR 
part 220), or Sec. 221.7(d) of Regulation U (12 CFR part 221).

[56 FR 25619, June 5, 1991, as amended at 56 FR 67153, 67154, Dec. 30, 
1991; 57 FR 13002, Apr. 15, 1992; 58 FR 6363, Jan. 28, 1993; 58 FR 
26509, May 4, 1993; 62 FR 64996, Dec. 9, 1997; 63 FR 58621, Nov. 2, 
1998; 66 FR 54397, Oct. 26, 2001]



Sec. 265.8  Functions delegated to the Staff Director of the Division of 

International Finance.

    The Board's Staff Director of the Division of International Finance 
(or the Director's delegee) is authorized:
    (a) Establishment of foreign accounts. To approve the establishment 
of foreign accounts and the terms of any account-related agreements with 
the Federal Reserve Bank of New York under section 14(e) of the Federal 
Reserve Act (12 U.S.C. 358).
    (b) [Reserved]



Sec. 265.9  Functions delegated to the Director of Division of Consumer and 

Community Affairs.

    The Director of the Board's Division of Consumer and Community 
Affairs (or the Director's delegee) is authorized:
    (a) Issuing examination manuals, forms, and other materials. To 
issue examination or inspection manuals; report, agreement, and 
examination forms; examination procedures, guidelines, instructions, and 
other similar materials pursuant to: section 11(a) of the Federal 
Reserve Act (12 U.S.C. 248(a)); sections 108(b), 621(c), 704(b), 814(c), 
and 917(b) of the Consumer Credit Protection Act (15 U.S.C. 1607(b), 
1681s(b), 1691c(b), 1692l(c) and 1693o(b)); section 305(c) of the Home 
Mortgage Disclosure Act (12 U.S.C. 2804(c)); section 18(f)(3) of the 
Federal Trade Commission Act (15 U.S.C. 57a(f)(3)); section 808(c) of 
the Civil Rights Act of 1968 (42 U.S.C. 3608(c)); section 270(b) of the 
Truth in Savings Act (12 U.S.C. 4309); and section 5 of the Bank Holding 
Company Act of 1956 (12 U.S.C. 1844(c)). The foregoing manuals, forms, 
and other materials are for use within the Federal Reserve System in the 
administration of enforcement responsibilities in connection with:
    (1) Sections 1-200 and 501-921 of the Consumer Credit Protection Act 
(15 U.S.C. 1601-1693r), in regard to the Truth in Lending Act, the 
Consumer Leasing Act, the Equal Credit Opportunity Act, the Electronic 
Fund Transfer Act, the Fair Credit Reporting Act and the Fair Debt 
Collection Practices Act;
    (2) Sections 301-312 of the Home Mortgage Disclosure Act (12 U.S.C. 
2801-2811);
    (3) Section 18(f)(1)-(3) of the Federal Trade Commission Act (15 
U.S.C. 57a(f)(1)-(3));
    (4) Section 805 of the Civil Rights Act of 1968 (42 U.S.C. 3605) and 
rules and regulations issued thereunder;
    (5) Section 1364 of the National Flood Insurance Act of 1968 (42 
U.S.C. 4101(a)), and sections 105(b) and 202(b) of the Flood Disaster 
Protection Act of 1973 (42 U.S.C. 4012a(b), 4106(b));
    (6) Section 19(j) of the Federal Reserve Act (12 U.S.C. 371b); and

[[Page 961]]

    (7) Sections 801-806 of the Community Reinvestment Act (12 U.S.C. 
2901-2905).
    (8) Sections 261-274 of the Truth in Savings Act (12 U.S.C. 4301-
4313).
    (b) Consumer Advisory Council. Pursuant to section 703(b) of the 
Consumer Credit Protection Act (15 U.S.C. 1691b(b)), to call meetings of 
and consult with the Consumer Advisory Council established under that 
section, approve the agenda for such meetings, and accept any 
resignations from Consumer Advisory Council members.
    (c) Determining inconsistencies between state and federal laws. To 
determine whether a state law is inconsistent with the following federal 
acts and regulations:
    (1) Sections 111, 171(a) and 186(a) of the Truth in Lending Act (15 
U.S.C. 1610(a), 1666j(a), 1667e(a)) and Sec. 226.28 of Regulation Z (12 
CFR part 226) and Sec. 213.7 of Regulation M (12 CFR part 213);
    (2) Section 919 of the Electronic Fund Transfer Act (15 U.S.C. 
1693q), Sec. 205.12 of Regulation E (12 CFR part 205);
    (3) Section 705(f) of the Equal Credit Opportunity Act (15 U.S.C. 
1691d(f) and Sec. 202.11 of Regulation B (12 CFR part 202);
    (4) Section 306(a) of the Home Mortgage Disclosure Act (12 U.S.C. 
2805(a)) and Sec. 203.3 of Regulation C (12 CFR part 203); and
    (5) Section 273 of the Truth in Savings Act (12 U.S.C. 4312) and 
Sec. 230.1 of Regulation DD (12 CFR part 230).
    (d) Interpreting the Fair Credit Reporting Act. To issue 
interpretations pursuant to section 621(e) of the Fair Credit Reporting 
Act (15 U.S.C. 1681s(e));
    (e) Annual adjustments. To adjust as required by law:
    (1) The amount specified in section 103(aa)(1)(B)(ii) of the Truth 
in Lending Act and Sec. 226.32(a)(1)(ii) of Regulation Z (12 CFR part 
226), relating to mortgages bearing fees above a certain amount in 
accord with section 103(aa)(3) of that act (15 U.S.C. 1602(aa)); and
    (2) The amount specified in section 309(b)(1) of the Home Mortgage 
Disclosure Act (12 U.S.C. 2808(b)(1)) and Sec. 203.3(a)(1)(ii) of 
Regulation C (12 CFR part 203) relating to the asset threshold above 
which a depository institution must collect and report data.
    (f) Community Reinvestment Act determinations. To make 
determinations, pursuant to section 804 of the Community Reinvestment 
Act (12 U.S.C. 2903), approving or disapproving:
    (1) Strategic plans and any amendments thereto pursuant to Sec. 
228.27(g) and (h) of Regulation BB (12 CFR part 228); and
    (2) Requests for designation as a wholesale or limited purpose bank 
or the revocation of such designation, pursuant to Sec. 228.25(b) of 
Regulation BB (12 CFR part 228).
    (g) Public hearings. To conduct hearings or other proceedings 
required by law, concerning consumer law or other matters within the 
responsibilities of the Division of Consumer and Community Affairs, in 
consultation with other interested divisions of the Board where 
appropriate.

[56 FR 25619, June 5, 1991, as amended at 56 FR 67154, Dec. 30, 1991; 58 
FR 65540, Dec. 15, 1993; 63 FR 65044, Nov. 25, 1998]



Sec. 265.10  Functions delegated to Secretary of Federal Open Market 

Committee.

    The Secretary of the Federal Open Market Committee (or the Deputy 
Secretary in the Secretary's absence) is authorized:
    (a) Records of policy actions. To approve for inclusion in the 
Board's Annual Report to Congress, records of policy actions of the 
Federal Open Market Committee.
    (b) [Reserved]



Sec. 265.11  Functions delegated to Federal Reserve Banks.

    Each Federal Reserve Bank is authorized as to a member bank or other 
indicated organization for which the Reserve Bank is reponsible for 
receiving applications or registration statements or to take other 
actions as indicated:
    (a) Procedure--(1) Member bank affiliate's reports. To extend the 
time for good cause shown, within which an affiliate of a state member 
bank must file reports under section 9(17) of the Federal Reserve Act 
(12 U.S.C. 334).
    (2) Edge corporation's divestiture of stock. To extend the time in 
which an Edge Act corporation must divest itself of stock acquired in 
satisfaction of a

[[Page 962]]

debt previously contracted under section 25A(9) of the Federal Reserve 
Act (12 U.S.C. 615).
    (3) Edge corporation's corporate existence. To extend the period of 
corporate existence of an Edge corporation under section 25A(22) of the 
Federal Reserve Act (12 U.S.C. 628).
    (4) Bank holding company registration statement. To extend the time 
within which a bank holding company must file a registration statement 
under section 5(a) of the Bank Holding Company Act (12 U.S.C. 1844(a)).
    (5) Bank holding company divestiture of nonbanking interests. To 
extend the time within which a bank holding company must divest itself 
of interests in nonbanking organizations under section 4(a) of the Bank 
Holding Company Act (12 U.S.C. 1843(a)).
    (6) Bank holding company divestiture of dpc interests. To extend the 
time within which a bank holding company or any of its subsidiaries must 
divest itself of interests acquired in satisfaction of a debt previously 
contracted:
    (i) Under section 4(c)(2) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(2)) or Sec. 225.22(c)(1) of Regulation Y (12 CFR part 225); or
    (ii) Under sections 2(a)(5)(D) and 3(a) of the Bank Holding Company 
Act (12 U.S.C. 1841(a)(5)(D) and 1842(a)).
    (7) Member bank's surrender of Reserve Bank stock upon withdrawal 
from membership. To extend the time within which a member bank that has 
given notice of intention to withdraw from membership must surrender its 
Federal Reserve Bank stock and its certificate of membership under 
Regulation H (12 CFR 209.3(e)).
    (8) Members bank's reports of condition. To extend the time for 
publication of reports of condition under Regulation H (12 CFR part 208) 
for good cause shown.
    (9) Bank holding company's annual reports. To grant to a bank 
holding company a 90-day extension of time in which to file an annual 
report, and for good cause shown grant an additional extension of time 
not to exceed 90 days under section 5(c) of the Bank Holding Company Act 
(12 U.S.C. 1844(c)).
    (10) Regulation K--Divestiture of foreign portfolio investment, 
joint venture, or subsidiary acquired through debt previously 
contracted. To extend the time within which an investor must divest 
itself of interests in a foreign portfolio investment, joint venture, or 
subsidiary acquired in satisfaction of a debt previously contracted 
under Regulation K (12 CFR 211.5(e)).
    (11) Bank holding company's acquisition of shares, opening new bank, 
consummating merger. To extend the time within which a bank holding 
company may acquire shares, open a new bank to be acquired, or 
consummante a merger in connection with an application approved by the 
Board, if no material change relevant to the proposal has occurred since 
its approval.
    (12) Member bank's establishing domestic or foreign branch; Edge or 
agreement corporation's establishing branch or agency. To extend the 
times within which:
    (i) A member bank may establish a domestic branch;
    (ii) A member bank may establish a foreign branch; or
    (iii) An Edge or agreement corporation may establish a branch or 
agency, if no material change has occurred in the bank's (or 
corporation's) general condition since the application was approved.
    (13) Purchase of stock by Edge or Agreement Corporation, member 
bank, or bank holding company. To extend the time within which an Edge 
or Agreement corporation, member bank, or a bank holding company may 
accomplish a purchase of stock if no material change has occurred in the 
general condition of the corporation, the member bank, or bank holding 
company since such authorization under sections 25 or 25A of the Federal 
Reserve Act or section 4(c)(13) of the Bank Holding Company Act (12 
U.S.C. 615, 628, 1843).)
    (14) Federal Reserve Membership. To extend the time within which 
Federal Reserve membership must be accomplished, if no material change 
has occurred in the bank's general condition since the application was 
approved.
    (15) Enforcement actions; written agreements; cease and desist 
orders. With the prior approval of both the Board's Director of the 
Division of Banking Supervision and Regulation and the Board's General 
Counsel;
    (i) To enter into a written agreement with a bank holding company or 
any

[[Page 963]]

nonbanking subsidiary thereof, with a state member bank, or with any 
other person or entity subject to the Board's supervisory jurisdiction 
under 12 U.S.C. 1818(b) concerning the prevention or correction of an 
unsafe or unsound practice in conducting the business of the bank 
holding company, nonbanking subsidiary, or state member bank or other 
entity, or concerning the correction or prevention of any violation of 
law, rule, or regulation, or any condition imposed in writing by the 
Board in connection with the granting of any application or other 
request by the bank or company or any other appropriate matter;
    (ii) To stay, modify, terminate, or suspend an agreement entered 
into pursuant to this paragraph;
    (iii) To stay, modify, terminate, or suspend an outstanding cease 
and desist order that has become final pursuant to 12 U.S.C. 1818 (b) 
and (k). Any agreement authorized under this paragraph may, by its 
terms, be enforceable to the same extent and in the same manner as an 
effective and outstanding cease and desist order that has become final 
pursuant to 12 U.S.C. 1818 (b) and (k).
    (16) Appointment of assistant Federal Reserve agents. To approve the 
appointment of assistant Federal Reserve agents (including 
representatives or alternate representatives of such agents) under 
section 4, paragraph 21 of the Federal Reserve Act (12 U.S.C. 306).
    (b) Availability of Information--(1) Availability of Information; 
Board records. To make available information of the Board of the nature 
and in the circumstances described in the Board's Rules Regarding 
Availability of Information (12 CFR 261.11).
    (2) [Reserved]
    (c) Bank holding companies; Change in bank control; Mergers--(1) 
Require reports under oath. To require reports under oath to determine 
whether a company is complying with section 5(c) of the Bank Holding 
Company Act (12 U.S.C. 1844(c)).
    (2) Acquisition of going concern--authorization of consummation; 
early consummation. (i) To notify a bank holding company that, because 
the circumstances surrounding the application to acquire a going concern 
indicate that additional information is required or that the acquisition 
should be considered by the Board, the acquisition should not be 
consummated until specifically authorized by the Reserve Bank or by the 
Board.
    (ii) To permit a bank holding company to make a proposed acquisition 
of a going concern before the expiration of the 30-day period referred 
to in Regulation Y (12 CFR 225.23(a)(2)) because exigent circumstances 
justify consummation of the acquisition at an earlier time.
    (3) Petition for review of decision that adverse comments are not 
substantive; permit proposed de novo activities; authorization of 
consummation; early consummation. Under Sec. 225.4(b)(1) of Regulation 
Y (12 CFR part 225) and subject to Sec. 265.3 of this part, if a person 
submitting adverse comments that the Reserve Bank had decided are not 
substantive files a petition for review by the Board of that decision:
    (i) To permit a bank holding company to engage de novo in activities 
specified in Sec. 225.25 of Regulation Y (12 CFR part 225), or retain 
shares in a company established de novo and engaging in such activities, 
if the Reserve Bank's evaluation of the considerations specified in 
section 4(c)(8) of the Bank Holding Company Act leads it to conclude 
that the proposal can reasonably be expected to produce benefits to the 
public.
    (ii) To notify a bank holding company that the proposal should not 
be consummated until specifically authorized by the Reserve Bank or by 
the Board or that the proposal should be processed in accordance with 
the procedures in Sec. 225.23(a)(2) of Regulation Y (12 CFR part 225).
    (iii) To permit a bank holding company to consummate the proposal 
before the expiration of the 45-day period referred to in Sec. 
225.23(a)(1) of Regulation Y because exigent circumstances justify 
consummation at an earlier time under Sec. 225.4(b)(1) of Regulation Y 
(12 CFR part 225).
    (4) Permit or stay of modification or location of activities. To 
permit or stay a proposed de novo modification or relocation of 
activities engaged in by a bank holding company on the same

[[Page 964]]

basis as de novo proposals under Sec. 265.11(d)(3) of this part.
    (5) Notices under change in Bank Control Act. With respect to the 
bank holding company or a state member bank:
    (i) To determine the informational sufficiency of notices and 
reports filed under the Change in Bank Control Act;
    (ii) To extend periods for consideration of notices;
    (iii) To determine whether a person who is or will be subject to a 
presumption described in Sec. 225.41(b) of Regulation Y (12 CFR part 
225) should file a notice regarding a proposed transaction; and
    (iv) To issue a notice of intention not to disapprove a proposed 
change in control if all the following conditions are met:
    (A) No member of the Board has indicated an objection prior to the 
Reserve Bank's action;
    (B) No senior officer or director of an involved party is also a 
director of a Federal Reserve Bank or branch;
    (C) All relevant departments of the Reserve Bank concur;
    (D) If the proposal involves shares of a state member bank or a bank 
holding company controlling a state member bank, the appropriate bank 
supervisory authorities have indicated that they have no objection to 
the proposal, or no objection has been received from them within the 
time allowed by the act; and
    (E) No significant policy issue under the change in Bank Control 
Act, 12 U.S.C. 1817(j) or Sec. 225.41 of Regulation Y (12 CFR part 225) 
is raised by the proposal as to which the Board has not expressed its 
view.
    (6) Failure to comply with publication requirement under change in 
Bank Control Act. To waive, dispense with, modify, or excuse the failure 
to comply with the requirement for publication and solicitation of 
public comment regarding a notice filed under the Change in Bank Control 
Act, with the concurrence of the Board's Director of the Division of 
Banking Supervision and Regulation and the Board's General Counsel, 
provided that a written finding is made that such disclosure or 
solicitation would seriously threaten the safety or soundness of a bank 
holding company or bank under the Change in Bank Control Act (12 U.S.C. 
1817(j)(2)).
    (7) Grandfathered nonbanking activities. To determine under section 
4(a)(2) of the Bank Holding Company Act (12 U.S.C. 1843(a)(2)) that 
termination of grandfathered nonbanking activities of a particular bank 
holding company is not warranted, provided the Reserve Bank is satisfied 
all of the following conditions are met:
    (i) The company or its successor is ``a company covered in 1970'';
    (ii) The nonbanking activities for which indefinite grandfather 
privileges are being sought do not present any significant unsettled 
policy issues; and
    (iii) The bank holding company was lawfully engaged in such 
activities as of June 30, 1968 and has been engaged in such activities 
continuously thereafter.
    (8) Opening of additional nonbanking offices. To approve 
applications by a bank holding company under sections 4(c)(8) and 5(b) 
of the Bank Holding Company Act (12 U.S.C. 1843(c)(8), 1844(b)) and 
Sec. 225.23(b) of Regulation Y (12 CFR part 225) to open additional 
offices to engage in nonbanking activities for which the bank holding 
company previously received approval pursuant to Board order, unless one 
of the conditions specified in Sec. 265.11(f) (1), (2), (3), or (4), of 
this part is present.
    (9) Notices for addition or change of directors or officers. Under 
section 914(a) of the Financial Institutions Reform, Recovery and 
Enforcement Act (12 U.S.C. 1831i) and subpart H of Regulation Y (12 CFR 
part 225), provided that no senior officer or director or proposed 
senior officer or director of the notificant is also a director of the 
Reserve Bank or a branch of the Reserve Bank:
    (i) To determine the informational sufficiency of notices filed 
pursuant to Sec. 225.72 of Regulation Y; and
    (ii) To waive the prior notice requirements of that section.
    (10) Acquisition approvals under section 5(d)(3) of the FDI Act. To 
approve, under section 5(d)(3)(E) of the Federal Deposit Insurance Act, 
requests by a bank holding company to engage in any transaction 
described in section 5(d)(3)(A) of that Act.

[[Page 965]]

    (11) Applications requiring Board approval; competitive factors 
reports for bank mergers. To approve applications requiring prior 
approval of the Board and furnish to the Comptroller of the Currency and 
the Federal Deposit Insurance Corporation reports on competitive factors 
involved in a bank merger required to be approved by one of those 
agencies, unless one or more of the following conditions is present.
    (i) A member of the Board has indicated an objection prior to the 
Reserve Bank's action; or
    (ii) The Board has indicated that such delegated authority shall not 
be exercised by the Reserve Bank in whole or in part; or
    (iii) A written substantive objection to the application has been 
properly made; or
    (iv) The application raises a significant policy issue or legal 
question on which the Board has not established its position; or
    (v) With respect to bank holding company formations, bank 
acquisitions or mergers, the proposed transaction involves two or more 
banking organizations that, upon consummation of the proposal, would 
control over 35 percent of total deposits (including 50 percent of 
thrift deposits) in banking offices in the relevant geographic market, 
or would result in an increase of at least 200 points in the Herfindahl-
Hirschman Index (HHI) in a highly concentrated market (a market with a 
post-merger HHI of at least 1800); or
    (vi) With respect to nonbank acquisitions, the nonbanking activities 
involved do not clearly fall within activities that the Board has 
designated as permissible for bank holding companies under Sec. 
225.25(b) of Regulation Y.
    (d) International banking--(1) Application to establish Edge 
Corporation. To approve the application by a U.S. banking organization 
to establish an Edge corporation under section 25 of the Federal Reserve 
Act (12 U.S.C. 611) and the Board's Regulation K (12 CFR part 211) if 
all of the following criteria are met:
    (i) The U.S. banking organization meets the capital adequacy 
guidelines and is otherwise in satisfactory condition;
    (ii) The proposed Edge corporation will be a wholly-owned subsidiary 
of a single banking organization; and
    (iii) No other significant policy issue is raised on which the Board 
has not previously expressed its view.
    (2) Issuance of permit to Edge corporation to commence business. To 
issue to an Edge corporation under section 25A of the Federal Reserve 
Act (12 U.S.C. 612) and Regulation K, Sec. 211.4(a) (12 CFR part 211) a 
final permit to commence business and to approve amendments to the 
articles of association of any Edge corporation to reflect the 
following:
    (i) Any increase in capital stock where all additional shares are to 
be acquired by existing shareholders;
    (ii) Any change in the location of the home office in the city where 
the Edge corporation is presently located;
    (iii) Any change in the number of members of the board of directors;
    (iv) Any change in the name; and
    (v) Deletion of the requirements that all directors and shareholders 
must be U.S. citizens.
    (3) Edge corporation establishing branch abroad. To approve, under 
Sec. 211.3(a) Regulation K (12 CFR part 211), an Edge corporation 
application to establish a branch abroad, provided that no senior 
officer or director of the involved parties is also a director of a 
Reserve Bank or branch and that no significant policy issue is raised by 
the proposal as to which the Board has not expressed its view.
    (4) Member bank establishing foreign branch. To approve under Sec. 
211.3(a) of Regulation K (12 CFR part 211) a member bank's establishing, 
directly or indirectly, a foreign branch where the application is not 
one for a full-service branch in a foreign country, provided that no 
senior officer or director of the involved parties is also a director of 
a Reserve Bank or branch and that no significant policy issue is raised 
by the proposal as to which the Board has not expressed its view.
    (5) Agreement with foreign bank concerning deposits of out-of-home-
state branch. To enter into an agreement or undertaking with a foreign 
bank that it shall receive only such deposits at its out-of-home-state 
branch as would be permissible for an Edge corporation

[[Page 966]]

under section 5 of the International Banking Act (12 U.S.C. 3103).
    (6) Waiver of 30-day prior notification period. To waive the 30-day 
prior notification period with respect to a foreign bank's change of 
home state under Sec. 211.22(c)(1) of Regulation K (12 CFR part 211).
    (7) Granting specific consent. To grant prior specific consent to an 
investor for an investment in its first subsidiary or its first joint 
venture, where such investment does not exceed the general consent 
limitations under 211.5(c) of Regulation K (12 CFR part 211).
    (8) Authority under prior-notice procedures. (i) With regard to a 
prior notice to make an investment under Sec. 211.9(f) of Regulation K 
(12 CFR 211.9(f)):
    (A) To suspend the notice period; or
    (B) To require the notificant to file an application for the Board's 
specific consent.
    (ii) With regard to a prior notice of a foreign bank to establish 
certain U.S. offices under Sec. 211.24(a)(2)(i) of Regulation K (12 CFR 
211.24(a)(2)(i)):
    (A) To suspend the notice period; or
    (B) To require that the foreign bank file an application for the 
Board's specific consent.
    (9) Investment in export trading company. To issue a notice of 
intention not to disapprove a proposed investment in an export trading 
company if all the following criteria are met:
    (i) The proposed export trading company will be a wholly-owned 
subsidiary of a single investor, or ownership will be shared with an 
individual or individuals involved in the operation of the export 
trading company;
    (ii) A bank holding company investor and its lead bank meet the 
minimum capital adequacy guidelines of the Board, the Comptroller of the 
Currency, or the Federal Deposit Insurance Corporation or have enacted 
capital enhancement plans that have been determined by the appropriate 
supervisory authority to be acceptable.
    (iii) The proposed activities of the export trading company do not 
include product research or design, product modification, or activities 
not specifically covered by the list of services contained in 
4(c)(14)(F)(ii) of the Bank Holding Company Act (12 U.S.C. 
1843(c)(14)(F)(ii));
    (iv) No other significant policy issue is raised on which the Board 
has not previously expressed its view under section 4(c)(14) of the Bank 
Holding Company Act (12 U.S.C. 1843(c)(14) and Regulation K (12 CFR 
211.31-211.34).
    (10) Futures commission merchant activities. To approve, under Sec. 
211.5(d)(17) of Regulation K (12 CFR part 211), applications to engage 
in futures commission merchant activities on an exchange that requires 
members to guarantee or otherwise contract to cover losses suffered by 
the other members, provided that the Board has previously approved the 
exchange and the application is on the same terms and conditions on 
which the Board based its approval of the exchange.
    (11) Investments in Edge and agreement Corporation subsidiaries. To 
approve an application by a member bank to invest more than 10 percent 
of capital and surplus in Edge and agreement corporation subsidiaries, 
provided that:
    (i) The member bank's total investment, including the retained 
earnings of the Edge and agreement corporation subsidiaries, does not 
exceed 20 percent of the bank's capital and surplus or would not exceed 
that level as a result of the proposal; and
    (ii) The proposal raises no significant policy or supervisory 
issues.
    (12) Amendments to Edge corporation charters. To approve amendments 
to Edge corporation charters.
    (e) Member banks--(1) Approval of membership applications. To 
approve applications for membership in the Federal Reserve System under 
section 9 of the Federal Reserve Act (12 USC 321 et seq.) and Regulation 
H (12 CFR part 208) if the Reserve Bank is satisfied that approval is 
warranted after considering the factors set forth in 12 CFR 208.3(b).
    (2) Waiver of notice of intention to withdraw from membership. To 
approve or deny applications by state banks for waiver of the required 
six months' notice of intention to withdraw from Federal Reserve 
membership under section 9(10) of the Federal Reserve Act (12 U.S.C. 
328).
    (3) Approval of branch applications. To approve a state member 
bank's establishment of a domestic branch under section 9 of the Federal 
Reserve Act (12

[[Page 967]]

USC 321 et seq.) and Regulation H (12 CFR part 208) if the Reserve Bank 
is satisfied that approval is warranted after considering the factors 
set forth in 12 CFR 208.6(b).
    (4) Declaration of dividends in excess of net profits. To permit a 
state member bank under section 9(6) of the Federal Reserve Act (12 USC 
324 and 60) to declare dividends in excess of the amounts allowed in 12 
CFR 208.5(c) if the Reserve Bank is satisfied that approval is warranted 
after giving consideration to:
    (i) The banks capitalization in relation to the character and 
condition of its assets and to its deposit liabilities and other 
corporate responsibilities, including the volume of its risk assets and 
of its marginal and inferior quality assets, all considered in relation 
to the strength of its management; and
    (ii) The bank's capitalization after payment of the proposed 
dividends.
    (5) Reduction of capital stock. To permit a state member bank under 
section 9(11) of the Federal Reserve Act (12 USC 239) to reduce its 
capital stock below the amounts set forth in 12 CFR 208.5(d) if the 
state member bank's capitalization thereafter will be:
    (i) In conformity with the requirements of federal law; and
    (ii) Adequate in relation to the character and condition of its 
assets and to its deposit liabilities and other corporate 
responsibilities, including the volume of its risk assets and of its 
marginal and inferior quality assets, all considered in relation to the 
strength of its management.
    (6) Acceptance of drafts and bills of exchange. To permit a member 
bank or a federal or state branch or agency of a foreign bank that is 
subject to reserve requirements under section 7 of the International 
Banking Act of 1978 (12 U.S.C. 3105) to accept drafts or bills of 
exchange under section 13(7) of the Federal Reserve Act (12 U.S.C. 372) 
in an aggregate amount at any one time up to 200 percent of its paid-up 
and unimpaired capital stock and surplus, if the Reserve Bank is 
satisfied that such permission is warranted after giving consideration 
to the institution's capitalization in relation to the character and 
condition of its assets and to its deposit liabilities and other 
corporate responsibilities, including the volume of its risk assets and 
of its marginal and inferior-quality assets, all considered in relation 
to the strength of its management.
    (7) Investment in bank premises in excess of capital stock. To 
permit a state member bank to invest in bank premises under section 24A 
of the Federal Reserve Act (12 USC 371a) in an amount in excess of that 
set forth in 12 CFR 208.21(a), if the Reserve Bank is satisfied that 
approval is warranted after giving consideration to the bank's 
capitalization in relation to the character and condition of its assets 
and to its deposit liabilities and other corporate responsibilities, 
including the volume of its risk assets and of its marginal and inferior 
quality assets, all considered in relation to the strength of its 
management.
    (8) Security devices. To determine whether security devices and 
procedures of state member banks are deficient in meeting the 
requirements of Regulation H (12 CFR part 208) and whether such 
requirements should be varied in the circumstances of a particular 
banking office, and whether to require corrective action.
    (9) Classifying member banks for election of directors. To classify 
member banks for the purposes of electing Federal Reserve Bank class A 
and class B directors under section 4(16) of the Federal Reserve Act (12 
U.S.C. 304), giving consideration to:
    (i) The statutory requirement that each of the three groups shall 
consist as nearly as may be of banks of similar capitalization; and
    (ii) The desirability that every member bank have the opportunity to 
vote for a class A or a class B director at least once every three 
years.
    (10) Waiver of penalty for deficient reserves. To waive the penalty 
for deficient reserves by a member bank if, after a review of all the 
circumstances relating to the deficiency, the Reserve Bank concludes 
that waiver is warranted, except that in no case may a penalty be waived 
if the deficiency in reserves arises out of the bank's gross negligence 
or conduct inconsistent with the principles and purposes of reserve 
requirements.

[[Page 968]]

    (11) Retirement of subordinated debt. To approve the retirement 
prior to maturity of capital notes described in Sec. 
204.2(a)(1)(vii)(C) of Regulation D (12 CFR part 204) and issued by a 
state member bank, provided the Reserve Bank is satisfied that the 
capital position of the bank will be adequate after the proposed 
redemption.
    (12) Public welfare investments. To permit a state member bank to 
make a public welfare investment that meets the conditions of 12 CFR 
208.22(b)(1)-(3), (b)(5) and (b)(7), if the Reserve Bank is satisfied 
that:
    (i) The state member bank received at least an overall rating of 
``3'' as of its most recent consumer compliance examination; and
    (ii) The aggregate of all such investments of the state member bank 
does not exceed 10 percent of its capital stock and surplus as defined 
under 12 CFR 208.2(d).
    (f) Securities. To approve applications by a registered lender for 
termination of the registration under Sec. 221.3(b)(2) of Regulation U 
(12 CFR 221.3(b)(2)).
    (g) Management interlocks--(1) Change in circumstances requiring 
termination of management interlocks; Regulation L. To grant time for 
compliance with Sec. 121.6 of Regulation L (12 CFR part 212) of up to 
an aggregate of 15 months from the date on which the change in 
circumstances as specified in that section occurs when the additional 
time appears to be appropriate to avoid undue disruption to the 
depository organizations involved in the management interlocks.
    (2) Depository Institutions Management Interlocks Act. After 
consultation with the General Counsel of the Board, to decide not to 
disapprove notices to establish director interlocks with diversified 
savings and loan holding companies. (12 U.S.C. 3204(8)).

[56 FR 25619, June 5, 1991, as amended at 56 FR 67154, Dec. 30, 1991; 57 
FR 11907, Apr. 8, 1992; 57 FR 40600, Sept. 4, 1992; 58 FR 6363, Jan. 28, 
1993; 59 FR 22968, May 4, 1994; 60 FR 22257, May 5, 1995; 63 FR 2839, 
Jan. 16, 1998; 63 FR 58622, Nov. 2, 1998; 66 FR 54398, Oct. 26, 2001; 66 
FR 58656, Nov. 23, 2001]



PART 266_LIMITATIONS ON ACTIVITIES OF FORMER MEMBERS AND EMPLOYEES OF THE 

BOARD--Table of Contents




Sec.
266.1 Basis and scope.
266.2 Definitions.
266.3 Limitations.
266.4 Suspension of appearance privilege.
266.5 Criminal penalties.

    Authority: Sec. 11(i), Federal Reserve Act (12 U.S.C. 248(i)); 5 
U.S.C. 552.

    Source: 38 FR 31672, Nov. 16, 1973, unless otherwise noted.



Sec. 266.1  Basis and scope.

    This part, issued under authority of section 11(i) of the Federal 
Reserve Act (12 U.S.C. 248(i)), and pursuant to section 552 of title 5 
of the United States Code, which requires that every agency shall 
publish in the Federal Register its rules of procedure, relates to 
limitations on former members and employees of the Board with respect to 
participation in matters connected with their former duties and official 
responsibilities while serving with the Board.\1\
---------------------------------------------------------------------------

    \1\ While the Board has not adopted rules with regard to the 
disclosure of unpublished information by former Board members and 
employees, it advises such persons not to disclose unpublished 
information of the Board obtained in the course of their work. Questions 
in this regard may be addressed to the General Counsel or the Secretary 
of the Board.
---------------------------------------------------------------------------



Sec. 266.2  Definitions.

    (a) Employee means a regular officer or employee of the Board; it 
does not include a consultant to the Board.\2\
---------------------------------------------------------------------------

    \2\ While former consultants to the Board are not covered by these 
Rules, they appear to fall within the coverage of section 207 of the 
United States Criminal Code (18 U.S.C. 207) that provides criminal 
penalties for engaging in activities similar, although not identical, to 
those described in paragraphs (a) and (b) of Sec. 266.3.
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    (b) Official responsibility, with respect to a matter, means 
administrative, supervisory, or decisional authority, whether 
intermediate or final, exercisable alone or with others, personally or 
through subordinates, to approve, disapprove, decide, or recommend

[[Page 969]]

Board action or to express staff opinions in dealings with the public.
    (c) Appear personally includes personal appearance or attendance 
before, or personal communication, either written or oral, with the 
Board or a Federal Reserve Bank of any member or employee thereof, or 
personal participation in the formulation or preparation of any material 
presented or communicated to, or filed with, the Board, in connection 
with any application or interpretation arising under the statutes or 
regulations administered by the Board or the Federal Reserve Banks, 
except that requests for general information or explanations of Board 
policy or interpretation shall not be construed to be a personal 
appearance.



Sec. 266.3  Limitations.

    (a) Matters on which Board member or employee worked. No former 
member or employee of the Board shall appear personally before the Board 
or a Federal Reserve Bank on behalf of anyone other than the United 
States, an agency thereof, or a Federal Reserve Bank, in connection with 
any judicial or other proceedings, application, request for ruling or 
determination, or other particular matter involving a specific party or 
parties in which the United States, an agency thereof, or a Federal 
Reserve Bank is also a party or has a direct and substantial interest 
and in which he participated personally and substantially as a member or 
employee of the Board through approval, disapproval, decision, 
recommendation, advice, investigation or otherwise.
    (b) Matters within Board member or employee's official 
responsibility. No former member or employee of the Board shall appear 
personally before the Board or a Federal Reserve Bank on behalf of 
anyone other than the United States, an agency thereof, or a Federal 
Reserve Bank, in connection with any judicial or other proceeding, 
application, request for ruling or determination, or other particular 
matter involving a specific party or parties in which the United States, 
an agency thereof, or a Federal Reserve Bank is also a party or has a 
direct and substantial interest, and which matter was in process during 
his tenure of office or period of employment and under his official 
Board responsibility, at any time within a period of one year after the 
termination of such responsibility.
    (c) Consultation as to propriety of appearance before the Board. Any 
former member or employee of the Board who wishes to personally appear 
before the Board or a Federal Reserve Bank on behalf of any party other 
than the United States or an agency thereof or a Federal Reserve Bank at 
any time within two years from termination of employment with the Board 
is advised to consult the General Counsel or the Secretary of the Board 
as to the propriety of such appearance.
    (d) Rulemaking proceedings. Nothing in this section shall preclude a 
former member or employee of the Board from representing another person 
in any Board or Federal Reserve Bank proceeding governed by a rule, 
regulation, standard, or policy of the Board solely by reason of the 
fact that such former member or employee participated in or had official 
responsibility in the formation or adoption of such rule, regulation, 
standard, or policy.
    (e) Effective date. This part shall become effective November 6, 
1973. Notwithstanding the foregoing, the limitations of this part shall 
not apply to any activities with respect to a specific matter before the 
Board in which any former Board member or employee may be engaged on 
September 21, 1973, the date of publication of this part, until the 
expiration of 60 days following the effective date of this part or of 
such additional period as the Secretary of the Board may determine to be 
appropriate in order to avoid inequity.



Sec. 266.4  Suspension of appearance privilege.

    If any person knowingly and willfully fails to comply with the 
provisions of this part, the Board may decline to permit such person to 
appear personally before it or a Federal Reserve Bank for such periods 
of time as it may determine and may impose such other sanctions as the 
Board may deem just and proper.



Sec. 266.5  Criminal penalties.

    Any former member or employee of the Board who engages in actions in

[[Page 970]]

contravention of paragraph (a) or (b) of Sec. 266.3 may be subject to 
criminal penalties for violation of section 207 of the United States 
Criminal Code (18 U.S.C. 207).



PART 267_RULES OF ORGANIZATION AND PROCEDURE OF THE CONSUMER ADVISORY 

COUNCIL--Table of Contents




Sec.
267.1 Statutory authority.
267.2 Purposes and objectives of the Council.
267.3 Members.
267.4 Officers.
267.5 Meetings.
267.6 Amendments.

    Authority: Sec. 703, Equal Credit Opportunity Act, as amended in 
Pub. L. 94-239.

    Source: 41 FR 49802, Nov. 11, 1976, unless otherwise noted.



Sec. 267.1  Statutory authority.

    Section 703 of the Equal Credit Opportunity Act, as amended, 
provides:

    The Board [of Governors of the Federal Reserve System] shall 
establish a Consumer Advisory Council to advise and consult with it in 
the exercise of its functions under the Consumer Credit Protection Act 
and to advise and consult with it concerning other consumer related 
matters it may place before the Council. In appointing the members of 
the Council, the Board shall seek to achieve a fair representation of 
the interests of creditors and consumers. The Council shall meet from 
time to time at the call of the Board. Members of the Council who are 
not regular full-time employees of the United States shall, while 
attending meetings of such Council, be entitled to receive compensation 
at a rate fixed by the Board, but not exceeding $100 per day, including 
travel time. Such members may be allowed travel expenses, including 
transportation and subsistence, while away from their homes or regular 
place of business.



Sec. 267.2  Purposes and objectives of the Council.

    The Council shall advise and consult with the Board in the exercise 
of the Board's functions under the Consumer Credit Protection Act and 
with regard to other matters the Board may place before the Council.



Sec. 267.3  Members.

    (a) The Council shall consist of not more than 30 members appointed 
by the Board. The term of office of each member of the Council shall be 
three years. However, the initial terms of the members first taking 
office shall expire as follows: approximately one-third on December 31, 
1977, and approximately one-third at the end of each of the two 
succeeding calendar years. After the expiration of any member's term of 
office, such member may continue to serve until a successor has been 
appointed by the Board. The Board shall have the authority to appoint 
persons to fill vacancies on the Council.
    (b) Resignation. Any member may resign at any time by giving notice 
to the Board. Any such resignation shall take effect upon its acceptance 
by the Board.
    (c) Compensation. Members who are not regular full-time employees of 
the United States shall be paid travel expenses, including 
transportation and subsistence, and compensation of $100 for each day 
devoted to attending and traveling to and from meetings.



Sec. 267.4  Officers.

    (a) Chairman. The Board shall appoint a Chairman and a Vice Chairman 
from among the members of the Council, who shall serve at the pleasure 
of the Board. The Chairman, or in the Chairman's absence the Vice 
Chairman, shall preside at all meetings of the Council. The Board may 
appoint a Chairman pro tem who shall preside at a meeting of the Council 
in the absence of the Chairman and Vice Chairman.
    (b) Secretary. The Board shall designate a member of its staff, who 
may but need not be the representative described in Sec. 267.5(c), to 
act as Secretary of the Council. The Secretary shall record and maintain 
minutes of the meetings of the Council. Minutes of each meeting shall 
contain, among other things, a record of the persons present, a 
description of the matters discussed, and recommendations made. The 
person acting as Secretary at a meeting shall certify to the accuracy of 
the minutes of that meeting.

[[Page 971]]



Sec. 267.5  Meetings.

    (a) Time. Meetings of the Council shall be held at least once each 
year and may be held more frequently at the call of the Board.
    (b) Agenda. Each meeting of the Council shall be conducted in 
accordance with an agenda formulated or approved by the Board.
    (c) Board representation. Each meeting of the Council shall be 
attended by a representative of the Board who is either a member of the 
Board or of the Board's staff. The Board representative shall have 
authority to and shall adjourn any meeting of the Council when such 
representative considers adjournment to be in the public interest.
    (d) Public nature. (1) Each meeting of the Council shall, to the 
extent of reasonably available facilities, be open to public observation 
unless the Board, in accordance with paragraph (d)(6), of this section, 
determines that the meeting shall be closed.
    (2) Notice of the time, place and purpose of each meeting, as well 
as a summary of the proposed agenda, shall be published in the Federal 
Register not more than 45 or less than 15 days prior to the scheduled 
meeting date. Insofar as is practicable, a list of persons and 
organizations interested in the Council shall be maintained, and a 
notice of each meeting shall be mailed to such persons and organizations 
at least 15 days in advance of the scheduled meeting date. Shorter 
notice may be given when the Board determines that its business so 
requires; in such event, the public, including persons and organizations 
described in the preceding sentence, will be given notice at the 
earliest practicable time.
    (3) Members of the public may file written statements with the 
Council prior to the meeting concerning matters on the Council's agenda. 
The person presiding at the Council meeting may permit members of the 
public to submit written statements on such matters within a specified 
time after the Council meeting. All such submissions shall be circulated 
to the Council members as soon as is practicable.
    (4) Oral presentations at the Council meetings by members of the 
public shall not be permitted except upon invitation of the Council. 
However, if the Council and the Board determine that public hearings 
regarding a matter or matters of concern to the Council are warranted, 
members of the public may make presentations at such hearings in 
accordance with procedures established therefor.
    (5) Minutes of meetings, records, reports, studies, and agenda of 
the Council shall be available to the public for copying at the Board's 
offices in Washington, DC, in accordance with the provisions of 12 CFR 
part 261 Rules Regarding Availability of Information. Requests for 
copies of such documents should be addressed to the Secretary, Board of 
Governors of the Federal Reserve System, Washington, DC 20551.
    (6) The Board may close to the public any meeting, or any portion of 
any meeting, of the Council if it determines that such meeting or 
portion thereof is likely to:
    (i) Disclose matters that relate solely to internal personnel rules 
and practices of the Council;
    (ii) Disclose trade secrets and commercial or financial information 
obtained from a person and privileged or confidential;
    (iii) Involve accusing any person of a crime, or formally censuring 
any person;
    (iv) Disclose information of a personal nature where disclosure 
would constitute a clearly unwarranted invasion of personal privacy;
    (v) Disclose information contained in or related to examination, 
operating or condition reports prepared by, on behalf of, or for the use 
of an agency responsible for the regulation or supervision of financial 
institutions;
    (vi) Disclose information the premature disclosure of which would be 
likely to lead to significant financial speculation in currencies, 
securities, or commodities or significantly endanger the stability of 
any financial institution;
    (vii) Disclose information the premature disclosure of which would 
be likely to frustrate significantly implementation of a proposed Board 
action, unless the Board has already disclosed to the public the content 
or nature of its proposed action, or where the Board

[[Page 972]]

is required by law to make such disclosure on its own initiative prior 
to taking final action on the proposal; or
    (viii) Which relate to any legal proceedings, agency adjudicatory 
proceeding or arbitration involving the Board or the Council.
    (e) If the Board closes a meeting or any portion of a meeting, the 
Council will issue, at least annually, a report containing a summary, 
consistent with 5 U.S.C. 552(b) (1970), of the Council's activities 
during such closed meetings or portions of meetings.



Sec. 267.6  Amendments.

    These rules of organization and procedure may be amended or repealed 
at any time by action of the Board, provided, however, that members of 
the Council shall be promptly notified by the Board of any such action.



PART 268_RULES REGARDING EQUAL OPPORTUNITY--Table of Contents




             Subpart A_General Provisions and Administration

Sec.
268.1 Authority, purpose and scope.
268.2 Definitions.

          Subpart B_Board Program To Promote Equal Opportunity

268.101 General policy for equal opportunity.
268.102 Board program for equal employment opportunity.
268.103 Complaints of discrimination covered by this part.
268.104 Pre-complaint processing.
268.105 Individual complaints.
268.106 Dismissals of complaints.
268.107 Investigation of complaints.
268.108 Hearings.
268.109 Final action by the Board.

        Subpart C_Provisions Applicable to Particular Complaints

268.201 Age Discrimination in Employment Act.
268.202 Equal Pay Act.
268.203 Rehabilitation Act.
268.204 Class complaints.
268.205 Employment of aliens; Access to sensitive information.

                       Subpart D_Related Processes

268.301 Negotiated grievance procedure.
268.302 Mixed case complaints.

    Subpart E_Appeals to the Equal Employment Opportunity Commission

268.401 Appeals to the Equal Employment Opportunity Commission.
268.402 Time for appeals to the Equal Employment Opportunity Commission.
268.403 How to appeal.
268.404 Appellate Procedure.
268.405 Decisions on appeals.
268.406 Civil action: Title VII, Age Discrimination in Employment Act 
          and Rehabilitation Act.
268.407 Civil action: Equal Pay Act.
268.408 Effect of filing a civil action.

                   Subpart F_Remedies and Enforcement

268.501 Remedies and relief.
268.502 Compliance with final Commission decisions.
268.503 Enforcement of final EEOC decisions.
268.504 Compliance with settlement agreements and final actions.
268.505 Interim relief.

               Subpart G_Matters of General Applicability

268.601 EEO group statistics.
268.602 Reports to the Commission.
268.603 Voluntary settlement attempts.
268.604 Filing and computation of time.
268.605 Representation and official time.
268.606 Joint processing and consolidation of complaints.
268.607 Delegation of Authority.

   Subpart H_Prohibition Against Discrimination in Board Programs and 
          Activities Because of a Physical or Mental Disability

268.701 Purpose and application.
268.702 Definitions
268.703 Notice.
268.704 General prohibition against discrimination.
268.705 Employment.
268.706 Program accessibility: Discrimination prohibited.
268.707 Program accessibility: Existing facilities.
268.708 Program accessibility: New construction and alterations.
268.709 Communications.
268.710 Compliance procedures.

    Authority: 12 U.S.C. 244 and 248(i), (k) and (1).

    Source: 68 FR 18085, Apr. 15, 2003, unless otherwise noted.

[[Page 973]]



             Subpart A_General Provisions and Administration



Sec. 268.1  Authority, purpose and scope.

    (a) Authority. The regulations in this part (12 CFR part 268) are 
issued by the Board of Governors of the Federal Reserve System (Board) 
under the authority of sections 10(4) and 11(i), (k), and (l) of the 
Federal Reserve Act (partially codified in 12 U.S.C. 244 and 248(i), (k) 
and (1)).
    (b) Purpose and scope. This part sets forth the Board's policy, 
program and procedures for providing equal opportunity to Board 
employees and applicants for employment without regard to race, color, 
religion, sex, national origin, age, or physical or mental disability. 
It also sets forth the Board's policy, program and procedures for 
prohibiting discrimination on the basis of physical or mental disability 
in programs and activities conducted by the Board. It also specifies the 
circumstances under which the Board will hire or decline to hire persons 
who are not citizens of the United States, consistent with the Board's 
operational needs and applicable law.



Sec. 268.2  Definitions.

    The definitions contained in this section shall have the following 
meanings throughout this part unless otherwise stated.
    (a) Commission or EEOC means the Equal Employment Opportunity 
Commission.
    (b) Title VII means Title VII of the Civil Rights Act (42 U.S.C. 
2000e et seq.).



          Subpart B_Board Program To Promote Equal Opportunity



Sec. 268.101  General policy for equal opportunity.

    (a) It is the policy of the Board to provide equal opportunity in 
employment for all persons, to prohibit discrimination in employment 
because of race, color, religion, sex, national origin, age or 
disability, and to promote the full realization of equal opportunity in 
employment through a continuing affirmative program.
    (b) No person shall be subject to retaliation for opposing any 
practice made unlawful by Title VII of the Civil Rights Act (title VII) 
(42 U.S.C. 2000e et seq.), the Age Discrimination in Employment Act 
(ADEA) (29 U.S.C. 621 et seq.), the Equal Pay Act (29 U.S.C. 206(d)), or 
the Rehabilitation Act (29 U.S.C. 791 et seq.) or for participating in 
any stage of administrative or judicial proceedings under those 
statutes.



Sec. 268.102  Board program for equal employment opportunity.

    (a) The Board shall maintain a continuing affirmative program to 
promote equal opportunity and to identify and eliminate discriminatory 
practices and policies. In support of this program, the Board shall:
    (1) Provide sufficient resources to its equal opportunity program to 
ensure efficient and successful operation;
    (2) Provide for the prompt, fair and impartial processing of 
complaints in accordance with this part and the instructions contained 
in the Commission's Management Directives;
    (3) Conduct a continuing campaign to eradicate every form of 
prejudice or discrimination from the Board's personnel policies, 
practices and working conditions;
    (4) Communicate the Board's equal employment opportunity policy and 
program and its employment needs to all sources of job candidates 
without regard to race, color, religion, sex, national origin, age or 
disability, and solicit their recruitment assistance on a continuing 
basis;
    (5) Review, evaluate and control managerial and supervisory 
performance in such a manner as to insure a continuing affirmative 
application and vigorous enforcement of the policy of equal opportunity, 
and provide orientation, training and advice to managers and supervisors 
to assure their understanding and implementation of the equal employment 
opportunity policy and program;
    (6) Take appropriate disciplinary action against employees who 
engage in discriminatory practices;
    (7) Make reasonable accommodation to the religious needs of 
employees and applicants for employment when those accommodations can be 
made without undue hardship on the business of the Board;

[[Page 974]]

    (8) Make reasonable accommodation to the known physical or mental 
limitations of qualified applicants and employees with a disability 
unless the accommodation would impose an undue hardship on the 
operations of the Board's program;
    (9) Provide recognition to employees, supervisors, managers and 
units demonstrating superior accomplishment in equal employment 
opportunity;
    (10) Establish a system for periodically evaluating the 
effectiveness of the Board's overall equal employment opportunity 
effort;
    (11) Provide the maximum feasible opportunity to employees to 
enhance their skills through on-the-job training, work-study programs 
and other training measures so that they may perform at their highest 
potential and advance in accordance with their abilities;
    (12) Inform its employees and recognized labor organizations of the 
Board's affirmative equal opportunity policy and program and enlist 
their cooperation; and
    (13) Participate at the community level with other employers, with 
schools and universities and with other public and private groups in 
cooperative action to improve employment opportunities and community 
conditions that affect employability.
    (b) In order to implement its program, the Board shall:
    (1) Develop the plans, procedures and regulations necessary to carry 
out its program;
    (2) Establish or make available an alternative dispute resolution 
program. Such program must be available for both the precomplaint 
process and the formal complaint process.
    (3) Appraise its personnel operations at regular intervals to assure 
their conformity with the Board's program, this part 268 and the 
instructions contained in the Commission's management directives;
    (4) Designate a Director for Equal Employment Opportunity (EEO 
Programs Director), EEO Officer(s), and such Special Emphasis Program 
Managers/Coordinators (e.g., People with Disabilities Program, Federal 
Women's Program and Hispanic Employment Program), clerical and 
administrative support as may be necessary to carry out the functions 
described in this part in all organizational units of the Board and at 
all Board installations. The EEO Programs Director shall be under the 
immediate supervision of the Chairman.
    (5) Make written materials available to all employees and applicants 
informing them of the variety of equal employment opportunity programs 
and administrative and judicial remedial procedures available to them 
and prominently post such written materials in all personnel and EEO 
offices and throughout the workplace;
    (6) Ensure that full cooperation is provided by all Board employees 
to EEO Counselors and Board EEO personnel in the processing and 
resolution of pre-complaint matters and complaints within the Board and 
that full cooperation is provided to the Commission in the course of 
appeals, including, granting the Commission routine access to personnel 
records of the Board when required in connection with an investigation;
    (7) Publicize to all employees and post at all times the names, 
business telephone numbers and business addresses of the EEO Counselors 
(unless the counseling function is centralized, in which case only the 
telephone number and address need be publicized and posted), a notice of 
the time limits and necessity of contacting a Counselor before filing a 
complaint and the telephone numbers and addresses of the EEO Programs 
Director, EEO Officer(s) and the Special Emphasis Program Managers/
Coordinators.
    (c) The EEO Programs Director shall be responsible for:
    (1) Advising the Board of Governors with respect to the preparation 
of national and regional equal employment opportunity plans, procedures, 
regulations, reports and other matters pertaining to the policy in Sec. 
268.101 and the Board's program;
    (2) Evaluating from time to time the sufficiency of the total Board 
program for equal employment opportunity and reporting to the Board of 
Governors with recommendations as to any improvement or correction 
needed, including remedial or disciplinary action

[[Page 975]]

with respect to managerial, supervisory or other employees who have 
failed in their responsibilities;
    (3) When authorized by the Board of Governors, making changes in 
programs and procedures designed to eliminate discriminatory practices 
and to improve the Board's program for equal employment opportunity;
    (4) Providing for counseling of aggrieved individuals and for the 
receipt and processing of individual and class complaints of 
discrimination; and
    (5) Assuring that individual complaints are fairly and thoroughly 
investigated and that final action is taken in a timely manner in 
accordance with this part.
    (d) Directives, instructions, forms and other Commission materials 
referenced in this part may be obtained in accordance with the 
provisions of 29 CFR 1610.7.



Sec. 268.103  Complaints of discrimination covered by this part.

    (a) Individual and class complaints of employment discrimination and 
retaliation prohibited by title VII (discrimination on the basis of 
race, color, religion, sex and national origin), the ADEA 
(discrimination on the basis of age when the aggrieved person is at 
least 40 years of age), the Rehabilitation Act (discrimination on the 
basis of disability), or the Equal Pay Act (sex-based wage 
discrimination) shall be processed in accordance with this part. 
Complaints alleging retaliation prohibited by these statutes are 
considered to be complaints of discrimination for purposes of this part.
    (b) This part applies to all Board employees and applicants for 
employment at the Board, and to all employment policies or practices 
affecting Board employees or applicants for employment.
    (c) This part does not apply to Equal Pay Act complaints of 
employees whose services are performed within a foreign country or 
certain United States territories as provided in 29 U.S.C. 213(f).



Sec. 268.104  Pre-complaint processing.

    (a) Aggrieved persons who believe they have been discriminated 
against on the basis of race, color, religion, sex, national origin, age 
or disability must consult a Counselor prior to filing a complaint in 
order to try to informally resolve the matter.
    (1) An aggrieved person must initiate contact with a Counselor 
within 45 days of the date of the matter alleged to be discriminatory 
or, in the case of a personnel action, within 45 days of the effective 
date of the action.
    (2) The Board or the Commission shall extend the 45-day time limit 
in paragraph (a)(1) of this section when the individual shows that he or 
she was not notified of the time limits and was not otherwise aware of 
them, that he or she did not know and reasonably should not have known 
that the discriminatory matter or personnel action occurred, that 
despite due diligence he or she was prevented by circumstances beyond 
his or her control from contacting the counselor within the time limits, 
or for other reasons considered sufficient by the Board or the 
Commission.
    (b)(1) At the initial counseling session, Counselors must advise 
individuals in writing of their rights and responsibilities, including 
the right to request a hearing or an immediate final decision after an 
investigation by the Board in accordance with Sec. 268.107(f), election 
rights pursuant to Sec. 268.302, the right to file a notice of intent 
to sue pursuant to Sec. 268.201(a) and a lawsuit under the ADEA instead 
of an administrative complaint of age discrimination under this part, 
the duty to mitigate damages, administrative and court time frames, and 
that only the claims raised in precomplaint counseling (or issues or 
claims like or related to issues or claims raised in pre-complaint 
counseling) may be alleged in a subsequent complaint filed with the 
Board. Counselors must advise individuals of their duty to keep the 
Board and the Commission informed of their current address and to serve 
copies of appeal papers on the Board. The notice required by paragraphs 
(d) or (e) of this section shall include a notice of the right to file a 
class complaint. If the aggrieved person informs the Counselor that he 
or she wishes to file a class complaint, the Counselor shall explain the 
class complaint procedures

[[Page 976]]

and the responsibilities of a class agent.
    (2) Counselors shall advise aggrieved persons that, where the Board 
agrees to offer ADR in the particular case, they may choose between 
participation in the alternative dispute resolution program and the 
counseling activities provided for in paragraph (c) of this section.
    (c) Counselors shall conduct counseling activities in accordance 
with instructions contained in Commission Management Directives. When 
advised that a complaint has been filed by an aggrieved person, the 
Counselor shall submit a written report within 15 days to the EEO 
Programs Director and the aggrieved person concerning the issues 
discussed and actions taken during counseling.
    (d) Unless the aggrieved person agrees to a longer counseling period 
under paragraph (e) of this section, or the aggrieved person chooses an 
alternative dispute resolution procedure in accordance with paragraph 
(b)(2) of this section, the Counselor shall conduct the final interview 
with the aggrieved person within 30 days of the date the aggrieved 
person contacted the Board's EEO Programs Office to request counseling. 
If the matter has not been resolved, the aggrieved person shall be 
informed in writing by the Counselor, not later than the thirtieth day 
after contacting the Counselor, of the right to file a discrimination 
complaint with the Board. This notice shall inform the complainant of 
the right to file a discrimination complaint within 15 days of receipt 
of the notice, of the appropriate official with whom to file a complaint 
and of the complainant's duty to assure that the EEO Programs Director 
is informed immediately if the complainant retains counsel or a 
representative.
    (e) Prior to the end of the 30-day period, the aggrieved person may 
agree in writing with the Board to postpone the final interview and 
extend the counseling period for an additional period of no more than 60 
days. If the matter has not been resolved before the conclusion of the 
agreed extension, the notice described in paragraph (d) of this section 
shall be issued.
    (f) Where the aggrieved person chooses to participate in an 
alternative dispute resolution procedure in accordance with paragraph 
(b)(2) of this section, the pre-complaint processing period shall be 90 
days. If the claim has not been resolved before the 90th day, the notice 
described in paragraph (d) of this section shall be issued.
    (g) The Counselor shall not attempt in any way to restrain the 
aggrieved person from filing a complaint. The Counselor shall not reveal 
the identity of an aggrieved person who consulted the Counselor, except 
when authorized to do so by the aggrieved person, or until the Board has 
received a discrimination complaint under this part from that person 
involving the same matter.



Sec. 268.105  Individual complaints.

    (a) A complaint must be filed with the agency that allegedly 
discriminated against the complainant.
    (b) A complaint must be filed within 15 days of receipt of the 
notice required by Sec. 268.104 (d), (e) or (f).
    (c) A complaint must contain a signed statement from the person 
claiming to be aggrieved or that person's attorney. This statement must 
be sufficiently precise to identify the aggrieved individual and the 
Board and to describe generally the action(s) or practice(s) that form 
the basis of the complaint. The complaint must also contain a telephone 
number and address where the complainant or the representative can be 
contacted.
    (d) A complainant may amend a complaint at any time prior to the 
conclusion of the investigation to include issues or claims like or 
related to those raised in the complaint. After requesting a hearing, a 
complainant may file a motion with the administrative judge to amend a 
complaint to include issues or claims like or related to those raised in 
the complaint.
    (e) The Board shall acknowledge receipt of a complaint or an 
amendment to a complaint in writing and inform the complainant of the 
date on which the complaint or amendment was filed. The Board shall 
advise the complainant in the acknowledgment of the EEOC office and its 
address where a request for a hearing shall be sent. Such

[[Page 977]]

acknowledgment shall also advise the complainant that:
    (1) The complainant has the right to appeal the final action on or 
dismissal of a complaint; and
    (2) The Board is required to conduct an impartial and appropriate 
investigation of the complaint within 180 days of the filing of the 
complaint unless the parties agree in writing to extend the time period. 
When a complaint has been amended, the Board shall complete its 
investigation within the earlier of 180 days after the last amendment to 
the complaint or 360 days after the filing of the original complaint, 
except that the complainant may request a hearing from an administrative 
judge on the consolidated complaints any time after 180 days from the 
date of the first filed complaint.



Sec. 268.106  Dismissals of complaints.

    (a) Prior to a request for a hearing in a case, the Board shall 
dismiss an entire complaint:
    (1) That fails to state a claim under Sec. 268.103 or Sec. 
268.105(a), or states the same claim that is pending before or has been 
decided by the Board or the Commission;
    (2) That fails to comply with the applicable time limits contained 
in Sec. Sec. 268.104, 268.105 and 268.204(c), unless the Board extends 
the time limits in accordance with Sec. 268.604(c), or that raises a 
matter that has not been brought to the attention of a Counselor and is 
not like or related to a matter that has been brought to the attention 
of a Counselor;
    (3) That is the basis of a pending civil action in a United States 
District Court in which the complainant is a party provided that at 
least 180 days have passed since the filing of the administrative 
complaint, or that was the basis of a civil action decided by a United 
States District Court in which the complainant was a party;
    (4) Where a complainant has raised the matter in an appeal to the 
Merit Systems Protection Board and Sec. 268.302 indicates that the 
complainant has elected to pursue the non-EEO process;
    (5) That is moot or alleges that a proposal to take a personnel 
action, or other preliminary step to taking a personnel action, is 
discriminatory;
    (6) Where the complainant cannot be located, provided that 
reasonable efforts have been made to locate the complainant and the 
complainant has not responded within 15 days to a notice of proposed 
dismissal sent to his or her last known address;
    (7) Where the Board has provided the complainant with a written 
request to provide relevant information or otherwise proceed with the 
complaint, and the complainant has failed to respond to the request 
within 15 days of its receipt or the complainant's response does not 
address the Board's request, provided that the request included a notice 
of the proposed dismissal. Instead of dismissing for failure to 
cooperate, the complaint may be adjudicated if sufficient information 
for that purpose is available;
    (8) That alleges dissatisfaction with the processing of a previously 
filed complaint; or
    (9) Where the Board, strictly applying the criteria set forth in 
Commission decisions, finds that the complaint is part of a clear 
pattern of misuse of the EEO process for a purpose other than the 
prevention and elimination of employment discrimination. A clear pattern 
of misuse of the EEO process requires:
    (i) Evidence of multiple complaint filings; and
    (ii) Allegations that are similar or identical, lack specificity or 
involve matters previously resolved; or
    (iii) Evidence of circumventing other administrative processes, 
retaliating against the Board's in-house administrative processes or 
overburdening the EEO complaint system.
    (b) Where the Board believes that some but not all of the claims in 
a complaint should be dismissed for the reasons contained in paragraphs 
(a)(1) through (9) of this section, the Board shall notify the 
complainant in writing of its determination, the rationale for that 
determination and that those claims will not be investigated, and shall 
place a copy of the notice in the investigative file. A determination 
under this paragraph is reviewable by an administrative judge if a 
hearing is requested on the remainder of the complaint, but is not 
appealable until final

[[Page 978]]

action is taken on the remainder of the complaint.



Sec. 268.107  Investigation of complaints.

    (a) The investigation of complaints filed against the Board shall be 
conducted by the Board.
    (b) In accordance with instructions contained in Commission 
Management Directives, the Board shall develop an impartial and 
appropriate factual record upon which to make findings on the claims 
raised by the written complaint. An appropriate factual record is one 
that allows a reasonable fact finder to draw conclusions as to whether 
discrimination occurred. The Board may use an exchange of letters or 
memoranda, interrogatories, investigations, fact-finding conferences or 
any other fact-finding methods that efficiently and thoroughly address 
the matters at issue. The Board may incorporate alternative dispute 
resolution techniques into its investigative efforts in order to promote 
early resolution of complaints.
    (c) The procedures in paragraphs (c)(1) through (3) of this section 
apply to the investigation of complaints:
    (1) The complainant, the Board, and any employee of the Board shall 
produce such documentary and testimonial evidence as the investigator 
deems necessary.
    (2) Investigators are authorized to administer oaths. Statements of 
witnesses shall be made under oath or affirmation or, alternatively, by 
written statement under penalty of perjury.
    (3) When the complainant, or the Board or its employees fail without 
good cause shown to respond fully and in timely fashion to requests for 
documents, records, comparative data, statistics, affidavits or the 
attendance of witness(es), the investigator may note in the 
investigative record that the decisionmaker should, or the Commission on 
appeal may, in appropriate circumstances:
    (i) Draw an adverse inference that the requested information, or the 
testimony of the requested witness, would have reflected unfavorably on 
the party refusing to provide the requested information;
    (ii) Consider the matters to which the requested information or 
testimony pertains to be established in favor of the opposing party;
    (iii) Exclude other evidence offered by the party failing to produce 
the requested information or witness;
    (iv) Issue a decision fully or partially in favor of the opposing 
party; or
    (v) Take such other actions as it deems appropriate.
    (d) Any investigation will be conducted by investigators with 
appropriate security clearances.
    (e)(1) The Board shall complete its investigation within 180 days of 
the date of filing of an individual complaint or within the time period 
contained in an order from the Office of Federal Operations on an appeal 
from a dismissal pursuant to Sec. 268.106. By written agreement within 
those time periods, the complainant and the Board may voluntarily extend 
the time period for not more than an additional 90 days. The Board may 
unilaterally extend the time period or any period of extension for not 
more than 30 days where it must sanitize a complaint file that may 
contain information classified pursuant to Executive Order No. 12356, or 
successor orders, as secret in the interest of national defense or 
foreign policy, provided the Board notifies the complainant of the 
extension.
    (2) Confidential supervisory information, as defined in 12 CFR 
261.2(c), and other confidential information of the Board may be 
included in the investigative file by the investigator, the EEO Programs 
Director, or another appropriate officer of the Board, where such 
information is relevant to the complaint. Neither the complainant nor 
the complainant's personal representative may make further disclosure of 
such information, however, except in compliance with the Board's Rules 
Regarding Availability of Information, 12 CFR part 261, and where 
applicable, the Board's Rules Regarding Access to Personal Information 
under the Privacy Act of 1974, 12 CFR part 261a.
    (f) Within 180 days from the filing of the complaint, or where a 
complaint was amended, within the earlier of 180 days after the last 
amendment to the complaint or 360 days after the filing of the original 
complaint, within the time period contained in an order from the

[[Page 979]]

Office of Federal Operations on an appeal from a dismissal, or within 
any period of extension provided for in paragraph (e) of this section, 
the Board shall provide the complainant with a copy of the investigative 
file, and shall notify the complainant that, within 30 days of receipt 
of the investigative file, the complainant has the right to request a 
hearing and decision from an administrative judge or may request an 
immediate final decision pursuant to Sec. 268.109(b) from the Board.
    (g) Where the complainant has received the notice required in 
paragraph (f) of this section or at any time after 180 days have elapsed 
from the filing of the complaint, the complainant may request a hearing 
by submitting a written request for a hearing directly to the EEOC 
office indicated in the Board's acknowledgment letter. The complainant 
shall send a copy of the request for a hearing to the Board's EEO 
Programs Office. Within 15 days of receipt of the request for a hearing, 
the Board's EEO Programs Office shall provide a copy of the complaint 
file to EEOC and, if not previously provided, to the complainant.



Sec. 268.108  Hearings.

    (a) When a complainant requests a hearing, the Commission shall 
appoint an administrative judge to conduct a hearing in accordance with 
this section. Upon appointment, the administrative judge shall assume 
full responsibility for the adjudication of the complaint, including 
overseeing the development of the record. Any hearing will be conducted 
by an administrative judge or hearing examiner with appropriate security 
clearances.
    (b) Dismissals. Administrative judges may dismiss complaints 
pursuant to Sec. 268.106, on their own initiative, after notice to the 
parties, or upon the Board's motion to dismiss a complaint.
    (c) Offer of resolution. (1) Any time after the filing of the 
written complaint but not later than the date an administrative judge is 
appointed to conduct a hearing, the Board may make an offer of 
resolution to a complainant who is represented by an attorney.
    (2) Any time after the parties have received notice that an 
administrative judge has been appointed to conduct a hearing, but not 
later than 30 days prior to the hearing, the Board may make an offer of 
resolution to the complainant, whether represented by an attorney or 
not.
    (3) The offer of resolution shall be in writing and shall include a 
notice explaining the possible consequences of failing to accept the 
offer. The Board's offer, to be effective, must include attorney's fees 
and costs and must specify any non-monetary relief. With regard to 
monetary relief, the Board may make a lump sum offer covering all forms 
of monetary liability, or it may itemize the amounts and types of 
monetary relief being offered. The complainant shall have 30 days from 
receipt of the offer of resolution to accept it. If the complainant 
fails to accept an offer of resolution and the relief awarded in the 
administrative judge's decision, the Board's final decision, or the 
Commission's decision on appeal is not more favorable than the offer, 
then, except where the interest of justice would not be served, the 
complainant shall not receive payment from the Board of attorney's fees 
or costs incurred after the expiration of the 30-day acceptance period. 
An acceptance of an offer must be in writing and will be timely if 
postmarked or received within the 30-day period. Where a complainant 
fails to accept an offer of resolution, the Board may make other offers 
of resolution and either party may seek to negotiate a settlement of the 
complaint at any time.
    (d) Discovery. The administrative judge shall notify the parties of 
the right to seek discovery prior to the hearing and may issue such 
discovery orders as are appropriate. Unless the parties agree in writing 
concerning the methods and scope of discovery, the party seeking 
discovery shall request authorization from the administrative judge 
prior to commencing discovery. Both parties are entitled to reasonable 
development of evidence on matters relevant to the issues raised in the 
complaint, but the administrative judge may limit the quantity and 
timing of discovery. Evidence may be developed through interrogatories, 
depositions, and requests for admissions,

[[Page 980]]

stipulations or production of documents. It shall be grounds for 
objection to producing evidence that the information sought by either 
party is irrelevant, overburdensome, repetitious, or privileged.
    (e) Conduct of hearing. The Board shall provide for the attendance 
at a hearing of all employees approved as witnesses by an administrative 
judge. Attendance at hearings will be limited to persons determined by 
the administrative judge to have direct knowledge relating to the 
complaint. Hearings are part of the investigative process and are thus 
closed to the public. The administrative judge shall have the power to 
regulate the conduct of a hearing, limit the number of witnesses where 
testimony would be repetitious, and exclude any person from the hearing 
for contumacious conduct or misbehavior that obstructs the hearing. The 
administrative judge shall receive into evidence information or 
documents relevant to the complaint. Rules of evidence shall not be 
applied strictly, but the administrative judge shall exclude irrelevant 
or repetitious evidence. The administrative judge or the Commission may 
refer to the Disciplinary Committee of the appropriate Bar Association 
any attorney or, upon reasonable notice and an opportunity to be heard, 
suspend or disqualify from representing complainants or agencies in EEOC 
hearings any representative who refuses to follow the orders of an 
administrative judge, or who otherwise engages in improper conduct.
    (f) Procedures. (1) The complainant, the Board and any employee of 
the Board shall produce such documentary and testimonial evidence as the 
administrative judge deems necessary. The administrative judge shall 
serve all orders to produce evidence on both parties.
    (2) Administrative judges are authorized to administer oaths. 
Statements of witnesses shall be made under oath or affirmation or, 
alternatively, by written statement under penalty of perjury.
    (3) When the complainant, or the Board, or its employees fail 
without good cause shown to respond fully and in timely fashion to an 
order of an administrative judge, or requests for the investigative 
file, for documents, records, comparative data, statistics, affidavits, 
or the attendance of witness(es), the administrative judge shall, in 
appropriate circumstances:
    (i) Draw an adverse inference that the requested information, or the 
testimony of the requested witness, would have reflected unfavorably on 
the party refusing to provide the requested information;
    (ii) Consider the matters to which the requested information or 
testimony pertains to be established in favor of the opposing party;
    (iii) Exclude other evidence offered by the party failing to produce 
the requested information or witness;
    (iv) Issue a decision fully or partially in favor of the opposing 
party; or
    (v) Take such other actions as appropriate.
    (g) Decisions without hearing. (1) If a party believes that some or 
all material facts are not in genuine dispute and there is no genuine 
issue as to credibility, the party may, at least 15 days prior to the 
date of the hearing or at such earlier time as required by the 
administrative judge, file a statement with the administrative judge 
prior to the hearing setting forth the fact or facts and referring to 
the parts of the record relied on to support the statement. The 
statement must demonstrate that there is no genuine issue as to any such 
material fact. The party shall serve the statement on the opposing 
party.
    (2) The opposing party may file an opposition within 15 days of 
receipt of the statement in paragraph (g)(1) of this section. The 
opposition may refer to the record in the case to rebut the statement 
that a fact is not in dispute or may file an affidavit stating that the 
party cannot, for reasons stated, present facts to oppose the request. 
After considering the submissions, the administrative judge may order 
that discovery be permitted on the fact or facts involved, limit the 
hearing to the issues remaining in dispute, issue a decision without a 
hearing or make such other ruling as is appropriate.
    (3) If the administrative judge determines upon his or her own 
initiative

[[Page 981]]

that some or all facts are not in genuine dispute, he or she may, after 
giving notice to the parties and providing them an opportunity to 
respond in writing within 15 calendar days, issue an order limiting the 
scope of the hearing or issue a decision without holding a hearing.
    (h) Record of hearing. The hearing shall be recorded and the Board 
shall arrange and pay for verbatim transcripts. All documents submitted 
to, and accepted by, the administrative judge at the hearing shall be 
made part of the record of the hearing. If the Board submits a document 
that is accepted, it shall furnish a copy of the document to the 
complainant. If the complainant submits a document that is accepted, the 
administrative judge shall make the document available to the Board's 
representative for reproduction.
    (i) Decisions by administrative judges. Unless the administrative 
judge makes a written determination that good cause exists for extending 
the time for issuing a decision, an administrative judge shall issue a 
decision on the complaint, and shall order appropriate remedies and 
relief where discrimination is found, within 180 days of receipt by the 
administrative judge of the complaint file from the Board. The 
administrative judge shall send copies of the hearing record, including 
the transcript, and the decision to the parties. If the Board does not 
issue a final order within 40 days of receipt of the administrative 
judge's decision in accordance with Sec. 268.109(a), then the decision 
of the administrative judge shall become the final action of the Board.



Sec. 268.109  Final action by the Board.

    (a) Final action by the Board following a decision by an 
administrative judge. When an EEOC administrative judge has issued a 
decision under Sec. Sec. 268.108(b), (g), or (i), the Board shall take 
final action on the complaint by issuing a final order within 40 days of 
receipt of the hearing file and the administrative judge's decision. The 
final order shall notify the complainant whether or not the Board will 
fully implement the decision of the administrative judge and shall 
contain notice of the complainant's right to appeal to the Equal 
Employment Opportunity Commission, the right to file a civil action in 
federal district court, the name of the proper defendant in any such 
lawsuit and the applicable time limits for appeals and lawsuits. If the 
final order does not fully implement the decision of the administrative 
judge, then the Board shall simultaneously file an appeal in accordance 
with Sec. 268.403 and append a copy of its appeal to the final order. A 
copy of EEOC Form 573 shall be attached to the final order.
    (b) Final action by the Board in all other circumstances. When the 
Board dismisses an entire complaint under Sec. 268.106, receives a 
request for an immediate final decision or does not receive a reply to 
the notice issued under Sec. 268.107(f), the Board shall take final 
action by issuing a final decision. The final decision shall consist of 
findings by the Board on the merits of each issue in the complaint, or, 
as appropriate, the rationale for dismissing any claims in the complaint 
and, when discrimination is found, appropriate remedies and relief in 
accordance with subpart F of this part. The Board shall issue the final 
decision within 60 days of receiving notification that a complainant has 
requested an immediate decision from the Board, or within 60 days of the 
end of the 30-day period for the complainant to request a hearing or an 
immediate final decision where the complainant has not requested either 
a hearing or a decision. The final action shall contain notice of the 
right to appeal the final action to the Equal Employment Opportunity 
Commission, the right to file a civil action in federal district court, 
the name of the proper defendant in any such lawsuit and the applicable 
time limits for appeals and lawsuits. A copy of EEOC Form 573 shall be 
attached to the final action. The Board may issue a final decision 
within 30 days after receiving a decision of the Commission pursuant to 
Sec. 268.405(c) of this part.

[[Page 982]]



        Subpart C_Provisions Applicable to Particular Complaints



Sec. 268.201  Age Discrimination in Employment Act.

    (a) As an alternative to filing a complaint under this part, an 
aggrieved individual may file a civil action in a United States district 
court under the ADEA against the Chairman of the Board of Governors 
after giving the Commission not less than 30 days' notice of the intent 
to file such an action. Such notice must be filed in writing with EEOC, 
at PO Box 19848, Washington, DC 20036, or by personal delivery or 
facsimile within 180 days of the occurrence of the alleged unlawful 
practice.
    (b) The Commission may exempt a position from the provisions of the 
ADEA if the Commission establishes a maximum age requirement for the 
position on the basis of a determination that age is a bona fide 
occupational qualification necessary to the performance of the duties of 
the position.
    (c) When an individual has filed an administrative complaint 
alleging age discrimination that is not a mixed case, administrative 
remedies will be considered to be exhausted for purposes of filing a 
civil action:
    (1) 180 days after the filing of an individual complaint if the 
Board has not taken final action and the individual has not filed an 
appeal or 180 days after the filing of a class complaint if the Board 
has not issued a final decision;
    (2) After final action on an individual or class complaint if the 
individual has not filed an appeal; or
    (3) After the issuance of a final decision by the Commission on an 
appeal or 180 days after the filing of an appeal, if the Commission has 
not issued a final decision.



Sec. 268.202  Equal Pay Act.

    Complaints alleging violations of the Equal Pay Act shall be 
processed under this part.



Sec. 268.203  Rehabilitation Act.

    (a) Model employer. The Board shall be a model employer of 
individuals with disabilities. The Board shall give full consideration 
to the hiring, placement, and advancement of qualified individuals with 
disabilities.
    (b) ADA standards. The standards used to determine whether section 
501 of the Rehabilitation Act of 1973, as amended (29 U.S.C. 791), has 
been violated in a complaint alleging nonaffirmative action employment 
discrimination under this part shall be the standards applied under 
Titles I and V (sections 501 through 504 and 510) of the Americans with 
Disabilities Act of 1990, as amended (42 U.S.C. 12101, 12111, 12201), as 
such sections relate to employment. These standards are set forth in the 
Commission's ADA regulation at 29 CFR part 1630.



Sec. 268.204  Class complaints.

    (a) Definitions--(1) Class is a group of Board employees, former 
employees or applicants for employment who, it is alleged, have been or 
are being adversely affected by a Board personnel management policy or 
practice that discriminates against the group on the basis of their 
race, color, religion, sex, national origin, age or disability.
    (2) Class complaint is a written complaint of discrimination filed 
on behalf of a class by the agent of the class alleging that:
    (i) The class is so numerous that a consolidated complaint of the 
members of the class is impractical;
    (ii) There are questions of fact common to the class;
    (iii) The claims of the agent of the class are typical of the claims 
of the class;
    (iv) The agent of the class, or, if represented, the representative, 
will fairly and adequately protect the interests of the class.
    (3) An agent of the class is a class member who acts for the class 
during the processing of the class complaint.
    (b) Pre-complaint processing. An employee or applicant who wishes to 
file a class complaint must seek counseling and be counseled in 
accordance with Sec. 268.104. A complainant may move for class 
certification at any reasonable point in the process when it becomes 
apparent that there are class implications to the claim raised in an 
individual complaint. If a complainant

[[Page 983]]

moves for class certification after completing the counseling process 
contained in Sec. 268.104, no additional counseling is required. The 
administrative judge shall deny class certification when the complainant 
has unduly delayed in moving for certification.
    (c) Filing and presentation of a class complaint. (1) A class 
complaint must be signed by the agent or representative and must 
identify the policy or practice adversely affecting the class as well as 
the specific action or matter affecting the class agent.
    (2) The complaint must be filed with the Board not later than 15 
days after the agent's receipt of the notice of right to file a class 
complaint.
    (3) The complaint shall be processed promptly; the parties shall 
cooperate and shall proceed at all times without undue delay.
    (d) Acceptance or dismissal. (1) Within 30 days of the Board's 
receipt of a complaint, the Board shall: Designate an agency 
representative who shall not be one of the individuals referenced in 
Sec. 268.102(b)(4), and forward the complaint, along with a copy of the 
Counselor's report and any other information pertaining to timeliness or 
other relevant circumstances related to the complaint, to the 
Commission. The Commission shall assign the complaint to an 
administrative judge or complaints examiner with a proper security 
clearance when necessary. The administrative judge may require the 
complainant or the Board to submit additional information relevant to 
the complaint.
    (2) The administrative judge may dismiss the complaint, or any 
portion, for any of the reasons listed in Sec. 268.106 or because it 
does not meet the prerequisites of a class complaint under Sec. 
268.204(a)(2).
    (3) If an allegation is not included in the Counselor's report, the 
administrative judge shall afford the agent 15 days to state whether the 
matter was discussed with the Counselor and, if not, explain why it was 
not discussed. If the explanation is not satisfactory, the 
administrative judge shall dismiss the allegation. If the explanation is 
satisfactory, the administrative judge shall refer the allegation to the 
Board for further counseling of the agent. After counseling, the 
allegation shall be consolidated with the class complaint.
    (4) If an allegation lacks specificity and detail, the 
administrative judge shall afford the agent 15 days to provide specific 
and detailed information. The administrative judge shall dismiss the 
complaint if the agent fails to provide such information within the 
specified time period. If the information provided contains new 
allegations outside the scope of the complaint, the administrative judge 
shall advise the agent how to proceed on an individual or class basis 
concerning these allegations.
    (5) The administrative judge shall extend the time limits for filing 
a complaint and for consulting with a Counselor in accordance with the 
time limit extension provisions contained in Sec. Sec. 268.104(a)(2) 
and 268.604.
    (6) When appropriate, the administrative judge may decide that a 
class be divided into subclasses and that each subclass be treated as a 
class, and the provisions of this section then shall be construed and 
applied accordingly.
    (7) The administrative judge shall transmit his or her decision to 
accept or dismiss a complaint to the Board and the agent. The Board 
shall take final action by issuing a final order within 40 days of 
receipt of the hearing record and administrative judge's decision. The 
final order shall notify the agent whether or not the Board will 
implement the decision of the administrative judge. If the final order 
does not implement the decision of the administrative judge, the Board 
shall simultaneously appeal the administrative judge's decision in 
accordance with Sec. 268.403 and append a copy of the appeal to the 
final order. A dismissal of a class complaint shall inform the agent 
either that the complaint is being filed on that date as an individual 
complaint of discrimination and will be processed under subpart B or 
that the complaint is also dismissed as an individual complaint in 
accordance with Sec. 268.106. In addition, it shall inform the agent of 
the right to appeal the dismissal of the class complaint to the Equal 
Employment Opportunity Commission or to file a civil action and

[[Page 984]]

shall include EEOC Form 573, Notice of Appeal/Petition.
    (e) Notification. (1) Within 15 days of receiving notice that the 
administrative judge has accepted a class complaint or a reasonable time 
frame specified by the administrative judge, the Board shall use 
reasonable means, such as delivery, mailing to last known address or 
distribution, to notify all class members of the acceptance of the class 
complaint.
    (2) Such notice shall contain:
    (i) An identification of the Board as the named agency, its 
location, and the date of acceptance of the complaint;
    (ii) A description of the issues accepted as part of the class 
complaint;
    (iii) An explanation of the binding nature of the final decision or 
resolution of the class complaint on class members; and
    (iv) The name, address and telephone number of the class 
representative.
    (f) Obtaining evidence concerning the complaint. (1) The 
administrative judge shall notify the agent and the Board's 
representative of the time period that will be allowed both parties to 
prepare their cases. This time period will include at least 60 days and 
may be extended by the administrative judge upon the request of either 
party. Both parties are entitled to reasonable development of evidence 
on matters relevant to the issues raised in the complaint. Evidence may 
be developed through interrogatories, depositions, and requests for 
admissions, stipulations or production of documents. It shall be grounds 
for objection to producing evidence that the information sought by 
either party is irrelevant, overburdensome, repetitious, or privileged.
    (2) If mutual cooperation fails, either party may request the 
administrative judge to rule on a request to develop evidence. If a 
party fails without good cause shown to respond fully and in timely 
fashion to a request made or approved by the administrative judge for 
documents, records, comparative data, statistics or affidavits, and the 
information is solely in the control of one party, such failure may, in 
appropriate circumstances, cause the administrative judge:
    (i) To draw an adverse inference that the requested information 
would have reflected unfavorably on the party refusing to provide the 
requested information;
    (ii) To consider the matters to which the requested information 
pertains to be established in favor of the opposing party;
    (iii) To exclude other evidence offered by the party failing to 
produce the requested information;
    (iv) To recommend that a decision be entered in favor of the 
opposing party; or
    (v) To take such other actions as the administrative judge deems 
appropriate.
    (3) During the period for development of evidence, the 
administrative judge may, in his or her discretion, direct that an 
investigation of facts relevant to the class complaint or any portion be 
conducted by an agency certified by the Commission.
    (4) Both parties shall furnish to the administrative judge copies of 
all materials that they wish to be examined and such other material as 
may be requested.
    (g) Opportunity for resolution of the complaint. (1) The 
administrative judge shall furnish the agent and the Board's 
representative a copy of all materials obtained concerning the complaint 
and provide opportunity for the agent to discuss the materials with the 
Board's representative and attempt resolution of the complaint.
    (2) The complaint may be resolved by agreement of the Board and the 
agent at any time pursuant to the notice and approval procedure 
contained in paragraph (g)(4) of this section.
    (3) If the complaint is resolved, the terms of the resolution shall 
be reduced to writing and signed by the agent and the Board.
    (4) Notice of the resolution shall be given to all class members in 
the same manner as notification of the acceptance of the class complaint 
and to the administrative judge. It shall state the relief, if any, to 
be granted by the Board and the name and address of the EEOC 
administrative judge assigned to the case. It shall state that within 30

[[Page 985]]

days of the date of the notice of resolution, any member of the class 
may petition the administrative judge to vacate the resolution because 
it benefits only the class agent, or is otherwise not fair, adequate and 
reasonable to the class as a whole. The administrative judge shall 
review the notice of resolution and consider any petitions to vacate 
filed. If the administrative judge finds that the proposed resolution is 
not fair, adequate and reasonable to the class as a whole, the 
administrative judge shall issue a decision vacating the agreement and 
may replace the original class agent with a petitioner or some other 
class member who is eligible to be the class agent during further 
processing of the class complaint. The decision shall inform the former 
class agent or the petitioner of the right to appeal the decision to the 
Equal Employment Opportunity Commission and include EEOC Form 573, 
Notice of Appeal/Petition. If the administrative judge finds that the 
resolution is fair, adequate and reasonable to the class as a whole, the 
resolution shall bind all members of the class.
    (h) Hearing. On expiration of the period allowed for preparation of 
the case, the administrative judge shall set a date for hearing. The 
hearing shall be conducted in accordance with 12 CFR 268.108(a) through 
(f).
    (i) Report of findings and recommendations. (1) The administrative 
judge shall transmit to the Board a report of findings and 
recommendations on the complaint, including a recommended decision, 
systemic relief for the class and any individual relief, where 
appropriate, with regard to the personnel action or matter that gave 
rise to the complaint.
    (2) If the administrative judge finds no class relief appropriate, 
he or she shall determine if a finding of individual discrimination is 
warranted and, if so, shall recommend appropriate relief.
    (3) The administrative judge shall notify the agent of the date on 
which the report of findings and recommendations was forwarded to the 
Board.
    (j) Board decision. (1) Within 60 days of receipt of the report of 
findings and recommendations issued under Sec. 268.204(i), the Board 
shall issue a final decision, which shall accept, reject, or modify the 
findings and recommendations of the administrative judge.
    (2) The final decision of the Board shall be in writing and shall be 
transmitted to the agent by certified mail, return receipt requested, 
along with a copy of the report of findings and recommendations of the 
administrative judge.
    (3) When the Board's final decision is to reject or modify the 
findings and recommendations of the administrative judge, the decision 
shall contain specific reasons for the Board's action.
    (4) If the Board has not issued a final decision within 60 days of 
its receipt of the administrative judge's report of findings and 
recommendations, those findings and recommendations shall become the 
final decision. The Board shall transmit the final decision to the agent 
within five days of the expiration of the 60-day period.
    (5) The final decision of the Board shall require any relief 
authorized by law and determined to be necessary or desirable to resolve 
the issue of discrimination.
    (6) The final decision on a class complaint shall, subject to 
subpart E of this part, be binding on all members of the class and the 
Board.
    (7) The final decision shall inform the agent of the right to appeal 
or to file a civil action in accordance with subpart E of this part and 
of the applicable time limits.
    (k) Notification of decision. The Board shall notify class members 
of the final decision and relief awarded, if any, through the same media 
employed to give notice of the existence of the class complaint. The 
notice, where appropriate, shall include information concerning the 
rights of class members to seek individual relief, and of the procedures 
to be followed. Notice shall be given by the Board within 10 days of the 
transmittal of its final decision to the agent.
    (l) Relief for individual class members. (1) When discrimination is 
found, the Board must eliminate or modify the employment policy or 
practice out of which the complaint arose and provide individual relief, 
including an award of attorney's fees and costs, to the agent in 
accordance with Sec. 268.501.

[[Page 986]]

    (2) When class-wide discrimination is not found, but it is found 
that the class agent is a victim of discrimination, Sec. 268.501 shall 
apply. The Board shall also, within 60 days of the issuance of the final 
decision finding no class-wide discrimination, issue the acknowledgment 
of receipt of an individual complaint as required by Sec. 268.105(d) 
and process in accordance with the provisions of subpart B of this part, 
each individual complaint that was subsumed into the class complaint.
    (3) When discrimination is found in the final decision and a class 
member believes that he or she is entitled to individual relief, the 
class member may file a written claim with the Board or the Board's EEO 
Programs Director within 30 days of receipt of notification by the Board 
of its final decision. Administrative judges shall retain jurisdiction 
over the complaint in order to resolve any disputed claims by class 
members. The claim must include a specific, detailed showing that the 
claimant is a class member who was affected by the discriminatory policy 
or practice, and that this discriminatory action took place within the 
period of time for which the Board found class-wide discrimination in 
its final decision. Where a finding of discrimination against a class 
has been made, there shall be a presumption of discrimination as to each 
member of the class. The Board must show by clear and convincing 
evidence that any class member is not entitled to relief. The 
administrative judge may hold a hearing or otherwise supplement the 
record on a claim filed by a class member. The Board or the Commission 
may find class-wide discrimination and order remedial action for any 
policy or practice in existence within 45 days of the agent's initial 
contact with the Counselor. Relief otherwise consistent with this Part 
may be ordered for the time the policy or practice was in effect. The 
Board shall issue a final decision on each such claim within 90 days of 
filing. Such decision must include a notice of the right to file an 
appeal or a civil action in accordance with subpart E of this part and 
the applicable time limits.



Sec. 268.205  Employment of aliens; Access to sensitive information.

    (a) Definitions. The definitions contained in this paragraph (a) 
apply only to this section:
    (1) Classified Information means information that is classified for 
national security purposes under Executive Order No. 12958, entitled 
``Classified National Security Information,'' including any amendments 
or superseding orders that the President of the United States may issue 
from time to time.
    (2) Confidential Supervisory Information means confidential 
supervisory information of the Board, as defined in 12 CFR 261.2(c). 
Three internal security designations, which are subject to change by the 
Board, apply to Confidential Supervisory Information. Those designations 
are:
    (i) Restricted-Controlled FR generally applies to information that, 
if disclosed to or modified by unauthorized individuals, might result in 
the risk of serious monetary loss, serious productivity loss or serious 
embarrassment to the Federal Reserve System. Examples of Confidential 
Supervisory Information designated as Restricted-Controlled FR include, 
but are not limited to, certain significant lists of financial 
institution supervisory ratings and nonpublic advance information 
regarding bank mergers or failures.
    (ii) Restricted FR covers information that is less sensitive than 
Restricted-Controlled FR information and, in general, is the largest 
category of Confidential Supervisory Information. This information, if 
disclosed to or modified by unauthorized individuals, might result in 
the risk of significant monetary loss, significant productivity loss, or 
significant embarrassment to the Federal Reserve System. Examples of 
Confidential Supervisory Information designated as Restricted FR 
include, but are not limited to, single supervisory ratings (e.g., 
CAMELS, BOPEC, etc.), Federal Reserve examination and inspection reports 
and workpapers, Interagency Country Exposure Review Committee (ICERC) 
country exposure determinations, and shared national credit data or 
listings.
    (iii) Internal FR covers information that is less sensitive than 
Restricted

[[Page 987]]

FR or Restricted-Controlled FR and generally applies to information 
that, if disclosed to or modified by unauthorized individuals, might 
result in the risk of some monetary loss, some productivity loss, or 
some embarrassment to the Federal Reserve System. Examples of 
Confidential Supervisory Information designated as Internal FR include, 
but are not limited to, foreign banking organization country studies and 
Federal Reserve risk assessments.
    (3) Country List refers to the list contained in the annual federal 
appropriations laws of specific countries, including a general category 
of ``countries allied with the United States in a current defense 
effort,'' from which particular categories of persons who are exempt 
from a ban on the use of appropriated funds are eligible to be hired as 
Federal employees in the excepted service or in the senior executive 
service. The appropriations ban is codified at 5 U.S.C. 3101 note. The 
list of eligible countries and persons is subject to legislative and 
other change.
    (4) Eligible Position refers to a position or job family requiring 
access to Sensitive Information for which the Board determines that 
hiring a Non-Citizen is appropriate.
    (5) Employee means an individual who works full-time or part-time 
and is appointed into Board service for a period of more than 90 days. 
The term ``Employee'' does not include members of the Board.
    (6) FOMC Information means confidential information of the Federal 
Open Market Committee (FOMC) regardless of the form or format in which 
it is created, conveyed, or maintained. FOMC Information includes 
information derived from confidential FOMC materials. Three internal 
security designations, which are subject to change by the FOMC, apply to 
FOMC Information as follows:
    (i) Class I FOMC generally applies to materials containing 
policymaker input, such as that related to monetary policy decisions at 
meetings, views expressed by policy makers on future policy, and 
identification of meeting participants who express particular views. 
Examples of Class I FOMC Information include, but are not limited to, 
the ``Bluebook,'' drafts of meeting minutes, unreleased meeting 
transcripts, documents reflecting the preparation of semi-annual 
forecasts and related testimony, and certain sensitive internal 
memorandums and reports.
    (ii) Class II FOMC covers information that is less sensitive than 
Class I FOMC. This designation generally applies to staff forecasts 
prepared for the FOMC and to information about open market operations. 
Examples of Class II FOMC Information include, but are not limited to, 
Part I of the ``Greenbook,'' reports of the Manager on domestic and 
foreign open market operations, and other materials on economic and 
financial developments.
    (iii) Class III FOMC covers information that is less sensitive than 
either Class II or Class I. This designation generally applies to 
background information supporting policy discussions and includes, but 
is not limited to, Part II of the Greenbook.
    (7) National refers to any individual who meets the requirements 
described in 8 U.S.C. 1408.
    (8) Non-Citizen refers to any individual who is not a Protected 
Individual.
    (9) Protected Individual means--
    (i) A citizen or National of the United States,
    (ii) An alien who:
    (A) Meets the conditions set forth in 8 U.S.C. 1324b(a)(3)(B), as 
amended, and
    (B) Has filed with the Board or the appropriate Federal Reserve Bank 
a declaration of intention to become a citizen of the United States, or
    (iii) An alien who:
    (A) Is lawfully admitted for permanent residence, is admitted for 
temporary residence under 8 U.S.C. 1160(a) or section 1255a(a)(1), is 
admitted as a refugee under 8 U.S.C. 1157, or is granted asylum under 8 
U.S.C. 1158;
    (B) Was an Employee of the Board or a Federal Reserve Bank on 
January 1, 2006;
    (C) Before requesting access to Sensitive Information filed an 
application for U.S. citizenship;
    (D) Has had his or her application for citizenship pending for two 
years or less, unless in the case of an application pending for a longer 
period, the alien can establish that the alien is actively pursuing 
naturalization. Time

[[Page 988]]

consumed by the Department of Homeland Security, Citizenship and 
Immigration Services (or its predecessor or successor agency) in 
processing the application shall not be counted toward the 2-year 
period; and
    (E) Has completed a background investigation acceptable to the 
Board.
    (10) Sensitive Information means FOMC Information, Classified 
Information, and Confidential Supervisory Information.
    (b) Hiring and access--(1) Prohibition against hiring unauthorized 
aliens. An individual is eligible for employment with the Board only if 
he or she satisfies the requirements of Section 101 of the Immigration 
Reform and Control Act of 1986, 8 U.S.C. 1324a.
    (2) Preference. Consistent with applicable law, where two applicants 
for employment at the Board are equally qualified for a position, the 
Board shall prefer the citizen or National of the United States over the 
equally qualified person who is not a citizen or National of the United 
States.
    (3) Protected Individuals' access to Sensitive Information. The 
Board may hire a person as an Employee into a position that requires 
access to Sensitive Information if the person is a Protected Individual.
    (4) Non-Citizens' access to Sensitive Information. The Board shall 
not hire a Non-Citizen into a position that requires access to Sensitive 
Information unless the Non-Citizen:
    (i) Is in an Eligible Position; and
    (ii) Meets the requirements of paragraph (c) of this section 
allowing access to Sensitive Information.
    (c) Access to Sensitive Information--(1) Generally. The Board will 
grant access to Sensitive Information only in accordance with the 
Board's rules and policies regarding access to Sensitive Information 
and, if applicable, the rules and policies of the FOMC. Access to any 
level of Sensitive Information includes access to all lower levels of 
that type of Sensitive Information. An Employee who is not a Protected 
Individual may not have access to FOMC Information or Confidential 
Supervisory Information unless otherwise permitted by this paragraph 
(c).
    (2) FOMC Information--(i) Access by a Non-Citizen from a country on 
the Country List. An Employee in an Eligible Position who is a Non-
Citizen from a country that, on the date the Employee begins employment 
with the Federal Reserve System or on the date access is granted, is on 
the Country List shall be granted access to Class I FOMC Information 
only if the Employee:
    (A) Has been recommended for such access by the Employee's Division 
Director;
    (B) Has been resident in the United States for at least six years, 
at least two of which include satisfactory employment with the Board 
and/or one or more of the Federal Reserve Banks; and
    (C) Has completed a background investigation acceptable to the 
Board.
    (ii) Access by a Non-Citizen from a country not on the Country List. 
An Employee in an Eligible Position who is a Non-Citizen from a country 
that, on the date the Employee begins employment with the Federal 
Reserve System and on the date access is granted, is not on the Country 
List:
    (A) Shall not be granted access to Class I FOMC Information, and
    (B) Shall be granted access to Class II FOMC Information only upon:
    (1) The recommendation of the Employee's Division Director;
    (2) Six years of residence in the United States, at least two of 
which include satisfactory employment by the Board and/or one or more of 
the Federal Reserve Banks; and
    (3) Completion of a background investigation acceptable to the 
Board.
    (iii) Changes to the Country List. If the Employee's country is 
deleted from the Country List after the date the Employee begins 
employment with the Federal Reserve System, the Employee's existing 
access to Class I or Class II FOMC information will not be affected by 
the change in the Country List. Similarly, the Employee would continue 
to be eligible for access to Class I information and may be granted such 
access if he or she meets the remaining conditions outlined in paragraph 
(c)(2)(i) for employees from a country on the Country List.
    (3) Confidential Supervisory Information--(i) Access by a Non-
Citizen from a

[[Page 989]]

country on the Country List. An Employee in an Eligible Position who is 
a Non-Citizen from a country that, on the date the Employee begins 
employment with the Federal Reserve System or on the date access is 
granted, is on the Country List shall be granted access to Confidential 
Supervisory Information designated as Restricted-Controlled FR only if 
the Employee:
    (A) Has been recommended for such access by the Employee's Division 
Director;
    (B) Has been resident in the United States for at least six years, 
at least two of which include satisfactory employment with the Board 
and/or one or more of the Federal Reserve Banks; and
    (C) Has completed a background investigation acceptable to the 
Board.
    (ii) Access by a Non-Citizen from a country not on the Country List. 
An Employee in an Eligible Position who is a Non-Citizen from a country 
that, on the date the Employee begins employment with the Federal 
Reserve System and on the date access is granted, is not on the Country 
List:
    (A) Shall not be granted access to Confidential Supervisory 
Information designated as Restricted-Controlled FR; and
    (B) Shall be granted access to Confidential Supervisory Information 
designated as Restricted FR only upon:
    (1) The recommendation of the Employee's Division Director;
    (2) Six years of residence in the United States, at least two of 
which include satisfactory employment by the Board and/or one or more of 
the Federal Reserve Banks; and
    (3) Completion of a background investigation acceptable to the 
Board.
    (iii) Changes to the Country List. If the Employee's country is 
deleted from the Country List after the date the Employee begins 
employment with the Federal Reserve System, the Employee's existing 
access to Confidential Supervisory Information designated as Restricted 
FR or Restricted-Controlled FR will not be affected by the change in the 
Country List. Similarly, the Employee would continue to be eligible for 
access to Confidential Supervisory Information designated as Restricted-
Controlled FR information and may be granted such access if he or she 
meets the remaining conditions outlined in paragraph (c)(3)(i) for 
employees from a country on the Country List.
    (4) Access to Sensitive Information by Reserve Bank employees--(i) 
FOMC Information. By action of the FOMC, a Reserve Bank employee may 
access FOMC Information in accordance with these rules.
    (ii) Confidential Supervisory Information. A Reserve Bank employee 
will be granted access to Confidential Supervisory Information only to 
the extent the employee meets all of the requirements for access to 
Confidential Supervisory Information provided in this paragraph (c) and 
the employee has received approval for such access from the Board's 
Director for Banking Supervision and Regulation. Notwithstanding the 
foregoing, this rule does not affect access that has been granted to 
employees hired before the effective date of this rule.
    (5) Exceptions for access to Confidential Supervisory Information. A 
Board or Reserve Bank employer may request an exception for access to 
Confidential Supervisory Information. The requester must demonstrate 
that unusual circumstances exist and that the Board or Reserve Bank 
employee for whom access is being requested has a strong and 
particularized need for access to the information. All exceptions for 
access to Confidential Supervisory Information must be approved by the 
Chairman of the Board's Committee on Supervisory and Regulatory Affairs.
    (6) Classified Information. Access to Classified Information is 
limited to those persons who are permitted access to Classified 
Information pursuant to the applicable executive orders and any 
subsequent amendments or superseding orders that the President of the 
United States may issue from time to time.

[71 FR 44558, Aug. 7, 2006, as amended at 73 FR 17887, Apr. 2, 2008]



                       Subpart D_Related Processes



Sec. 268.301  Negotiated grievance procedure.

    When an employee of the Board, which is not an agency subject to 5 
U.S.C. 7121(d), is covered by a negotiated grievance procedure, 
allegations

[[Page 990]]

of discrimination shall be processed as complaints under this part, 
except that the time limits for processing the complaint contained in 
Sec. 268.105 and for appeal to the Commission contained in Sec. 
268.402 may be held in abeyance during processing of a grievance 
covering the same matter as the complaint if the Board notifies the 
complainant in writing that the complaint will be held in abeyance 
pursuant to this section.



Sec. 268.302  Mixed case complaints.

    A mixed case complaint is a complaint of employment discrimination 
filed with the Board based on race, color, religion, sex, national 
origin, age or disability related to or stemming from an action that can 
be appealed to the Merit System Protection Board (MSPB). The complaint 
may contain only an allegation of employment discrimination or it may 
contain additional allegations that the MSPB has jurisdiction to 
address. A mixed case appeal is an appeal filed with the MSPB that 
alleges that an appealable Board action was effected, in whole or in 
part, because of discrimination on the basis of race, color, religion, 
sex, national origin, disability or age. Only a Board employee who is a 
preference eligible employee as defined by the Veterans Preference Act 
can file a mixed case complaint with the Board or a mixed case appeal 
with the MSPB. A mixed case complaint or mixed case appeal may only be 
filed for action(s) over which the MSPB has jurisdiction. The Board will 
apply sections 1614.302 to 1614.310 of 29 CFR to the processing of a 
mixed case complaint or mixed case appeal.



    Subpart E_Appeals to the Equal Employment Opportunity Commission



Sec. 268.401  Appeals to the Equal Employment Opportunity Commission.

    (a) A complainant may appeal the Board's final action or dismissal 
of a complaint.
    (b) The Board may appeal as provided in Sec. 268.109(a).
    (c) A class agent or the Board may appeal an administrative judge's 
decision accepting or dismissing all or part of a class complaint; a 
class agent may appeal a final decision on a class complaint; a class 
member may appeal a final decision on a claim for individual relief 
under a class complaint; and a class member, a class agent or the Board 
may appeal a final decision on a petition pursuant to Sec. 
268.204(g)(4).
    (d) A complainant, agent of the class or individual class claimant 
may appeal to the Commission the Board's alleged noncompliance with a 
settlement agreement or final decision in accordance with Sec. 268.504.



Sec. 268.402  Time for appeals to the Equal Employment Opportunity Commission.

    (a) Appeals described in Sec. 268.401(a) and (c) must be filed 
within 30 days of receipt of the dismissal, final action or decision. 
Appeals described in Sec. 268.401(b) must be filed within 40 days of 
receipt of the hearing file and decision. Where a complainant has 
notified the Board's EEO Programs Director of alleged noncompliance with 
a settlement agreement in accordance with Sec. 268.504, the complainant 
may file an appeal 35 days after service of the allegations of 
noncompliance, but no later than 30 days after receipt of the Board's 
determination.
    (b) If the complainant is represented by an attorney of record, then 
the 30-day time period provided in paragraph (a) of this section within 
which to appeal shall be calculated from the receipt of the required 
document by the attorney. In all other instances, the time within which 
to appeal shall be calculated from the receipt of the required document 
by the complainant.



Sec. 268.403  How to appeal.

    (a) The complainant, the Board, agent or individual class claimant 
(hereinafter appellant) must file an appeal with the Director, Office of 
Federal Operations, Equal Employment Opportunity Commission, at PO Box 
19848, Washington, DC 20036, or by personal delivery or facsimile. The 
appellant should use EEOC Form 573, Notice of Appeal/Petition, and 
should indicate what is being appealed.
    (b) The appellant shall furnish a copy of the appeal to the opposing 
party at the same time it is filed with the Commission. In or attached 
to the appeal to

[[Page 991]]

the Commission, the appellant must certify the date and method by which 
service was made on the opposing party.
    (c) If an appellant does not file an appeal within the time limits 
of this subpart, the appeal shall be dismissed by the Commission as 
untimely.
    (d) Any statement or brief on behalf of a complainant in support of 
the appeal must be submitted to the Office of Federal Operations within 
30 days of filing the notice of appeal. Any statement or brief on behalf 
of the Board in support of its appeal must be submitted to the Office of 
Federal Operations within 20 days filing the notice of appeal. The 
Office of Federal Operations will accept statements or briefs in support 
of an appeal by facsimile transmittal, provided they are no more than 10 
pages long.
    (e) The Board must submit the complaint file to the Office of 
Federal Operations within 30 days of initial notification that the 
complainant has filed an appeal or within 30 days of submission of an 
appeal by the Board.
    (f) Any statement or brief in opposition to an appeal must be 
submitted to the Commission and served on the opposing party within 30 
days of receipt of the statement or brief supporting the appeal, or, if 
no statement or brief supporting the appeal is filed, within 60 days of 
receipt of the appeal. The Office of Federal Operations will accept 
statements or briefs in opposition to an appeal by facsimile provided 
they are no more than 10 pages long.



Sec. 268.404  Appellate Procedure.

    (a) On behalf of the Commission, the Office of Federal Operations 
shall review the complaint file and all written statements and briefs 
from either party. The Commission may supplement the record by an 
exchange of letters or memoranda, investigation, remand to the Board or 
other procedures.
    (b) If the Office of Federal Operations requests information from 
one or both of the parties to supplement the record, each party 
providing information shall send a copy of the information to the other 
party.
    (c) When either party to an appeal fails without good cause shown to 
comply with the requirements of this section or to respond fully and in 
timely fashion to requests for information, the Office of Federal 
Operations shall, in appropriate circumstances:
    (1) Draw an adverse inference that the requested information would 
have reflected unfavorably on the party refusing to provide the 
requested information;
    (2) Consider the matters to which the requested information or 
testimony pertains to be established in favor of the opposing party;
    (3) Issue a decision fully or partially in favor of the opposing 
party; or
    (4) Take such other actions as appropriate.



Sec. 268.405  Decisions on appeals.

    (a) The Office of Federal Operations, on behalf of the Commission, 
shall issue a written decision setting forth its reasons for the 
decision. The Commission shall dismiss appeals in accordance with 
Sec. Sec. 268.106, 268.403(c) and 268.408. The decision on an appeal 
from the Board's final action shall be based on a de novo review, except 
that the review of the factual findings in a decision by an 
administrative judge issued pursuant to Sec. 268.108(i) shall be based 
on a substantial evidence standard of review. If the decision contains a 
finding of discrimination, appropriate remedy(ies) shall be included 
and, where appropriate, the entitlement to interest, attorney's fees or 
costs shall be indicated. The decision shall reflect the date of its 
issuance, inform the complainant of his or her civil action rights, and 
be transmitted to the complainant and the Board by first class mail.
    (b) A decision issued under paragraph (a) of this section is final, 
subject to paragraph (c) of this section, within the meaning of Sec. 
268.406 unless the Commission reconsiders the case. A party may request 
reconsideration within 30 days of receipt of a decision of the 
Commission, which the Commission in its discretion may grant, if the 
party demonstrates that:
    (1) The appellate decision involved a clearly erroneous 
interpretation of material fact or law; or
    (2) The decision will have a substantial impact on the policies, 
practices or operations of the Board.

[[Page 992]]

    (c) The Board, within 30 days of receiving the decision of the 
Commission, shall issue a final decision based upon that decision.



Sec. 268.406  Civil action: Title VII, Age Discrimination in Employment Act 

and Rehabilitation Act.

    A complainant who has filed an individual complaint, an agent who 
has filed a class complaint or a claimant who has filed a claim for 
individual relief pursuant to a class complaint is authorized under 
title VII, the ADEA and the Rehabilitation Act to file a civil action in 
an appropriate United States District Court:
    (a) Within 90 days of receipt of the final action on an individual 
or class complaint if no appeal has been filed;
    (b) After 180 days from the date of filing an individual or class 
complaint if an appeal has not been filed and final action has not been 
taken;
    (c) Within 90 days of receipt of the Commission's final decision on 
an appeal; or
    (d) After 180 days from the date of filing an appeal with the 
Commission if there has been no final decision by the Commission.



Sec. 268.407  Civil action: Equal Pay Act.

    A complainant is authorized under section 16(b) of the Fair Labor 
Standards Act (29 U.S.C. 216(b)) to file a civil action in a court of 
competent jurisdiction within two years or, if the violation is willful, 
three years of the date of the alleged violation of the Equal Pay Act 
regardless of whether he or she pursued any administrative complaint 
processing. Recovery of back wages is limited to two years prior to the 
date of filing suit, or to three years if the violation is deemed 
willful; liquidated damages in an equal amount may also be awarded. The 
filing of a complaint or appeal under this part shall not toll the time 
for filing a civil action.



Sec. 268.408  Effect of filing a civil action.

    Filing a civil action under Sec. Sec. 268.406 or 268.407 shall 
terminate Commission processing of the appeal. If private suit is filed 
subsequent to the filing of an appeal, the parties are requested to 
notify the Commission in writing.



                   Subpart F_Remedies and Enforcement



Sec. 268.501  Remedies and relief.

    (a) When the Board, or the Commission, in an individual case of 
discrimination, finds that an applicant or an employee has been 
discriminated against, the Board shall provide full relief which shall 
include the following elements in appropriate circumstances:
    (1) Notification to all employees of the Board in the affected 
facility of their right to be free of unlawful discrimination and 
assurance that the particular types of discrimination found will not 
recur;
    (2) Commitment that corrective, curative or preventive action will 
be taken, or measures adopted, to ensure that violations of the law 
similar to those found unlawful will not recur;
    (3) An unconditional offer to each identified victim of 
discrimination of placement in the position the person would have 
occupied but for the discrimination suffered by that person, or a 
substantially equivalent position;
    (4) Payment to each identified victim of discrimination on a make 
whole basis for any loss of earnings the person may have suffered as a 
result of the discrimination; and
    (5) Commitment that the Board shall cease from engaging in the 
specific unlawful employment practice found in the case.
    (b) Relief for an applicant. (1)(i) When the Board, or the 
Commission, finds that an applicant for employment has been 
discriminated against, the Board shall offer the applicant the position 
that the applicant would have occupied absent discrimination or, if 
justified by the circumstances, a substantially equivalent position 
unless clear and convincing evidence indicates that the applicant would 
not have been selected even absent the discrimination. The offer shall 
be made in writing. The individual shall have 15 days from receipt of 
the offer within which to accept or decline the offer. Failure to accept 
the offer within the 15-day period will be considered a declination of 
the offer, unless the individual can show that circumstances beyond his 
or her control prevented a response within the time limit.

[[Page 993]]

    (ii) If the offer is accepted, appointment shall be retroactive to 
the date the applicant would have been hired. Back pay, computed in the 
manner prescribed in 5 CFR 550.805, shall be awarded from the date the 
individual would have entered on duty until the date the individual 
actually enters on duty unless clear and convincing evidence indicates 
that the applicant would not have been selected even absent 
discrimination. Interest on back pay shall be included in the back pay 
computation where sovereign immunity has been waived. The individual 
shall be deemed to have performed service for the Board during this 
period for all purposes except for meeting service requirements for 
completion of a required probationary or trial period.
    (iii) If the offer of employment is declined, the Board shall award 
the individual a sum equal to the back pay he or she would have 
received, computed in the manner prescribed in 5 CFR 550.805, from the 
date he or she would have been appointed until the date the offer was 
declined, subject to the limitation of paragraph (b)(3) of this section. 
Interest on back pay shall be included in the back pay computation. The 
Board shall inform the applicant, in its offer of employment, of the 
right to this award in the event the offer is declined.
    (2) When the Board, or the Commission, finds that discrimination 
existed at the time the applicant was considered for employment but also 
finds by clear and convincing evidence that the applicant would not have 
been hired even absent discrimination, the Board shall nevertheless take 
all steps necessary to eliminate the discriminatory practice and ensure 
it does not recur.
    (3) Back pay under this paragraph (b) for complaints under title VII 
or the Rehabilitation Act may not extend from a date earlier than two 
years prior to the date on which the complaint was initially filed by 
the applicant.
    (c) Relief for an employee. When the Board, or the Commission, finds 
that an employee of the Board was discriminated against, the Board shall 
provide relief, which shall include, but need not be limited to, one or 
more of the following actions:
    (1) Nondiscriminatory placement, with back pay computed in the 
manner prescribed in 5 CFR 550.805, unless clear and convincing evidence 
contained in the record demonstrates that the personnel action would 
have been taken even absent the discrimination. Interest on back pay 
shall be included in the back pay computation where sovereign immunity 
has been waived. The back pay liability under title VII or the 
Rehabilitation Act is limited to two years prior to the date the 
discrimination complaint was filed.
    (2) If clear and convincing evidence indicates that, although 
discrimination existed at the time the personnel action was taken, the 
personnel action would have been taken even absent discrimination, the 
Board shall nevertheless eliminate any discriminatory practice and 
ensure it does not recur.
    (3) Cancellation of an unwarranted personnel action and restoration 
of the employee.
    (4) Expunction from the Board's records of any adverse materials 
relating to the discriminatory employment practice.
    (5) Full opportunity to participate in the employee benefit denied 
(e.g., training, preferential work assignments, overtime scheduling).
    (d) The Board has the burden of proving by a preponderance of the 
evidence that the complainant has failed to mitigate his or her damages.
    (e) Attorney's fees or costs--(1) Awards of attorney's fees or 
costs. The provisions of this paragraph relating to the award of 
attorney's fees or costs shall apply to allegations of discrimination 
prohibited by title VII and the Rehabilitation Act. In a decision or 
final action, the Board, administrative judge, or Commission may award 
the applicant or employee or reasonable attorney's fees (including 
expert witness fees) and other costs incurred in the processing of the 
complaint.
    (i) A finding of discrimination raises a presumption of entitlement 
to an award of attorney's fees.
    (ii) Any award of attorney's fees or costs shall be paid by the 
Board.
    (iii) Attorney's fees are allowable only for the services of members 
of the Bar and law clerks, paralegals or law

[[Page 994]]

students under the supervision of members of the Bar, except that no 
award is allowable for the services of any employee of the Federal 
Government.
    (iv) Attorney's fees shall be paid for services performed by an 
attorney after the filing of a written complaint, provided that the 
attorney provides reasonable notice of representation to the Board, 
administrative judge or Commission, except that fees are allowable for a 
reasonable period of time prior to the notification of representation 
for any services performed in reaching a determination to represent the 
complainant. The Board is not required to pay attorney's fees for 
services performed during the pre-complaint process, except that fees 
are allowable when the Commission affirms on appeal an administrative 
judge's decision finding discrimination after the Board takes final 
action by not implementing an administrative judge's decision. Written 
submissions to the Board that are signed by the representative shall be 
deemed to constitute notice of representation.
    (2) Amount of awards. (i) When the Board, administrative judge or 
the Commission determines an entitlement to attorney's fees or costs, 
the complainant's attorney shall submit a verified statement of 
attorney's fees (including expert witness fees) and other costs, as 
appropriate, to the Board or administrative judge within 30 days of 
receipt of the decision and shall submit a copy of the statement to the 
Board. A statement of attorney's fees and costs shall be accompanied by 
an affidavit executed by the attorney of record itemizing the attorney's 
charges for legal services. The Board may respond to a statement of 
attorney's fees and costs within 30 days of its receipt. The verified 
statement, accompanying affidavit and any Board response shall be made a 
part of the complaint file.
    (ii)(A) The Board or administrative judge shall issue a decision 
determining the amount of attorney's fees or costs due within 60 days of 
receipt of the statement and affidavit. The decision shall include a 
notice of right to appeal to the EEOC along with EEOC Form 573, Notice 
of Appeal/Petition and shall include the specific reasons for 
determining the amount of the award.
    (B) The amount of attorney's fees shall be calculated using the 
following standards: The starting point shall be the number of hours 
reasonably expended multiplied by a reasonable hourly rate. There is a 
strong presumption that this amount represents the reasonable fee. In 
limited circumstances, this amount may be reduced or increased in 
consideration of the degree of success, quality of representation, and 
long delay caused by the Board.
    (C) The costs that may be awarded are those authorized by 28 U.S.C. 
1920 to include: Fees of the reporter for all or any of the stenographic 
transcript necessarily obtained for use in the case; fees and 
disbursements for printing and witnesses; and fees for exemplification 
and copies necessarily obtained for use in the case.
    (iii) Witness fees shall be awarded in accordance with the 
provisions of 28 U.S.C. 1821, except that no award shall be made for a 
Federal employee who is in a duty status when made available as a 
witness.



Sec. 268.502  Compliance with final Commission decisions.

    (a) Relief ordered in a final Commission decision, if accepted 
pursuant to Sec. 268.405(c) as a final decision, or not acted upon the 
Board within the time periods of Sec. 268.405(c), is mandatory and 
binding on the Board except as provided in this section. Failure to 
implement ordered relief shall be subject to judicial enforcement as 
specified in Sec. 268.503(f).
    (b) Notwithstanding paragraph (a) of this section, when the Board 
requests reconsideration and the case involves removal, separation, or a 
suspension continuing beyond the date of the request for 
reconsideration, and when the decision orders retroactive restoration, 
the Board shall comply with the decision to the extent of the temporary 
or conditional restoration of the employee to duty status in the 
position specified by the Commission, pending the outcome of the Board's 
request for reconsideration.
    (1) Service under the temporary or conditional restoration 
provisions of

[[Page 995]]

this paragraph (b) shall be credited toward the completion of a 
probationary or trial period or the completion of the service 
requirement for career tenure, if the Commission upholds its decision 
after reconsideration.
    (2) When the Board requests reconsideration, it may delay the 
payment of any amounts ordered to be paid to the complainant until after 
the request for reconsideration is resolved. If the Board delays payment 
of any amount pending the outcome of the request to reconsider and the 
resolution of the request requires the Board to make the payment, then 
the Board shall pay interest from the date of the original appellate 
decision until payment is made.
    (3) The Board shall notify the Commission and the employee in 
writing at the same time it requests reconsideration that the relief it 
provides is temporary or conditional and, if applicable, that it will 
delay the payment of any amounts owed but will pay interest as specified 
in paragraph (b)(2) of this section. Failure of the Board to provide 
notification will result in the dismissal of the Board's request.
    (c) When no request for reconsideration is filed or when a request 
for reconsideration is denied, the Board shall provide the relief 
ordered and there is no further right to delay implementation of the 
ordered relief. The relief shall be provided in full not later than 60 
days after receipt of the final decision unless otherwise ordered in the 
decision.



Sec. 268.503  Enforcement of final EEOC decisions.

    (a) Petition for enforcement. A complainant may petition the 
Commission for enforcement of a decision issued under the Commission's 
appellate jurisdiction. The petition shall be submitted to the Office of 
Federal Operations. The petition shall specifically set forth the 
reasons that lead the complainant to believe that the Board is not 
complying with the decision.
    (b) Compliance. On behalf of the Commission, the Office of Federal 
Operations shall take all necessary action to ascertain whether the 
Board is implementing the decision of the Commission. If the Board is 
found not to be in compliance with the decision, efforts shall be 
undertaken to obtain compliance.
    (c) Clarification. On behalf of the Commission, the Office of 
Federal Operations may, on its own motion or in response to a petition 
for enforcement or in connection with a timely request for 
reconsideration, issue a clarification of a prior decision. A 
clarification cannot change the result of a prior decision or enlarge or 
diminish the relief ordered but may further explain the meaning or 
intent of the prior decision.
    (d) Referral to the Commission. Where the Director, Office of 
Federal Operations, is unable to obtain satisfactory compliance with the 
final decision, the Director shall submit appropriate findings and 
recommendations for enforcement to the Commission, or, as directed by 
the Commission, refer the matter to another appropriate agency.
    (e) Commission notice to show cause. The Commission may issue a 
notice to the Chairman of the Board to show cause why there is 
noncompliance. Such notice may request the Chairman of the Board or a 
representative to appear before the Commission or to respond to the 
notice in writing with adequate evidence of compliance or with 
compelling reasons for noncompliance.
    (f) Notification to complainant of completion of administrative 
efforts. Where the Commission has determined that the Board is not 
complying with a prior decision, or where the Board has failed or 
refused to submit any required report of compliance, the Commission 
shall notify the complainant the right to file a civil action for 
enforcement of the decision pursuant to title VII, the ADEA, the Equal 
Pay Act or the Rehabilitation Act and to seek judicial review of the 
Board's refusal to implement the ordered relief pursuant to the 
Administrative Procedures Act, 5 U.S.C. 701 et seq., and the mandamus 
statute, 28 U.S.C. 1361, or to commence de novo proceedings pursuant to 
the appropriate statutes.



Sec. 268.504  Compliance with settlement agreements and final actions.

    (a) Any settlement agreement knowingly and voluntarily agreed to by 
the parties, reached at any stage of the complaint process, shall be 
binding on

[[Page 996]]

both parties. Final action that has not been the subject of an appeal or 
a civil action shall be binding on the Board. If the complainant 
believes that the Board has failed to comply with the terms of a 
settlement agreement or decision, the complainant shall notify the 
Board's EEO Programs Director, in writing, of the alleged noncompliance 
within 30 days of when the complainant knew or should have known of the 
alleged noncompliance. The complainant may request that the terms of the 
settlement agreement be specifically implemented or, alternatively, that 
the complaint be reinstated for further processing from the point 
processing ceased.
    (b) The Board shall resolve the matter and respond to the 
complainant, in writing. If the Board has not responded to the 
complainant, in writing, or if the complainant is not satisfied with the 
Board's attempt to resolve the matter, the complainant may appeal to the 
Commission for a determination as to whether the Board has complied with 
the terms of the settlement agreement or decision. The complainant may 
file such an appeal 35 days after he or she has served the Board with 
the allegations of noncompliance, but must file an appeal within 30 days 
of his or her receipt of the Board's determination. The complainant must 
serve a copy of the appeal on the Board and the Board may submit a 
response to the Commission within 30 days of receiving notice of the 
appeal.
    (c) Prior to rendering its determination, the Commission may request 
that the parties submit whatever additional information or documentation 
it deems necessary or may direct that an investigation or hearing on the 
matter be conducted. If the Commission determines that the Board is not 
in compliance and the noncompliance is not attributable to acts or 
conduct of the complainant, it may order such compliance or it may order 
that the complaint be reinstated for further processing from the point 
processing ceased. Allegations that subsequent acts of discrimination 
violate a settlement agreement shall be processed as separate complaints 
under Sec. Sec. 268.105 or 268.204, as appropriate, rather than under 
this section.



Sec. 268.505  Interim relief.

    (a)(1) When the Board appeals and the case involves removal, 
separation, or suspension continuing beyond the date of the appeal, and 
when the administrative judge orders retroactive restoration, the Board 
shall comply with the decision to the extent of the temporary or 
conditional restoration of the employee to duty status in the position 
specified in the decision, pending the outcome of the Board appeal. The 
employee may decline the offer of interim relief.
    (2) Service under the temporary or conditional restoration 
provisions of paragraph (a)(1) of this section shall be credited toward 
the completion of a probationary or trial period, eligibility for a 
within-grade increase, or the completion of the service requirement for 
career tenure, if the Commission upholds the decision on appeal. Such 
service shall not be credited toward the completion of any applicable 
probationary or trial period or the completion of the service 
requirement for career tenure if the Commission reverses the decision on 
appeal.
    (3) When the Board appeals, it may delay the payment of any amount, 
other than prospective pay and benefits, ordered to be paid to the 
complainant until after the appeal is resolved. If the Board delays 
payment of any amount pending the outcome of the appeal and the 
resolution of the appeal requires the Board to make the payment, then 
the Board shall pay interest from the date of the original decision 
until payment is made.
    (4) The Board shall notify the Commission and the employee in 
writing at the same time it appeals that the relief it provides is 
temporary or conditional and, if applicable, that it will delay the 
payment of any amounts owed but will pay interest as specified in 
paragraph (b)(2) of this section. Failure of the Board to provide 
notification will result in the dismissal of the Board's appeal.
    (5) The Board may, by notice to the complainant, decline to return 
the complainant to his or her place of employment if it determines that 
the return or presence of the complainant will be unduly disruptive to 
the work environment. However, prospective pay

[[Page 997]]

and benefits must be provided. The determination not to return the 
complainant to his or her place of employment is not reviewable. A grant 
of interim relief does not insulate a complainant from subsequent 
disciplinary or adverse action.
    (b) If the Board files an appeal and has not provided required 
interim relief, the complainant may request dismissal of the Board's 
appeal. Any such request must be filed with the Office of Federal 
Operations within 25 days of the date of service of the Board's appeal. 
A copy of the request must be served on the Board at the same time it is 
filed with EEOC. The Board may respond with evidence and argument to the 
complainant's request to dismiss within 15 days of the date of service 
of the request.



               Subpart G_Matters of General Applicability



Sec. 268.601  EEO group statistics.

    (a) The Board shall establish a system to collect and maintain 
accurate employment information on the race, national origin, sex and 
disability(ies) of its employees.
    (b) Data on race, national origin and sex shall be collected by 
voluntary self-identification. If an employee does not voluntarily 
provide the requested information, the Board shall advise the employee 
of the importance of the data and of the Board's obligation to report 
it. If the employee still refuses to provide the information, the Board 
must make a visual identification and inform the employee of the data it 
will be reporting. If the Board believes that information provided by an 
employee is inaccurate, the Board shall advise the employee about the 
solely statistical purpose for which the data is being collected, the 
need for accuracy, the Board's recognition of the sensitivity of the 
information and the existence of procedures to prevent its unauthorized 
disclosure. If, thereafter, the employee declines to change the 
apparently inaccurate self identification, the Board must accept it.
    (c) Subject to applicable law, the information collected under 
paragraph (b) of this section shall be disclosed only in the form of 
gross statistics. The Board shall not collect or maintain any 
information on the race, national origin or sex of individual employees 
except in accordance with applicable law and when an automated data 
processing system is used in accordance with standards and requirements 
prescribed by the Commission to insure individual privacy and the 
separation of that information from personnel records.
    (d) The Board's system is subject to the following controls:
    (1) Only those categories of race and national origin prescribed by 
the Commission may be used;
    (2) Only the specific procedures for the collection and maintenance 
of data that are prescribed or approved by the Commission may be used.
    (e) The Board may use the data only in studies and analyses which 
contribute affirmatively to achieving the objectives of the Board's 
equal employment opportunity program. The Board shall not establish a 
quota for the employment of persons on the basis of race, color, 
religion, sex, or national origin.
    (f) Data on disabilities shall also be collected by voluntary self-
identification. If an employee does not voluntarily provide the 
requested information, the Board shall advise the employee of the 
importance of the data and of the Board's obligation to report it. If an 
employee who has been appointed pursuant to a special Board program for 
hiring individuals with a disability still refuses to provide the 
requested information, the Board must identify the employee's disability 
based upon the records supporting the appointment. If any other employee 
still refuses to provide the requested information or provides 
information that the Board believes to be inaccurate, the Board should 
report the employee's disability status as unknown.
    (g) The Board shall report to the Commission on employment by race, 
national origin, sex and disability in the form and at such times as the 
Board and Commission shall agree.



Sec. 268.602  Reports to the Commission.

    (a) The Board shall report to the Commission information concerning

[[Page 998]]

pre-complaint counseling and the status, processing, and disposition of 
complaints under this part at such times and in such manner as the Board 
and Commission shall agree.
    (b) The Board shall advise the Commission whenever it is served with 
a Federal court complaint based upon a complaint that is pending on 
appeal at the Commission.
    (c) The Board shall submit annually for the review and approval of 
the Commission written equal employment opportunity plans of action. 
Plans shall be submitted in the format prescribed by the Commission and 
shall include, but not be limited to:
    (1) Provision for the establishment of training and education 
programs designed to provide maximum opportunity for employees to 
advance so as to perform at their highest potential;
    (2) Description of the qualifications, in terms of training and 
experience relating to equal employment opportunity, of the principal 
and operating officials concerned with administration of the Board's 
equal employment opportunity program; and
    (3) Description of the allocation of personnel and resources 
proposed by the Board to carry out its equal employment opportunity 
program.



Sec. 268.603  Voluntary settlement attempts.

    The Board shall make reasonable efforts to voluntarily settle 
complaints of discrimination as early as possible in, and throughout, 
the administrative processing of complaints, including the pre-complaint 
counseling stage. Any settlement reached shall be in writing and signed 
by both parties and shall identify the claims resolved.



Sec. 268.604  Filing and computation of time.

    (a) All time periods in this part that are stated in terms of days 
are calendar days unless otherwise stated.
    (b) A document shall be deemed timely if it is received or 
postmarked before the expiration of the applicable filing period, or, in 
the absence of a legible postmark, if it is received by mail within five 
days of the expiration of the applicable filing period.
    (c) The time limits in this part are subject to waiver, estoppel and 
equitable tolling.
    (d) The first day counted shall be the day after the event from 
which the time period begins to run and the last day of the period shall 
be included, unless it falls on a Saturday, Sunday or Federal holiday, 
in which case the period shall be extended to include the next business 
day.



Sec. 268.605  Representation and official time.

    (a) At any stage in the processing of a complaint, including the 
counseling stage under Sec. 268.104, the complainant shall have the 
right to be accompanied, represented, and advised by a representative of 
complainant's choice.
    (b) If the complainant is an employee of the Board, he or she shall 
have a reasonable amount of official time, if otherwise on duty, to 
prepare the complaint and to respond to Board and EEOC requests for 
information. If the complainant is an employee of the Board and he 
designates another employee of the Board as his or her representative, 
the representative shall have a reasonable amount of official time, if 
otherwise on duty, to prepare the complaint and respond to Board and 
EEOC requests for information. The Board is not obligated to change work 
schedules, incur overtime wages, or pay travel expenses to facilitate 
the choice of a specific representative or to allow the complainant and 
representative to confer. The complainant and the representative, if 
employed by the Board and otherwise in a pay status, shall be on 
official time, regardless of their tour of duty, when their presence is 
authorized or required by the Board or the Commission during the 
investigation, informal adjustment, or hearing on the complaint.
    (c) In cases where the representation of a complainant or the Board 
would conflict with the official or collateral duties of the 
representative, the Commission or the Board may, after giving the 
representative an opportunity to respond, disqualify the representative.
    (d) Unless the complainant states otherwise in writing, after the 
Board has received written notice of the name, address and telephone 
number of

[[Page 999]]

a representative for the complainant, all official correspondence shall 
be with the representative with copies to the complainant. When the 
complainant designates an attorney as representative, service of all 
official correspondence shall be made on the attorney and the 
complainant, but time frames for receipt of material shall be computed 
from the time of receipt by the attorney. The complainant must serve all 
official correspondence on the designated representative of the Board.
    (e) The complainant shall at all times be responsible for proceeding 
with the complaint whether or not he or she has designated a 
representative.
    (f) Witnesses who are Board employees shall be in a duty status when 
their presence is authorized or required by Commission or Board 
officials in connection with a complaint.



Sec. 268.606  Joint processing and consolidation of complaints.

    Complaints of discrimination filed by two or more complainants 
consisting of substantially similar allegations of discrimination or 
relating to the same matter may be consolidated by the Board or the 
Commission for joint processing after appropriate notification to the 
parties. Two or more complaints of discrimination filed by the same 
complainant shall be consolidated by the Board for joint processing 
after appropriate notification to the complainant. When a complaint has 
been consolidated with one or more earlier filed complaints, the Board 
shall complete its investigation within the earlier of 180 days after 
the filing of the last complaint or 360 days after the filing of the 
original complaint, except that the complainant may request a hearing 
from an administrative judge on the consolidated complaints any time 
after 180 days from the date of the first filed complaint. 
Administrative judges or the Commission may, in their discretion, 
consolidate two or more complaints of discrimination filed by the same 
complainant.



Sec. 268.607  Delegation of authority.

    The Board of Governors may delegate authority under this part, to 
one or more designees.



   Subpart H_Prohibition Against Discrimination in Board Programs and 

           Activities Because of Physical or Mental Disability



Sec. 268.701  Purpose and application.

    (a) Purpose. The purpose of this subpart H is to prohibit 
discrimination on the basis of a disability in programs or activities 
conducted by the Board.
    (b) Application. (1) This subpart H applies to all programs and 
activities conducted by the Board. Such programs and activities include:
    (i) Holding open meetings of the Board or other meetings or public 
hearings at the Board's office in Washington, DC;
    (ii) Responding to inquiries, filing complaints, or applying for 
employment at the Board's office;
    (iii) Making available the Board's library facilities; and
    (iv) Any other lawful interaction with the Board or its staff in any 
official matter with people who are not employees of the Board.
    (2) This subpart H does not apply to Federal Reserve Banks or to 
financial institutions or other companies supervised or regulated by the 
Board.



Sec. 268.702  Definitions.

    For purposes of this subpart, the following definitions apply:
    (a) Auxiliary aids means services or devices that enable persons 
with impaired sensory, manual, or speaking skills to have an equal 
opportunity to participate in, and enjoy the benefits of, programs or 
activities conducted by the Board. For example, auxiliary aids useful 
for persons with impaired vision include readers, Brailled materials, 
audio recordings, telecommunications devices and other similar services 
and devices. Auxiliary aids useful for persons with impaired hearing 
include telephone handset amplifiers, telephones compatible with hearing 
aids, telecommunication devices for deaf persons (TDD's), interpreters, 
notetakers, written materials, and other similar services and devices.

[[Page 1000]]

    (b) Complete complaint means a written statement that contains the 
complainant's name and address and describes the Board's alleged 
discriminatory action in sufficient detail to inform the Board of the 
nature and date of the alleged violation. It shall be signed by the 
complainant or by someone authorized to do so on his or her behalf. 
Complaints filed on behalf of classes or third parties shall describe or 
identify (by name, if possible) the alleged victims of discrimination.
    (c) Facility means all or any portion of buildings, structures, 
equipment, roads, walks, parking lots, rolling stock or other 
conveyances, or other real or personal property.
    (d) Person with a disability means any person who has a physical or 
mental impairment that substantially limits one or more major life 
activities, has a record of such an impairment, or is regarded as having 
such an impairment. As used in this definition, the phrase:
    (1) Physical or mental impairment includes--
    (i) Any physiological disorder or condition, cosmetic disfigurement, 
or anatomical loss affecting one of more of the following body systems: 
Neurological; musculoskeletal; special sense organs; respiratory, 
including speech organs; cardiovascular; reproductive; digestive; 
genitourinary; hemic and lymphatic; skin; and endocrine; or
    (ii) Any mental or psychological disorder, such as mental 
retardation, organic brain syndrome, emotional or mental illness, and 
specific learning disabilities. The term physical or mental impairment 
includes, but is not limited to, such diseases and conditions as 
orthopedic, visual, speech, and hearing impairments, cerebral palsy, 
epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, 
diabetes, mental retardation, emotional illness, and drug addiction and 
alcoholism.
    (2) Major life activities includes functions such as caring for 
one's self, performing manual tasks, walking, seeing, hearing, speaking, 
breathing, learning, and working.
    (3) Has a record of such an impairment means has a history of, or 
has been misclassified as having, a mental or physical impairment that 
substantially limits one or more major life activities.
    (4) Is regarded as having an impairment means--
    (i) Has a physical or mental impairment that does not substantially 
limit major life activities but is treated by the Board as constituting 
such a limitation;
    (ii) Has a physical or mental impairment that substantially limits 
major life activities only as a result of the attitudes of others toward 
such impairment; or
    (iii) Has none of the impairments defined in paragraph (d)(1) of 
this section but is treated by Board as having such an impairment.
    (e) Qualified person with a disability means--
    (1) With respect to any Board program or activity under which a 
person is required to perform services or to achieve a level of 
accomplishment, a person with a disability who meets the essential 
eligibility requirements and who can achieve the purpose of the program 
or activity without modifications in the program or activity that the 
Board can demonstrate would result in a fundamental alteration in its 
nature; or
    (2) With respect to any other program or activity, a person with a 
disability who meets the essential eligibility requirements for 
participation in, or receipt of benefits from, that program or activity.
    (3) Qualified individual with a disability is defined for purposes 
of employment in Sec. 268.203 of this part, which is made applicable to 
this subpart by Sec. 268.705.



Sec. 268.703  Notice.

    The Board shall make available to employees, applicants for 
employment, participants, beneficiaries, and other interested persons 
information regarding the provisions of this subpart and its 
applicability to the programs and activities conducted by the Board, and 
make this information available to them in such manner as the Board 
finds necessary to apprise such persons of the protections against 
discrimination assured them by this subpart.

[[Page 1001]]



Sec. 268.704  General prohibitions against discrimination.

    (a) No qualified individual with a disability shall, on the basis of 
a disability, be excluded from participation in, be denied the benefits 
of, or otherwise be subjected to discrimination in any program or 
activity conducted by the Board.
    (b)(1) The Board, in providing any aid, benefit, or service, may 
not, directly or through contractual, licensing, or other arrangements, 
on the basis of a disability:
    (i) Deny a qualified individual with a disability the opportunity to 
participate in or benefit from the aid, benefit, or service that is not 
equal to that provided to others;
    (ii) Afford a qualified individual with a disability an opportunity 
to participate in or benefit from the aid, benefit, or service that is 
not equal to that afforded others;
    (iii) Provide a qualified individual with a disability with an aid, 
benefit, or service that is not as effective in affording equal 
opportunity to obtain the same result, to gain the same benefit, or to 
reach the same level of achievement as that provided to others;
    (iv) Provide different or separate aid, benefits, or services to 
individuals with a disability or to any class of individuals with a 
disability than is provided to others unless such action is necessary to 
provide qualified individuals with a disability with aid, benefits, or 
services that are as effective as those provided to others;
    (v) Deny a qualified individual with a disability the opportunity to 
participate as a member of planning or advisory boards; or
    (vi) Otherwise limit a qualified individual with a disability in the 
enjoyment of any right, privilege, advantage, or opportunity enjoyed by 
others receiving the aid, benefit, or service.
    (2) The Board may not deny a qualified individual with a disability 
the opportunity to participate in programs or activities that are not 
separate or different, despite the existence of permissibly separate or 
different programs or activities.
    (3) The Board may not, directly or through contractual or other 
arrangements, utilize criteria or methods of administration, the purpose 
or effect of which would:
    (i) Subject qualified individuals with a disability to 
discrimination on the basis of a disability; or
    (ii) Defeat or substantially impair accomplishment of the objectives 
of a program or activity with respect to individuals with a disability.
    (4) The Board may not, in determining the site or location of a 
facility, make selections the purpose or effect of which would:
    (i) Exclude individuals with a disability from, deny them the 
benefits of, or otherwise subject them to discrimination under any 
program or activity conducted by the Board; or
    (ii) Defeat or substantially impair the accomplishment of the 
objectives or a program or activity with respect to individuals with a 
disability.
    (5) The Board, in the selection of procurement contractors, may not 
use criteria that subject qualified individuals with a disability to 
discrimination on the basis of a disability.
    (6) The Board may not administer a licensing or certification 
program in a manner that subjects qualified individuals with a 
disability to discrimination on the basis of a disability, nor may the 
Board establish requirements for the programs and activities of 
licensees or certified entities that subject qualified individuals with 
a disability to discrimination on the basis of a disability. However, 
the programs and activities of entities that are licensed or certified 
by the Board are not, themselves, covered by this subpart.
    (c) The exclusion of individuals who do not have a disability from 
the benefits of a program limited by Federal statute or Board order to 
individuals with a disability or the exclusion of a specific class of 
individuals with a disability from a program limited by Federal statute 
or Board order to a different class of individuals with a disability is 
not prohibited by this subpart.
    (d) The Board shall administer programs and activities in the most 
integrated setting appropriate to the needs of qualified individuals 
with a disability.

[[Page 1002]]



Sec. 268.705  Employment.

    No qualified individual with a disability shall, on the basis of a 
disability, be subjected to discrimination in employment under any 
program or activity conducted by the Board. The definitions, 
requirements and procedures of Sec. 268.203 of this part shall apply to 
discrimination in employment in federally conducted programs or 
activities.



Sec. 268.706  Program accessibility: Discrimination prohibited.

    Except as otherwise provided in Sec. 268.707 of this subpart, no 
qualified individual with a disability shall, because the Board's 
facilities are inaccessible to or unusable by individuals with a 
disability, be denied the benefits of, be excluded from participation 
in, or otherwise be subjected to discrimination under any program or 
activity conducted by the Board.



Sec. 268.707  Program accessibility: Existing facilities.

    (a) General. The Board shall operate each program or activity so 
that the program or activity, when viewed in its entirety, is readily 
accessible to and usable by individuals with a disability. This 
paragraph (a) does not:
    (1) Necessarily require the Board to make each of its existing 
facilities accessible to and usable by individuals with a disability; or
    (2) Require the Board to take any action that it can demonstrate 
would result in a fundamental alteration in the nature of a program or 
activity or in undue financial and administrative burdens. In those 
circumstances where the Board believes that the proposed action would 
fundamentally alter the program or activity or would result in undue 
financial and administrative burdens, the Board has the burden of 
proving that compliance with this paragraph (a) would result in such 
alterations or burdens. The decision that compliance would result in 
such alterations or burdens shall be made by the Board of Governors or 
their designee after considering all Board resources available for use 
in the funding and operation of the conducted program or activity, and 
must be accompanied by a written statement of the reasons for reaching 
that conclusion. If an action would result in such an alteration or such 
burdens, the Board shall take any other action that would not result in 
such an alteration or such burdens but would nevertheless ensure that 
individuals with a disability receive the benefits and services of the 
program or activity.
    (b) Methods. The Board may comply with the requirements of this 
subpart H through such means as redesign of equipment, reassignment of 
services to accessible buildings, assignment of aides to individuals 
with a disability, home visits, delivery of service at alternate 
accessible sites, alteration of existing facilities and construction of 
new facilities, use of accessible rolling stock, or any other methods 
that result in making its programs or activities readily accessible to 
and usable by individuals with a disability. The Board is not required 
to make structural changes in existing facilities where other methods 
are effective in achieving compliance with this section. In choosing 
among available methods for meeting the requirements of this section, 
the Board shall give priority to those methods that offer programs and 
activities to qualified individuals with a disability in the most 
integrated setting appropriate.
    (c) Time period for compliance. The Board shall comply with any 
obligations established under this section as expeditiously as possible.



Sec. 268.708  Program accessibility: New construction and alterations.

    Each building or part of a building that is constructed or altered 
by, on behalf of, or for the use of the Board shall be designed, 
constructed, or altered so as to be readily accessible to and usable by 
individuals with a disability.



Sec. 268.709  Communications.

    (a) The Board shall take appropriate steps to ensure effective 
communication with applicants, participants, personnel of other Federal 
entities, and members of the public.
    (1) The Board shall furnish appropriate auxiliary aids where 
necessary to afford an individual with a disability an equal opportunity 
to participate in,

[[Page 1003]]

and enjoy the benefits of, a program or activity conducted by the Board.
    (i) In determining what type of auxiliary aid is necessary, the 
Board shall give primary consideration to the requests of the individual 
with a disability.
    (ii) The Board need not provide individually prescribed devices, 
readers for personal use or study, or other devices of a personal 
nature.
    (2) Where the Board communicates with employees and others by 
telephone, telecommunication devices for deaf persons (TDD's) or equally 
effective telecommunication systems shall be used.
    (b) The Board shall ensure that interested persons, including 
persons with impaired vision or hearing, can obtain information as to 
the existence and location of accessible services, activities, and 
facilities.
    (c) The Board shall provide signage at a primary entrance to each of 
its inaccessible facilities, directing users to a location at which they 
can obtain information about accessible facilities. The international 
symbol for accessibility shall be used at each primary entrance of an 
accessible facility.
    (d) This section does not require the Board to take any action that 
would result in a fundamental alteration in the nature of a program or 
activity or in undue financial and administrative burdens. In those 
circumstances where the Board believes that the proposed action would 
fundamentally alter the program or activity or would result in undue 
financial and administrative burdens, the Board has the burden of 
proving that compliance with section 268.709 would result in such 
alterations or burdens. The determination that compliance would result 
in such alteration or burdens must be made by the Board of Governors or 
their designee after considering all Board resources available for use 
in the funding and operation of the conducted program or activity, and 
must be accompanied by a written statement of the reasons for reaching 
that conclusion. If an action required to comply with this section would 
result in such an alteration or such burdens, the Board shall take any 
other action that would not result in such an alteration or such burdens 
but would nevertheless ensure that, to the maximum extent possible, 
individuals with a disability receive the benefits and services of the 
program or activity.



Sec. 268.710  Compliance procedures.

    (a) Applicability. Except as provided in paragraph (b) of this 
section, this section, rather than subpart B and Sec. 268.203 of this 
part, applies to all allegations of discrimination on the basis of a 
disability in programs or activities conducted by the Board.
    (b) Employment complaints. The Board shall process complaints 
alleging discrimination in employment on the basis of a disability in 
accordance with subparts A through G of this part.
    (c) Responsible official. The EEO Programs Director shall be 
responsible for coordinating implementation of this section.
    (d) Filing the complaint--(1) Who may file. Any person who believes 
that he or she has been subjected to discrimination prohibited by this 
subpart may, personally or by his or her authorized representative, file 
a complaint of discrimination with the EEO Programs Director.
    (2) Confidentiality. The EEO Programs Director shall not reveal the 
identity of any person submitting a complaint, except when authorized to 
do so in writing by the complainant, and except to the extent necessary 
to carry out the purposes of this subpart , including the conduct of any 
investigation, hearing, or proceeding under this subpart.
    (3) When to file. Complaints shall be filed within 180 days of the 
alleged act of discrimination. The EEO Programs Director may extend this 
time limit for good cause shown. For the purpose of determining when a 
complaint is timely filed under this paragraph (d), a complaint mailed 
to the Board shall be deemed filed on the date it is postmarked. Any 
other complaint shall be deemed filed on the date it is received by the 
Board.
    (4) How to file. Complaints may be delivered or mailed to the 
Administrative Governor, the Staff Director for Management, the EEO 
Programs Director, the Federal Women's Program Manager, the Hispanic 
Employment Program Coordinator, or the People with Disabilities Program 
Coordinator.

[[Page 1004]]

Complaints should be sent to the EEO Programs Director, Board of 
Governors of the Federal Reserve System, 20th and C Street NW., 
Washington, DC 20551. If any Board official other than the EEO Programs 
Director receives a complaint, he or she shall forward the complaint to 
the EEO Programs Director.
    (e) Acceptance of complaint. (1) The EEO Programs Director shall 
accept a complete complaint that is filed in accordance with paragraph 
(d) of this section and over which the Board has jurisdiction. The EEO 
Programs Director shall notify the complainant of receipt and acceptance 
of the complaint.
    (2) If the EEO Programs Director receives a complaint that is not 
complete, he or she shall notify the complainant, within 30 days of 
receipt of the incomplete complaint, that additional information is 
needed. If the complainant fails to complete the complaint within 30 
days of receipt of this notice, the EEO Programs Director shall dismiss 
the complaint without prejudice.
    (3) If the EEO Programs Director receives a complaint over which the 
Board does not have jurisdiction, the EEO Programs Director shall notify 
the complainant and shall make reasonable efforts to refer the complaint 
to the appropriate government entity.
    (f) Investigation/conciliation. (1) Within 180 days of the receipt 
of a complete complaint, the EEO Programs Director shall complete the 
investigation of the complaint, attempt informal resolution of the 
complaint, and if no informal resolution is achieved, the EEO Programs 
Director shall forward the investigative report to the Staff Director 
for Management.
    (2) The EEO Programs Director may request Board employees to 
cooperate in the investigation and attempted resolution of complaints. 
Employees who are requested by the EEO Programs Director to participate 
in any investigation under this section shall do so as part of their 
official duties and during the course of regular duty hours.
    (3) The EEO Programs Director shall furnish the complainant with a 
copy of the investigative report promptly after completion of the 
investigation and provide the complainant with an opportunity for 
informal resolution of the complaint.
    (4) If a complaint is resolved informally, the terms of the 
agreement shall be reduced to writing and made a part of the complaint 
file, with a copy of the agreement provided to the complainant. The 
written agreement may include a finding on the issue of discrimination 
and shall describe any corrective action to which the complainant has 
agreed.
    (g) Letter of findings. (1) If an informal resolution of the 
complaint is not reached, the EEO Programs Director shall transmit the 
complaint file to the Staff Director for Management. The Staff Director 
for Management shall, within 180 days of the receipt of the complete 
complaint by the EEO Programs Director, notify the complainant of the 
results of the investigation in a letter sent by certified mail, return 
receipt requested, containing:
    (i) Findings of fact and conclusions of law;
    (ii) A description of a remedy for each violation found;
    (iii) A notice of right of the complainant to appeal the letter of 
findings under paragraph (k) of this section; and
    (iv) A notice of right of the complainant to request a hearing.
    (2) If the complainant does not file a notice of appeal or does not 
request a hearing within the times prescribed in paragraph (h)(1) and 
(j)(1) of this section, the EEO Programs Director shall certify that the 
letter of findings under this paragraph (g) is the final decision of the 
Board at the expiration of those times.
    (h) Filing an appeal. (1) Notice of appeal, with or without a 
request for hearing, shall be filed by the complainant with the EEO 
Programs Director within 30 days of receipt from the Staff Director for 
Management of the letter of findings required by paragraph (g) of this 
section.
    (2) If the complainant does not request a hearing, the EEO Programs 
Director shall notify the Board of Governors of the appeal by the 
complainant and that a decision must be made under paragraph (k) of this 
section.
    (i) Acceptance of appeal. The EEO Programs Director shall accept and 
process any timely appeal. A complainant

[[Page 1005]]

may appeal to the Administrative Governor from a decision by the EEO 
Programs Director that an appeal is untimely. This appeal shall be filed 
within 15 calendar days of receipt of the decision from the EEO Programs 
Director.
    (j) Hearing. (1) Notice of a request for a hearing, with or without 
a request for an appeal, shall be filed by the complainant with the EEO 
Programs Director within 30 days of receipt from the Staff Director for 
Management of the letter of findings required by paragraph (g) of this 
section. Upon a timely request for a hearing, the EEO Programs Director 
shall request that the Board of Governors, or its designee, appoint an 
administrative law judge to conduct the hearing. The administrative law 
judge shall issue a notice to the complainant and the Board specifying 
the date, time, and place of the scheduled hearing. The hearing shall be 
commenced no earlier than 15 calendar days after the notice is issued 
and no later than 60 days after the request for a hearing is filed, 
unless all parties agree to a different date.
    (2) The hearing, decision, and any administrative review thereof 
shall be conducted in conformity with 5 U.S.C. 554-557. The 
administrative law judge shall have the duty to conduct a fair hearing, 
to take all necessary actions to avoid delay, and to maintain order. He 
or she shall have all powers necessary to these ends, including (but not 
limited to) the power to:
    (i) Arrange and change the dates, times, and places of hearings and 
prehearing conferences and to issue notice thereof;
    (ii) Hold conferences to settle, simplify, or determine the issues 
in a hearing, or to consider other matters that may aid in the 
expeditious disposition of the hearing;
    (iii) Require parties to state their positions in writing with 
respect to the various issues in the hearing and to exchange such 
statements with all other parties;
    (iv) Examine witnesses and direct witnesses to testify;
    (v) Receive, rule on, exclude, or limit evidence;
    (vi) Rule on procedural items pending before him or her; and
    (vii) Take any action permitted to the administrative law judge as 
authorized by this subpart G or by the provisions of the Administrative 
Procedures Act (5 U.S.C. 554-557).
    (3) Technical rules of evidence shall not apply to hearings 
conducted pursuant to this paragraph (j), but rules or principles 
designed to assure production of credible evidence and to subject 
testimony to cross-examination shall be applied by the administrative 
law judge wherever reasonably necessary. The administrative law judge 
may exclude irrelevant, immaterial, or unduly repetitious evidence. All 
documents and other evidence offered or taken for the record shall be 
open to examination by the parties, and opportunity shall be given to 
refute facts and arguments advanced on either side of the issues. A 
transcript shall be made of the oral evidence except to the extent the 
substance thereof is stipulated for the record. All decisions shall be 
based upon the hearing record.
    (4) The costs and expenses for the conduct of a hearing shall be 
allocated as follows:
    (i) Employees of the Board shall, upon the request of the 
administrative law judge, be made available to participate in the 
hearing and shall be on official duty status for this purpose. They 
shall not receive witness fees.
    (ii) Employees of other Federal agencies called to testify at a 
hearing, at the request of the administrative law judge and with the 
approval of the employing agency, shall be on official duty status 
during any absence from normal duties caused by their testimony, and 
shall not receive witness fees.
    (iii) The fees and expenses of other persons called to testify at a 
hearing shall be paid by the party requesting their appearance.
    (iv) The administrative law judge may require the Board to pay 
travel expenses necessary for the complainant to attend the hearing.
    (v) The Board shall pay the required expenses and charges for the 
administrative law judge and court reporter.
    (vi) All other expenses shall be paid by the parties incurring them.
    (5) The administrative law judge shall submit in writing recommended

[[Page 1006]]

findings of fact, conclusions of law, and remedies to the complainant 
and the EEO Programs Director within 30 days, after the receipt of the 
hearing transcripts, or within 30 days after the conclusion of the 
hearing if no transcripts are made. This time limit may be extended with 
the permission of the EEO Programs Director.
    (6) Within 15 calendar days after receipt of the recommended 
decision of the administrative law judge, the complainant may file 
exceptions to the recommended decision with the EEO Programs Director. 
On behalf of the Board, the EEO Programs Director may, within 15 
calendar days after receipt of the recommended decision of the 
administrative law judge, take exception to the recommended decision of 
the administrative law judge and shall notify the complainant in writing 
of the Board's exception. Thereafter, the complainant shall have 10 
calendar days to file reply exceptions with the EEO Programs Director. 
The EEO Programs Director shall retain copies of the exceptions and 
replies to the Board's exception for consideration by the Board. After 
the expiration of the time to reply, the recommended decision shall be 
ripe for a decision under paragraph (k) of this section.
    (k) Decision. (1) The EEO Programs Director shall notify the Board 
of Governors when a complaint is ripe for decision under this paragraph 
(k). At the request of any member of the Board of Governors made within 
3 business days of such notice, the Board of Governors shall make the 
decision on the complaint. If no such request is made, the 
Administrative Governor, or the Staff Director for Management if he or 
she is delegated the authority to do so, shall make the decision on the 
complaint. The decision shall be made based on information in the 
investigative record and, if a hearing is held, on the hearing record. 
The decision shall be made within 60 days of the receipt by the EEO 
Programs Director of the notice of appeal and investigative record 
pursuant to paragraph (h)(1) of this section or 60 days following the 
end of the period for filing reply exceptions set forth in paragraph 
(j)(6) of this section, whichever is applicable. If the decision-maker 
under this paragraph (k) determines that additional information is 
needed from any party, the decision-maker shall request the information 
and provide the other party or parties an opportunity to respond to that 
information. The decision-maker shall have 60 days from receipt of the 
additional information to render the decision on the appeal. The 
decision-maker shall transmit the decision by letter to all parties. The 
decision shall set forth the findings, any remedial actions required, 
and the reasons for the decision. If the decision is based on a hearing 
record, the decision-maker shall consider the recommended decision of 
the administrative law judge and render a final decision based on the 
entire record. The decision-maker may also remand the hearing record to 
the administrative law judge for a fuller development of the record.
    (2) The Board shall take any action required under the terms of the 
decision promptly. The decision-maker may require periodic compliance 
reports specifying:
    (i) The manner in which compliance with the provisions of the 
decision has been achieved;
    (ii) The reasons any action required by the final Board decision has 
not been taken; and
    (iii) The steps being taken to ensure full compliance.
    (3) The decision-maker may retain responsibility for resolving 
disputes that arise between parties over interpretation of the final 
Board decision, or for specific adjudicatory decisions arising out of 
implementation.



PART 269_POLICY ON LABOR RELATIONS FOR THE FEDERAL RESERVE BANKS--Table of 

Contents




Sec.
269.1 Definition of a labor organization.
269.2 Membership in a labor organization.
269.3 Recognition of a labor organization and its relationship to a 
          Federal Reserve Bank.
269.4 Determination of appropriate bargaining unit.
269.5 Elections.
269.6 Unfair labor practices.
269.7 Approval of agreement and required contents.
269.8 Grievance procedures.
269.9 Mediation of negotiation impasses.

[[Page 1007]]

269.10 Time for internal labor organization business, consultations and 
          negotiations.
269.11 Federal Reserve System Labor Relations Panel.
269.12 Amendment.

    Authority: Sec. 11, 38 Stat. 261; 12 U.S.C. 248.

    Source: 48 FR 32331, July 15, 1983, unless otherwise noted.



Sec. 269.1  Definition of a labor organization.

    When used in this part, the term labor organization means any lawful 
organization of any kind, or any employee representation group, which 
exists for the purpose, in whole or in part, of dealing with any Federal 
Reserve Bank concerning grievances, personnel policies and practices, or 
other matters affecting the working conditions of its employees, but the 
term shall not include any organization:
    (a) Which asserts the right to strike against the government of the 
United States, the Board of Governors of the Federal Reserve System, or 
any Federal Reserve Bank, or to assist or participate in any such 
strike, or which imposes a duty or obligation to conduct, assist or 
participate in any such strike; or
    (b) Which fails to agree to refrain from seeking or accepting 
support from any organization which employs coercive tactics affecting 
any Federal Reserve Bank's operations; or
    (c) Which advocates the overthrow of the constitutional form of the 
government of the United States; or
    (d) Which discriminates with regard to the terms or conditions of 
membership because of race, color, sex, creed, age or national origin.



Sec. 269.2  Membership in a labor organization.

    (a) Any employee of a Federal Reserve Bank (hereinafter referred to 
as ``Bank'') is free to join and assist any existing labor organization 
or to participate in the formation of a new labor organization, or to 
refrain from any such activities except that officers and their 
administrative or confidential assistants, managers and other 
supervisory personnel, secretaries to all such persons and all employees 
engaged in Bank personnel work shall not be represented by any labor 
organization.
    (b) The rights described in paragraph (a) of this section for 
employees do not extend to participation in the management of a labor 
organization, or acting as a representative of any such organization, 
where such participation or activity would conflict with law or the 
duties of an employee.
    (c) Notwithstanding anything stated in paragraph (a) of this 
section, professional employees of a Bank shall not be represented by a 
labor organization which represents other employees of the Bank unless a 
majority of the professional employees eligible to vote specifically 
elect to be represented by such labor organization. However, the 
professional employees of a Bank may, if they so choose, be represented 
by a separate labor organization of their own, or by no labor 
organization at all.
    (d) Notwithstanding anything stated in paragraph (a) of this 
section, the guards of a Bank shall not be members of a labor 
organization which represents other categories of employees of the Bank. 
However, the guards of a Bank may, if they so choose, be represented by 
a separate labor organization of their own, or by no labor organization 
at all.



Sec. 269.3  Recognition of a labor organization and its relationship to a 

Federal Reserve Bank.

    (a) Any labor organization shall be recognized as the exclusive 
bargaining representative of the employees in an appropriate unit of a 
Bank when that organization has been selected by the employees in said 
unit pursuant to the procedure set forth in Sec. 269.5. A unit may be 
established in a Bank on any basis which will ensure a clear and 
identifiable community of interest among the employees concerned, and 
will promote effective relationships and the efficiency of the Bank's 
operations, but no unit shall be established solely on the basis of the 
extent to which a labor organization or employees in the proposed unit 
may have sought organization.
    (b) When a labor organization has been recognized as the exclusive 
representative of employees in an appropriate unit, it shall be entitled 
to act

[[Page 1008]]

for and to negotiate agreements in good faith covering all employees in 
the unit, and it shall be responsible for representing the interests of 
all such employees without discrimination and without regard to whether 
they are members of that labor organization or not, provided that 
nothing in this Policy shall prevent an employee from adjusting his or 
her grievance without the intervention of the recognized labor 
organization. The labor organization shall be given notice of the 
adjustment and a reasonable opportunity to object on the sole ground 
that it is in conflict with the terms of the collective bargaining 
agreement.
    (c) A Bank, through appropriate officials, shall have the obligation 
to meet at reasonable times with representatives of a recognized labor 
organization to negotiate, in good faith, with respect to personnel 
policies and practices affecting working conditions for employees, 
provided that they do not involve matters in any of the following areas:
    (1) The purposes and functions of the Bank; the compensation of and 
hours worked by employees; any classification system used to evaluate 
positions; the budget of the Bank; the retirement system; any insurance 
or other benefit plans; internal security operations; maintenance of the 
efficiency of Bank operations including the determination of work 
methods; the right to contract out; the determination as to manpower 
requirements; use of technology and organization of work; and action to 
meet emergency situations;
    (2) Management rights as to the direction of employees, including 
hiring, promotion, transfer, classification, assignment, layoffs, 
retention, suspension, demotion, discipline and discharge, provided that 
on matters involving the procedures to be followed by a Bank for the 
exercise of its rights under this subparagraph, a Bank shall, upon 
request, discuss such procedures with a recognized labor organization, 
but shall not be required to negotiate for an agreement as to them;
    (3) All Bank matters specifically governed by applicable laws or 
regulations.

The obligation under this paragraph to negotiate with regard to certain 
matters shall include the execution of a written contract incorporating 
any agreement reached, but does not compel either a Bank or a labor 
organization to agree to a particular proposal or to make any concession 
during such negotiations.
    (d) At the time it requests an election to be held, any labor 
organization seeking recognition shall submit to a Bank a roster of its 
officers and representatives, a copy of its constitution and bylaws, and 
a statement of its objectives.
    (e) Subject to the provisions of Sec. 269.8, the exclusive 
recognition of a labor organization shall not preclude any employee, 
regardless of labor organization membership, from bringing matters of 
personal concern not governed by a collective bargaining agreement to 
the attention of appropriate officers, managers or supervisory personnel 
in accordance with applicable law, rule, regulation, or established Bank 
policy, or from choosing his or her own representative in such matters.



Sec. 269.4  Determination of appropriate bargaining unit.

    (a) If a labor organization asserts in writing to a Bank that it 
holds cards requesting a representation election signed by at least 
thirty percent (30%) of the employees in a unit which that organization 
considers to be an appropriate bargaining unit, the labor organization 
and the Bank shall each designate a representative who together shall 
request the American Arbitration Association (hereinafter referred to as 
``Association'') to submit to them from its National Panel of 
Professional Labor Arbitrators a list of seven (7) impartial, qualified 
professional arbitrators. The two designated representatives shall meet 
promptly and, by alternately striking names from the list, arrive at the 
remaining person who, together with the two representatives, shall 
constitute a Special Tribunal to rule on the labor organization's 
request for an election. The impartial arbitrator shall always act as 
the Chairperson of any Special Tribunal duly constituted under this 
section.
    (b) In the absence of an agreement between the labor organization 
and the

[[Page 1009]]

Bank on the appropriate unit, the Tribunal shall investigate the facts, 
hold hearings if necessary, and issue a decision as to the 
appropriateness of the unit for the purposes of conducting a 
representation election for exclusive recognition and as to related 
issues submitted for consideration. The expenses for this proceeding, 
including the fees of the association and of the arbitrator, shall be 
borne equally by the labor organization and the Bank. If either the Bank 
or the labor organization should disagree with the Special Tribunal's 
decision, the party in disagreement may appeal within thirty (30) 
calendar days to the Federal Reserve System Labor Relations Panel 
referred to in Sec. 269.11, and the decision of the System Panel shall 
be final and binding on the parties.
    (c) If there is any dispute as to whether a labor organization holds 
cards signed by at least thirty percent (30%) of the employees in a unit 
claimed by a labor organization as appropriate or subsequently 
determined by the Special Tribunal as appropriate, the dispute shall be 
resolved by the Chairperson of the Special Tribunal, acting as a single 
impartial arbitrator. The expenses of such procedure, including the 
impartial arbitrator's fee, shall be borne equally by the labor 
organization and the Bank. The decision of the Chairperson of the 
Special Tribunal shall be final and binding and shall not be subject to 
appeal to the Federal Reserve System Labor Relations Panel.



Sec. 269.5  Elections.

    (a) Once there has been a final determination of the existence of an 
appropriate bargaining unit under the procedure in Sec. 269.4, and a 
showing by a labor organization that it has cards signed by at least 
thirty percent (30%) of the employees in such unit requesting a 
representation election, an election shall be ordered by the Special 
Tribunal. A labor organization shall be recognized as the exclusive 
bargaining representative of the unit if it is selected by a majority of 
the employees in the unit actually voting.
    (b) The election shall be held under the auspices of the Association 
and shall be subject to its election rules and regulations. However, if 
there should be any conflict between such rules and regulations and the 
provisions of this Policy, the latter shall prevail. The fees charged by 
the Association for its election service shall be borne equally by the 
labor organization and the Bank.
    (c) An election to determine whether a labor organization should 
continue as the exclusive bargaining representative of a particular unit 
shall be held when requested by a petition or other bona fide showing by 
at least thirty percent (30%) of the employees of that unit. Any dispute 
as to whether thirty percent (30%) of the employees requested such an 
election shall be resolved by the same procedure as that set forth in 
Sec. 269.4(b). The election shall be held under the auspices of the 
Association in the same manner described in paragraph (b) of this 
section. The recognition of a labor organization as the exclusive 
bargaining representative of a unit shall be revoked if a majority of 
the employees in the unit who actually vote signify approval of such 
revocation.
    (d) Only one election may be held in any unit in a twelve (12) month 
period to determine whether a labor organization should become, or 
continue to be recognized as, the exclusive representative of the 
employees in that unit.
    (e) Upon receipt of a request for an election from a labor 
organization under Sec. 269.4(a), it shall be incumbent on the Bank, 
labor organization and all others to refrain from any conduct, action or 
policy that interferes with or restrains employees from making a fair 
and free choice in selecting or rejecting a bargaining representative 
consistent with the right of the Bank, labor organization or employees 
to exercise privileges of free speech in the expression of any views, 
argument or opinion, or the dissemination thereof, whether in oral, 
written, printed, graphic or visual form.
    (f) The Special Tribunal shall hear and decide any post-election 
objections of a Bank or labor organization filed with it claiming that a 
violation of paragraph (e) of this section has improperly affected the 
outcome of the election. Such objections must be filed with the Special 
Tribunal no later than five (5) business days after the date of

[[Page 1010]]

election. In the event of such violation by a Bank, labor organization 
or other individuals or organizations which the Special Tribunal finds 
sufficient to have prejudiced the outcome of an election, appropriate 
remedial action shall be taken in the form of setting aside the election 
results and ordering a new election, provided, however, that an appeal 
from the order of the Special Tribunal may be taken within thirty (30) 
calendar days to the Federal Reserve System Labor Relations Panel by 
either the affected Bank or labor organization. The ruling of the System 
Panel shall be final and binding. Neither the Special Tribunal nor the 
Federal Reserve System Labor Relations Panel shall have the authority to 
direct a Bank to recognize a labor organization as the exclusive 
collective bargaining representative without a valid election being held 
in which a majority of the employees actually voting have so designated 
such labor organization.
    (g) The Special Tribunal and the Federal Reserve System Labor 
Relations Panel will adhere to any rules and regulations promulgated by 
the Board of Governors for the administration of the provisions of 
paragraphs (e) and (f) of this section.



Sec. 269.6  Unfair labor practices.

    (a) It shall be an unfair labor practice for a Bank to: (1) 
Interfere with, restrain, or coerce employees in the exercise of the 
rights guaranteed in Sec. 269.2(a); (2) dominate or interfere with the 
formation or administration of any labor organization, or to contribute 
financial or other support to it; (3) encourage or discourage membership 
in any labor organization by discrimination in regard to hire or tenure 
of employment or any term or condition of employment; (4) refuse to 
bargain collectively with the representatives of its employees subject 
to the provisions of Sec. 269.3 (b) and (c).
    (b) It shall be an unfair labor practice for a labor organization, 
its agents or representatives to: (1) Restrain or coerce employees in 
the exercise of the rights guaranteed in Sec. 269.2(a); (2) cause or 
attempt to cause a Bank to Discriminate against an employee in violation 
of paragraph (a)(3) of this section; (3) refuse to bargain collectively 
with a Bank, provided the labor organization is the exclusive 
representative of a unit of employees.
    (c) Notwithstanding anything previously stated in this section, the 
expression of any view, argument or opinion, or the dissemination 
thereof, whether in oral, written, printed, graphic or visual form, 
shall not constitute or be evidence of an unfair labor practice, if such 
expression contains no threat of reprisal or force, or promise of 
benefit.
    (d) The Federal Reserve System Labor Relations Panel will adhere to 
the rules and regulations promulgated by the Board of Governors for the 
prevention and remedy of the unfair labor practices listed herein.



Sec. 269.7  Approval of agreement and required contents.

    Any agreement entered into with a labor organization as the 
exclusive representative of employees in a unit must be approved by the 
President of the Bank or a designated officer representative. All 
agreements with labor organizations shall also be subject to the 
requirement that the administration of all matters covered by the 
agreement shall be governed by the provisions of applicable laws and 
Federal Reserve System rules and regulations, and the agreement shall at 
all times be applied subject to such laws and regulations.



Sec. 269.8  Grievance procedures.

    (a) Subject to the provisions of Sec. 269.3(b), an agreement 
entered into with a labor organization as the exclusive representative 
of employees in a unit may contain a grievance procedure, applicable 
only to employees in such unit and which shall be the exclusive means 
for a labor organization and/or an employee to obtain resolution of a 
grievance arising under such agreement.
    (b) Grievance procedures established by a labor agreement may also 
include provisions for arbitration of unresolved grievances by a 
tripartite panel under the Voluntary Labor Arbitration Rules of the 
Association with the impartial arbitrator selected by the Bank and labor 
organization representatives on

[[Page 1011]]

the arbitration panel to be the Chairperson. In such event, arbitration 
shall extend only to grievances which involve the interpretation and 
application of specific provisions of a labor agreement and not to any 
other matters or to changes in or proposed changes in the agreement. 
Arbitration may only be invoked by labor organization on behalf of 
individual employees with their concurrence.



Sec. 269.9  Mediation of negotiation impasses.

    In the event of an impasse in negotiations between the parties for a 
collective bargaining agreement, either the labor organization or the 
Bank may request the appointment of a qualified neutral person as a 
mediator to assist the parties in attempting to resolve the impasse. The 
parties will meet promptly with the mediator, and all matters discussed, 
as well as any documents submitted, shall not be publicly divulged for 
any reason. The cost of the mediator shall be borne equally by the 
parties.



Sec. 269.10  Time for internal labor organization business, consultations and 

negotiations.

    Solicitation of memberships, dues or other internal labor 
organization business shall be conducted during the nonduty hours of the 
employees concerned. Officially requested or approved consultation 
between management executives and representatives of a labor 
organization shall, whenever practicable, be conducted on official time, 
but the President or a duly authorized officer of a Bank may require 
that negotiations with a labor organization be conducted during the 
nonduty hours of the Bank.



Sec. 269.11  Federal Reserve System Labor Relations Panel.

    There shall be established a Federal Reserve System Labor Relations 
Panel, which shall consist of three members: one member of the Board of 
Governors of the Federal Reserve System, who shall be Chairperson of the 
Panel, and two public members. Each member shall be selected by the 
Board of Governors; provided, however, that the public members shall not 
have any present or past affiliation with the Federal Reserve System. 
Initially, one of the two public members shall be appointed for a term 
of two years, and the other for a term of three years. Thereafter, each 
public member shall be appointed for a term of three years, except that 
in the case of an unexpired term of a former member, the successor shall 
be appointed to fill such unexpired term. Upon the expiration of their 
term of office, public members may continue to serve until their 
successors are appointed and have qualified. A public member may be 
removed by the Board only upon notice and hearing, and only for neglect 
of duty or malfeasance in office. The Panel shall be responsible for the 
duties assigned to it as set forth in this Policy.



Sec. 269.12  Amendment.

    This policy may be amended upon appropriate legal notice to all 
Federal Reserve Banks and labor organizations recognized, or seeking 
recognition, at any such Bank under this Policy. In no instance shall an 
amendment be applied retroactively.



PART 269a_DEFINITIONS--Table of Contents




Sec.
269a.1 Party.
269a.2 Party in interest.
269a.3 Intervenor.
269a.4 Investigator.
269a.5 Hearing officer.

    Authority: Sec. 11, 38 Stat. 261 (12 U.S.C. 248).

    Source: 35 FR 8919, June 10, 1970, unless otherwise noted. 
Redesignated at 48 FR 32334, July 15, 1983.



Sec. 269a.1  Party.

    The term Party means any person, employee, group of employees, labor 
organization, or bank as defined in Sec. 269.2 of this chapter (a) 
filing a charge, petition, application, or rquest pursuant to these 
rules and regulations, (b) named as a party in a charge, complaint, 
petition, application, or request, or (c) whose intervention has been 
permitted or directed by the investigator, the hearing officer, or the 
panel, as the case may be, but nothing shall be construed to prevent the 
panel, or any officer designated by it, from

[[Page 1012]]

limiting any party's participation in the proceedings to the extent of 
his interest as determined by the investigator, hearing officer, or 
panel.



Sec. 269a.2  Party in interest.

    The term party in interest means any person, employee, group of 
employees, labor organization, or bank that will be or is directly 
affected by the resolution of any charge, complaint, petition, 
application, or request presented to or being considered by the panel or 
its designated officers. Any (a) labor organization (not a charging 
party nor a charged party) attempting to organize the employees of a 
bank or that is or was recently a party to a collective bargaining 
agreement with a bank named as a party in a charge, complaint, petition, 
application, or a request, or (b) bank (not a charging party nor a 
charged party) that acts as the employer of any person named in a 
charge, complaint, petition, or request shall be deemed to be also a 
party in interest and shall be entitled to notification and service of 
all relevant procedures and documents.



Sec. 269a.3  Intervenor.

    The term intervenor means the party in a proceeding whose 
intervention has been permitted or directed by the panel or its 
designated officer.



Sec. 269a.4  Investigator.

    The term investigator means the officer designated by the panel to 
investigate and determine whether or not a complainant has established a 
prima facie case, as defined in Sec. 269b.210 of this subchapter.

[35 FR 8919, June 10, 1970. Redesignated at 48 FR 32334, July 15, 1983, 
as amended at 65 FR 2530, Jan. 18, 2000.



Sec. 269a.5  Hearing officer.

    The term hearing officer means the officer designated by the panel 
to conduct hearings pursuant to Sec. 269b.420 et seq. of this 
subchapter and whose duties and power are enumerated in Sec. 269b.442 
of this subchapter.

[35 FR 8919, June 10, 1970. Redesignated at 48 FR 32334, July 15, 1983, 
as amended at 65 FR 2530, Jan. 18, 2000.



PART 269b_CHARGES OF UNFAIR LABOR PRACTICES--Table of Contents




          Charges of Violations of Sec. 269.6 (of the Policy)

Sec.
269b.110 Charges.
269b.111 Filing of charges.
269b.112 Contents of the charge.
269b.113 Withdrawal or settlement.
269b.120 Answer to a charge.
269b.121 Contents of answer.

                        Preliminary Investigation

269b.210 Referral to National Center for Dispute Settlement.
269b.220 Priority; acceleration of proceedings.
269b.230 Assessment of costs; posting of bond.
269b.240 The investigation.

                 Appeal From the Center's Determination

269b.310 Appeal rights.
269b.320 Proceedings before the panel.

                           Formal Proceedings

269b.410 Notice of hearing.
269b.420 Designation of hearing officer.
269b.430 Contents of notice of hearing.
269b.440 Conduct of hearing.
269b.441 Rights of parties.
269b.442 Duties and powers of the hearing officer.
269b.443 Motions before or after a hearing.
269b.444 Objection to conduct of hearing; other motions during hearing.
269b.450 Submission of hearing officer's report to the panel.

    Panel Review of Hearing Officer's Report and Recommended Decision

269b.510 Review by panel.
269b.520 Exceptions to hearing officer's report.
269b.530 Briefs in support of the hearing officer's report.
269b.540 Action by the panel.

                               Compliance

269b.610 Procedures.
269b.620 Action by panel.

                              General Rules

269b.710 Rules to be liberally construed.
269b.720 Computation of time for filing papers.
269b.730 Number of copies; form.
269b.731 Signature.
269b.740 Service of pleading and other paper; statement of service.
269b.750 Requests for appearance of witnesses and production of 
          documents.


[[Page 1013]]


    Authority: Sec. 11, 38 Stat. 261 (12 U.S.C. 248).

    Source: 35 FR 8920, June 10, 1970, unless otherwise noted. 
Redesignated at 48 FR 32334, July 15, 1983.

          Charges of Violations of Sec. 269.6 (of the Policy)



Sec. 269b.110  Charges.

    A charge that any bank or labor organization, or agents or 
representatives of a bank or labor organization, has engaged in or is 
engaging in any act prohibited under Sec. 269.6 of the policy or has 
failed to take any action required by Sec. 269.6 of the policy may be 
filed by any party in interest, or its representative, within 60 days 
after the alleged violations or within 60 days after the charging party 
has become or should have become aware of the alleged violation.



Sec. 269b.111  Filing of charges.

    Any charge pursuant to Sec. 269b.110 shall be in writing and 
signed. An original and three copies of such charge, together with one 
copy for each charged party named, shall be transmitted to the Secretary 
of the Federal Reserve System Labor Relations Panel, 20th Street and 
Constitution Avenue NW., Washington, DC 20551. Within 5 days after 
receipt of a properly filed charge that meets the formal requirements 
set forth in Sec. 269b.112, the Secretary will cause a copy of such 
charge to be served on each party against whom the charge is made and 
upon all other potential parties in interest.



Sec. 269b.112  Contents of the charge.

    A charge shall contain the following:
    (a) The full name, address, and telephone number of the person, 
bank, or labor organization making the charge (hereinafter referred to 
as the charging party) and of the person signing the charge who shall 
state also his relation to or his capacity with the complainant. Where 
discrimination is alleged, all known discriminatees shall be named;
    (b) The name, address, and telephone number of the bank or labor 
organization against whom the charge is made (hereinafter referred to as 
the respondent) and of any parties in interest;
    (c) A clear and concise statement of the facts constituting the 
alleged unfair labor practice, including the time and place of 
occurrence of the particular acts, and a statement of the portion or 
portions of the policy alleged to have been violated. A charge shall not 
incorporate by reference affidavits or other documents submitted in 
support of the charge;
    (d) A statement of the relief sought;
    (e) A statement of any other remedies invoked for the redress of the 
alleged violations of the policy and the results, if any, of their 
invocation. If the issue in such charge is subject to an established 
grievance procedure, the complainant must irrevocably elect, prior to 
the completion of the first applicable step of the grievance procedure, 
whether he will invoke the grievance procedure or whether he will invoke 
the unfair labor practice procedures of the panel. A charge which is 
withdrawn or rejected by the panel as defective prior to the institution 
of any formal proceedings by the panel shall not prejudice the filing of 
a grievance on the same matter, unless the parties otherwise so provide;
    (f) A declaration by the person signing the charge, that its 
contents are true and correct to the best of his knowledge and belief, 
such declaration to be subject to applicable provisions of the Federal 
Criminal Code (18 U.S.C. 1001).



Sec. 269b.113  Withdrawal or settlement.

    A charge may be withdrawn or settlement of the matter may be reached 
without consent of the panel at any time. In connection with any such 
settlement the parties in interest shall prepare and sign a settlement 
agreement which shall record that the settlement is mutually 
satisfactory, shall stipulate any occurrences which constituted unfair 
labor practices and shall set forth the terms of the settlement.



Sec. 269b.120  Answer to a charge.

    The respondent shall file an answer to the charge with the Secretary 
of the panel within 15 days after service of the charge. Upon 
application and for good cause shown, the panel may extend the time 
within which the answer

[[Page 1014]]

shall be filed. One copy of the answer shall be served on each party 
with proof of service furnished to the Secretary, and the original, 
which shall be signed, and four copies shall be filed with the 
Secretary.



Sec. 269b.121  Contents of answer.

    The answer shall contain:
    (a) A specific admission or denial, and where appropriate, 
explanation thereof; or if the respondent is without knowledge of the 
allegation, he shall so state and such statement shall operate as a 
denial. Admissions or denials may be to all or part of an allegation but 
shall be responsive to the substance of the allegation;
    (b) A specified, detailed statement of any affirmative defense;
    (c) A clear and concise statement of the facts and matters of law 
relied upon constituting the grounds of defense.

Any allegation of the charge not denied in the answer may be deemed 
admitted and may be so found by the panel.

                        Preliminary Investigation



Sec. 269b.210  Referral to National Center for Dispute Settlement.

    (a) Within 5 days after the answer to the charge has been or should 
have been filed, the panel may refer the matter, accompanied by a 
general or particularized request, to the National Center for Dispute 
Settlement of the American Arbitration Association (hereinafter referred 
to as the Center) to make an investigation and to determine whether the 
charging party has established a prima facie case.
    (b) For the purposes of this part, a prima facie case means a case 
where allegations of an unfair labor practice that have been presented 
give reasonable cause to believe that such practice may have occurred, 
but where evidentiary proceedings are necessary for determination of 
whether the allegations are substantiated.
    (c) The Center may use its own personnel or may hire individuals on 
a contract basis to conduct such investigations. The panel may 
consolidate or sever proceedings conducted pursuant to this part.
    (d) Any party may request the Center or other appointing authority 
to withdraw appointment of the investigator within 3 days after 
designation on the basis of previously demonstrated personal bias, 
conflict of interest, or prejudice. Such a request shall set forth in 
detail the matter alleged to constitute grounds for disqualification. 
Denial of a request by the Center or other appointing authority shall be 
substantiated in writing and transmitted to the requesting party, and 
shall be submitted to the panel together with the complete report of the 
investigator required in Sec. 269b.240(b).



Sec. 269b.220  Priority; acceleration of proceedings.

    (a) A charge of ``refusal to bargain'' or a charge that, if 
sustained, would require the setting aside of an election or the conduct 
of a new election shall be given priority.
    (b) The parties, individually or jointly, may petition the panel at 
any time to invoke immediately the formal hearing procedures set forth 
in Sec. 269b.410. They may also petition the panel to entertain the 
matter itself without prior investigation and/or without the formal 
hearing procedure set forth in Sec. 269b.410. The panel is empowered 
also on its own motion to so accelerate disposition of the case.
    (c) Before accelerating a case the panel may utilize whatever 
proceedings it may deem appropriate and timely to allow parties in 
interest to comment on the proposed course of action.



Sec. 269b.230  Assessment of costs; posting of bond.

    (a) The panel shall normally bear the costs of an investigation 
conducted pursuant to Sec. 269b.210, but the panel may require that the 
charging party, the respondent, and/or other parties in interest or 
intervenors, or several of them, shall bear a portion or all of the 
costs therefor. With respect to each case where an investigation is 
directed by the panel, the charging party may, in the discretion of the 
panel, be required to file a cost bond, or equivalent security, of $500, 
unless the panel fixes a different amount.
    (b) Among the circumstances that may be the basis for payment of 
costs

[[Page 1015]]

by other than the panel are cases where a clearly spurious charge has 
been filed or where the filing of a charge was necessary to redress the 
respondent's flagrant misconduct.
    (c) The bond or equivalent security shall be to secure the payment 
of the costs of the investigation as may be assessed by the panel. In 
those cases where the panel does not assess such costs, the bond posted 
and the cost thereof shall be reimbursed to the charging party. The 
panel may require also the posting of a cost bond by the respondent or 
other party to the proceeding, who shall be entitled to reimbursement of 
the cost of the bond in the event that no costs of investigation are 
assessed upon such party by the panel.
    (d) Notification of the panel's decision that a bond shall be 
required shall be effected by registered mail, such notice to advise of 
the amount of the bond required and the period by which it shall be 
posted.
    (e) Absent good cause shown, failure of a party to file timely such 
cost bond or equivalent security may be ground for dismissal or other 
administrative sanctions deemed appropriate by the Panel.



Sec. 269b.240  The investigation.

    (a) The purpose of the investigation is (1) to ascertain, analyze, 
and apply the relevant facts in order to determine whether or not formal 
proceedings are warranted and (2) to assist, by mediation and other 
appropriate means, the parties to reach a mutually satisfactory 
resolution of the issues as an alternative to the hearing process. In so 
doing, the investigator is not limited to the allegations set forth in 
the charge and may advise the charging party to amend his charge. In 
addition, he should adduce facts pertaining to the remedy as well as to 
the alleged violation. Investigation should also adduce facts pertaining 
to the jurisdiction of the panel and the timeliness of the charge. If 
the charge is untimely on its face, no investigation shall be required 
except to determine whether or not attending circumstances warrant 
waiving the time requirements, set forth in Sec. 269b.110. The 
investigator may request the appearance of parties and witnesses, may 
cause, the production of relevant document, and may take or cause 
depositions to be taken.
    (b) When the investigation has been completed, the Center shall 
issue a written determination whether the charging party has established 
a prima facie case, whether the charge was timely filed, and whether the 
charge is within the jurisdiction of the panel, and reasons therefor. 
This determination shall be served upon the panel and all parties. The 
panel shall receive also the complete report of the investigator.

                 Appeal From the Center's Determination



Sec. 269b.310  Appeal rights.

    Where the investigator has found that a prima facie case does not 
exist, a party, including an intervenor but excluding the respondent or 
other parties having the same interest as the respondent, within 5 days 
after receiving the Center's determination may petition the panel to set 
aside the determination and to cause formal proceedings, set forth in 
Sec. 269b.410, to be invoked. The panel may grant such petition only on 
grounds that the Center or its agents were arbitrary, capricious, or 
acted contrary to law or the policy, or that the investigator's 
determination is clearly erroneous. The filing requirements for such a 
petition shall be the same as that for the filing of a charge, as set 
forth in Sec. 269b.111.



Sec. 269b.320  Proceedings before the panel.

    The panel shall issue its decision within 15 days after the receipt 
of the petition provided for in Sec. 269b.310 or by the end of that 
period shall announce that it will require briefs by the parties. Such 
announcement shall specify the requirements as to contents of the 
briefs, and the time for submission, which shall vary to meet the 
circumstances of the matter appealed. The panel, at such time, may also 
require oral argument or the production of evidence or may so order oral 
argument and/or the production of evidence after examination of the 
briefs. The panel shall issue its final decision

[[Page 1016]]

within 20 days after briefs have been filed, evidence has been produced, 
or oral argument has been conducted.

                           Formal Proceedings



Sec. 269b.410  Notice of hearing.

    If formal proceedings are found to be needed under the above 
procedures, and if no satisfactory settlement has been reached within 5 
days after finding that a prima facie case exists, the Secretary of the 
panel, unless there is cause for granting an extension of time, shall 
issue and cause to be served upon the parties a notice of hearing. The 
panel shall appoint, pursuant to Sec. 269b.420, a hearing officer to 
hold a hearing and issue a report to the panel containing findings of 
fact, conclusions of law, and recommendations including, where 
appropriate, remedial action to be taken and notices to be posted. The 
Secretary shall furnish to the hearing officer the investigator's report 
and all other relevant information in the panel's possession.



Sec. 269b.420  Designation of hearing officer.

    (a) The panel, absent special circumstances, shall employ the center 
to select the hearing officer to conduct the hearing at a site most 
convenient to the parties and witnesses. The individual who performed 
the investigation, pursuant to Sec. 269b.210, shall be barred from 
acting as a hearing officer on the same matter, unless all parties in 
interest agree to his participation. The selection of the hearing 
officer, to the extent practicable, shall be done with the concurrence 
of the parties.
    (b) Any party may request the hearing officer, at any time following 
his designation and before the filing of his decision, to withdraw on 
grounds of previously demonstrated personal bias, conflict of interest, 
or prejudice by filing with him promptly upon the discovery of the 
alleged facts a timely affidavit setting forth in detail the matters 
alleged to constitute grounds for disqualification. If, in the opinion 
of the hearing officer, such affidavit is filed with due diligence and 
is sufficient on its face, he shall forthwith disqualify himself and 
withdraw from the proceeding. If he does not so withdraw, he shall so 
rule upon the record, stating the grounds for his ruling and proceed 
with the hearing, or, if the hearing has closed, he shall proceed with 
the issuance of his decision, and his ruling shall be subject to the 
same review by the panel that is given to the rest of his decision.
    (c) The costs of conducting the hearing and of the hearing officer 
shall be borne by the panel. Witness fees and expenses shall be paid by 
the party at whose instance the witnesses appear.



Sec. 269b.430  Contents of notice of hearing.

    The notice of hearing shall include:
    (a) A copy of the charge;
    (b) A statement of the time of the hearing which shall be not less 
than 10 days after service of the notice of hearing, except in 
extraordinary circumstances. All charges involving a ``refusal to 
bargain'' allegation and all charges, if sustained, that would require 
the setting aside of an election, or the conducting of a new election 
shall be given first priority;
    (c) A statement of the place and nature of hearing;
    (d) A statement of the legal authority and jurisdiction under which 
the hearing is to be held;
    (e) A reference to the particular section of the policy and rules 
and regulations of this chapter involved;
    (f) A copy of the determination, if any, made causing the invocation 
of these formal proceedings.



Sec. 269b.440  Conduct of hearing.

    (a) Hearing shall be public unless otherwise ordered by the hearing 
officer or the panel. An official reporter shall make the only official 
transcript of such proceedings.
    (b) Copies of the official transcript will not be provided to the 
parties, but may be purchased by arrangement with the official reporter 
or with such costs as the panel may otherwise assess, or may be examined 
in the offices of the panel and/or the hearing officer subject to such 
conditions as the panel may prescribe.
    (c) A charging party in asserting that an unfair labor practice has 
been committed within the meaning of the policy, shall have the burden 
of proving

[[Page 1017]]

the allegations of the charge, or the amended charge, by a preponderance 
of the evidence.
    (d) The parties shall not be bound by the technical rules of 
evidence, but the hearing officer, may, in his discretion, exclude any 
evidence or offer of proof if he finds that its probative value is 
substantially outweighed by the risk that its admission will either 
necessitate undue consumption of time or create substantial danger of 
undue prejudice or confusion.



Sec. 269b.441  Rights of parties.

    (a) Any party shall have the right to appear at such hearing in 
person, by counsel, or by other representative, to call, examine, and 
cross-examine witnesses as may be required for a full and true 
disclosure of the facts, and to introduce into the record documentary or 
other relevant evidence, except that the participation of any party 
shall be limited to the extent permitted by the hearing officer. Five 
copies of such documentary evidence shall be submitted unless the 
hearing officer permits a reduced number for good cause shown.
    (b) Any party shall be entitled, upon request, to a reasonable 
period at the close of the hearing for oral argument, which shall be 
included in the stenographic report of the hearing.
    (c) Any party shall be entitled to file a brief to the hearing 
officer within 10 days after the close of the hearing, but no reply 
brief may be filed except upon special permission of the hearing 
officer. A party filing a brief must file the original and one copy with 
the hearing officer along with proof of service of a copy of such brief 
to all parties. Requests for extension of time to file briefs must be 
made to the hearing officer who must receive the request at least 3 days 
prior to the expiration of time fixed for filing of briefs and notice of 
the request shall be served simultaneously on all other parties, and 
proof of service shall be furnished. If a request for extension of time 
is based on the need for a copy of the transcript prior to filing a 
brief, such request must be made to the hearing officer before the 
hearing is closed and must be ruled on prior to the close of the 
hearing.



Sec. 269b.442  Duties and powers of the hearing officer.

    The hearing officer shall inquire fully into the facts as to whether 
the respondent has engaged or is engaging in an unfair labor practice as 
set forth in the charge or the amended charge. The hearing officer shall 
have authority, with respect to cases assigned to him, between the time 
he is designated and transfer of the case to the panel, subject to the 
rules and regulations in this subchapter, to:
    (a) Grant requests for attendance of witnesses and production of 
documents;
    (b) Rule upon petitions to quash requests made pursuant to paragraph 
(a) of this section;
    (c) Call, examine, and cross-examine parties and witnesses as may be 
required for a full and true disclosure of the facts and to introduce 
into the record documentary or other evidence;
    (d) Rule upon offers of proof and receive relevant evidence;
    (e) Take or cause depositions to be taken whenever the ends of 
justice would be served thereby;
    (f) Limit lines of questioning or testimony which are repetitive, 
cumulative, or irrelevant;
    (g) Regulate the course of the hearing and, if appropriate or 
necessary, exclude persons or counsel from the hearing for contemptuous 
conduct and strike all related testimony of witnesses refusing to answer 
any proper question;
    (h) Hold such prehearing conferences as may be necessary to expedite 
proceedings and hold such other conferences for the settlement or 
simplification of the issues by consent of the parties or upon his own 
motion;
    (i) Dispose of procedural requests, motions, or similar matters 
which shall be made part of the record of the proceeding, including 
motions referred to the hearing officer by the panel, and motions to 
amend pleadings, also to recommend dismissal of cases or portions 
thereof, and to order hearings reopened or, upon motion, consolidated 
prior to issuance of the hearing officer's report and recommendations;
    (j) Request the parties at any time during the hearing to state 
their respective positions concerning any issue

[[Page 1018]]

in the case or theory in support thereof;
    (k) Require the parties, if necessary, to file written briefs in 
support of their positions;
    (l) Take any other action necessary under the foregoing and 
authorized by the rules and regulations in this subchapter.

In the event the hearing officer designated to conduct the hearing 
becomes unavailable, the panel may designate another hearing officer for 
the purpose of further hearing or issuance of a report and 
recommendation on the record as made, or both.



Sec. 269b.443  Motions before or after a hearing.

    All motions (including motions for intervention), other than those 
made during a hearing, shall be made in writing to the Secretary of the 
panel, shall briefly state the relief sought, shall set forth the 
grounds for such motion, and shall be accompanied 3 days thereafter by 
proof of service on all parties. Answering statements, if any, must be 
served on all parties and the original thereof, together with two copies 
and statement of service, shall be filed with the Secretary within 5 
days after service of the moving papers, unless the Secretary directs 
otherwise. Motions may be referred to the hearing officer whose ruling 
shall be made upon the record or the motion may be stayed until such 
time as the panel reviews the hearing officer's report and 
recommendations.



Sec. 269b.444  Objection to conduct of hearing; other motions during hearing.

    Any objection with respect to the conduct of the hearing, including 
any objection to the introduction of evidence, or any other motion 
during the course of the hearing, including a request to allow 
intervention, may be stated orally or in writing accompanied by a short 
statement of the grounds for such objection, and included in the record. 
No such objection shall be deemed waived by further participation in the 
hearing and such objection shall not stay the conduct of the hearing. 
Automatic exceptions will be allowed to all adverse rulings and shall be 
considered by the panel upon its review of the hearing officer's report 
and recommendations, if exception to the ruling is included in a 
statement of exceptions submitted to the panel after the close of the 
hearing, subject to the requirements of Sec. 269b.520.



Sec. 269b.450  Submission of hearing officer's report to the panel.

    After the close of the hearing, and the receipt of briefs, if any, 
the hearing officer shall prepare a report and recommendations, 
containing findings of fact, conclusions of law, including judgments as 
to the credibility of witnesses where appropriate, and the reasons or 
basis therefor, and recommendations as to the disposition of the case, 
and, where appropriate, including the remedial action and notices to be 
posted. After he has caused his report and recommendations to be served 
promptly on all parties to the proceeding, he shall transfer the case to 
the panel including his report and recommendations and the complete 
record. Such submission shall be made within 20 days after the close of 
the hearing and the receipt of briefs, if any, unless otherwise extended 
by the panel. The record shall include the charge, notice of hearing, 
service sheet, motions, rulings, orders, official transcript of the 
hearing, stipulations, objections, depositions, documentary evidence, 
exhibits, and any briefs or other documents submitted to the parties.

    Panel Review of Hearing Officer's Report and Recommended Decision



Sec. 269b.510  Review by panel.

    The panel shall review the report and recommendations of each 
hearing officer, the record of the hearing, and such other documents as 
enumerated in Sec. 269b.450, whether or not any party files an appeal, 
unless the parties file with the panel a settlement agreement within 10 
days after service of the hearing officer's report upon them. In the 
course of such review, the panel may require oral argument or written 
briefs on any relevant issue within such time limits as the panel may 
prescribe, and may reopen the record in any case and receive further 
evidence.

[[Page 1019]]



Sec. 269b.520  Exceptions to hearing officer's report.

    (a) Any party may file with the panel exceptions to the hearing 
officer's report and recommendations, and any ruling contained therein, 
if made within 10 days after service of the report and recommendations. 
The Panel may, for good cause shown, extend the time for filing such 
exceptions upon written request, with copies served simultaneously on 
the other parties, received not later than 3 days before the date 
exceptions are due. Requests for oral argument will not be considered 
unless filed with exceptions.
    (b) Any exception to a ruling, finding, conclusion, or 
recommendation which is not specifically urged shall be deemed to have 
been waived, although the panel may on its own motion rule upon any 
matter in the report and recommendations.
    (c) Any exception which fails to comply with the following 
requirements may be disregarded:
    (1) The exceptions shall set forth specifically the questions of 
procedure, fact, law, or policy to which exceptions are taken;
    (2) The exceptions shall identify the part of the hearing officer's 
report to which objection is made;
    (3) The exceptions shall designate by precise citation of page the 
portions of the record relied on, shall state the grounds for the 
exceptions, and shall include the citation of authorities unless set 
forth in a supporting brief.
    (d) Any brief in support of exceptions shall contain no matter not 
included within the scope of the exceptions and shall contain in the 
order indicated, the following:
    (1) A concise statement of the case containing all that is material 
to the consideration of the questions presented;
    (2) A specification of the questions involved and to be argued;
    (3) The argument, presenting clearly the points of fact and law 
relied on in support of the position taken on each question, with 
specific page reference to the transcript and the legal or other 
material relied on.
    (e) Answering briefs to the exceptions, and cross-exceptions and 
supporting briefs will not be permitted without special leave of the 
panel. Requests for oral argument will not be considered unless 
accompanying such petition for special leave.
    (f) Five copies of exceptions and briefs must be filed with the 
panel along with a statement of service of copies of the exceptions and 
supporting briefs upon all parties.



Sec. 269b.530  Briefs in support of the hearing officer's report.

    Any party may file a brief in support of the hearing officer's 
report and recommendations subject to the same time limits and rules 
pertaining to filing exceptions and briefs in support thereof, as set 
forth in Sec. 269b.520.



Sec. 269b.540  Action by the panel.

    After considering the hearing officer's report and recommendations, 
the record, any other documents, any exceptions filed, and any oral 
argument permitted, the panel shall issue its written decision. Upon 
finding that the respondent is engaging in or has engaged in an unfair 
labor practice, the panel shall order the respondent to cease and desist 
from such conduct and may require the respondent to take such 
affirmative corrective action as the panel deems appropriate to 
effectuate the Policy. Such action by the panel may include, but shall 
not be limited to, orders to provide back pay, provide reinstatement, 
set aside an election, bargain, and award recognition. Upon finding no 
violation of the policy, the panel shall dismiss the case. The panel's 
decision and order setting forth the remedial action, if any, required 
shall be conspicuously posted by the parties.

                               Compliance



Sec. 269b.610  Procedures.

    Where remedial action is ordered or provided for in a settlement 
agreement, a report to the panel that such action has been taken and 
that compliance with the decision and orders of the panel has been 
effected shall be submitted within the period of time specified in the 
panel's decision. The panel is empowered to utilize whatever 
administrative procedures it deems necessary to ascertain compliance.

[[Page 1020]]



Sec. 269b.620  Action by panel.

    In any case where it is found, after a hearing, that the respondent 
has failed to comply with the final decision and order of the panel, the 
panel shall be empowered to take whatever action may be appropriate and 
shall expect the full cooperation of the Board of Governors of the 
Federal Reserve System in obtaining such compliance. Among the actions 
that may be taken by the panel against a noncomplying respondent labor 
organization, after a show cause hearing, may be suspension of that 
labor organization's checkoff privileges or recognition as exclusive 
bargaining representative for such period of time as determined by the 
panel.

                              General Rules



Sec. 269b.710  Rules to be liberally construed.

    (a) Whenever the panel finds that unusual circumstances or good 
cause exist and that strict compliance with the terms of the rules and 
regulations in this subchapter will work an injustice or unfairness, it 
shall construe the rules and regulations in this subchapter liberally to 
prevent injustices and to effectuate the purposes of the policy.
    (b) When an act is required or allowed to be done at or within a 
specified time, the panel may at any time, in its discretion, order the 
period altered where it shall be manifest that strict adherence will 
work surprise or injustice or interfere with the proper effectuation of 
the policy.



Sec. 269b.720  Computation of time for filing papers.

    In computing any period of time prescribed by or allowed by the 
panel, the day of the act, event, or default after which the designated 
period of time begins to run, shall not be included. The last day of the 
period so computed is to be included, unless it is a Saturday, Sunday, 
or the applicable local legal holiday in which event the period shall 
run until the end of the next day which is neither a Saturday, Sunday, 
or legal holiday. When the period of time prescribed, or allowed, is 
seven days or less, intermediate Saturdays, Sundays, and legal holidays 
shall be excluded from the computations. When the rules and regulations 
in this subchapter require the filing of any paper, such document must 
be received by the panel or the officer or agent designated by it to 
receive such matter before the close of business of the last day of the 
time limit, if any, for such filing or extension of the time that may 
have been granted.



Sec. 269b.730  Number of copies; form.

    Except as otherwise provided in the regulations in this subchapter, 
any documents or papers shall be filed with four copies in addition to 
the original. All matters filed shall be printed, typed, or otherwise 
legibly duplicated; carbon copies of typewritten matter will be accepted 
if they are clearly legible.



Sec. 269b.731  Signature.

    The original of each document filed shall be signed by the party or 
by an attorney or representative of record for the party, or by an 
officer of the party and shall contain the address and telephone number 
of the person signing it.



Sec. 269b.740  Service of pleading and other paper; statement of service.

    (a) Method of service. Notices of hearings, decisions, orders, and 
other papers may be served personally or by registered or certified mail 
or by telegraph.
    (b) Upon whom served. Unless otherwise provided in the rules and 
regulations in this subchapter, all papers except complaints, petitions, 
and papers relating to requests for appearance or production of 
documents, shall be served upon all counsel of record and upon parties 
not represented by counsel or by their agents designated by them or by 
law and upon the panel, or its designated officers or agents, where 
appropriate. Service upon such counsel or representative shall 
constitute service upon the party, but a copy also shall be transmitted 
to the party.
    (c) Proof of service. The party or person serving the papers or 
process shall submit simultaneously to the panel or its designated 
representative, or the individual conducting the proceeding, a written 
statement of such service.

[[Page 1021]]

Failure to file a statement of service shall not affect the validity of 
the service. Proof of service, except where otherwise provided, shall be 
required only if subsequent to the receipt of a statement of service a 
question is raised with respect to proper service.



Sec. 269b.750  Requests for appearance of witnesses and production of 

documents.

    Parties may request appearance of witnesses and production of 
documents by filing application therefor, depending upon the stage of 
the proceedings at which the request is made, with the officer 
conducting the investigation or hearing, or with the panel. Such 
application shall name and identify the witnesses or documents sought 
and shall briefly state the need for such appearance or production. The 
officer with whom such request is filed shall rule upon each such 
request and the record of the proceeding shall contain a record of that 
ruling and the basis therefor. The record shall also contain a statement 
of reasons for any request for the appearance of witnesses or production 
of documents initiated by a presiding officer.

[[Page 1022]]



               SUBCHAPTER B_FEDERAL OPEN MARKET COMMITTEE



PART 270_OPEN MARKET OPERATIONS OF FEDERAL RESERVE BANKS--Table of Contents




 Regulations Relating to Open Market Operations of Federal Reserve Banks

Sec.
270.1 Authority.
270.2 Definitions.
270.3 Governing principles.
270.4 Transactions in obligations.

    Authority: Sec. 8, 48 Stat. 168, as amended (12 U.S.C. 263).

    Source: 38 FR 2753, Jan. 30, 1973, unless otherwise noted.

 Regulations Relating to Open Market Operations of Federal Reserve Banks



Sec. 270.1  Authority.

    This part is issued by the Federal Open Market Committee (the 
``Committee'') pursuant to authority conferred upon it by sections 12A 
and 14 of the Federal Reserve Act (12 U.S.C. 263, 355).



Sec. 270.2  Definitions.

    (a) The term obligations means Government securities, U.S. agency 
securities, bankers' acceptances, bills of exchange, cable transfers, 
bonds, notes, warrants, debentures, and other obligations that Federal 
Reserve banks are authorized by law to purchase and sell.
    (b) The term Government securities means direct obligations of the 
United States (i.e., U.S. bonds, notes, certificates of indebtedness, 
and Treasury bills) and obligations fully guaranteed as to principal and 
interest by the United States.
    (c) The term U.S. agency securities means obligations that are 
direct obligations of, or are fully guaranteed as to principal and 
interest by, any agency of the United States.
    (d) The term System Open Market Account means the obligations 
acquired pursuant to authorizations and directives issued by the 
Committee and held on behalf of all Federal Reserve banks.



Sec. 270.3  Governing principles.

    As required by section 12A of the Federal Reserve Act, the time, 
character, and volume of all purchases and sales of obligations in the 
open market by Federal Reserve banks are governed with a view to 
accommodating commerce and business and with regard to their bearing 
upon the general credit situation of the country.



Sec. 270.4  Transactions in obligations.

    (a) Each Federal Reserve bank shall engage in open market operations 
under section 14 of the Federal Reserve Act only in accordance with this 
part and with the authorizations and directives issued by the Committee 
from time to time, and no Reserve bank shall decline to engage in open 
market operations as directed by the Committee.
    (b) Transactions for the System Open Market Account shall be 
executed by a Federal Reserve bank selected by the Committee. The 
participations of the several Federal Reserve banks in such account and 
in the profits and losses on transactions for the account shall be 
allocated in accordance with principles determined by the Committee from 
time to time.
    (c) In accordance with such limitations, terms, and conditions as 
are prescribed by law and in authorizations and directives issued by the 
Committee, the Reserve bank selected by the Committee is authorized and 
directed--
    (1) To buy and sell Government securities and U.S. agency securities 
in the open market for the System Open Market Account, and to exchange 
maturing securities with the issuer;
    (2) To buy and sell banker's acceptances in the open market for its 
own account;
    (3) To buy Government securities, U.S. agency securities, and 
banker's acceptances of the kinds described above, under agreements for 
repurchase of such obligations, in the open market for its own account; 
and
    (4) To buy and sell foreign currencies in the form of cable 
transfers in the

[[Page 1023]]

open market for the System Open Market Account and to maintain for such 
account reciprocal currency arrangements with foreign banks among those 
designated by the Board of Governors of the Federal Reserve System under 
Sec. 214.5 of this chapter (Regulation N).
    (d) The Federal Reserve banks are authorized and directed to engage 
in such other operations as the Committee may from time to time 
determine to be reasonably necessary to the effective conduct of open 
market operations and the effectuation of open market policies.

[38 FR 2753, Jan. 30, 1973, as amended at 39 FR 11873, Apr. 1, 1974; 48 
FR 32336, July 15, 1983]



PART 271_RULES REGARDING AVAILABILITY OF INFORMATION--Table of Contents




Sec.
271.1 Authority and purpose.
271.2 Definitions.
271.3 Published information.
271.4 Records available for public inspection and copying.
271.5 Records available to the public on request.
271.6 Processing requests.
271.7 Exemptions from disclosure.
271.8 Subpoenas.
271.9 Fee schedules; waiver of fees.

    Authority: 5 U.S.C. 552; 12 U.S.C. 263.

    Source: 62 FR 61218, Nov. 17, 1997, unless otherwise noted.



Sec. 271.1  Authority and purpose.

    (a) Authority. This part is issued by the Federal Open Market 
Committee (the Committee) pursuant to the Freedom of Information Act, 5 
U.S.C. 552, and also pursuant to the Committee's authority under section 
12A of the Federal Reserve Act, 12 U.S.C. 263, to issue regulations 
governing the conduct of its business.
    (b) Purpose. This part sets forth the categories of information made 
available to the public and the procedures for obtaining documents and 
records.



Sec. 271.2  Definitions.

    (a) Board means the Board of Governors of the Federal Reserve System 
established by the Federal Reserve Act of 1913 (38 Stat. 251).
    (b) Commercial use request refers to a request from or on behalf of 
one who seeks information for a use or purpose that furthers the 
commercial, trade, or profit interests of the requester or the person on 
whose behalf the request is made.
    (c) Direct costs mean those expenditures that the Committee actually 
incurs in searching for, reviewing, and duplicating documents in 
response to a request made under Sec. 271.5.
    (d) Duplication refers to the process of making a copy of a document 
in response to a request for disclosure of records or for inspection of 
original records that contain exempt material or that otherwise cannot 
be inspected directly. Among others, such copies may take the form of 
paper, microform, audiovisual materials, or machine-readable 
documentation (e.g., magnetic tape or disk).
    (e) Educational institution refers to a preschool, a public or 
private elementary or secondary school, or an institution of 
undergraduate higher education, graduate higher education, professional 
education, or an institution of vocational education that operates a 
program of scholarly research.
    (f) Federal Reserve Bank means one of the district Banks authorized 
by the Federal Reserve Act, 12 U.S.C. 222, including any branch of any 
such Bank.
    (g) Information of the Committee means all information coming into 
the possession of the Committee or of any member thereof or of any 
officer, employee, or agent of the Committee, the Board, or any Federal 
Reserve Bank, in the performance of duties for, or pursuant to the 
direction of, the Committee.
    (h) Noncommercial scientific institution refers to an institution 
that is not operated on a ``commercial'' basis (as that term is used in 
this section) and which is operated solely for the purpose of conducting 
scientific research, the results of which are not intended to promote 
any particular product or industry.
    (i) Records of the Committee includes rules, statements, decisions, 
minutes, memoranda, letters, reports, transcripts, accounts, charts, and 
other written material, as well as any materials in machine readable 
form that

[[Page 1024]]

constitute a part of the Committee's official files.
    (j) Representative of the news media refers to any person actively 
gathering news for an entity that is organized and operated to publish 
or broadcast news to the public.
    (1) The term ``news'' means information about current events or that 
would be of current interest to the public.
    (2) Examples of news media entities include, but are not limited to, 
television or radio stations broadcasting to the public at large, and 
publishers of newspapers and other periodicals (but only in those 
instances when they can qualify as disseminators of ``news'') who make 
their products available for purchase or subscription by the general 
public.
    (3) ``Freelance'' journalists may be regarded as working for a news 
organization if they can demonstrate a solid basis for expecting 
publication through that organization, even though not actually employed 
by it.
    (k)(1) Review refers to the process of examining documents, located 
in response to a request for access, to determine whether any portion of 
a document is exempt information. It includes doing all that is 
necessary to excise the documents and otherwise to prepare them for 
release.
    (2) Review does not include time spent resolving general legal or 
policy issues regarding the application of exemptions.
    (l)(1) Search means a reasonable search, by manual or automated 
means, of the Committee's official files and any other files containing 
records of the Committee as seem reasonably likely in the particular 
circumstances to contain documents of the kind requested. For purposes 
of computing fees under Sec. 271.9, search time includes all time spent 
looking for material that is responsive to a request, including line-by-
line identification of material within documents. Such activity is 
distinct from ``review'' of material to determine whether the material 
is exempt from disclosure.
    (2) Search does not mean or include research, creation of any 
document, or extensive modification of an existing program or system 
that would significantly interfere with the operation of the Committee's 
automated information system.



Sec. 271.3  Published information.

    (a) Federal Register. The Committee publishes in the Federal 
Register, in addition to this part:
    (1) A description of its organization;
    (2) Statements of the general course and method by which its 
functions are channeled and determined;
    (3) Rules of procedure;
    (4) Substantive rules of general applicability, and statements of 
general policy and interpretations of general applicability formulated 
and adopted by the Committee;
    (5) Every amendment, revision, or repeal of the foregoing; and
    (6) General notices of proposed rulemaking.
    (b) Annual Report to Congress. Each annual report made to Congress 
by the Board includes a complete record of the actions taken by the 
Committee during the preceding year upon all matters of policy relating 
to open market operations, showing the reasons underlying the actions, 
and the votes taken.
    (c) Other published information. From time to time, other 
information relating to open market operations of the Federal Reserve 
Banks is published in the Federal Reserve Bulletin, in the Board's 
annual report to Congress, and in announcements and statements released 
to the press. Copies of issues of the Bulletin and of annual reports of 
the Board may be obtained from the Publications Services of the Federal 
Reserve Board, 20th Street and Constitution Avenue, N.W., Washington, 
D.C. 20551 (pedestrian entrance is on C Street, N.W.). Subscription or 
other charges may apply.

[62 FR 61218, Nov. 17, 1997, as amended at 70 FR 7840, Feb. 16, 2005]



Sec. 271.4  Records available for public inspection and copying.

    (a) Types of records made available. Unless they were published 
promptly and made available for sale or without charge, certain records 
shall be made available for inspection and copying at the Board's 
Freedom of Information Office pursuant to 5 U.S.C. 552(a)(2).

[[Page 1025]]

    (b) Reading room procedures. (1) Information available under this 
section is available for inspection and copying, from 9:00 a.m. to 5:00 
p.m. weekdays, at the Freedom of Information Office of the Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, N.W., Washington, D.C. 20551 (the pedestrian entrance is on C 
Street, N.W.).
    (2) The Committee may determine that certain classes of publicly 
available filings shall be made available for inspection and copying 
only at the Federal Reserve Bank where those records are maintained.
    (c) Electronic records. Information available under this section 
that was created on or after November 1, 1996, shall also be available 
on the Board's Web site, found at http://www.federalreserve.gov.
    (d) Privacy protection. The Committee may delete identifying details 
from any record to prevent a clearly unwarranted invasion of personal 
privacy.

[62 FR 61218, Nov. 17, 1997, as amended at 70 FR 7840, Feb. 16, 2005]



Sec. 271.5  Records available to the public on request.

    (a) Types of records made available. All records of the Committee 
that are not available under Sec. Sec. 271.3 and 271.4 shall be made 
available upon request, pursuant to the procedures in this section and 
the exceptions in Sec. 271.7.
    (b) Procedures for requesting records. (1) A request for 
identifiable records shall reasonably describe the records in a way that 
enables the Committee's staff to identify and produce the records with 
reasonable effort and without unduly burdening or significantly 
interfering with any of the Committee's operations.
    (2) The request shall be submitted in writing to the Secretary of 
the Committee, Federal Open Market Committee, 20th & C Street, N.W., 
Washington, D.C. 20551; or sent by facsimile to the Secretary of the 
Committee, (202) 452-2921. The request shall be clearly marked FREEDOM 
OF INFORMATION ACT REQUEST.
    (c) Contents of request. The request shall contain the following 
information:
    (1) The name and address of the requester, and the telephone number 
at which the requester can be reached during normal business hours;
    (2) Whether the requested information is intended for commercial 
use, and whether the requester represents an educational or 
noncommercial scientific institution, or news media;
    (3) A statement agreeing to pay the applicable fees, or a statement 
identifying any fee limitation desired, or a request for a waiver or 
reduction of fees that satisfies Sec. 271.9(f).
    (d) Defective requests. The Committee need not accept or process a 
request that does not reasonably describe the records requested or that 
does not otherwise comply with the requirements of this section. The 
Committee may return a defective request, specifying the deficiency. The 
requester may submit a corrected request, which will be treated as a new 
request.



Sec. 271.6  Processing requests.

    (a) Receipt of requests. The date of receipt for any request, 
including one that is addressed incorrectly or that is referred to the 
Committee by another agency or by a Federal Reserve Bank, is the date 
the Secretary of the Committee actually receives the request.
    (b) Priority of responses. The Committee shall normally process 
requests in the order they are received. However, in the Secretary's 
discretion, or upon a court order in a matter to which the Committee is 
a party, a particular request may be processed out of turn.
    (c) Expedited processing. Where a person requesting expedited access 
to records has demonstrated a compelling need for the records, or where 
the Committee has determined to expedite the response, the Committee 
shall process the request as soon as practicable.
    (1) To demonstrate a compelling need for expedited processing, the 
requester shall provide a certified statement, a sample of which may be 
obtained from the Board's Freedom of Information Office. The statement, 
certified to be true and correct to the best of the requester's 
knowledge and belief, shall demonstrate that:
    (i) The failure to obtain the records on an expedited basis could 
reasonably

[[Page 1026]]

be expected to pose an imminent threat to the life or physical safety of 
an individual; or
    (ii) The requester is a representative of the news media, as defined 
in Sec. 271.2, and there is urgency to inform the public concerning 
actual or alleged Committee activity.
    (2) In response to a request for expedited processing, the Secretary 
of the Committee shall notify a requester of the determination within 
ten working days of receipt of the request. In exceptional situations, 
the Secretary of the Committee has the discretion to waive the formality 
of certification. If the Secretary of the Committee denies a request for 
expedited processing, the requester may file an appeal pursuant to the 
procedures set forth in paragraph (i) of this section, and the Committee 
shall respond to the appeal within ten working days after the appeal was 
received by the Committee.
    (d) Time limits. The time for response to requests shall be 20 
working days, except:
    (1) In the case of expedited treatment under paragraph (c) of this 
section;
    (2) Where the running of such time is suspended for payment of fees 
pursuant to Sec. 271.9(b)(2);
    (3) In unusual circumstances, as defined in 5 U.S.C. 552(a)(6)(B). 
In such circumstances, the time limit may be extended for a period of 
time not to exceed:
    (i) 10 working days as provided by written notice to the requester, 
setting forth the reasons for the extension and the date on which a 
determination is expected to be dispatched; or
    (ii) Such alternative time period as mutually agreed to by the 
Secretary of the Committee and the requester when the Secretary of the 
Committee notifies the requester that the request cannot be processed in 
the specified time limit.
    (e) Response to request. In response to a request that satisfies 
Sec. 271.5, an appropriate search shall be conducted of records of the 
Committee in existence on the date of receipt of the request, and a 
review made of any responsive information located. The Secretary shall 
notify the requester of:
    (1) The Committee's determination of the request;
    (2) The reasons for the determination;
    (3) The amount of information withheld;
    (4) The right of the requester to appeal to the Committee any denial 
or partial denial, as specified in paragraph (i) of this section; and
    (5) In the case of a denial of a request, the name and title or 
position of the person responsible for the denial.
    (f) Referral to another agency. To the extent a request covers 
documents that were created by, obtained from, or classified by another 
agency, the Committee may refer the request to that agency for a 
response and inform the requester promptly of the referral.
    (g) Providing responsive records. (1) Copies of requested records 
shall be sent to the requester by regular U.S. mail to the address 
indicated in the request, unless the requester elects to take delivery 
of the documents at the Board's Freedom of Information Office or makes 
other acceptable arrangements, or the Committee deems it appropriate to 
send the documents by another means.
    (2) The Committee shall provide a copy of the record in any form or 
format requested if the record is readily reproducible by the Committee 
in that form or format, but the Committee need not provide more than one 
copy of any record to a requester.
    (h) Appeal of denial of request. Any person denied access to 
Committee records requested under Sec. 271.5 may file a written appeal 
with the Committee, as follows:
    (1) The appeal shall prominently display the phrase FREEDOM OF 
INFORMATION ACT APPEAL on the first page, and shall be addressed to the 
Secretary of the Committee, Federal Open Market Committee, 20th and C 
Street, N.W., Washington, D.C. 20551; or sent by facsimile to the 
Secretary of the Committee, (202) 452-2921.
    (2) An initial request for records may not be combined in the same 
letter with an appeal.
    (3) The Committee, or such member of the Committee as is delegated 
the authority, shall make a determination regarding any appeal within 20 
working days of actual receipt of the appeal by the Secretary, and the 
determination

[[Page 1027]]

letter shall notify the appealing party of the right to seek judicial 
review of such denial.



Sec. 271.7  Exemptions from disclosure.

    (a) Types of records exempt from disclosure. Pursuant to 5 U.S.C. 
552(b), the following records of the Committee are exempt from 
disclosure under this part:
    (1) National defense. Any information that is specifically 
authorized under criteria established by an Executive Order to be kept 
secret in the interest of national defense or foreign policy and is in 
fact properly classified pursuant to the Executive Order.
    (2) Internal personnel rules and practices. Any information related 
solely to the internal personnel rules and practices of the Board.
    (3) Statutory exemption. Any information specifically exempted from 
disclosure by statute (other than 5 U.S.C. 552b), if the statute:
    (i) Requires that the matters be withheld from the public in such a 
manner as to leave no discretion on the issue; or
    (ii) Establishes particular criteria for withholding or refers to 
particular types of matters to be withheld.
    (4) Trade secrets; commercial or financial information. Any matter 
that is a trade secret or that constitutes commercial or financial 
information obtained from a person and that is privileged or 
confidential.
    (5) Inter- or intra-agency memorandums. Information contained in 
inter- or intra-agency memorandums or letters that would not be 
available by law to a party (other than an agency) in litigation with an 
agency, including, but not limited to:
    (i) Memorandums;
    (ii) Reports;
    (iii) Other documents prepared by the staffs of the Committee, Board 
or Federal Reserve Banks; and
    (iv) Records of deliberations of the Committee and of discussions at 
meetings of the Committee or its staff.
    (6) Personnel and medical files. Any information contained in 
personnel and medical files and similar files the disclosure of which 
would constitute a clearly unwarranted invasion of personal privacy.
    (7) Information compiled for law enforcement purposes. Any records 
or information compiled for law enforcement purposes, to the extent 
permitted under 5 U.S.C. 552(b)(7).
    (8) Examination, inspection, operating, or condition reports, and 
confidential supervisory information. Any matter that is contained in or 
related to examination, operating, or condition reports prepared by, on 
behalf of, or for the use of an agency responsible for the regulation or 
supervision of financial institutions, including a state financial 
institution supervisory agency.
    (b) Segregation of nonexempt information. The Committee shall 
provide any reasonably segregable portion of a record that is requested 
after deleting those portions that are exempt under this section.
    (c) Discretionary release. Except where disclosure is expressly 
prohibited by statute, regulation, or order, the Committee may authorize 
the release of records that are exempt from mandatory disclosure 
whenever the Committee or designated Committee members determines that 
such disclosure would be in the public interest.
    (d) Delayed release. Publication in the Federal Register or 
availability to the public of certain information may be delayed if 
immediate disclosure would likely:
    (1) Interfere with accomplishing the objectives of the Committee in 
the discharge of its statutory functions;
    (2) Interfere with the orderly conduct of the foreign affairs of the 
United States;
    (3) Permit speculators or others to gain unfair profits or other 
unfair advantages by speculative trading in securities or otherwise;
    (4) Result in unnecessary or unwarranted disturbances in the 
securities markets;
    (5) Interfere with the orderly execution of the objectives or 
policies of other government agencies; or
    (6) Impair the ability to negotiate any contract or otherwise harm 
the commercial or financial interest of the United States, the 
Committee, the Board, any Federal Reserve Bank, or any department or 
agency of the United States.

[[Page 1028]]

    (e) Prohibition against disclosure. Except as provided in this part, 
no officer, employee, or agent of the Committee or any Federal Reserve 
Bank shall disclose or permit the disclosure of any unpublished 
information of the Committee to any person (other than Committee 
officers, employees, or agents properly entitled to such information for 
the performance of official duties).



Sec. 271.8  Subpoenas.

    (a) Advice by person served. If any person, whether or not an 
officer or employee of the Committee, of the Board of Governors of the 
Federal Reserve System, or of a Federal Reserve Bank, has information of 
the Committee that may not be disclosed by reason of Sec. 271.7 and in 
connection therewith is served with a subpoena, order, or other process 
requiring the person's personal attendance as a witness or the 
production of documents or information upon any proceeding, the person 
should promptly inform the Secretary of the Committee of such service 
and of all relevant facts, including the documents and information 
requested and any facts that may be of assistance in determining whether 
such documents or information should be made available; and the person 
should take action at the appropriate time to inform the court or 
tribunal that issued the process, and the attorney for the party at 
whose instance the process was issued, if known, of the substance of 
this part.
    (b) Appearance by person served. Except as disclosure of the 
relevant information is authorized pursuant to this part, any person who 
has information of the Committee and is required to respond to a 
subpoena or other legal process shall attend at the time and place 
therein mentioned and decline to disclose such information or give any 
testimony with respect thereto, basing such refusal upon this part. If, 
notwithstanding, the court or other body orders the disclosure of such 
information, or the giving of such testimony, the person having such 
information of the Committee shall continue to decline to disclose such 
information and shall promptly report the facts to the Committee for 
such action as the Committee may deem appropriate.

[62 FR 61218, Nov. 17, 1997, as amended at 70 FR 7840, Feb. 16, 2005]



Sec. 271.9  Fee schedules; waiver of fees.

    (a) Fee schedules. The fees applicable to a request for records 
pursuant to Sec. Sec. 271.4 and 271.5 are set forth in appendix A to 
this section. These fees cover only the full allowable direct costs of 
search, duplication, and review. No fees will be charged where the 
average cost of collecting the fee (calculated at $5.00) exceeds the 
amount of the fee.
    (b) Payment procedures. The Secretary may assume that a person 
requesting records pursuant to Sec. 271.5 will pay the applicable fees, 
unless the request includes a limitation on fees to be paid or seeks a 
waiver or reduction of fees pursuant to paragraph (f) of this section.
    (1) Advance notification of fees. If the estimated charges are 
likely to exceed $100, the Secretary of the Committee shall notify the 
requester of the estimated amount, unless the requester has indicated a 
willingness to pay fees as high as those anticipated. Upon receipt of 
such notice, the requester may confer with the Secretary to reformulate 
the request to lower the costs.
    (2) Advance payment. The Secretary may require advance payment of 
any fee estimated to exceed $250. The Secretary may also require full 
payment in advance where a requester has previously failed to pay a fee 
in a timely fashion. The time period for responding to requests under 
Sec. 271.6(d), and the processing of the request shall be suspended 
until the Secretary receives the required payment.
    (3) Late charges. The Secretary may assess interest charges when fee 
payment is not made within 30 days of the date on which the billing was 
sent. Interest is at the rate prescribed in 31 U.S.C. 3717 and accrues 
from the date of the billing.
    (c) Categories of uses. The fees assessed depend upon the intended 
use for the records requested. In determining which category is 
appropriate, the Secretary shall look to the intended use set forth in 
the request for records. Where a requester's description of the

[[Page 1029]]

use is insufficient to make a determination, the Secretary may seek 
additional clarification before categorizing the request.
    (1) Commercial use. The fees for search, duplication, and review 
apply when records are requested for commercial use.
    (2) Educational, research, or media use. The fees for duplication 
apply when records are not sought for commercial use, and the requester 
is a representative of the news media or an educational or noncommercial 
scientific institution, whose purpose is scholarly or scientific 
research. The first 100 pages of duplication, however, will be provided 
free.
    (3) All other uses. For all other requests, the fees for document 
search and duplication apply. The first two hours of search time and the 
first 100 pages of duplication, however, will be provided free.
    (d) Nonproductive search. Fees for search and review may be charged 
even if no responsive documents are located or if the request is denied.
    (e) Aggregated requests. A requester may not file multiple requests 
at the same time, solely in order to avoid payment of fees. If the 
Secretary reasonably believes that a requester is separating a request 
into a series of requests for the purpose of evading the assessment of 
fees, the Secretary may aggregate any such requests and charge 
accordingly. It is considered reasonable for the Secretary to presume 
that multiple requests of this type made within a 30-day period have 
been made to avoid fees.
    (f) Waiver or reduction of fees. A request for a waiver or reduction 
of the fees, and the justification for the waiver, shall be included 
with the request for records to which it pertains. If a waiver is 
requested and the requester has not indicated in writing an agreement to 
pay the applicable fees if the waiver request is denied, the time for 
response to the request for documents, as set forth in Sec. 271.6(d), 
shall not begin until a determination has been made on the request for a 
waiver or reduction of fees.
    (1) Standards for determining waiver or reduction. The Secretary 
shall grant a waiver or reduction of fees where it is determined both 
that disclosure of the information is in the public interest because it 
is likely to contribute significantly to public understanding of the 
operation or activities of the government, and that the disclosure of 
information is not primarily in the commercial interest of the 
requester. In making this determination, the following factors shall be 
considered:
    (i) Whether the subject of the records concerns the operations or 
activities of the government;
    (ii) Whether disclosure of the information is likely to contribute 
significantly to public understanding of government operations or 
activities;
    (iii) Whether the requester has the intention and ability to 
disseminate the information to the public;
    (iv) Whether the information is already in the public domain;
    (v) Whether the requester has a commercial interest that would be 
furthered by the disclosure; and, if so,
    (vi) Whether the magnitude of the identified commercial interest of 
the requester is sufficiently large, in comparison with the public 
interest in disclosure, that disclosure is primarily in the commercial 
interest of the requester.
    (2) Contents of request for waiver. A request for a waiver or 
reduction of fees shall include:
    (i) A clear statement of the requester's interest in the documents;
    (ii) The use proposed for the documents and whether the requester 
will derive income or other benefit for such use;
    (iii) A statement of how the public will benefit from such use and 
from the Committee's release of the documents;
    (iv) A description of the method by which the information will be 
disseminated to the public; and
    (v) If specialized use of the information is contemplated, a 
statement of the requester's qualifications that are relevant to that 
use.
    (3) Burden of proof. The burden shall be on the requester to present 
evidence or information in support of a request for a waiver or 
reduction of fees.
    (4) Determination by Secretary. The Secretary shall make a 
determination

[[Page 1030]]

on the request for a waiver or reduction of fees and shall notify the 
requester accordingly. A denial may be appealed to the Committee in 
accordance with Sec. 271.6(h).
    (g) Employee requests. In connection with any request by an 
employee, former employee, or applicant for employment, for records for 
use in prosecuting a grievance or complaint of discrimination against 
the Committee, fees shall be waived where the total charges (including 
charges for information provided under the Privacy Act of 1974 (5 U.S.C. 
552a) are $50 or less; but the Secretary may waive fees in excess of 
that amount.
    (h) Special services The Secretary may agree to provide, and set 
fees to recover the costs of, special services not covered by the 
Freedom of Information Act, such as certifying records or information 
and sending records by special methods such as express mail or overnight 
delivery.

     Appendix A to Sec.  271.9--Freedom of Information Fee Schedule
Duplication:
    Photocopy, per standard page...........................         $.10
    Paper copies of microfiche, per frame..................          .10
    Duplicate microfiche, per microfiche...................          .35
Search and review:
    Clerical/Technical, hourly rate........................        20.00
    Professional/Supervisory, hourly rate..................        38.00
    Manager/Senior Professional, hourly rate...............        65.00
Computer search and production:
    Computer operator search, hourly rate..................        32.00
    Tapes (cassette), per tape.............................         6.00
    Tapes (cartridge), per tape............................         9.00
    Tapes (reel), per tape.................................        18.00
    Diskettes (3\1/2\), per diskette............         4.00
    Diskettes (5\1/4\), per diskette............         5.00
    Computer Output (PC), per minute.......................          .10
    Computer Output (mainframe)............................  actual cost
 



PART 272_RULES OF PROCEDURE--Table of Contents




Sec.
272.1 Authority.
272.2 Functions of the Committee.
272.3 Meetings.
272.4 Committee actions.
272.5 Notice and public procedure.

    Authority: 5 U.S.C. 552.

    Source: 38 FR 2754, Jan. 30, 1973, unless otherwise noted.



Sec. 272.1  Authority.

    This part is issued by the Federal Open Market Committee (the 
Committee) pursuant to the requirement of section 552 of title 5 of the 
United States Code that every agency shall publish in the Federal 
Register its rules of procedure.



Sec. 272.2  Functions of the Committee.

    The procedures followed by the Committee are designed to facilitate 
the effective performance of the Committee's statutory functions with 
respect to the regulation and direction of open market operations 
conducted by the Federal Reserve banks and with respect to certain 
direct transactions between the Reserve banks and the United States. In 
determining the policies to be followed in such operations, the 
Committee considers information regarding business and credit conditions 
and domestic and international economic and financial developments, and 
other pertinent information gathered and submitted by its staff and the 
staffs of the Board of Governors of the Federal Reserve System (the 
Board) and the Federal Reserve banks. Against the background of such 
information, the Committee takes actions from time-to-time to regulate 
and direct the open market operations of the Reserve banks. Such policy 
actions ordinarily are taken through the adoption and transmission to 
the Federal Reserve banks of regulations, authorizations, and 
directives.

[[Page 1031]]



Sec. 272.3  Meetings.

    (a) Place and frequency. The Committee meets in Washington, DC, at 
least four times each year and oftener if deemed necessary. Meetings are 
held upon the call of the Chairman of the Board or at the request of any 
three members of the Committee. Notices of calls by the Chairman of the 
Board to other members are given by the Secretary of the Committee in 
writing, by telephone, or electronic means. Requests of any three 
members for the calling of a meeting shall state the time therefor and 
shall be filed in writing, by telephone, or electronic means with the 
Secretary who shall forthwith notify all members of the Committee in 
writing, by telephone, or electronic means. When the Secretary has sent 
notices to all members of the Committee that a meeting has been 
requested by three members and of the time therefor, a meeting is deemed 
to have been called. If, in the judgment of the Chairman, circumstances 
require that a meeting be called at such short notice that one or more 
members cannot be present in person, such members may participate in the 
meeting by telephone conference arrangements or by electronic means.
    (b) Alternates. Whenever any member of the Committee representing 
Federal Reserve banks shall find that the member will be unable to 
attend a meeting of the Committee, the member shall promptly notify the 
member's alternate and the Secretary of the Committee in writing, by 
telephone, or electronic means, and upon receipt of such notice such 
alternate shall advise the Secretary whether the alternate will attend 
such meeting.
    (c) Quorum. Seven members constitute a quorum of the Committee for 
purposes of transacting business except that, if there are fewer than 
seven members in office, then the number of members in office constitute 
a quorum. For purposes of this paragraph (c), members of the Committee 
include alternates acting in the absence of members. Less than a quorum 
may adjourn a meeting of the Committee from time to time until a quorum 
is in attendance.
    (d) Attendance at meetings. Attendance at Committee meetings is 
restricted to members and alternate members of the Committee, the 
Presidents of Federal Reserve Banks who are not at the time members or 
alternates, staff officers of the Committee, the Manager, and such other 
advisers as the Committee may invite from time to time.
    (e) Meeting agendas. The Secretary, in consultation with the 
Chairman, prepares an agenda of matters to be discussed at each meeting 
and the Secretary transmits the agenda to the members of the Committee 
within a reasonable time in advance of such meeting. In general, the 
agendas include reports by the Manager on open market operations since 
the previous meeting, and ratification by the Committee of such 
operations; reports by Economists on, and Committee discussion of, the 
economic and financial situation and outlook; Committee discussion of 
monetary policy and action with respect thereto; and such other matters 
as may be considered necessary.

[38 FR 2754, Jan. 30, 1973, as amended at 44 FR 52823, Sept. 11, 1979; 
65 FR 6320, Feb. 9, 2000; 68 FR 6061, Feb. 6, 2003; 70 FR 7840, Feb. 16, 
2005]



Sec. 272.4  Committee actions.

    (a) Actions at meetings. Actions are taken at meetings of the 
Committee except as described below.
    (b) Actions between meetings. Special circumstances may make it 
desirable in the public interest for Committee members to consider an 
action to modify an outstanding Committee authorization or directive at 
a time when it is not feasible to call a meeting. Whenever, in the 
judgment of the Chairman, such circumstances have arisen, the relevant 
information and recommendations for action are transmitted to the 
members by the Secretary, and the members communicate their votes to the 
Secretary. If the action is approved by a majority of the members, 
advice to that effect is promptly given by the Secretary to the members 
of the Committee and to the Reserve bank selected to execute 
transactions for the System Open Market Account. All communications of 
recommended actions and votes under this paragraph shall be in writing, 
by telephone, or

[[Page 1032]]

electronic means; if the communication is made orally, the Secretary 
shall cause a written record to be made without delay. An action taken 
between meetings has the force and effect of an action at a meeting: 
Provided, however, That if a meeting is held before the execution of any 
operations pursuant to the action, the action is null and void unless it 
is ratified and confirmed by the Committee at such meeting.
    (c) Delegations of authority. In special circumstances, the 
Committee may delegate authority to take an action, subject to such 
instructions or guidelines as the Committee deems proper. Such 
delegations of authority may be made to the Chairman; to a subcommittee 
consisting of the Chairman and the Vice Chairman of the Committee and 
the Vice Chairman of the Board (or in the absence of the Chairman or of 
the Vice Chairman of the Board the members of the Board designated by 
the Chairman as alternates, and in the absence of the Vice Chairman of 
the Committee the alternate for the Vice Chairman); or to any other 
member or members of the Committee. An action taken pursuant to such a 
delegation of authority has the force and effect of an action taken by 
the Committee.
    (d) Technical changes to Committee rules. The Secretary of the 
Committee (or the acting secretary) is authorized to make technical 
corrections, such as spelling, grammar, construction, and organization 
(including removal of obsolete provisions and references), to the 
Committee's rules, regulations, and orders and other records of 
Committee action but only with the concurrence of the Committee's 
General Counsel.
    (e) Effective date. Committee action ordinarily is made effective as 
of the time it is taken because the nature of the subject matter and the 
action taken is such that the public interest and the proper discharge 
of the Committee's responsibilities so require. Occasionally, however, 
the Committee may specify that an action is to be effective at some 
different time.

[38 FR 2754, Jan. 30, 1973, as amended at 65 FR 6320, Feb. 9, 2000; 70 
FR 7841, Feb. 16, 2005]



Sec. 272.5  Notice and public procedure.

    There ordinarily is no published notice of proposed action by the 
Committee or public procedure thereon, as described in section 553 of 
title 5 of the United States Code, because such notice and procedure are 
impracticable, unnecessary, or contrary to the public interest.



PART 281_STATEMENTS OF POLICY--Table of Contents




Sec. 281.1  Policy regarding the Government in the Sunshine Act.

    On September 13, 1976, there was enacted into law the Government in 
the Sunshine Act, Pub. L. No. 94-409, 90 Stat. 1241 (``Sunshine Act''), 
established for the purpose of providing the public with the ``fullest 
practicable information regarding the decisionmaking processes of the 
Federal Government * * * while protecting the rights of individuals and 
the ability of the Government to carry out its responsibilities.'' \1\ 
The Sunshine Act applies only to those Federal agencies that are defined 
in section 552(e) of Title 5 of the United States Code and ``headed by a 
collegial body composed of two or more individual members, a majority of 
whom are appointed to such position by the President with the advice and 
consent of the Senate, and any subdivision thereof authorized to act on 
behalf of the agency.'' \2\
---------------------------------------------------------------------------

    \1\Government in the Sunshine Act, Pub. L. 94-409, sec. 2, 90 Stat. 
1241 (1976).
    \2\ Government in the Sunshine Act, Pub. L. 94-409, sec. 3(a), 90 
Stat. 1241 (1976).
---------------------------------------------------------------------------

    The Federal Open Market Committee (``FOMC'') is a separate and 
independent statutory body within the Federal Reserve System. In no 
respect is it an agent or ``subdivision'' of the Board of Governors of 
the Federal Reserve System (``Board of Governors''). It was originally 
established by the Banking Act of 1933 and restructured in its present 
form by the Banking Act of 1935 and subsequent legislation in 1942 
(generally see 12 U.S.C. 263(a)). The FOMC's membership is composed of 
the seven members of the Board of Governors and five representatives of 
the Federal Reserve Banks who are selected annually in accordance with 
the procedures set forth in Section 12A of the Federal Reserve Act, 12 
U.S.C. 263(a). Members of the Board of Governors serve in an ex officio 
capacity on the FOMC by reason of their appointment as Members of the 
Board of Governors, not as a result of an appointment ``to such 
position'' (the FOMC) by the President. Representatives of the Reserve 
Banks serve on the FOMC not as a result of an appointment ``to such 
position'' by the President, but rather by virtue of their positions 
with the

[[Page 1033]]

Reserve Banks and their selection pursuant to Section 12A of the Federal 
Reserve Act. It is clear therefore that the FOMC does not fall within 
the scope of an ``agency'' or ``subdivision'' as defined in the Sunshine 
Act and consequently is not subject to the provisions of that Act.
    As explained below, the Act would not require the FOMC to hold its 
meetings in open session even if the FOMC were covered by the Act. 
However, despite the conclusion reached that the Sunshine Act does not 
apply to the FOMC, the FOMC has determined that its procedures and 
timing of public disclosure already are conducted in accordance with the 
spirit of the Sunshine Act, as that Act would apply to deliberations of 
the nature engaged in by the FOMC.
    In the foregoing regard, the FOMC has noted that while the Act calls 
generally for open meetings of multi-member Federal agencies, 10 
specific exemptions from the open meeting requirement are provided to 
assure the ability of the Government to carry out its responsibilities. 
Among the exemptions provided is that which authorizes any agency 
operating under the Act to conduct closed meetings where the subject of 
a meeting involves information ``the premature disclosure of which 
would--in the case of an agency which regulates currencies, securities, 
commodities, or financial institutions, be likely to lead to significant 
financial speculation in currencies, securities, or commodities.'' \3\
---------------------------------------------------------------------------

    \3\ Government in the Sunshine Act, Pub. L. 94-409, sec. 3(a), 90 
Stat. 1242 (1976).
---------------------------------------------------------------------------

    As to meetings closed under such exemption, the Act requires the 
maintenance of either a transcript, electronic recording or minutes and 
sets forth specified, detailed requirements as to the contents and 
timing of disclosure of certain portions or all of such minutes. The Act 
permits the withholding from the public of the minutes where disclosure 
would be likely to produce adverse consequences of the nature described 
in the relevant exemptions.
    The FOMC has reviewed the agenda of its monthly meetings for the 
past three years and has determined that all such meetings could have 
been closed pursuant to the exemption dealing with finanical speculation 
or other exemptions set forth in the Sunshine Act. The FOMC has further 
determined that virtually all of its substantive deliberations could 
have been preserved pursuant to the Act's minutes requirements and that 
such minutes could similarly have been protected against premature 
disclosure under the provisions of the Act.
    The FOMC's deliberations are currently reported by means of a 
document entitled ``Record of Policy Actions'' which is released to the 
public approximately one month after the meeting to which it relates. 
The Record of Policy Actions complies with the Act's minutes 
requirements in that it contains a full and accurate report of all 
matters of policy discussed and views presented, clearly sets forth all 
policy actions taken by the FOMC and the reasons therefor, and includes 
the votes by individual members on each policy action. The timing of 
release of the Record of Policy Actions is fully consistent with the 
Act's provisions assuring against premature release of any item of 
discussion in an agency's minutes that contains information of a 
sensitive financial nature. In fact, by releasing the comprehensive 
Record of Policy Actions to the public approximately a month after each 
meeting, the FOMC exceeds the publication requirements that would be 
mandated by the letter of the Sunshine Act.
    Recognizing the Congressional purpose underlying the enactment of 
the Sunshine Act, the FOMC has determined to continue its current 
practice and timing of public disclosures in the conviction that its 
operations thus conducted are consistent with the intent and spirit of 
the Sunshine Act.

(12 U.S.C. 263; 5 U.S.C. 552)

[42 FR 13300, Mar. 10, 1977. Redesignated at 70 FR 7841, Feb. 16, 2005]

[[Page 1034]]



        SUBCHAPTER C_FEDERAL RESERVE SYSTEM LABOR RELATIONS PANEL



                        PARTS 290-299 [RESERVED]


[[Page 1035]]



                              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 1037]]



                    Table of CFR Titles and Chapters




                     (Revised as of January 1, 2009)

                      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  Office of Management and Budget Governmentwide 
                Guidance for Grants and Agreements (Parts 100--
                199)
        II  Office of Management and Budget Circulars and Guidance 
                (200--299)
            Subtitle B--Federal Agency Regulations for Grants and 
                Agreements
       III  Department of Health and Human Services (Parts 300-- 
                399)
        VI  Department of State (Parts 600--699)
      VIII  Department of Veterans Affairs (Parts 800--899)
        IX  Department of Energy (Parts 900--999)
        XI  Department of Defense (Parts 1100--1199)
       XII  Department of Transportation (Parts 1200--1299)
       XIV  Department of the Interior (Parts 1400--1499)
        XV  Environmental Protection Agency (Parts 1500--1599)
     XVIII  National Aeronautics and Space Administration (Parts 
                1880--1899)
      XXII  Corporation for National and Community Service (Parts 
                2200--2299)
     XXIII  Social Security Administration (Parts 2300--2399)
      XXIV  Housing and Urban Development (Parts 2400--2499)
       XXV  National Science Foundation (Parts 2500--2599)
      XXVI  National Archives and Records Administration (Parts 
                2600--2699)
     XXVII  Small Business Administration (Parts 2700--2799)
    XXVIII  Department of Justice (Parts 2800--2899)
      XXXI  Institute of Museum and Library Services (Parts 3100--
                3199)
     XXXII  National Endowment for the Arts (Parts 3200--3299)
    XXXIII  National Endowment for the Humanities (Parts 3300--
                3399)
      XXXV  Export-Import Bank of the United States (Parts 3500--
                3599)
    XXXVII  Peace Corps (Parts 3700--3799)

[[Page 1038]]

                        Title 3--The President

         I  Executive Office of the President (Parts 100--199)

                           Title 4--Accounts

         I  Government Accountability 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 (Parts 2100--2199)
       XIV  Federal Labor Relations Authority, General Counsel of 
                the Federal Labor Relations Authority and Federal 
                Service Impasses Panel (Parts 2400--2499)
        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 (Parts 3200--
                3299)
     XXIII  Department of Energy (Parts 3300--3399)
      XXIV  Federal Energy Regulatory Commission (Parts 3400--
                3499)
       XXV  Department of the Interior (Parts 3500--3599)
      XXVI  Department of Defense (Parts 3600-- 3699)
    XXVIII  Department of Justice (Parts 3800--3899)
      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 (Parts 4300--
                4399)
      XXXV  Office of Personnel Management (Parts 4500--4599)
        XL  Interstate Commerce Commission (Parts 5000--5099)
       XLI  Commodity Futures Trading Commission (Parts 5100--
                5199)
      XLII  Department of Labor (Parts 5200--5299)
     XLIII  National Science Foundation (Parts 5300--5399)
       XLV  Department of Health and Human Services (Parts 5500--
                5599)
      XLVI  Postal Rate Commission (Parts 5600--5699)
     XLVII  Federal Trade Commission (Parts 5700--5799)
    XLVIII  Nuclear Regulatory Commission (Parts 5800--5899)
         L  Department of Transportation (Parts 6000--6099)
       LII  Export-Import Bank of the United States (Parts 6200--
                6299)
      LIII  Department of Education (Parts 6300--6399)

[[Page 1039]]

       LIV  Environmental Protection Agency (Parts 6400--6499)
        LV  National Endowment for the Arts (Parts 6500--6599)
       LVI  National Endowment for the Humanities (Parts 6600--
                6699)
      LVII  General Services Administration (Parts 6700--6799)
     LVIII  Board of Governors of the Federal Reserve System 
                (Parts 6800--6899)
       LIX  National Aeronautics and Space Administration (Parts 
                6900--6999)
        LX  United States Postal Service (Parts 7000--7099)
       LXI  National Labor Relations Board (Parts 7100--7199)
      LXII  Equal Employment Opportunity Commission (Parts 7200--
                7299)
     LXIII  Inter-American Foundation (Parts 7300--7399)
      LXIV  Merit Systems Protection Board (Parts 7400--7499)
       LXV  Department of Housing and Urban Development (Parts 
                7500--7599)
      LXVI  National Archives and Records Administration (Parts 
                7600--7699)
     LXVII  Institute of Museum and Library Services (Parts 7700--
                7799)
    LXVIII  Commission on Civil Rights (Parts 7800--7899)
      LXIX  Tennessee Valley Authority (Parts 7900--7999)
      LXXI  Consumer Product Safety Commission (Parts 8100--8199)
    LXXIII  Department of Agriculture (Parts 8300--8399)
     LXXIV  Federal Mine Safety and Health Review Commission 
                (Parts 8400--8499)
     LXXVI  Federal Retirement Thrift Investment Board (Parts 
                8600--8699)
    LXXVII  Office of Management and Budget (Parts 8700--8799)
     XCVII  Department of Homeland Security Human Resources 
                Management System (Department of Homeland 
                Security--Office of Personnel Management) (Parts 
                9700--9799)
      XCIX  Department of Defense Human Resources Management and 
                Labor Relations Systems (Department of Defense--
                Office of Personnel Management) (Parts 9900--9999)

                      Title 6--Domestic Security

         I  Department of Homeland Security, Office of the 
                Secretary (Parts 0--99)
         X  Privacy and Civil Liberties Oversight Board (Parts 
                1000--1099)

                         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)

[[Page 1040]]

       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)
      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 Policy and New Uses, 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)

[[Page 1041]]

      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)
         L  Rural Business-Cooperative Service, Rurual Housing 
                Service, and Rural Utilities Service, Department 
                of Agriculture (Parts 5000--5099)

                    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)
       III  Department of Energy (Parts 700--999)
         X  Department of Energy (General Provisions) (Parts 
                1000--1099)
      XIII  Nuclear Waste Technical Review Board (Parts 1303--
                1399)
      XVII  Defense Nuclear Facilities Safety Board (Parts 1700--
                1799)
     XVIII  Northeast Interstate Low-Level Radioactive Waste 
                Commission (Parts 1800--1899)

                      Title 11--Federal Elections

         I  Federal Election Commission (Parts 1--9099)
        II  Election Assistance Commission (Parts9400--9499)

[[Page 1042]]

                      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)
       XII  Federal Housing Finance Agency (Parts 1200--1299)
       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 (Parts 400--499)
         V  Emergency Oil and Gas Guaranteed Loan Board (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)
       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)

[[Page 1043]]

        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)

          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)

[[Page 1044]]

        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 Service, 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)
        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 (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)
      XIII  Millenium Challenge Corporation (Parts 1300--1399)

[[Page 1045]]

       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 
                HousingCommissioner, 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]
       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)

[[Page 1046]]

         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 (Parts 1200--1299)

                      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)

                   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)

[[Page 1047]]

      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)
        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)

[[Page 1048]]

            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)
      XVII  Office of the Director of National Intelligence (Parts 
                1700--1799)
     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)
        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)

[[Page 1049]]

            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)
       VII  Office of Educational Research and Improvmeent, 
                Department of Education [Reserved]
        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)
        VI  [Reserved]
       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 (Parts 1500--
                1599)
       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)
        II  Copyright Office, Library of Congress (Parts 200--299)
       III  Copyright Royalty Board, Library of Congress (Parts 
                301--399)

[[Page 1050]]

        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 Regulatory 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)
            Chapters 62--100 [Reserved]
            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)
            Chapters 103--104 [Reserved]
       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 1051]]

            Chapters 129--200 [Reserved]
            Subtitle D--Other Provisions Relating to Property 
                Management [Reserved]
            Subtitle E--Federal Information Resources Management 
                Regulations System [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 1052]]

        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) 
                [Reserved]
         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 1053]]

       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  Defense Acquisition Regulations System, 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  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)
        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 [Reserved]
        54  Defense Logistics Agency, Department of Defense (Parts 
                5400--5499)

[[Page 1054]]

        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  Pipeline and Hazardous Materials Safety 
                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  Research and Innovative Technology Administration, 
                Department of Transportation [Reserved]
       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)
         V  Marine Mammal Commission (Parts 500--599)

[[Page 1055]]

        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 1057]]





           Alphabetical List of Agencies Appearing in the CFR




                     (Revised as of January 1, 2009)

                                                  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              22, II
  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                               2, IX; 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, L
  Rural Development Administration                7, XLII
  Rural Housing Service                           7, XVIII, XXXV, L
  Rural Telephone Bank                            7, XVI
  Rural Utilities Service                         7, XVII, XVIII, XLII, L
  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 1058]]

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                       5, LXVIII; 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
Copyright Royalty Board                           37, III
Corporation for National and Community Service    2, XXII; 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 1059]]

  Advanced Research Projects Agency               32, I
  Air Force Department                            32, VII
  Army Department                                 32, V; 33, II; 36, III, 
                                                  48, 51
  Defense Acquisition Regulations System          48, 2
  Defense Intelligence Agency                     32, I
  Defense Logistics Agency                        32, I, XII; 48, 54
  Engineers, Corps of                             33, II; 36, III
  National Imagery and Mapping Agency             32, I
  Navy Department                                 32, VI; 48, 52
  Secretary of Defense, Office of                 2, XI; 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
Election Assistance Commission                    11, II
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                   2, XV; 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

[[Page 1060]]

  Presidential Documents                          3
  Science and Technology Policy, Office of        32, XXIV; 47, II
  Trade Representative, Office of the United      15, XX
       States
Export-Import Bank of the United States           2, XXXV; 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 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 Agency                    12, XII
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 Services Administration                   5, LVII; 41, 105
  Contract Appeals, Board of                      48, 61

[[Page 1061]]

  Federal Acquisition Regulation                  48, 5
  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 Accountability Office                  4, I
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          2, III; 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
  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
HOPE for Homeowners Program, Board of Directors   24, XXIV
     of
Housing and Urban Development, Department of      2, XXIV; 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

[[Page 1062]]

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
  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            2, XIV; 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 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
Investment Security, Office of                    31, VIII
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                                2, XXVII; 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

[[Page 1063]]

  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
  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
  Copyright Royalty Board                         37, III
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, LXIV
Micronesian Status Negotiations, Office for       32, XXVII
Millenium Challenge Corporation                   22, XIII
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
Museum and Library Services, Institute of         2, XXXI
National Aeronautics and Space Administration     2, XVIII; 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      2, XXVI; 5, LXVI; 36, XII
  Information Security Oversight Office           32, XX
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 Endowment for the Arts                   2, XXXII
National Endowment for the Humanities             2, XXXIII
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 Intelligence, Office of Director of      32, XVII
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                       2, XXV; 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
[[Page 1064]]

National Telecommunications and Information       15, XXIII; 47, III
     Administration
National Transportation Safety Board              49, VIII
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
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
Pipeline and Hazardous Materials Safety           49, I
     Administration
Postal Regulatory 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
Privacy and Civil Liberties Oversight Board       6, X
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
Relocation Allowances                             41, 302
Research and Innovative Technology                49, XI
     Administration
Rural Business-Cooperative Service                7, XVIII, XLII, L
Rural Development Administration                  7, XLII
Rural Housing Service                             7, XVIII, XXXV, L
Rural Telephone Bank                              7, XVI
Rural Utilities Service                           7, XVII, XVIII, XLII, L
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                     2, XXVII; 13, I
Smithsonian Institution                           36, V
Social Security Administration                    2, XXIII; 20, III; 48, 23
Soldiers' and Airmen's Home, United States        5, XI
Special Counsel, Office of                        5, VIII

[[Page 1065]]

Special Education and Rehabilitative Services,    34, III
     Office of
State Department                                  2, VI; 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
Thrift Supervision Office, Department of the      12, V
     Treasury
Trade Representative, United States, Office of    15, XX
Transportation, Department of                     2, XII; 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
  Pipeline and Hazardous Materials Safety         49, I
       Administration
  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 Claims Collection Standards             31, IX
  Federal Law Enforcement Training Center         31, VII
  Fiscal Service                                  31, II
  Foreign Assets Control, Office of               31, V
  Internal Revenue Service                        26, I
  Investment Security, 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                       2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
     Office of the Assistant Secretary for
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                       2, VIII; 38, I
  Federal Acquisition Regulation                  48, 8
Veterans' Employment and Training Service,        41, 61; 20, IX
   Office of the Assistant Secretary for
[[Page 1066]]

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 1067]]



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
220 OTC margin stock lists..................................11101, 44525
225 Authority citation amended.................................414, 8636
225.1 (c)(9) added...................................................414
    (c)(10) revised.................................................8484
    (c)(16) added...................................................8636
225.2 (r)(2) and (s) revised; (t) added..............................414
225.4 (h) added.....................................................8636
225.14 (c)(2)(i) revised.............................................415
225.23 (c)(2)(i) revised.............................................415
225.81--225.94 (Subpart I) Revised...................................415
225.86 (e) added; interim............................................260
    (d) and (e) added; interim.....................................19081
225.170--225.177 (Subpart J) Revised................................8484
225 Appendix F added................................................8636
    Appendix E correctly revised; CFR correction...................48532
    Appendix A amended......................................59643, 67074
    Appendix D amended.............................................59651
226 Compliance notification........................................41439
226.1 (b) and (d)(5) revised.......................................65617
226.5 (a)(5) added; interim........................................17338
226.5a (b)(1)(ii) and (c) revised; (b)(1)(iii) added; interim......17338
226.5b (c) redesignated as (c)(1); (c)(1) heading and (2) added; 
        interim....................................................17338
226.15 (b) introductory text amended; interim......................17338
226.16 (c) revised; interim........................................17338
226.17 (a)(3) added; (g) introductory text revised; interim........17338
226.23 (b)(1) amended; interim.....................................17338
226.24 (d) revised; interim........................................17338
226.27 Revised; interim............................................17339
226.31 (b) revised; interim........................................17339
226.32 (a)(1)(i), (b)(1), (c) introductory text, (3) and (d) 
        introductory text revised; (c)(5) and (d)(8) added; (e) 
        removed....................................................65617
226.34 Added.......................................................65618
226.36 (Subpart F) Added; interim..................................17339
226 Appendix H amended.............................................65618
     Supplement I amended; interim.................................17339
    Appendix G corrected; CFR correction...........................43463
    Supplement No. 1 amended; eff. 1-1-02..........................57849
230 Compliance notification........................................41439
230.3 (a) revised; (g) added; interim..............................17802
230.4 (a)(1) and (2)(i) revised; interim...........................17802
230.6 (c) removed; interim.........................................17802
230.10 Added; interim..............................................17803
230 Supplement I amended; interim..................................17803
250 Authority citation revised.....................................24233
250.243 Added......................................................24229
250.244 Added......................................................24299
250.245 Added......................................................24229
250.246 Added......................................................24225
250.247 Added; interim.............................................24233
250.248 Added; interim.............................................24233
261a.13 (b)(9) revised; (c)(11) added..............................19718
    Corrected......................................................20863

[[Page 1068]]

263 Authority citation revised......................................8637
263.302 (a) revised.................................................8637
265.5 (d)(3) added.................................................54397
    (d)(3) revised.................................................58655
265.6 (f) revised..................................................54397
265.7 (d)(4) revised; (d)(9) through (14) added....................54397
265.11 (d)(8) and (11) revised; (d)(12) added......................54398
    (d)(11) revised................................................58656
268 Revised; interim................................................7704

                                  2002

12 CFR
                                                                   67 FR
                                                                    Page
Chapter II
220 OTC margin stocks lists..................................8182, 53875
223 Added; eff. 4-1-03.............................................76604
225 Appendix A amended.......................................3800, 16977
    Appendix D amended..............................................3803
    Appendix A corrected...........................................34991
226.17 (a)(1) footnote 38 amended..................................16982
226 Supplement I amended....................................16982, 61769
250.160 (b) removed; eff. 4-1-03...................................76622
250.240 Removed; eff. 4-1-03.......................................76622
250.241 Removed; eff. 4-1-03.......................................76622
250.242 Removed; eff. 4-1-03.......................................76622
250.243 Removed; eff. 4-1-03.......................................76622
250.244 Removed; eff. 4-1-03.......................................76622
250.245 Removed; eff. 4-1-03.......................................76622
250.246 Removed; eff. 4-1-03.......................................76622
250.247 Removed; eff. 4-1-03.......................................76622
250.248 Removed; eff. 4-1-03.......................................76622
250.250 Removed; eff. 4-1-03.......................................76622
261a.13 (b)(10) added..............................................44526
264a Removed.......................................................15335

                                  2003

12 CFR
                                                                   68 FR
                                                                    Page
Chapter II
220 OTC margin stock lists...................................8993, 52486
222 Added; interim.................................................74469
225.28 (b)(8)(ii)(B) revised.......................................39810
    (b)(8)(ii)(B) corrected........................................41901
    (b)(14) revised; eff. 1-8-04...................................68499
225 Appendix A amended; interim....................................56535
226 Supplement I amended....................................16189, 50965
229 Technical correction...........................................37957
    Appendix A amended......................................31596, 52078
    Appendices A and E amended.....................................52078
    Appendix E corrected...........................................53672
263 Authority citation revised.....................................48267
263.94 (a) and (b) revised.........................................48267
263.400--263.405 (Subpart J) Added.................................48267
264b Revised; eff. 1-9-04..........................................68721
268 Revised........................................................18085
272.3 (c) revised...................................................6061

                                  2004

12 CFR
                                                                   69 FR
                                                                    Page
Chapter II
220 OTC margin stock lists.........................................10601
222 Authority citation revised..............................33284, 77618
222.1 (c)(2) and (3) added..........................................6530
    (b) added......................................................33284
    (b)(2)(i) amended; eff. 7-1-05.................................77618
222.83 (Subpart I) Added; eff. 7-1-05..............................77618
222 Appendix B added...............................................33285
225.4 (h) revised; eff. 7-1-05.....................................77618
225 Appendix A amended; interim....................................22385
    Appendix A amended.............................................44919
    Appendix E amended.............................................44921
    Appendix F amended; eff. 7-1-05................................77618
226.2 (b)(5) added.................................................16773
226 Supplement I amended....................................16773, 50299
228.12 (g) removed; (h) through (q) and (s) through (w) 
        redesignated as (g) through (p) and (t) through (x); new 
        (q) and (s) added; (b)(1), new (k), (l) and (r) revised; 
        interim....................................................41187
228.27 (g)(1) amended; interim.....................................41187
228.41 (b), (c)(1) and (e)(4) revised; interim.....................41187
228.42 (i) revised; interim........................................41187
229 Authority citation amended.....................................47309
229.1 (a) revised; (b)(4) added....................................47309
229.2 (a) introductory text (1) through (5) and undesignated 
        concluding text redesignated as (a)(1) introductory text, 
        (i) through (v) and (2); introductory text, new (a)(2) and 
        (qq) revised; new (a)(1), (e), (k) undesignated concluding 
        text, (q), (z) and (ff) amended; (a)(3), (k)(7) and (rr) 
        through (eee) added........................................47309
229.3 (b)(1) and (c)(2)(ii) amended................................47310
229.13 (g)(1)(i)(A) revised........................................47310
229.16 (c)(2)(i)(A) revised........................................47311

[[Page 1069]]

229.20 (g)(2) amended..............................................47311
229.21 Amended.....................................................47311
229.30 Undesignated text following (a)(2)(iii) amended; (c)(1) and 
        (d) revised................................................47311
229.31 Undesignated text following (a)(2)(iii) amended.............47311
229.33 (b) and (d) amended.........................................47311
229.34 (c)(3) amended..............................................47311
229.35 (a) revised.................................................47311
229.38 (d)(1) and (f) amended......................................47311
229.51--229.60 (Subpart D) Added...................................47311
229 Appendix A amended....1656, 6919, 10603, 19922, 25827, 28820, 35506, 
                                                                   57839
    Appendix A corrected...........................................30189
    Appendix C amended.............................................47315
    Appendix D amended; eff. in part 1-1-06........................47316
    Appendix E amended.............................................47317
263.65 Revised.....................................................56930

                                  2005

12 CFR
                                                                   70 FR
                                                                    Page
Chapter II
222 Authority citation revised..............................33979, 70678
222.2 Added; interim; eff. 3-7-06..................................33979
    Regulation at 70 FR 33979 eff. date delayed to 4-1-06..........70664
    Added; eff. 4-1-06.............................................70678
    Correctly revised..............................................75931
222.3 Added; interim; eff. 3-7-06..................................33979
    Regulation at 70 FR 33979 eff. date delayed to 4-1-06..........70664
    Added; eff. 4-1-06.............................................70678
    Correctly revised..............................................75931
222.30--222.32 (Subpart D) Added; interim; eff. 3-7-06.............33979
    Regulation at 70 FR 33979 eff. date delayed to 4-1-06..........70664
    Added; eff. 4-1-06.............................................70679
    Correctly revised..............................................75931
225 Authority citation revised.....................................15753
    Policy statement...............................................59987
    Appendix A amended.............................................11834
    Appendix D amended.............................................11838
    Appendix F amended.............................................15753
    Appendix A corrected...........................................20704
226 Supplement I amended...........................................46067
228.12 Regulation at 69 FR 41187 confirmed.........................15574
    (g)(4) and (u) revised.........................................44267
228.26 Revised.....................................................44268
228.27 Regulation at 69 FR 41187 confirmed.........................15574
228.28 (c) revised.................................................44268
228.41 Regulation at 69 FR 41187 confirmed.........................15574
228.42 Regulation at 69 FR 41187 confirmed.........................15574
228 Appendix A amended.............................................44268
229.2 (fff) added; eff. 7-1-06.....................................71225
229.34 (d), (e) and (f) redesignated as (e), (f) and (g); new (d) 
        added; eff. 7-1-06.........................................71225
229.43 (b)(3) revised; eff. 7-1-06.................................71225
229 Appendix A amended..........................7380, 8717, 21133, 47086
    Technical correction...........................................48842
    Appendix A amended; eff. in part 1-21-06 and 2-11-06...........60420
    Appendix A amended; eff. in part 3-31-06.......................75000
    Appendix A amended; eff. 2-25-06...............................73129
    Appendix E amended; eff. 7-1-06................................71225
230.2 (b) revised; eff. 7-1-06.....................................29593
230.6 (a)(3) revised; eff. 7-1-06..................................29593
230.8 (a) revised; (f) added; eff. 7-1-06..........................29593
230.11 Added; eff. 7-1-06..........................................29593
230 Supplement I amended; eff. 7-1-06..............................29594
232 Added; interim; eff. 3-7-06....................................33982
    Regulation at 70 FR 33982 eff. date delayed to 4-1-06..........70664
    Added; eff. 4-1-06.............................................70682
    Correctly revised..............................................75931
263.1 (f) amended; (g) redesignated as (h); new (g) added..........69638
264a Added.........................................................69638
268.205 Revised; interim...........................................67643
271.3 (c) amended...................................................7840
271.4 (c) revised...................................................7480
271.8 (a) revised; (b) amended......................................7840
272.3 (a) and (e) amended; (b) and (d) revised......................7840
272.4 (c) amended; (d) redesignated as (e); new (d) added...........7841
281 Authority citation revised......................................7841
281.1 Removed; new 281.1 redesignated from 281.2....................7841
281.2 Redesignated as 281.1.........................................7841

[[Page 1070]]

                                  2006

12 CFR
                                                                   71 FR
                                                                    Page
Chapter II
225.2 Footnote 2 revised............................................9901
225.4 (b)(2)(iii) revised...........................................9901
225.14 (a)(1)(v) revised............................................9901
225.17 Footnote 5 revised...........................................9902
225.23 (a)(1)(iii)(A) and (B) revised...............................9902
225 Appendixes A, C and D amended...................................9902
    Appendix E amended..............................................8937
    Appendix F correctly amended....................................5780
226.7 (f) correctly amended; CFR correction........................30577
226 Supplement I amended...........................................46388
227.2 (a)(2)(ii) amended...........................................11297
228.12 (u)(1) revised..............................................78336
228.26 (d) added...................................................78337
229 Appendix A amended.............................................32266
268.205 Revised; interim...........................................44558

                                  2007

12 CFR
                                                                   72 FR
                                                                    Page
Chapter II
220.132 Introductory text correctly amended........................70486
222 Authority citation revised.....................................62954
222.1 (a) added; (b)(2)(i) revised.................................62954
222.3 Introductory text revised....................................63756
222.20--222.28 (Subpart C) Added...................................62955
222.80--222.83 (Subpart I) Heading revised.........................63756
222.82 Added.......................................................63756
222.90--222.91 (Subpart J) Added...................................63757
222 Appendix C added...............................................62962
    Appendix J added...............................................63758
225 Appendix G added and amended; eff. 4-1-08......................69431
226.5 (a)(1) revised; (a)(5) removed...............................63473
226.5a (a)(2)(v) added.............................................63473
226.5b (a)(3) added; (c)(1) heading and (2) removed; (c)(1) 
        redesignated as (c)........................................63474
226.15 (b) introductory text amended...............................63474
226.16 (c) revised.................................................63474
226.17 (a)(1) and (g) revised; (a)(3) removed......................63474
226.19 (c) added...................................................63474
226.23 (b)(1) amended..............................................63474
226.24 (d) revised.................................................63474
226.31 (b) revised.................................................63475
226.36 (Subpart F) Removed.........................................63475
226 Supplement I amended....................................44033, 63475
    Supplement I amended; eff. 1-14-08.............................71059
227.2 (a)(2) revised...............................................55021
228.12 (u)(1) correctly revised....................................72573
228.26 (a)(1) heading correctly revised............................72573
229 Appendix A correctly amended; CFR correction....................3706
    Appendix A amended...............................27952, 34597, 46144
    Appendix B revised.............................................27952
230.3 (a) revised; (g) removed.....................................63483
230.4 (a)(1)(ii) and (2)(i) revised................................63483
230 Supplement I amended...........................................63484

                                  2008

12 CFR
                                                                   73 FR
                                                                    Page
Chapter II
223.42 (n) added; interim..........................................54308
    (o) added; interim.............................................55709
223.56 Added; interim..............................................55709
225 Technical correction and appendix G corrected..................21690
    Policy statement...............................................44620
 Appendices A and D amended; interim...............................55708
    Appendix A amended; interim....................................62853
    Appendix A correctly amended; interim..........................63624
    Appendix A amended; eff. 1-29-09...............................79606
226 Authority citation revised.....................................44599
226.1 (d)(5) revised; eff. 10-1-09.................................44599
226.2 (a)(6) revised; eff. 10-1-09.................................44599
226.16 (d)(2), (3) and (4) revised; (d)(6) and (e) added; eff. 10-
        1-09.......................................................44599
226.17 (b) and (f) revised; eff. 10-1-09...........................44600
226.19 Heading and (a)(1) revised; eff. 10-1-09....................44600
226.23 (a)(3) footnote 48 revised; eff. 10-1-09....................44601
226.24 (b), (c) and (d) redesignated as (c), (d) and (e) and 
        revised; new (b) and (f) through (i) added; footnote 49 
        removed; eff. 10-1-09......................................44601
226.32 (d)(6) and (7) revised; eff. 10-1-09........................44602
226.34 Heading and (a)(4) revised; eff. 10-1-09....................44603

[[Page 1071]]

226.35 Added; eff. 10-1-09 and 4-1-10 in part......................44603
226.36 Added; eff. 10-1-09.........................................44604
226 Supplement I amended; eff. 10-1-09.............................44604
    Supplement I amended...........................................46191
228.12 (u)(1) revised..............................................78154
229 Appendix A amended..................1269, 28320, 41236, 47818, 52909
    Appendix B revised..............................................1269
    Appendix A amended; Appendix B removed..........................8788
    Appendix A amended; eff. 1-31-09...............................70591
    Appendix A amended; eff. 2-21-09...............................77492
233 Added; eff. 1-19-09............................................69405
263 Authority citation revised.....................................58032
263.65 Revised.....................................................58032
268.205 Regulation at 71 FR 44558 confirmed........................17886
    (a)(3), (9)(iii)(C) and (D) amended; (c)(4)(i) revised; (c)(5) 
redesignated as (c)(6); (a)(9)(iii)(E) and new (c)(5) added........17887


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