[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2012 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
Title 12
Banks and Banking
________________________
Parts 200 to 219
Revised as of January 1, 2012
Containing a codification of documents of general
applicability and future effect
As of January 1, 2012
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
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Table of Contents
Page
Explanation................................................. v
Title 12:
Chapter II--Federal Reserve System 3
Finding Aids:
Table of CFR Titles and Chapters........................ 547
Alphabetical List of Agencies Appearing in the CFR...... 567
List of CFR Sections Affected........................... 577
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Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 12 CFR 201.1 refers
to title 12, part 201,
section 1.
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[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
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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
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collection request.
[[Page vi]]
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[[Page vii]]
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Office of the Federal Register.
January 1, 2012.
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THIS TITLE
Title 12--Banks and Banking is composed of eight volumes. The parts
in these volumes are arranged in the following order: Parts 1-199, 200-
219, 220-229, 230-299, 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,
third and fourth volumes containing parts 200-299 are comprised of
chapter II--Federal Reserve System. The fifth 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
sixth volume containing parts 500-599 is comprised of chapter V--Office
of Thrift Supervision, Department of the Treasury. The seventh 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 eighth 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, 2012.
For this volume, Bonnie Fritts was Chief Editor. The Code of Federal
Regulations publication program is under the direction of Michael L.
White, assisted by Ann Worley.
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TITLE 12--BANKS AND BANKING
(This book contains parts 200 to 219)
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Part
chapter ii--Federal Reserve System.......................... 201
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CHAPTER II--FEDERAL RESERVE SYSTEM
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SUBCHAPTER A--BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Part Page
200 [Reserved]
201 Extensions of credit by Federal Reserve
banks (Regulation A).................... 5
202 Equal Credit Opportunity Act (Regulation B). 15
203 Home mortgage disclosure (Regulation C)..... 72
204 Reserve requirements of depository
institutions (Regulation D)............. 97
205 Electronic fund transfers (Regulation E).... 131
206 Limitations on interbank liabilities
(Regulation F).......................... 194
207 Disclosure and reporting of CRA-related
agreements (Regulation G)............... 198
208 Membership of State banking institutions in
the Federal Reserve System (Regulation
H)...................................... 211
209 Issue and cancellation of Federal Reserve
Bank capital stock (Regulation I)....... 367
210 Collection of checks and other items by
Federal Reserve banks and funds
transfers through Fedwire (Regulation J) 371
211 International banking operations (Regulation
K)...................................... 408
212 Management official interlocks.............. 456
213 Consumer leasing (Regulation M)............. 460
214 Relations with foreign banks and bankers
(Regulation N).......................... 486
215 Loans to executive officers, directors, and
principal shareholders of member banks
(Regulation O).......................... 488
216 Privacy of consumer financial information
(Regulation P).......................... 498
217 [Reserved]
218 Exceptions for banks from the definition of
broker in the Securities Exchange Act of
1934 (Regulation R)..................... 525
219 Reimbursement for providing financial
records; recordkeeping requirements for
certain financial records (Regulation S) 539
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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 200 [RESERVED]
PART 201_EXTENSIONS OF CREDIT BY FEDERAL RESERVE BANKS (REGULATION A)--Table
of Contents
Sec.
201.1 Authority, purpose and scope.
201.2 Definitions.
201.3 Extensions of credit generally.
201.4 Availability and terms of credit.
201.5 Limitations on availability and assessments.
201.51 Interest rates applicable to credit extended by a Federal Reserve
Bank.
Interpretations
201.104 Eligibility of consumer loans and finance company paper.
201.107 Eligibility of demand paper for discount and as security for
advances by Reserve Banks.
201.108 Obligations eligible as collateral for advances.
201.109 Eligibility for discount of mortgage company notes.
201.110 Goods held by persons employed by owner.
Authority: 12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c, 348
et seq., 357, 374, 374a, and 461.
Source: 45 FR 54010, Aug. 14, 1980, unless otherwise noted.
Sec. 201.1 Authority, purpose and scope.
(a) Authority. This part is issued under the authority of sections
10A, 10B, 11(i), 11(j), 13, 13A, 14(d), and 19 of the Federal Reserve
Act (12 U.S.C. 248(i)-(j), 343 et seq., 347a, 347b, 347c, 348 et seq.,
357, 374, 374a, and 461).
(b) Purpose and scope. This part establishes rules under which a
Federal Reserve Bank may extend credit to depository institutions and
others. Except as otherwise provided, this part applies to United States
branches and agencies of foreign banks that are subject to reserve
requirements under Regulation D (12 CFR part 204) in the same manner and
to the same extent as this part applies to depository institutions. The
Federal Reserve System extends credit with due regard to the basic
objectives of monetary policy and the maintenance of a sound and orderly
financial system.
[Reg. A, 67 FR 67785, Nov. 7, 2002]
Sec. 201.2 Definitions.
For purposes of this part, the following definitions shall apply:
(a) Appropriate federal banking agency has the same meaning as in
section 3 of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C.
1813(q)).
(b) Critically undercapitalized insured depository institution means
any insured depository institution as defined in section 3 of the FDI
Act (12 U.S.C. 1813(c)(2)) that is deemed to be critically
undercapitalized under section 38 of the FDI Act (12 U.S.C.
1831o(b)(1)(E)) and its implementing regulations.
(c)(1) Depository institution means an institution that maintains
reservable transaction accounts or nonpersonal time deposits and is:
(i) An insured bank as defined in section 3 of the FDI Act (12
U.S.C. 1813(h)) or a bank that is eligible to make application to become
an insured bank under section 5 of such act (12 U.S.C. 1815);
(ii) A mutual savings bank as defined in section 3 of the FDI Act
(12 U.S.C. 1813(f)) or a bank that is eligible to make application to
become an insured bank under section 5 of such act (12 U.S.C. 1815);
(iii) A savings bank as defined in section 3 of the FDI Act (12
U.S.C. 1813(g)) or a bank that is eligible to make application to become
an insured bank under section 5 of such act (12 U.S.C. 1815);
(iv) An insured credit union as defined in section 101 of the
Federal Credit Union Act (12 U.S.C. 1752(7)) or a credit union that is
eligible to make application to become an insured credit union pursuant
to section 201 of such act (12 U.S.C. 1781);
(v) A member as defined in section 2 of the Federal Home Loan Bank
Act (12 U.S.C. 1422(4)); or
(vi) A savings association as defined in section 3 of the FDI Act
(12 U.S.C. 1813(b)) that is an insured depository
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institution as defined in section 3 of the act (12 U.S.C. 1813(c)(2)) or
is eligible to apply to become an insured depository institution under
section 5 of the act (12 U.S.C. 15(a)).
(2) The term depository institution does not include a financial
institution that is not required to maintain reserves under Sec.
204.1(c)(4) of Regulation D (12 CFR 204.1(c)(4)) because it is organized
solely to do business with other financial institutions, is owned
primarily by the financial institutions with which it does business, and
does not do business with the general public.
(d) Transaction account and nonpersonal time deposit have the
meanings specified in Regulation D (12 CFR part 204).
(e) Undercapitalized insured depository institution means any
insured depository institution as defined in section 3 of the FDI Act
(12 U.S.C. 1813(c)(2)) that:
(1) Is not a critically undercapitalized insured depository
institution; and
(2)(i) Is deemed to be undercapitalized under section 38 of the FDI
Act (12 U.S.C. 1831o(b)(1)(C)) and its implementing regulations; or
(ii) Has received from its appropriate federal banking agency a
composite CAMELS rating of 5 under the Uniform Financial Institutions
Rating System (or an equivalent rating by its appropriate federal
banking agency under a comparable rating system) as of the most recent
examination of such institution.
(f) Viable, with respect to a depository institution, means that the
Board of Governors or the appropriate federal banking agency has
determined, giving due regard to the economic conditions and
circumstances in the market in which the institution operates, that the
institution is not critically undercapitalized, is not expected to
become critically undercapitalized, and is not expected to be placed in
conservatorship or receivership. Although there are a number of criteria
that may be used to determine viability, the Board of Governors believes
that ordinarily an undercapitalized insured depository institution is
viable if the appropriate federal banking agency has accepted a capital
restoration plan for the depository institution under 12 U.S.C.
1831o(e)(2) and the depository institution is complying with that plan.
[Reg. A, 67 FR 67785, Nov. 7, 2002]
Sec. 201.3 Extensions of credit generally.
(a) Advances to and discounts for a depository institution. (1) A
Federal Reserve Bank may lend to a depository institution either by
making an advance secured by acceptable collateral under Sec. 201.4 of
this part or by discounting certain types of paper. A Federal Reserve
Bank generally extends credit by making an advance.
(2) An advance to a depository institution must be secured to the
satisfaction of the Federal Reserve Bank that makes the advance.
Satisfactory collateral generally includes United States government and
federal-agency securities, and, if of acceptable quality, mortgage notes
covering one-to four-family residences, state and local government
securities, and business, consumer, and other customer notes.
(3) If a Federal Reserve Bank concludes that a discount would meet
the needs of a depository institution or an institution described in
section 13A of the Federal Reserve Act (12 U.S.C. 349) more effectively,
the Reserve Bank may discount any paper indorsed by the institution,
provided the paper meets the requirements specified in the Federal
Reserve Act.
(b) No obligation to make advances or discounts. A Federal Reserve
Bank shall have no obligation to make, increase, renew, or extend any
advance or discount to any depository institution.
(c) Information requirements. (1) Before extending credit to a
depository institution, a Federal Reserve Bank should determine if the
institution is an undercapitalized insured depository institution or a
critically undercapitalized insured depository institution and, if so,
follow the lending procedures specified in Sec. 201.5.
(2) Each Federal Reserve Bank shall require any information it
believes appropriate or desirable to ensure that assets tendered as
collateral for advances or for discount are acceptable and that the
borrower uses the credit provided in a manner consistent with this part.
(3) Each Federal Reserve Bank shall:
[[Page 7]]
(i) Keep itself informed of the general character and amount of the
loans and investments of a depository institution as provided in section
4(8) of the Federal Reserve Act (12 U.S.C. 301); and
(ii) Consider such information in determining whether to extend
credit.
(d) Indirect credit for others. Except for depository institutions
that receive primary credit as described in Sec. 201.4(a), no
depository institution shall act as the medium or agent of another
depository institution in receiving Federal Reserve credit except with
the permission of the Federal Reserve Bank extending credit.
(e) Credit ratings for Term Asset-Backed Securities Loan Facility
(TALF). (1) If the Board requires that a TALF advance, discount, or
other extension of credit be against collateral (other than commercial
mortgage-backed securities) that is rated by one or more credit rating
agencies, the Federal Reserve Bank of New York may only accept the
ratings of any credit rating agency that:
(i) Is registered with the Securities and Exchange Commission as a
Nationally Recognized Statistical Rating Organization for issuers of
asset-backed securities;
(ii) Has a current and publicly available rating methodology
specific to asset-backed securities in the particular TALF asset sector
(as defined in the TALF haircut schedule) for which it wishes its
ratings to be accepted; and
(iii) Demonstrates that it has sufficient experience to provide
credit ratings that would assist in the Federal Reserve Bank of New
York's risk assessment on the most senior classes of newly issued asset-
backed securities in the particular TALF asset sector by having made
public or made available to a paying subscriber base, since September
30, 2006, ratings on at least ten transactions denominated in U.S.
dollars within the particular category to which the particular TALF
asset sector is assigned as set out below--
(A) Category 1--auto, floorplan, and equipment TALF sectors;
(B) Category 2--credit card and insurance premium finance TALF
sectors;
(C) Category 3--mortgage servicing advances TALF sector; and
(D) Category 4--student loans TALF sector.
(2) For purposes of the requirement in paragraph (e)(1)(iii) of this
section, ratings on residential mortgage-backed securities may be
included in Category 3 (servicer advances).
(3) The Federal Reserve Bank of New York may in its discretion
review at any time the eligibility of a credit rating agency to rate one
or more types of assets being offered as collateral.
(4) Process. (i) Credit rating agencies that wish to have their
ratings accepted for TALF transactions should send a written notice to
the Credit, Investment, and Payment Risk group of the Federal Reserve
Bank of New York including information on the factors listed in
paragraph (e)(1) of this section with respect to each TALF asset sector
for which they wish their ratings to be accepted.
(ii) The Federal Reserve Bank of New York will notify the submitter
within 5 business days of receipt of a submission whether additional
information needs to be submitted.
(iii) Within 5 business days of receipt of all information necessary
to evaluate a credit rating agency pursuant to the factors set out in
paragraph (e)(1) of this section, the Federal Reserve Bank of New York
will notify the credit rating agency regarding its eligibility.
(5) Conditions. The Federal Reserve Bank of New York may accept
credit ratings under this subsection only from a credit rating agency
that agrees to--
(i) Discuss with the Federal Reserve its views of the credit risk of
any transaction within the TALF asset sector that has been submitted to
TALF and upon which the credit rating agency is being or has been
consulted by the issuer; and
(ii) Provide any information requested by the Federal Reserve for
the purpose of determining that the credit rating agency continues to
meet the eligibility requirements under paragraph (e)(1) of this
section.
[Reg. A, 67 FR 67786, Nov. 7, 2002, as amended at 74 FR 65016, Dec. 9,
2009]
Sec. 201.4 Availability and terms of credit.
(a) Primary credit. A Federal Reserve Bank may extend primary credit
on a
[[Page 8]]
very short-term basis, usually overnight, as a backup source of funding
to a depository institution that is in generally sound financial
condition in the judgment of the Reserve Bank. Such primary credit
ordinarily is extended with minimal administrative burden on the
borrower. A Federal Reserve Bank also may extend primary credit with
maturities up to a few weeks as a backup source of funding to a
depository institution if, in the judgment of the Reserve Bank, the
depository institution is in generally sound financial condition and
cannot obtain such credit in the market on reasonable terms. Credit
extended under the primary credit program is granted at the primary
credit rate.
(b) Secondary credit. A Federal Reserve Bank may extend secondary
credit on a very short-term basis, usually overnight, as a backup source
of funding to a depository institution that is not eligible for primary
credit if, in the judgment of the Reserve Bank, such a credit extension
would be consistent with a timely return to a reliance on market funding
sources. A Federal Reserve Bank also may extend longer-term secondary
credit if the Reserve Bank determines that such credit would facilitate
the orderly resolution of serious financial difficulties of a depository
institution. Credit extended under the secondary credit program is
granted at a rate above the primary credit rate.
(c) Seasonal credit. A Federal Reserve Bank may extend seasonal
credit for periods longer than those permitted under primary credit to
assist a smaller depository institution in meeting regular needs for
funds arising from expected patterns of movement in its deposits and
loans. An interest rate that varies with the level of short-term market
interest rates is applied to seasonal credit.
(1) A Federal Reserve Bank may extend seasonal credit only if:
(i) The depository institution's seasonal needs exceed a threshold
that the institution is expected to meet from other sources of liquidity
(this threshold is calculated as a certain percentage, established by
the Board of Governors, of the institution's average total deposits in
the preceding calendar year); and
(ii) The Federal Reserve Bank is satisfied that the institution's
qualifying need for funds is seasonal and will persist for at least four
weeks.
(2) The Board may establish special terms for seasonal credit when
depository institutions are experiencing unusual seasonal demands for
credit in a period of liquidity strain.
(d) Emergency credit for others. In unusual and exigent
circumstances and after consultation with the Board of Governors, a
Federal Reserve Bank may extend credit to an individual, partnership, or
corporation that is not a depository institution if, in the judgment of
the Federal Reserve Bank, credit is not available from other sources and
failure to obtain such credit would adversely affect the economy. If the
collateral used to secure emergency credit consists of assets other than
obligations of, or fully guaranteed as to principal and interest by, the
United States or an agency thereof, credit must be in the form of a
discount and five or more members of the Board of Governors must
affirmatively vote to authorize the discount prior to the extension of
credit. Emergency credit will be extended at a rate above the highest
rate in effect for advances to depository institutions.
(e) Term auction facility. (1) A Federal Reserve Bank may make an
advance to a depository institution pursuant to an auction conducted
under this paragraph and at the rate specified in Sec. 201.51(e) if, in
the judgment of the Reserve Bank, the depository institution is in
generally sound financial condition and is expected to remain in that
condition during the term of the advance. An auction under this
paragraph shall be conducted subject to such conditions, including
conditions regarding the participants, size and duration of the
facility, minimum bid amount, maximum bid amount, term of advance,
minimum bid rate, use of proceeds, and schedule of auction dates, as the
Board may establish from time to time in connection with the term
auction facility. The Board may appoint one or more Reserve Banks or
others to conduct the auction.
[[Page 9]]
(2) Authorization for the term auction facility established by Sec.
201.4(e)(1) shall expire on such date as set by the Board.
[Reg. A, 67 FR 67786, Nov. 7, 2002, as amended at 72 FR 71203, Dec. 17,
2007]
Sec. 201.5 Limitations on availability and assessments.
(a) Lending to undercapitalized insured depository institutions. A
Federal Reserve Bank may make or have outstanding advances to or
discounts for a depository institution that it knows to be an
undercapitalized insured depository institution, only:
(1) If, in any 120-day period, advances or discounts from any
Federal Reserve Bank to that depository institution are not outstanding
for more than 60 days during which the institution is an
undercapitalized insured depository institution; or
(2) During the 60 calendar days after the receipt of a written
certification from the chairman of the Board of Governors or the head of
the appropriate federal banking agency that the borrowing depository
institution is viable; or
(3) After consultation with the Board of Governors. In unusual
circumstances, when prior consultation with the Board is not possible, a
Federal Reserve Bank should consult with the Board as soon as possible
after extending credit that requires consultation under this paragraph
(a)(3).
(b) Lending to critically undercapitalized insured depository
institutions. A Federal Reserve Bank may make or have outstanding
advances to or discounts for a depository institution that it knows to
be a critically undercapitalized insured depository institution only:
(1) During the 5-day period beginning on the date the institution
became a critically undercapitalized insured depository institution; or
(2) After consultation with the Board of Governors. In unusual
circumstances, when prior consultation with the Board is not possible, a
Federal Reserve Bank should consult with the Board as soon as possible
after extending credit that requires consultation under this paragraph
(b)(2).
(c) Assessments. The Board of Governors will assess the Federal
Reserve Banks for any amount that the Board pays to the FDIC due to any
excess loss in accordance with section 10B(b) of the Federal Reserve
Act. Each Federal Reserve Bank shall be assessed that portion of the
amount that the Board of Governors pays to the FDIC that is attributable
to an extension of credit by that Federal Reserve Bank, up to 1 percent
of its capital as reported at the beginning of the calendar year in
which the assessment is made. The Board of Governors will assess all of
the Federal Reserve Banks for the remainder of the amount it pays to the
FDIC in the ratio that the capital of each Federal Reserve Bank bears to
the total capital of all Federal Reserve Banks at the beginning of the
calendar year in which the assessment is made, provided, however, that
if any assessment exceeds 50 percent of the total capital and surplus of
all Federal Reserve Banks, whether to distribute the excess over such 50
percent shall be made at the discretion of the Board of Governors.
[Reg. A, 67 FR 67787, Nov. 7, 2002]
Sec. 201.51 Interest rates applicable to credit extended by a Federal Reserve
Bank. \1\
---------------------------------------------------------------------------
\1\ The primary, secondary, and seasonal credit rates described in
this section apply to both advances and discounts made under the
primary, secondary, and seasonal credit programs, respectively.
---------------------------------------------------------------------------
(a) Primary credit. The interest rates for primary credit provided
to depository institutions under Sec. 201.4(a) are:
------------------------------------------------------------------------
Federal Reserve Bank Rate Effective
------------------------------------------------------------------------
Boston............................ 0.75 February 19, 2010.
New York.......................... 0.75 February 19, 2010.
Philadelphia...................... 0.75 February 19, 2010.
Cleveland......................... 0.75 February 19, 2010.
Richmond.......................... 0.75 February 19, 2010.
Atlanta........................... 0.75 February 19, 2010.
Chicago........................... 0.75 February 19, 2010.
St. Louis......................... 0.75 February 19, 2010.
Minneapolis....................... 0.75 February 19, 2010.
Kansas City....................... 0.75 February 19, 2010.
Dallas............................ 0.75 February 19, 2010.
San Francisco..................... 0.75 February 19, 2010.
------------------------------------------------------------------------
(b) Secondary credit. The interest rates for secondary credit
provided to depository institutions under 201.4(b) are:
[[Page 10]]
------------------------------------------------------------------------
Federal Reserve Bank Rate Effective
------------------------------------------------------------------------
Boston............................ 1.25 February 19, 2010.
New York.......................... 1.25 February 19, 2010.
Philadelphia...................... 1.25 February 19, 2010.
Cleveland......................... 1.25 February 19, 2010.
Richmond.......................... 1.25 February 19, 2010.
Atlanta........................... 1.25 February 19, 2010.
Chicago........................... 1.25 February 19, 2010.
St. Louis......................... 1.25 February 19, 2010.
Minneapolis....................... 1.25 February 19, 2010
Kansas City....................... 1.25 February 19, 2010.
Dallas............................ 1.25 February 19, 2010.
San Francisco..................... 1.25 February 19, 2010.
------------------------------------------------------------------------
(c) Seasonal credit. The rate for seasonal credit extended to
depository institutions under Sec. 201.4(c) is a flexible rate that
takes into account rates on market sources of funds.
(d) Primary credit rate in a financial emergency. (1) The primary
credit rate at a Federal Reserve Bank is the target federal funds rate
of the Federal Open Market Committee if:
(i) In a financial emergency the Reserve Bank has established the
primary credit rate at that rate; and
(ii) The Chairman of the Board of Governors (or, in the Chairman's
absence, his authorized designee) certifies that a quorum of the Board
is not available to act on the Reserve Bank's rate establishment.
(2) For purposes of this paragraph (d), a financial emergency is a
significant disruption to the U.S. money markets resulting from an act
of war, military or terrorist attack, natural disaster, or other
catastrophic event.
(e) Term auction facility. The interest rate on advances to
depository institutions made pursuant to an auction under Sec. 201.4(e)
is the rate at which all bids at that auction may be fulfilled, up to
the maximum auction amount and subject to any minimum bid rate and other
conditions as set by the Board.
[Reg. A, 67 FR 67787, Nov. 7, 2002]
Editorial Note: For Federal Register citations affecting Sec.
201.51, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Interpretations
Sec. 201.104 Eligibility of consumer loans and finance company paper.
(a) The Board of Governors has clarified and modified its position
with respect to the eligibility of consumer loans and finance company
paper for discount with and as collateral for advances by the reserve
banks.
(b) Section 13, paragraph 2, of the Federal Reserve Act authorizes a
Federal Reserve Bank, under certain conditions, to discount for member
banks
* * * notes, drafts, and bills of exchange arising out of actual
commercial transactions; that is, notes, drafts, and bills of exchange
issued or drawn for agricultural, industrial, or commercial purposes, or
the proceeds of which have been used, or are to be used, for such
purposes, the Board of Governors of the Federal Reserve System to have
the right to determine or define the character of the paper thus
eligible for discount, within the meaning of this Act.
(c) It continues to be the opinion of the Board that borrowing for
the purpose of purchasing goods is borrowing for a commercial purpose,
whether the borrower intends to use the goods himself or to resell them.
Hence, loans made to enable consumers to purchase automobiles or other
goods should be included under commercial, agricultural, and industrial
paper within the meaning of the Federal Reserve Act, and as such are
eligible for discounting with the Reserve Banks and as security for
advances from the Reserve Banks under section 13, paragraph 8, of the
Federal Reserve Act as long as they conform to requirements with respect
to maturity and other matters. This applies equally to loans made
directly by banks to consumers and to paper accepted by banks from
dealers or finance companies. It also applies to notes of finance
companies themselves as long as the proceeds of such notes are used to
finance the purchase of consumer goods or for other purposes which are
eligible within the meaning of the Federal Reserve Act.
(d) If there is any question as to whether the proceeds of a note of
a finance company have been or are to be used for a commercial,
agricultural, or industrial purpose, a financial statement of the
finance company reflecting an excess of notes receivable which appear
eligible for rediscount (without regard to maturity) over total current
liabilities (i.e., notes due within 1 year) may be taken as an
indication of eligibility. Where information is lacking as
[[Page 11]]
to whether direct consumer loans by a finance company are for eligible
purposes, it may be assumed that 50 percent of such loans are ``notes
receivable which appear eligible for rediscount''. In addition, that
language should be regarded as including notes given for the purchase of
mobile homes that are acquired by a finance company from a dealer-seller
of such homes.
(e) The principles stated above apply not only to notes of a finance
company engaged in making consumer loans but also to notes of a finance
company engaged in making loans for other eligible purposes, including
business and agricultural loans. Under section 13a of the Federal
Reserve Act, paper representing loans to finance the production,
marketing, and carrying of agricultural products or the breeding,
raising, fattening, or marketing of livestock is eligible for discount
if the paper has a maturity of not exceeding 9 months. Consequently, a
note of a finance company the proceeds of which are used by it to make
loans for such purposes is eligible for discount or as security for a
Federal Reserve advance, and such a note, unlike the note of a finance
company making consumer loans, may have a maturity of up to 9 months.
[37 FR 4701, Mar. 4, 1972]
Sec. 201.107 Eligibility of demand paper for discount and as security for
advances by Reserve Banks.
(a) The Board of Governors has reconsidered a ruling made in 1917
that demand notes are ineligible for discount under the provisions of
the Federal Reserve Act. (1917 Federal Reserve Bulletin 378.)
(b) The basis of that ruling was the provision in the second
paragraph of section 13 of the Federal Reserve Act that notes, drafts,
and bills of exchange must have a maturity at the time of discount of
not more than 90 days, exclusive of grace. The ruling stated that
a demand note or bill is not eligible under the provisions of the
act, since it is not in terms payable within the prescribed 90 days,
but, at the option of the holder, may not be presented for payment until
after that time.
(c) It is well settled as a matter of law, however, that demand
paper is due and payable on the date of its issue. The generally
accepted legal view is stated in Beutel's Brannan on Negotiable
Instruments Law, at page 305, as follows:
The words on demand serve the same purpose as words making
instruments payable at a specified time. They fix maturity of the
obligation and do not make demand necessary, but mean that the
instrument is due, payable and matured when made and delivered.
(d) Accordingly, the Board has concluded that, since demand paper is
due and payable on the date of its issue, it satisfies the maturity
requirements of the statute. Demand paper which otherwise meets the
eligibility requirements of the Federal Reserve Act and this part
Regulation A, therefore, is eligible for discount and as security for
advances by Reserve Banks.
[31 FR 5443, Apr. 16, 1966]
Sec. 201.108 Obligations eligible as collateral for advances.
(a) Section 3(a) of Pub. L. 90-505, approved September 21, 1968,
amended the eighth paragraph of section 13 of the Federal Reserve Act
(12 U.S.C. 347) to authorize advances thereunder to member banks
``secured by such obligations as are eligible for purchase under section
14(b) of this Act.'' The relevant part of such paragraph had previously
referred only to ``notes * * * eligible * * * for purchase'', which the
Board had construed as not including obligations generally regarded as
securities. (See 1962 Federal Reserve Bulletin 690, Sec. 201.103(d).)
(b) Under section 14(b) direct obligations of, and obligations fully
guaranteed as to principal and interest by, the United States are
eligible for purchase by Reserve Banks. Such obligations include
certificates issued by the trustees of Penn Central Transportation Co.
that are fully guaranteed by the Secretary of Transportation. Under
section 14(b) direct obligations of, and obligations fully guaranteed as
to principal and interest by, any agency of the United States are also
eligible for purchase by Reserve Banks. Following are the principal
agency obligations eligible as collateral for advances:
(1) Federal Intermediate Credit Bank debentures;
[[Page 12]]
(2) Federal Home Loan Bank notes and bonds;
(3) Federal Land Bank bonds;
(4) Bank for Cooperative debentures;
(5) Federal National Mortgage Association notes, debentures and
guaranteed certificates of participation;
(6) Obligations of or fully guaranteed by the Government National
Mortgage Association;
(7) Merchant Marine bonds;
(8) Export-Import Bank notes and guaranteed participation
certificates;
(9) Farmers Home Administration insured notes;
(10) Notes fully guaranteed as to principal and interest by the
Small Business Administration;
(11) Federal Housing Administration debentures;
(12) District of Columbia Armory Board bonds;
(13) Tennessee Valley Authority bonds and notes;
(14) Bonds and notes of local urban renewal or public housing
agencies fully supported as to principal and interest by the full faith
and credit of the United States pursuant to section 302 of the Housing
Act of 1961 (42 U.S.C. 1421a(c), 1452(c)).
(15) Commodity Credit Corporation certificates of interest in a
price-support loan pool.
(16) Federal Home Loan Mortgage Corporation notes, debentures, and
guaranteed certificates of participation.
(17) U.S. Postal Service obligations.
(18) Participation certificates evidencing undivided interests in
purchase contracts entered into by the General Services Administration.
(19) Obligations entered into by the Secretary of Health, Education,
and Welfare under the Public Health Service Act, as amended by the
Medical Facilities Construction and Modernization Amendments of 1970.
(20) Obligations guaranteed by the Overseas Private Investment
Corp., pursuant to the provisions of the Foreign Assistance Act of 1961,
as amended.
(c) Nothing less than a full guarantee of principal and interest by
a Federal agency will make an obligation eligible. For example, mortgage
loans insured by the Federal Housing Administration are not eligible
since the insurance contract is not equivalent to an unconditional
guarantee and does not fully cover interest payable on the loan.
Obligations of international institutions, such as the Inter-American
Development Bank and the International Bank for Reconstruction and
Development, are also not eligible, since such institutions are not
agencies of the United States.
(d) Also eligible for purchase under section 14(b) are ``bills,
notes, revenue bonds, and warrants with a maturity from date of purchase
of not exceeding 6 months, issued in anticipation of the collection of
taxes or in anticipation of the receipt of assured revenues by any
State, county, district, political subdivision, or municipality in the
continental United States, including irrigation, drainage and
reclamation districts.''\3\ In determining the eligibility of such
obligations as collateral for advances, but the Reserve Bank will
satisfy itself that sufficient tax or other assured revenues earmarked
for payment of such obligations will be available for that purpose at
maturity, or within 6 months from the date of the advance if no maturity
is stated. Payments due from Federal, State or other governmental units
may, in the Reserve Bank's discretion, be regarded as ``other assured
revenues''; but neither the proceeds of a prospective issue of
securities nor future tolls, rents or similar collections for the
voluntary use of government property for non-governmental purposes will
normally be so regarded. Obligations with original maturities exceeding
1 year would not ordinarily be self-liquidating as contemplated by the
statute, unless at the time of issue provision is made for a redemption
or sinking fund that will be sufficient to pay such obligations at
maturity.
---------------------------------------------------------------------------
\2\ [Reserved]
\3\ Paragraph 3 of section 1 of the Federal Reserve Act (12 U.S.C.
221) defines the continental United States to mean ``the States of the
United States and the District of Columbia'', thus including Alaska and
Hawaii.
[Reg. A, 33 FR 17231, Nov. 21, 1968, as amended at 34 FR 1113, Jan. 24,
1969; 34 FR 6417, Apr. 12, 1969; 36 FR 8441, May 6, 1971; 37 FR 24105,
Nov. 14, 1972; 43 FR 53709, Nov. 17, 1978; 58 FR 68515, Dec. 28, 1993]
[[Page 13]]
Sec. 201.109 Eligibility for discount of mortgage company notes.
(a) The question has arisen whether notes issued by mortgage banking
companies to finance their acquisition and temporary holding of real
estate mortgages are eligible for discount by Reserve Banks.
(b) Under section 13 of the Federal Reserve Act the Board has
authority to define what are ``agricultural, industrial, or commercial
purposes'', which is the statutory criterion for determining the
eligibility of notes and drafts for discount. However, such definition
may not include paper ``covering merely investments or issued or drawn
for the purpose of carrying or trading in stocks, bonds, or other
investment securities''.
(c) The legislative history of section 13 suggests that Congress
intended to make eligible for discount ``any paper drawn for a
legitimate business purpose of any kind'' \4\ and that the Board, in
determining what paper is eligible, should place a ``broad and adaptable
construction'' \5\ upon the terms in section 13. It may also be noted
that Congress apparently considered paper issued to carry investment
securities as paper issued for a ``commercial purpose'', since it
specifically prohibited the Board from making such paper eligible for
discount. If ``commercial'' is broad enough to encompass investment
banking, it would also seem to include mortgage banking.
---------------------------------------------------------------------------
\4\ House Report No. 69, 63d Cong., p. 48.
\5\ 50 Cong. Rec. 4675 (1913) (remarks of Rep. Phelan).
---------------------------------------------------------------------------
(d) In providing for the discount of commercial paper by Reserve
Banks, Congress obviously intended to facilitate the current financing
of agriculture, industry, and commerce, as opposed to long-term
investment. \6\ In the main, trading in stocks and bonds is investment-
oriented; most securities transactions do not directly affect the
production or distribution of goods and services. Mortgage banking, on
the other hand, is essential to the construction industry and thus more
closely related to industry and commerce. Although investment bankers
also perform similar functions with respect to newly issued securities,
Congress saw fit to deny eligibility to all paper issued to finance the
carrying of securities. Congress did not distinguish between newly
issued and outstanding securities, perhaps covering the larger area in
order to make certain that the area of principal concern (i.e., trading
in outstanding stocks and bonds) was fully included. Speculation was
also a major Congressional concern, but speculation is not a material
element in mortgage banking operations. Mortgage loans would not
therefore seem to be within the purpose underlying the exclusions from
eligibility in section 13.
---------------------------------------------------------------------------
\6\ 50 Cong. Rec. 5021 (1913) (remarks of Rep. Thompson of
Oklahoma); 50 Cong. Rec. 4731-32 (1913) (remarks of Rep. Borland).
---------------------------------------------------------------------------
(e) Section 201.3(a) provides that a negotiable note maturing in 90
days or less is not eligible for discount if the proceeds are used ``for
permanent or fixed investments of any kind, such as land, buildings or
machinery, or for any other fixed capital purpose''. However, the
proceeds of a mortgage company's commercial paper are not used by it for
any permanent or fixed capital purpose, but only to carry temporarily an
inventory of mortgage loans pending their ``packaging'' for sale to
permanent investors that are usually recurrent customers.
(f) In view of the foregoing considerations the Board concluded that
notes issued to finance such temporary ``warehousing'' of real estate
mortgage loans are notes issued for an industrial or commercial purpose,
that such mortgage loans do not constitute ``investment securities'', as
that term is used in section 13, and that the temporary holding of such
mortgages in these circumstances is not a permanent investment by the
mortgage banking company. Accordingly, the Board held that notes having
not more than 90 days to run which are issued to finance the temporary
holding of mortgage loans are eligible for discount by Reserve Banks.
[35 FR 527, Jan. 15, 1970, as amended at 58 FR 68515, Dec. 28, 1993]
Sec. 201.110 Goods held by persons employed by owner.
(a) The Board has been asked to review an Interpretation it issued
in 1933
[[Page 14]]
concerning the eligibility for rediscount by a Federal Reserve Bank of
bankers' acceptances issued against field warehouse receipts where the
custodian of the goods is a present or former employee of the borrower.
[] 1445 Published Interpretations, 1933 BULLETIN 188] The Board
determined at that time that the acceptances were not eligible because
such receipts do not comply with the requirement of section 13 of the
Federal Reserve Act that a banker's acceptance be ``secured at the time
of acceptance by a warehouse receipt or other such document conveying or
securing title covering readily marketable staples,'' nor with the
requirement of section XI of the Board's Regulation A that it be
``secured at the time of acceptance by a warehouse, terminal, or other
similar receipt, conveying security title to such staples, issued by a
party independent of the customer.''
The requirement that the receipt be ``issued by a party independent of
the customer'' was deleted from Regulation A in 1973, and thus the
primary issue for the Board's consideration is whether a field warehouse
receipt is a document ``securing title'' to readily marketable staples.
(b) While bankers' acceptances secured by field warehouse receipts
are rarely offered for rediscount or as collateral for an advance, the
issue of ``eligibility'' is still significant. If an ineligible
acceptance is discounted and then sold by a member bank, the proceeds
are deemed to be ``deposits'' under Sec. 204.1(f) of Regulation D and
are subject to reserve requirements.
(c) In reviewing this matter, the Board has taken into consideration
the changes that have occurred in commercial law and practice since
1933. Modern commercial law, embodied in the Uniform Commercial Code,
refers to ``perfecting security interests'' rather than ``securing
title'' to goods. The Board believes that if, under State law, the
issuance of a field warehouse receipt provides the lender with a
perfected security interest in the goods, the receipt should be regarded
as a document ``securing title'' to goods for the purposes of section 13
of the Federal Reserve Act. It should be noted, however, that the mere
existence of a perfected security interest alone is not sufficient; the
Act requires that the acceptance be secured by a warehouse receipt or
its equivalent.
(d) Under the U.C.C., evidence of an agreement between the secured
party and the debtor must exist before a security interest can attach.
[U.C.C. section 9-202.] This agreement may be evidence by: (1) A written
security agreement signed by the debtor, or (2) the collateral being
placed in the possession of the secured party or his agent [U.C.C.
section 9-203]. Generally, a security interest is perfected by the
filing of a financing statement, [U.C.C. section 9-302.] However, if the
collateral is in the possession of a bailee, then perfection can be
achieved by:
(1) Having warehouse receipts issued in the name of the secured
party; (2) notifying the bailee of the secured party's interest; or (3)
having a financing statement filed. [U.C.C. section 9-304(3).]
(e) If the field warehousing operation is properly conducted, a
security interest in the goods is perfected when a warehouse receipt is
issued in the name of the secured party (the lending bank). Therefore,
warehouse receipts issued pursuant to a bona fide field warehousing
operation satisfy the legal requirements of section 13 of the Federal
Reserve Act. Moreover, in a properly conducted field warehousing
operation, the warehouse manager will be trained, bonded, supervised and
audited by the field warehousing company. This procedure tends to insure
that he will not be impermissibly controlled by his former (or sometimes
present) employer, the borrower, even though he may look to the borrower
for reemployment at some future time. A prudent lender will, of course,
carefully review the field warehousing operation to ensure that stated
procedures are satisfactory and that they are actually being followed.
The lender may also wish to review the field warehousing company's
fidelity bonds and legal liability insurance policies to ensure that
they provide satisfactory protection to the lender.
(f) If the warehousing operation is not conducted properly, however,
and the manager remains under the control of the borrower, the security
interest
[[Page 15]]
may be lost. Consequently, the lender may wish to require a written
security agreement and the filing of a financing statement to insure
that the lender will have a perfected security interest even if it is
later determined that the field warehousing operation was not properly
conducted. It should be noted however, that the Federal Reserve Act
clearly requires that the bankers' acceptance be secured by a warehouse
receipt in order to satisfy the requirements of eligibility, and a
written security agreement and a filed financing statement, while
desirable, cannot serve as a substitute for a warehouse receipt.
(g) This Interpretation is based on facts that have been presented
in regard to field warehousing operations conducted by established,
professional field warehouse companies, and it does not necessarily
apply to all field warehousing operations. Thus ] 1430 and ] 1440 of the
Published Interpretations [1918 BULLETIN 31 and 1918 BULLETIN 862]
maintain their validity with regard to corporations formed for the
purpose of conducting limited field warehousing operations. Furthermore,
the prohibition contained in ] 1435 Published Interpretations [1918
BULLETIN 634] that ``the borrower shall not have access to the premises
and shall exercise no control over the goods stored'' retains its
validity, except that access for inspection purposes is still permitted
under ] 1450 [1926 BULLETIN 666]. The purpose for the acceptance
transaction must be proper and cannot be for speculation [] 1400, 1919
BULLETIN 858] or for the purpose of furnishing working capital [] 1405,
1922 BULLETIN 52].
(h) This interpretation suspersedes only the previous ] 1445 of the
Published Interpretations [1933 BULLETIN 188], and is not intended to
affect any other Board Interpretation regarding field warehousing.
(12 U.S.C. 342 et seq.)
[43 FR 21434, May 18, 1978]
PART 202_EQUAL CREDIT OPPORTUNITY ACT (REGULATION B)--Table of Contents
Sec.
Regulation B (Equal Credit Opportunity)
202.1 Authority, scope and purpose.
202.2 Definitions.
202.3 Limited exceptions for certain classes of transactions.
202.4 General rules.
202.5 Rules concerning requests for information.
202.6 Rules concerning evaluation of applications.
202.7 Rules concerning extensions of credit.
202.8 Special purpose credit programs.
202.9 Notifications.
202.10 Furnishing of credit information.
202.11 Relation to state law.
202.12 Record retention.
202.13 Information for monitoring purposes.
202.14 Rules on providing appraisal reports.
202.15 Incentives for self-testing and self-correction.
202.16 Enforcement, penalties and liabilities.
202.17 Data collection for credit applications by women-owned, minority-
owned, or small businesses.
Appendix A to Part 202--Federal Enforcement Agencies
Appendix B to Part 202--Model Application Forms
Appendix C to Part 202--Sample Notification Forms
Appendix D to Part 202--Issuance of Staff Interpretations
Supplement I to Part 202--Official Staff Interpretations
Authority: 15 U.S.C. 1691-1691f; Pub. L. 111-203, 124 Stat. 1376.
Source: Reg. B, 68 FR 13161, Mar. 18, 2003, unless otherwise noted.
Sec. 202.1 Authority, scope and purpose.
(a) Authority and scope. This regulation is issued by the Board of
Governors of the Federal Reserve System pursuant to title VII (Equal
Credit Opportunity Act) of the Consumer Credit Protection Act, as
amended (15 U.S.C. 1601 et seq.). Except as otherwise provided herein,
this regulation applies to all persons who are creditors, as defined in
Sec. 202.2(1). Information collection requirements contained in this
regulation have been approved by the Office of Management and Budget
under the provisions of 44 U.S.C. 3501 et seq. and have been assigned
OMB No. 7100-0201.
[[Page 16]]
(b) Purpose. The purpose of this regulation is to promote the
availability of credit to all creditworthy applicants without regard to
race, color, religion, national origin, sex, marital status, or age
(provided the applicant has the capacity to contract); to the fact that
all or part of the applicant's income derives from a public assistance
program; or to the fact that the applicant has in good faith exercised
any right under the Consumer Credit Protection Act. The regulation
prohibits creditor practices that discriminate on the basis of any of
these factors. The regulation also requires creditors to notify
applicants of action taken on their applications; to report credit
history in the names of both spouses on an account; to retain records of
credit applications; to collect information about the applicant's race
and other personal characteristics in applications for certain dwelling-
related loans; and to provide applicants with copies of appraisal
reports used in connection with credit transactions.
Sec. 202.2 Definitions.
For the purposes of this regulation, unless the context indicates
otherwise, the following definitions apply.
(a) Account means an extension of credit. When employed in relation
to an account, the word use refers only to open-end credit.
(b) Act means the Equal Credit Opportunity Act (title VII of the
Consumer Credit Protection Act).
(c) Adverse action. (1) The term means:
(i) A refusal to grant credit in substantially the amount or on
substantially the terms requested in an application unless the creditor
makes a counteroffer (to grant credit in a different amount or on other
terms) and the applicant uses or expressly accepts the credit offered;
(ii) A termination of an account or an unfavorable change in the
terms of an account that does not affect all or substantially all of a
class of the creditor's accounts; or
(iii) A refusal to increase the amount of credit available to an
applicant who has made an application for an increase.
(2) The term does not include:
(i) A change in the terms of an account expressly agreed to by an
applicant.
(ii) Any action or forbearance relating to an account taken in
connection with inactivity, default, or delinquency as to that account;
(iii) A refusal or failure to authorize an account transaction at
point of sale or loan, except when the refusal is a termination or an
unfavorable change in the terms of an account that does not affect all
or substantially all of a class of the creditor's accounts, or when the
refusal is a denial of an application for an increase in the amount of
credit available under the account;
(iv) A refusal to extend credit because applicable law prohibits the
creditor from extending the credit requested; or
(v) A refusal to extend credit because the creditor does not offer
the type of credit or credit plan requested.
(3) An action that falls within the definition of both paragraphs
(c)(1) and (c)(2) of this section is governed by paragraph (c)(2) of
this section.
(d) Age refers only to the age of natural persons and means the
number of fully elapsed years from the date of an applicant's birth.
(e) Applicant means any person who requests or who has received an
extension of credit from a creditor, and includes any person who is or
may become contractually liable regarding an extension of credit. For
purposes of Sec. 202.7(d), the term includes guarantors, sureties,
endorsers, and similar parties.
(f) Application means an oral or written request for an extension of
credit that is made in accordance with procedures used by a creditor for
the type of credit requested. The term application does not include the
use of an account or line of credit to obtain an amount of credit that
is within a previously established credit limit. A completed application
means an application in connection with which a creditor has received
all the information that the creditor regularly obtains and considers in
evaluating applications for the amount and type of credit requested
(including, but not limited to, credit reports, any additional
information requested from the applicant, and
[[Page 17]]
any approvals or reports by governmental agencies or other persons that
are necessary to guarantee, insure, or provide security for the credit
or collateral). The creditor shall exercise reasonable diligence in
obtaining such information.
(g) Business credit refers to extensions of credit primarily for
business or commercial (including agricultural) purposes, but excluding
extensions of credit of the types described in Sec. 202.3(a)-(d).
(h) Consumer credit means credit extended to a natural person
primarily for personal, family, or household purposes.
(i) Contractually liable means expressly obligated to repay all
debts arising on an account by reason of an agreement to that effect.
(j) Credit means the right granted by a creditor to an applicant to
defer payment of a debt, incur debt and defer its payment, or purchase
property or services and defer payment therefor.
(k) Credit card means any card, plate, coupon book, or other single
credit device that may be used from time to time to obtain money,
property, or services on credit.
(l) Creditor means a person who, in the ordinary course of business,
regularly participates in a credit decision, including setting the terms
of the credit. The term creditor includes a creditor's assignee,
transferee, or subrogee who so participates. For purposes of Sec.
202.4(a) and (b), the term creditor also includes a person who, in the
ordinary course of business, regularly refers applicants or prospective
applicants to creditors, or selects or offers to select creditors to
whom requests for credit may be made. A person is not a creditor
regarding any violation of the Act or this regulation committed by
another creditor unless the person knew or had reasonable notice of the
act, policy, or practice that constituted the violation before becoming
involved in the credit transaction. The term does not include a person
whose only participation in a credit transaction involves honoring a
credit card.
(m) Credit transaction means every aspect of an applicant's dealings
with a creditor regarding an application for credit or an existing
extension of credit (including, but not limited to, information
requirements; investigation procedures; standards of creditworthiness;
terms of credit; furnishing of credit information; revocation,
alteration, or termination of credit; and collection procedures).
(n) Discriminate against an applicant means to treat an applicant
less favorably than other applicants.
(o) Elderly means age 62 or older.
(p) Empirically derived and other credit scoring systems--(1) A
credit scoring system is a system that evaluates an applicant's
creditworthiness mechanically, based on key attributes of the applicant
and aspects of the transaction, and that determines, alone or in
conjunction with an evaluation of additional information about the
applicant, whether an applicant is deemed creditworthy. To qualify as an
empirically derived, demonstrably and statistically sound, credit
scoring system, the system must be:
(i) Based on data that are derived from an empirical comparison of
sample groups or the population of creditworthy and noncreditworthy
applicants who applied for credit within a reasonable preceding period
of time;
(ii) Developed for the purpose of evaluating the creditworthiness of
applicants with respect to the legitimate business interests of the
creditor utilizing the system (including, but not limited to, minimizing
bad debt losses and operating expenses in accordance with the creditor's
business judgment);
(iii) Developed and validated using accepted statistical principles
and methodology; and
(iv) Periodically revalidated by the use of appropriate statistical
principles and methodology and adjusted as necessary to maintain
predictive ability.
(2) A creditor may use an empirically derived, demonstrably and
statistically sound, credit scoring system obtained from another person
or may obtain credit experience from which to develop such a system. Any
such system must satisfy the criteria set forth in paragraph (p)(1)(i)
through (iv) of this section; if the creditor is unable during the
development process to validate the system based on its own credit
experience in accordance with paragraph (p)(1) of this section, the
system must
[[Page 18]]
be validated when sufficient credit experience becomes available. A
system that fails this validity test is no longer an empirically
derived, demonstrably and statistically sound, credit scoring system for
that creditor.
(q) Extend credit and extension of credit mean the granting of
credit in any form (including, but not limited to, credit granted in
addition to any existing credit or credit limit; credit granted pursuant
to an open-end credit plan; the refinancing or other renewal of credit,
including the issuance of a new credit card in place of an expiring
credit card or in substitution for an existing credit card; the
consolidation of two or more obligations; or the continuance of existing
credit without any special effort to collect at or after maturity).
(r) Good faith means honesty in fact in the conduct or transaction.
(s) Inadvertent error means a mechanical, electronic, or clerical
error that a creditor demonstrates was not intentional and occurred
notwithstanding the maintenance of procedures reasonably adapted to
avoid such errors.
(t) Judgmental system of evaluating applicants means any system for
evaluating the creditworthiness of an applicant other than an
empirically derived, demonstrably and statistically sound, credit
scoring system.
(u) Marital status means the state of being unmarried, married, or
separated, as defined by applicable state law. The term ``unmarried''
includes persons who are single, divorced, or widowed.
(v) Negative factor or value, in relation to the age of elderly
applicants, means utilizing a factor, value, or weight that is less
favorable regarding elderly applicants than the creditor's experience
warrants or is less favorable than the factor, value, or weight assigned
to the class of applicants that are not classified as elderly and are
most favored by a creditor on the basis of age.
(w) Open-end credit means credit extended under a plan in which a
creditor may permit an applicant to make purchases or obtain loans from
time to time directly from the creditor or indirectly by use of a credit
card, check, or other device.
(x) Person means a natural person, corporation, government or
governmental subdivision or agency, trust, estate, partnership,
cooperative, or association.
(y) Pertinent element of creditworthiness, in relation to a
judgmental system of evaluating applicants, means any information about
applicants that a creditor obtains and considers and that has a
demonstrable relationship to a determination of creditworthiness.
(z) Prohibited basis means race, color, religion, national origin,
sex, marital status, or age (provided that the applicant has the
capacity to enter into a binding contract); the fact that all or part of
the applicant's income derives from any public assistance program; or
the fact that the applicant has in good faith exercised any right under
the Consumer Credit Protection Act or any state law upon which an
exemption has been granted by the Board.
(aa) State means any state, the District of Columbia, the
Commonwealth of Puerto Rico, or any territory or possession of the
United States.
Sec. 202.3 Limited exceptions for certain classes of transactions.
(a) Public utilities credit--(1) Definition. Public utilities credit
refers to extensions of credit that involve public utility services
provided through pipe, wire, or other connected facilities, or radio or
similar transmission (including extensions of such facilities), if the
charges for service, delayed payment, and any discount for prompt
payment are filed with or regulated by a government unit.
(2) Exceptions. The following provisions of this regulation do not
apply to public utilities credit:
(i) Section 202.5(d)(1) concerning information about marital status;
and
(ii) Section 202.12(b) relating to record retention.
(b) Securities credit--(1) Definition. Securities credit refers to
extensions of credit subject to regulation under section 7 of the
Securities Exchange Act of 1934 or extensions of credit by a broker or
dealer subject to regulation as a broker or dealer under the Securities
Exchange Act of 1934.
[[Page 19]]
(2) Exceptions. The following provisions of this regulation do not
apply to securities credit:
(i) Section 202.5(b) concerning information about the sex of an
applicant;
(ii) Section 202.5(c) concerning information about a spouse or
former spouse;
(iii) Section 202.5(d)(1) concerning information about marital
status;
(iv) Section 202.7(b) relating to designation of name to the extent
necessary to comply with rules regarding an account in which a broker or
dealer has an interest, or rules regarding the aggregation of accounts
of spouses to determine controlling interests, beneficial interests,
beneficial ownership, or purchase limitations and restrictions;
(v) Section 202.7(c) relating to action concerning open-end
accounts, to the extent the action taken is on the basis of a change of
name or marital status;
(vi) Section 202.7(d) relating to the signature of a spouse or other
person;
(vii) Section 202.10 relating to furnishing of credit information;
and
(viii) Section 202.12(b) relating to record retention.
(c) Incidental credit--(1) Definition. Incidental credit refers to
extensions of consumer credit other than the types described in
paragraphs (a) and (b) of this section:
(i) That are not made pursuant to the terms of a credit card
account;
(ii) That are not subject to a finance charge (as defined in
Regulation Z, 12 CFR 226.4); and
(iii) That are not payable by agreement in more than four
installments.
(2) Exceptions. The following provisions of this regulation do not
apply to incidental credit:
(i) Section 202.5(b) concerning information about the sex of an
applicant, but only to the extent necessary for medical records or
similar purposes;
(ii) Section 202.5(c) concerning information about a spouse or
former spouse;
(iii) Section 202.5(d)(1) concerning information about marital
status;
(iv) Section 202.5(d)(2) concerning information about income derived
from alimony, child support, or separate maintenance payments;
(v) Section 202.7(d) relating to the signature of a spouse or other
person;
(vi) Section 202.9 relating to notifications;
(vii) Section 202.10 relating to furnishing of credit information;
and
(viii) Section 202.12(b) relating to record retention.
(d) Government credit--(1) Definition. Government credit refers to
extensions of credit made to governments or governmental subdivisions,
agencies, or instrumentalities.
(2) Applicability of regulation. Except for Sec. 202.4(a), the
general rule against discrimination on a prohibited basis, the
requirements of this regulation do not apply to government credit.
Sec. 202.4 General rules.
(a) Discrimination. A creditor shall not discriminate against an
applicant on a prohibited basis regarding any aspect of a credit
transaction.
(b) Discouragement. A creditor shall not make any oral or written
statement, in advertising or otherwise, to applicants or prospective
applicants that would discourage on a prohibited basis a reasonable
person from making or pursuing an application.
(c) Written applications. A creditor shall take written applications
for the dwelling-related types of credit covered by Sec. 202.13(a).
(d) Form of disclosures--(1) General rule. A creditor that provides
in writing any disclosures or information required by this regulation
must provide the disclosures in a clear and conspicuous manner and,
except for the disclosures required by Sec. Sec. 202.5 and 202.13, in a
form the applicant may retain.
(2) Disclosures in electronic form. The disclosures required by this
part that are required to be given in writing may be provided to the
applicant 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.).
Where the disclosures under Sec. Sec. 202.5(b)(1), 202.5(b)(2),
202.5(d)(1), 202.5(d)(2), 202.13, and 202.14(a)(2)(i) accompany an
application accessed by the applicant in electronic
[[Page 20]]
form, these disclosures may be provided to the applicant in electronic
form on or with the application form, without regard to the consumer
consent or other provisions of the E-Sign Act.
(e) Foreign-language disclosures. Disclosures may be made in
languages other than English, provided they are available in English
upon request.
[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 72 FR 63451, Nov. 9,
2007]
Sec. 202.5 Rules concerning requests for information.
(a) General rules--(1) Requests for information. Except as provided
in paragraphs (b) through (d) of this section, a creditor may request
any information in connection with a credit transaction. \1\
---------------------------------------------------------------------------
\1\ This paragraph does not limit or abrogate any Federal or State
law regarding privacy, privileged information, credit reporting
limitations, or similar restrictions on obtainable information.
---------------------------------------------------------------------------
(2) Required collection of information. Notwithstanding paragraphs
(b) through (d) of this section, a creditor shall request information
for monitoring purposes as required by Sec. 202.13 for credit secured
by the applicant's dwelling. In addition, a creditor may obtain
information required by a regulation, order, or agreement issued by, or
entered into with, a court or an enforcement agency (including the
Attorney General of the United States or a similar state official) to
monitor or enforce compliance with the Act, this regulation, or other
federal or state statutes or regulations.
(3) Special-purpose credit. A creditor may obtain information that
is otherwise restricted to determine eligibility for a special purpose
credit program, as provided in Sec. 202.8(b), (c), and (d).
(b) Limitation on information about race, color, religion, national
origin, or sex. A creditor shall not inquire about the race, color,
religion, national origin, or sex of an applicant or any other person in
connection with a credit transaction, except as provided in paragraphs
(b)(1) and (b)(2) of this section.
(1) Self-test. A creditor may inquire about the race, color,
religion, national origin, or sex of an applicant or any other person in
connection with a credit transaction for the purpose of conducting a
self-test that meets the requirements of Sec. 202.15. A creditor that
makes such an inquiry shall disclose orally or in writing, at the time
the information is requested, that:
(i) The applicant will not be required to provide the information;
(ii) The creditor is requesting the information to monitor its
compliance with the federal Equal Credit Opportunity Act;
(iii) Federal law prohibits the creditor from discriminating on the
basis of this information, or on the basis of an applicant's decision
not to furnish the information; and
(iv) If applicable, certain information will be collected based on
visual observation or surname if not provided by the applicant or other
person.
(2) Sex. An applicant may be requested to designate a title on an
application form (such as Ms., Miss, Mr., or Mrs.) if the form discloses
that the designation of a title is optional. An application form shall
otherwise use only terms that are neutral as to sex.
(c) Information about a spouse or former spouse--(1) General rule.
Except as permitted in this paragraph, a creditor may not request any
information concerning the spouse or former spouse of an applicant.
(2) Permissible inquiries. A creditor may request any information
concerning an applicant's spouse (or former spouse under paragraph
(c)(2)(v) of this section) that may be requested about the applicant if:
(i) The spouse will be permitted to use the account;
(ii) The spouse will be contractually liable on the account;
(iii) The applicant is relying on the spouse's income as a basis for
repayment of the credit requested;
(iv) The applicant resides in a community property state or is
relying on property located in such a state as a basis for repayment of
the credit requested; or
(v) The applicant is relying on alimony, child support, or separate
maintenance payments from a spouse or former spouse as a basis for
repayment of the credit requested.
[[Page 21]]
(3) Other accounts of the applicant. A creditor may request that an
applicant list any account on which the applicant is contractually
liable and to provide the name and address of the person in whose name
the account is held. A creditor may also ask an applicant to list the
names in which the applicant has previously received credit.
(d) Other limitations on information requests--(1) Marital status.
If an applicant applies for individual unsecured credit, a creditor
shall not inquire about the applicant's marital status unless the
applicant resides in a community property state or is relying on
property located in such a state as a basis for repayment of the credit
requested. If an application is for other than individual unsecured
credit, a creditor may inquire about the applicant's marital status, but
shall use only the terms married, unmarried, and separated. A creditor
may explain that the category unmarried includes single, divorced, and
widowed persons.
(2) Disclosure about income from alimony, child support, or separate
maintenance. A creditor shall not inquire whether income stated in an
application is derived from alimony, child support, or separate
maintenance payments unless the creditor discloses to the applicant that
such income need not be revealed if the applicant does not want the
creditor to consider it in determining the applicant's creditworthiness.
(3) Childbearing, childrearing. A creditor shall not inquire about
birth control practices, intentions concerning the bearing or rearing of
children, or capability to bear children. A creditor may inquire about
the number and ages of an applicant's dependents or about dependent-
related financial obligations or expenditures, provided such information
is requested without regard to sex, marital status, or any other
prohibited basis.
(e) Permanent residency and immigration status. A creditor may
inquire about the permanent residency and immigration status of an
applicant or any other person in connection with a credit transaction.
Sec. 202.6 Rules concerning evaluation of applications.
(a) General rule concerning use of information. Except as otherwise
provided in the Act and this regulation, a creditor may consider any
information obtained, so long as the information is not used to
discriminate against an applicant on a prohibited basis. \2\
---------------------------------------------------------------------------
\2\ The legislative history of the Act indicates that the Congress
intended an ``effects test'' concept, as outlined in the employment
field by the Supreme Court in the cases of Griggs v. Duke Power Co., 401
U.S. 424 (1971), and Albemarle Paper Co. v. Moody, 422 U.S. 405 (1975),
to be applicable to a creditor's determination of creditworthiness.
---------------------------------------------------------------------------
(b) Specific rules concerning use of information--(1) Except as
provided in the Act and this regulation, a creditor shall not take a
prohibited basis into account in any system of evaluating the
creditworthiness of applicants.
(2) Age, receipt of public assistance. (i) Except as permitted in
this paragraph, a creditor shall not take into account an applicant's
age (provided that the applicant has the capacity to enter into a
binding contract) or whether an applicant's income derives from any
public assistance program.
(ii) In an empirically derived, demonstrably and statistically
sound, credit scoring system, a creditor may use an applicant's age as a
predictive variable, provided that the age of an elderly applicant is
not assigned a negative factor or value.
(iii) In a judgmental system of evaluating creditworthiness, a
creditor may consider an applicant's age or whether an applicant's
income derives from any public assistance program only for the purpose
of determining a pertinent element of creditworthiness.
(iv) In any system of evaluating creditworthiness, a creditor may
consider the age of an elderly applicant when such age is used to favor
the elderly applicant in extending credit.
(3) Childbearing, childrearing. In evaluating creditworthiness, a
creditor shall not make assumptions or use aggregate statistics relating
to the likelihood that any category of persons will bear or rear
children or will, for that reason, receive diminished or interrupted
income in the future.
[[Page 22]]
(4) Telephone listing. A creditor shall not take into account
whether there is a telephone listing in the name of an applicant for
consumer credit but may take into account whether there is a telephone
in the applicant's residence.
(5) Income. A creditor shall not discount or exclude from
consideration the income of an applicant or the spouse of an applicant
because of a prohibited basis or because the income is derived from
part-time employment or is an annuity, pension, or other retirement
benefit; a creditor may consider the amount and probable continuance of
any income in evaluating an applicant's creditworthiness. When an
applicant relies on alimony, child support, or separate maintenance
payments in applying for credit, the creditor shall consider such
payments as income to the extent that they are likely to be consistently
made.
(6) Credit history. To the extent that a creditor considers credit
history in evaluating the creditworthiness of similarly qualified
applicants for a similar type and amount of credit, in evaluating an
applicant's creditworthiness a creditor shall consider:
(i) The credit history, when available, of accounts designated as
accounts that the applicant and the applicant's spouse are permitted to
use or for which both are contractually liable;
(ii) On the applicant's request, any information the applicant may
present that tends to indicate the credit history being considered by
the creditor does not accurately reflect the applicant's
creditworthiness; and
(iii) On the applicant's request, the credit history, when
available, of any account reported in the name of the applicant's spouse
or former spouse that the applicant can demonstrate accurately reflects
the applicant's creditworthiness.
(7) Immigration status. A creditor may consider the applicant's
immigration status or status as a permanent resident of the United
States, and any additional information that may be necessary to
ascertain the creditor's rights and remedies regarding repayment.
(8) Marital status. Except as otherwise permitted or required by
law, a creditor shall evaluate married and unmarried applicants by the
same standards; and in evaluating joint applicants, a creditor shall not
treat applicants differently based on the existence, absence, or
likelihood of a marital relationship between the parties.
(9) Race, color, religion, national origin, sex. Except as otherwise
permitted or required by law, a creditor shall not consider race, color,
religion, national origin, or sex (or an applicant's or other person's
decision not to provide the information) in any aspect of a credit
transaction.
(c) State property laws. A creditor's consideration or application
of state property laws directly or indirectly affecting creditworthiness
does not constitute unlawful discrimination for the purposes of the Act
or this regulation.
Sec. 202.7 Rules concerning extensions of credit.
(a) Individual accounts. A creditor shall not refuse to grant an
individual account to a creditworthy applicant on the basis of sex,
marital status, or any other prohibited basis.
(b) Designation of name. A creditor shall not refuse to allow an
applicant to open or maintain an account in a birth-given first name and
a surname that is the applicant's birth-given surname, the spouse's
surname, or a combined surname.
(c) Action concerning existing open-end accounts--(1) Limitations.
In the absence of evidence of the applicant's inability or unwillingness
to repay, a creditor shall not take any of the following actions
regarding an applicant who is contractually liable on an existing open-
end account on the basis of the applicant's reaching a certain age or
retiring or on the basis of a change in the applicant's name or marital
status:
(i) Require a reapplication, except as provided in paragraph (c)(2)
of this section;
(ii) Change the terms of the account; or
(iii) Terminate the account.
(2) Requiring reapplication. A creditor may require a reapplication
for an open-end account on the basis of a change in the marital status
of an applicant who is contractually liable if the credit granted was
based in whole or in part on income of the applicant's
[[Page 23]]
spouse and if information available to the creditor indicates that the
applicant's income may not support the amount of credit currently
available.
(d) Signature of spouse or other person--(1) Rule for qualified
applicant. Except as provided in this paragraph, a creditor shall not
require the signature of an applicant's spouse or other person, other
than a joint applicant, on any credit instrument if the applicant
qualifies under the creditor's standards of creditworthiness for the
amount and terms of the credit requested. A creditor shall not deem the
submission of a joint financial statement or other evidence of jointly
held assets as an application for joint credit.
(2) Unsecured credit. If an applicant requests unsecured credit and
relies in part upon property that the applicant owns jointly with
another person to satisfy the creditor's standards of creditworthiness,
the creditor may require the signature of the other person only on the
instrument(s) necessary, or reasonably believed by the creditor to be
necessary, under the law of the state in which the property is located,
to enable the creditor to reach the property being relied upon in the
event of the death or default of the applicant.
(3) Unsecured credit--community property states. If a married
applicant requests unsecured credit and resides in a community property
state, or if the applicant is relying on property located in such a
state, a creditor may require the signature of the spouse on any
instrument necessary, or reasonably believed by the creditor to be
necessary, under applicable state law to make the community property
available to satisfy the debt in the event of default if:
(i) Applicable state law denies the applicant power to manage or
control sufficient community property to qualify for the credit
requested under the creditor's standards of creditworthiness; and
(ii) The applicant does not have sufficient separate property to
qualify for the credit requested without regard to community property.
(4) Secured credit. If an applicant requests secured credit, a
creditor may require the signature of the applicant's spouse or other
person on any instrument necessary, or reasonably believed by the
creditor to be necessary, under applicable state law to make the
property being offered as security available to satisfy the debt in the
event of default, for example, an instrument to create a valid lien,
pass clear title, waive inchoate rights, or assign earnings.
(5) Additional parties. If, under a creditor's standards of
creditworthiness, the personal liability of an additional party is
necessary to support the credit requested, a creditor may request a
cosigner, guarantor, endorser, or similar party. The applicant's spouse
may serve as an additional party, but the creditor shall not require
that the spouse be the additional party.
(6) Rights of additional parties. A creditor shall not impose
requirements upon an additional party that the creditor is prohibited
from imposing upon an applicant under this section.
(e) Insurance. A creditor shall not refuse to extend credit and
shall not terminate an account because credit life, health, accident,
disability, or other credit-related insurance is not available on the
basis of the applicant's age.
Sec. 202.8 Special purpose credit programs.
(a) Standards for programs. Subject to the provisions of paragraph
(b) of this section, the Act and this regulation permit a creditor to
extend special purpose credit to applicants who meet eligibility
requirements under the following types of credit programs:
(1) Any credit assistance program expressly authorized by federal or
state law for the benefit of an economically disadvantaged class of
persons;
(2) Any credit assistance program offered by a not-for-profit
organization, as defined under section 501(c) of the Internal Revenue
Code of 1954, as amended, for the benefit of its members or for the
benefit of an economically disadvantaged class of persons; or
(3) Any special purpose credit program offered by a for-profit
organization, or in which such an organization participates to meet
special social needs, if:
(i) The program is established and administered pursuant to a
written plan
[[Page 24]]
that identifies the class of persons that the program is designed to
benefit and sets forth the procedures and standards for extending credit
pursuant to the program; and
(ii) The program is established and administered to extend credit to
a class of persons who, under the organization's customary standards of
creditworthiness, probably would not receive such credit or would
receive it on less favorable terms than are ordinarily available to
other applicants applying to the organization for a similar type and
amount of credit.
(b) Rules in other sections--(1) General applicability. All the
provisions of this regulation apply to each of the special purpose
credit programs described in paragraph (a) of this section except as
modified by this section.
(2) Common characteristics. A program described in paragraph (a)(2)
or (a)(3) of this section qualifies as a special purpose credit program
only if it was established and is administered so as not to discriminate
against an applicant on any prohibited basis; however, all program
participants may be required to share one or more common characteristics
(for example, race, national origin, or sex) so long as the program was
not established and is not administered with the purpose of evading the
requirements of the Act or this regulation.
(c) Special rule concerning requests and use of information. If
participants in a special purpose credit program described in paragraph
(a) of this section are required to possess one or more common
characteristics (for example, race, national origin, or sex) and if the
program otherwise satisfies the requirements of paragraph (a) of this
section, a creditor may request and consider information regarding the
common characteristic(s) in determining the applicant's eligibility for
the program.
(d) Special rule in the case of financial need. If financial need is
one of the criteria under a special purpose credit program described in
paragraph (a) of this section, the creditor may request and consider, in
determining an applicant's eligibility for the program, information
regarding the applicant's marital status; alimony, child support, and
separate maintenance income; and the spouse's financial resources. In
addition, a creditor may obtain the signature of an applicant's spouse
or other person on an application or credit instrument relating to a
special purpose credit program if the signature is required by federal
or state law.
Sec. 202.9 Notifications.
(a) Notification of action taken, ECOA notice, and statement of
specific reasons--(1) When notification is required. A creditor shall
notify an applicant of action taken within:
(i) 30 days after receiving a completed application concerning the
creditor's approval of, counteroffer to, or adverse action on the
application;
(ii) 30 days after taking adverse action on an incomplete
application, unless notice is provided in accordance with paragraph (c)
of this section;
(iii) 30 days after taking adverse action on an existing account; or
(iv) 90 days after notifying the applicant of a counteroffer if the
applicant does not expressly accept or use the credit offered.
(2) Content of notification when adverse action is taken. A
notification given to an applicant when adverse action is taken shall be
in writing and shall contain a statement of the action taken; the name
and address of the creditor; a statement of the provisions of Sec.
701(a) of the Act; the name and address of the federal agency that
administers compliance with respect to the creditor; and either:
(i) A statement of specific reasons for the action taken; or
(ii) A disclosure of the applicant's right to a statement of
specific reasons within 30 days, if the statement is requested within 60
days of the creditor's notification. The disclosure shall include the
name, address, and telephone number of the person or office from which
the statement of reasons can be obtained. If the creditor chooses to
provide the reasons orally, the creditor shall also disclose the
applicant's right to have them confirmed in writing within 30 days of
receiving the applicant's written request for confirmation.
(3) Notification to business credit applicants. For business credit,
a creditor
[[Page 25]]
shall comply with the notification requirements of this section in the
following manner:
(i) With regard to a business that had gross revenues of $1 million
or less in its preceding fiscal year (other than an extension of trade
credit, credit incident to a factoring agreement, or other similar types
of business credit), a creditor shall comply with paragraphs (a)(1) and
(2) of this section, except that:
(A) The statement of the action taken may be given orally or in
writing, when adverse action is taken;
(B) Disclosure of an applicant's right to a statement of reasons may
be given at the time of application, instead of when adverse action is
taken, provided the disclosure contains the information required by
paragraph (a)(2)(ii) of this section and the ECOA notice specified in
paragraph (b)(1) of this section;
(C) For an application made entirely by telephone, a creditor
satisfies the requirements of paragraph (a)(3)(i) of this section by an
oral statement of the action taken and of the applicant's right to a
statement of reasons for adverse action.
(ii) With regard to a business that had gross revenues in excess of
$1 million in its preceding fiscal year or an extension of trade credit,
credit incident to a factoring agreement, or other similar types of
business credit, a creditor shall:
(A) Notify the applicant, within a reasonable time, orally or in
writing, of the action taken; and
(B) Provide a written statement of the reasons for adverse action
and the ECOA notice specified in paragraph (b)(1) of this section if the
applicant makes a written request for the reasons within 60 days of the
creditor's notification.
(b) Form of ECOA notice and statement of specific reasons--(1) ECOA
notice. To satisfy the disclosure requirements of paragraph (a)(2) of
this section regarding section 701(a) of the Act, the creditor shall
provide a notice that is substantially similar to the following: The
federal Equal Credit Opportunity Act prohibits creditors from
discriminating against credit applicants on the basis of race, color,
religion, national origin, sex, marital status, age (provided the
applicant has the capacity to enter into a binding contract); because
all or part of the applicant's income derives from any public assistance
program; or because the applicant has in good faith exercised any right
under the Consumer Credit Protection Act. The federal agency that
administers compliance with this law concerning this creditor is [name
and address as specified by the appropriate agency listed in appendix A
of this regulation].
(2) Statement of specific reasons. The statement of reasons for
adverse action required by paragraph (a)(2)(i) of this section must be
specific and indicate the principal reason(s) for the adverse action.
Statements that the adverse action was based on the creditor's internal
standards or policies or that the applicant, joint applicant, or similar
party failed to achieve a qualifying score on the creditor's credit
scoring system are insufficient.
(c) Incomplete applications--(1) Notice alternatives. Within 30 days
after receiving an application that is incomplete regarding matters that
an applicant can complete, the creditor shall notify the applicant
either:
(i) Of action taken, in accordance with paragraph (a) of this
section; or
(ii) Of the incompleteness, in accordance with paragraph (c)(2) of
this section.
(2) Notice of incompleteness. If additional information is needed
from an applicant, the creditor shall send a written notice to the
applicant specifying the information needed, designating a reasonable
period of time for the applicant to provide the information, and
informing the applicant that failure to provide the information
requested will result in no further consideration being given to the
application. The creditor shall have no further obligation under this
section if the applicant fails to respond within the designated time
period. If the applicant supplies the requested information within the
designated time period, the creditor shall take action on the
application and notify the applicant in accordance with paragraph (a) of
this section.
[[Page 26]]
(3) Oral request for information. At its option, a creditor may
inform the applicant orally of the need for additional information. If
the application remains incomplete the creditor shall send a notice in
accordance with paragraph (c)(1) of this section.
(d) Oral notifications by small-volume creditors. In the case of a
creditor that did not receive more than 150 applications during the
preceding calendar year, the requirements of this section (including
statements of specific reasons) are satisfied by oral notifications.
(e) Withdrawal of approved application. When an applicant submits an
application and the parties contemplate that the applicant will inquire
about its status, if the creditor approves the application and the
applicant has not inquired within 30 days after applying, the creditor
may treat the application as withdrawn and need not comply with
paragraph (a)(1) of this section.
(f) Multiple applicants. When an application involves more than one
applicant, notification need only be given to one of them but must be
given to the primary applicant where one is readily apparent.
(g) Applications submitted through a third party. When an
application is made on behalf of an applicant to more than one creditor
and the applicant expressly accepts or uses credit offered by one of the
creditors, notification of action taken by any of the other creditors is
not required. If no credit is offered or if the applicant does not
expressly accept or use the credit offered, each creditor taking adverse
action must comply with this section, directly or through a third party.
A notice given by a third party shall disclose the identity of each
creditor on whose behalf the notice is given.
[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 72 FR 63451, Nov. 9,
2007]
Sec. 202.10 Furnishing of credit information.
(a) Designation of accounts. A creditor that furnishes credit
information shall designate:
(1) Any new account to reflect the participation of both spouses if
the applicant's spouse is permitted to use or is contractually liable on
the account (other than as a guarantor, surety, endorser, or similar
party); and
(2) Any existing account to reflect such participation, within 90
days after receiving a written request to do so from one of the spouses.
(b) Routine reports to consumer reporting agency. If a creditor
furnishes credit information to a consumer reporting agency concerning
an account designated to reflect the participation of both spouses, the
creditor shall furnish the information in a manner that will enable the
agency to provide access to the information in the name of each spouse.
(c) Reporting in response to inquiry. If a creditor furnishes credit
information in response to an inquiry, concerning an account designated
to reflect the participation of both spouses, the creditor shall furnish
the information in the name of the spouse about whom the information is
requested.
Sec. 202.11 Relation to state law.
(a) Inconsistent state laws. Except as otherwise provided in this
section, this regulation alters, affects, or preempts only those state
laws that are inconsistent with the Act and this regulation and then
only to the extent of the inconsistency. A state law is not inconsistent
if it is more protective of an applicant.
(b) Preempted provisions of state law. (1) A state law is deemed to
be inconsistent with the requirements of the Act and this regulation and
less protective of an applicant within the meaning of section 705(f) of
the Act to the extent that the law:
(i) Requires or permits a practice or act prohibited by the Act or
this regulation;
(ii) Prohibits the individual extension of consumer credit to both
parties to a marriage if each spouse individually and voluntarily
applies for such credit;
(iii) Prohibits inquiries or collection of data required to comply
with the Act or this regulation;
(iv) Prohibits asking about or considering age in an empirically
derived, demonstrably and statistically sound, credit scoring system to
determine a pertinent element of creditworthiness, or to favor an
elderly applicant; or
[[Page 27]]
(v) Prohibits inquiries necessary to establish or administer a
special purpose credit program as defined by Sec. 202.8.
(2) A creditor, state, or other interested party may request that
the Board determine whether a state law is inconsistent with the
requirements of the Act and this regulation.
(c) Laws on finance charges, loan ceilings. If married applicants
voluntarily apply for and obtain individual accounts with the same
creditor, the accounts shall not be aggregated or otherwise combined for
purposes of determining permissible finance charges or loan ceilings
under any federal or state law. Permissible loan ceiling laws shall be
construed to permit each spouse to become individually liable up to the
amount of the loan ceilings, less the amount for which the applicant is
jointly liable.
(d) State and federal laws not affected. This section does not alter
or annul any provision of state property laws, laws relating to the
disposition of decedents' estates, or federal or state banking
regulations directed only toward insuring the solvency of financial
institutions.
(e) Exemption for state-regulated transactions--(1) Applications. A
state may apply to the Board for an exemption from the requirements of
the Act and this regulation for any class of credit transactions within
the state. The Board will grant such an exemption if the Board
determines that:
(i) The class of credit transactions is subject to state law
requirements substantially similar to those of the Act and this
regulation or that applicants are afforded greater protection under
state law; and
(ii) There is adequate provision for state enforcement.
(2) Liability and enforcement. (i) No exemption will extend to the
civil liability provisions of section 706 of the Act or the
administrative enforcement provisions of section 704 of the Act.
(ii) After an exemption has been granted, the requirements of the
applicable state law (except for additional requirements not imposed by
federal law) will constitute the requirements of the Act and this
regulation.
Sec. 202.12 Record retention.
(a) Retention of prohibited information. A creditor may retain in
its files information that is prohibited by the Act or this regulation
for use in evaluating applications, without violating the Act or this
regulation, if the information was obtained:
(1) From any source prior to March 23, 1977;
(2) From consumer reporting agencies, an applicant, or others
without the specific request of the creditor; or
(3) As required to monitor compliance with the Act and this
regulation or other federal or state statutes or regulations.
(b) Preservation of records--(1) Applications. For 25 months (12
months for business credit, except as provided in paragraph (b)(5) of
this section) after the date that a creditor notifies an applicant of
action taken on an application or of incompleteness, the creditor shall
retain in original form or a copy thereof:
(i) Any application that it receives, any information required to be
obtained concerning characteristics of the applicant to monitor
compliance with the Act and this regulation or other similar law, and
any other written or recorded information used in evaluating the
application and not returned to the applicant at the applicant's
request;
(ii) A copy of the following documents if furnished to the applicant
in written form (or, if furnished orally, any notation or memorandum
made by the creditor):
(A) The notification of action taken; and
(B) The statement of specific reasons for adverse action; and
(iii) Any written statement submitted by the applicant alleging a
violation of the Act or this regulation.
(2) Existing accounts. For 25 months (12 months for business credit,
except as provided in paragraph (b)(5) of this section) after the date
that a creditor notifies an applicant of adverse action regarding an
existing account, the creditor shall retain as to that account, in
original form or a copy thereof:
(i) Any written or recorded information concerning the adverse
action; and
[[Page 28]]
(ii) Any written statement submitted by the applicant alleging a
violation of the Act or this regulation.
(3) Other applications. For 25 months (12 months for business
credit, except as provided in paragraph (b)(5) of this section) after
the date that a creditor receives an application for which the creditor
is not required to comply with the notification requirements of Sec.
202.9, the creditor shall retain all written or recorded information in
its possession concerning the applicant, including any notation of
action taken.
(4) Enforcement proceedings and investigations. A creditor shall
retain the information beyond 25 months (12 months for business credit,
except as provided in paragraph (b)(5) of this section) if the creditor
has actual notice that it is under investigation or is subject to an
enforcement proceeding for an alleged violation of the Act or this part,
by the Attorney General of the United States or by an enforcement agency
charged with monitoring that creditor's compliance with the Act and this
regulation, or if it has been served with notice of an action filed
pursuant to section 706 of the Act and Sec. 202.16 of this part. The
creditor shall retain the information until final disposition of the
matter, unless an earlier time is allowed by order of the agency or
court.
(5) Special rule for certain business credit applications. With
regard to a business that had gross revenues in excess of $1 million in
its preceding fiscal year, or an extension of trade credit, credit
incident to a factoring agreement, or other similar types of business
credit, the creditor shall retain records for at least 60 days after
notifying the applicant of the action taken. If within that time period
the applicant requests in writing the reasons for adverse action or that
records be retained, the creditor shall retain records for 12 months.
(6) Self-tests. For 25 months after a self-test (as defined in Sec.
202.15) has been completed, the creditor shall retain all written or
recorded information about the self-test. A creditor shall retain
information beyond 25 months if it has actual notice that it is under
investigation or is subject to an enforcement proceeding for an alleged
violation, or if it has been served with notice of a civil action. In
such cases, the creditor shall retain the information until final
disposition of the matter, unless an earlier time is allowed by the
appropriate agency or court order.
(7) Prescreened solicitations. For 25 months after the date on which
an offer of credit is made to potential customers (12 months for
business credit, except as provided in paragraph (b)(5) of this
section), the creditor shall retain in original form or a copy thereof:
(i) The text of any prescreened solicitation;
(ii) The list of criteria the creditor used to select potential
recipients of the solicitation; and
(iii) Any correspondence related to complaints (formal or informal)
about the solicitation.
[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 76 FR 41599, July 15,
2011]
Sec. 202.13 Information for monitoring purposes.
(a) Information to be requested. (1) A creditor that receives an
application for credit primarily for the purchase or refinancing of a
dwelling occupied or to be occupied by the applicant as a principal
residence, where the extension of credit will be secured by the
dwelling, shall request as part of the application the following
information regarding the applicant(s):
(i) Ethnicity, using the categories Hispanic or Latino, and not
Hispanic or Latino; and race, using the categories American Indian or
Alaska Native, Asian, Black or African American, Native Hawaiian or
Other Pacific Islander, and White;
(ii) Sex;
(iii) Marital status, using the categories married, unmarried, and
separated; and
(iv) Age.
(2) Dwelling means a residential structure that contains one to four
units, whether or not that structure is attached to real property. The
term includes, but is not limited to, an individual condominium or
cooperative unit and a mobile or other manufactured home.
(b) Obtaining information. Questions regarding ethnicity, race, sex,
marital status, and age may be listed, at the creditor's option, on the
application
[[Page 29]]
form or on a separate form that refers to the application. The
applicant(s) shall be asked but not required to supply the requested
information. If the applicant(s) chooses not to provide the information
or any part of it, that fact shall be noted on the form. The creditor
shall then also note on the form, to the extent possible, the ethnicity,
race, and sex of the applicant(s) on the basis of visual observation or
surname.
(c) Disclosure to applicant(s). The creditor shall inform the
applicant(s) that the information regarding ethnicity, race, sex,
marital status, and age is being requested by the federal government for
the purpose of monitoring compliance with federal statutes that prohibit
creditors from discriminating against applicants on those bases. The
creditor shall also inform the applicant(s) that if the applicant(s)
chooses not to provide the information, the creditor is required to note
the ethnicity, race and sex on the basis of visual observation or
surname.
(d) Substitute monitoring program. A monitoring program required by
an agency charged with administrative enforcement under section 704 of
the Act may be substituted for the requirements contained in paragraphs
(a), (b), and (c) of this section.
Sec. 202.14 Rules on providing appraisal reports.
(a) Providing appraisals. A creditor shall provide a copy of an
appraisal report used in connection with an application for credit that
is to be secured by a lien on a dwelling. A creditor shall comply with
either paragraph (a)(1) or (a)(2) of this section.
(1) Routine delivery. A creditor may routinely provide a copy of an
appraisal report to an applicant (whether credit is granted or denied or
the application is withdrawn).
(2) Upon request. A creditor that does not routinely provide
appraisal reports shall provide a copy upon an applicant's written
request.
(i) Notice. A creditor that provides appraisal reports only upon
request shall notify an applicant in writing of the right to receive a
copy of an appraisal report. The notice may be given at any time during
the application process but no later than when the creditor provides
notice of action taken under Sec. 202.9 of this regulation. The notice
shall specify that the applicant's request must be in writing, give the
creditor's mailing address, and state the time for making the request as
provided in paragraph (a)(2)(ii) of this section.
(ii) Delivery. A creditor shall mail or deliver a copy of the
appraisal report promptly (generally within 30 days) after the creditor
receives an applicant's request, receives the report, or receives
reimbursement from the applicant for the report, whichever is last to
occur. A creditor need not provide a copy when the applicant's request
is received more than 90 days after the creditor has provided notice of
action taken on the application under Sec. 202.9 of this regulation or
90 days after the application is withdrawn.
(b) Credit unions. A creditor that is subject to the regulations of
the National Credit Union Administration on making copies of appraisal
reports available is not subject to this section.
(c) Definitions. For purposes of paragraph (a) of this section, the
term dwelling means a residential structure that contains one to four
units whether or not that structure is attached to real property. The
term includes, but is not limited to, an individual condominium or
cooperative unit, and a mobile or other manufactured home. The term
appraisal report means the document(s) relied upon by a creditor in
evaluating the value of the dwelling.
Sec. 202.15 Incentives for self-testing and self-correction.
(a) General rules--(1) Voluntary self-testing and correction. The
report or results of a self-test that a creditor voluntarily conducts
(or authorizes) are privileged as provided in this section. Data
collection required by law or by any governmental authority is not a
voluntary self-test.
(2) Corrective action required. The privilege in this section
applies only if the creditor has taken or is taking appropriate
corrective action.
(3) Other privileges. The privilege created by this section does not
preclude the assertion of any other privilege that may also apply.
[[Page 30]]
(b) Self-test defined--(1) Definition. A self-test is any program,
practice, or study that:
(i) Is designed and used specifically to determine the extent or
effectiveness of a creditor's compliance with the Act or this
regulation; and
(ii) Creates data or factual information that is not available and
cannot be derived from loan or application files or other records
related to credit transactions.
(2) Types of information privileged. The privilege under this
section applies to the report or results of the self-test, data or
factual information created by the self-test, and any analysis,
opinions, and conclusions pertaining to the self-test report or results.
The privilege covers workpapers or draft documents as well as final
documents.
(3) Types of information not privileged. The privilege under this
section does not apply to:
(i) Information about whether a creditor conducted a self-test, the
methodology used or the scope of the self-test, the time period covered
by the self-test, or the dates it was conducted; or
(ii) Loan and application files or other business records related to
credit transactions, and information derived from such files and
records, even if the information has been aggregated, summarized, or
reorganized to facilitate analysis.
(c) Appropriate corrective action--(1) General requirement. For the
privilege in this section to apply, appropriate corrective action is
required when the self-test shows that it is more likely than not that a
violation occurred, even though no violation has been formally
adjudicated.
(2) Determining the scope of appropriate corrective action. A
creditor must take corrective action that is reasonably likely to remedy
the cause and effect of a likely violation by:
(i) Identifying the policies or practices that are the likely cause
of the violation; and
(ii) Assessing the extent and scope of any violation.
(3) Types of relief. Appropriate corrective action may include both
prospective and remedial relief, except that to establish a privilege
under this section:
(i) A creditor is not required to provide remedial relief to a
tester used in a self-test;
(ii) A creditor is only required to provide remedial relief to an
applicant identified by the self-test as one whose rights were more
likely than not violated; and
(iii) A creditor is not required to provide remedial relief to a
particular applicant if the statute of limitations applicable to the
violation expired before the creditor obtained the results of the self-
test or the applicant is otherwise ineligible for such relief.
(4) No admission of violation. Taking corrective action is not an
admission that a violation occurred.
(d) Scope of privilege--(1) General rule. The report or results of a
privileged self-test may not be obtained or used:
(i) By a government agency in any examination or investigation
relating to compliance with the Act or this regulation; or
(ii) By a government agency or an applicant (including a prospective
applicant who alleges a violation of Sec. 202.4(b)) in any proceeding
or civil action in which a violation of the Act or this regulation is
alleged.
(2) Loss of privilege. The report or results of a self-test are not
privileged under paragraph (d)(1) of this section if the creditor or a
person with lawful access to the report or results:
(i) Voluntarily discloses any part of the report or results, or any
other information privileged under this section, to an applicant or
government agency or to the public;
(ii) Discloses any part of the report or results, or any other
information privileged under this section, as a defense to charges that
the creditor has violated the Act or regulation; or
(iii) Fails or is unable to produce written or recorded information
about the self-test that is required to be retained under Sec.
202.12(b)(6) when the information is needed to determine whether the
privilege applies. This paragraph does not limit any other penalty or
remedy that may be available for a violation of Sec. 202.12.
(3) Limited use of privileged information. Notwithstanding paragraph
(d)(1) of this section, the self-test report or
[[Page 31]]
results and any other information privileged under this section may be
obtained and used by an applicant or government agency solely to
determine a penalty or remedy after a violation of the Act or this
regulation has been adjudicated or admitted. Disclosures for this
limited purpose may be used only for the particular proceeding in which
the adjudication or admission was made. Information disclosed under this
paragraph (d)(3) remains privileged under paragraph (d)(1) of this
section.
Sec. 202.16 Enforcement, penalties and liabilities.
(a) Administrative enforcement. (1) As set forth more fully in
section 704 of the Act, administrative enforcement of the Act and this
regulation regarding certain creditors is assigned to the Comptroller of
the Currency, Board of Governors of the Federal Reserve System, Board of
Directors of the Federal Deposit Insurance Corporation, Office of Thrift
Supervision, National Credit Union Administration, Surface
Transportation Board, Secretary of Agriculture, Farm Credit
Administration, Securities and Exchange Commission, Small Business
Administration, and Secretary of Transportation.
(2) Except to the extent that administrative enforcement is
specifically assigned to other authorities, compliance with the
requirements imposed under the Act and this regulation is enforced by
the Federal Trade Commission.
(b) Penalties and liabilities. (1) Sections 702(g) and 706(a) and
(b) of the Act provide that any creditor that fails to comply with a
requirement imposed by the Act or this regulation is subject to civil
liability for actual and punitive damages in individual or class
actions. Pursuant to sections 702(g) and 704(b), (c), and (d) of the
Act, violations of the Act or this regulation also constitute violations
of other federal laws. Liability for punitive damages can apply only to
nongovernmental entities and is limited to $10,000 in individual actions
and the lesser of $500,000 or 1 percent of the creditor's net worth in
class actions. Section 706(c) provides for equitable and declaratory
relief and section 706(d) authorizes the awarding of costs and
reasonable attorney's fees to an aggrieved applicant in a successful
action.
(2) As provided in section 706(f), a civil action under the Act or
this regulation may be brought in the appropriate United States district
court without regard to the amount in controversy or in any other court
of competent jurisdiction within two years after the date of the
occurrence of the violation, or within one year after the commencement
of an administrative enforcement proceeding or of a civil action brought
by the Attorney General of the United States within two years after the
alleged violation.
(3) If an agency responsible for administrative enforcement is
unable to obtain compliance with the Act or this regulation, it may
refer the matter to the Attorney General of the United States. If the
Board, the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision, or the National Credit
Union Administration has reason to believe that one or more creditors
have engaged in a pattern or practice of discouraging or denying
applications in violation of the Act or this regulation, the agency
shall refer the matter to the Attorney General. If the agency has reason
to believe that one or more creditors violated section 701(a) of the
Act, the agency may refer a matter to the Attorney General.
(4) On referral, or whenever the Attorney General has reason to
believe that one or more creditors have engaged in a pattern or practice
in violation of the Act or this regulation, the Attorney General may
bring a civil action for such relief as may be appropriate, including
actual and punitive damages and injunctive relief.
(5) If the Board, the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, or the
National Credit Union Administration has reason to believe (as a result
of a consumer complaint, a consumer compliance examination, or some
other basis) that a violation of the Act or this regulation has occurred
which is also a violation of the Fair Housing Act, and the matter is not
referred to the Attorney General, the agency shall:
[[Page 32]]
(i) Notify the Secretary of Housing and Urban Development; and
(ii) Inform the applicant that the Secretary of Housing and Urban
Development has been notified and that remedies may be available under
the Fair Housing Act.
(c) Failure of compliance. A creditor's failure to comply with
Sec. Sec. 202.6(b)(6), 202.9, 202.10, 202.12 or 202.13 is not a
violation if it results from an inadvertent error. On discovering an
error under Sec. Sec. 202.9 and 202.10, the creditor shall correct it
as soon as possible. If a creditor inadvertently obtains the monitoring
information regarding the ethnicity, race, and sex of the applicant in a
dwelling-related transaction not covered by Sec. 202.13, the creditor
may retain information and act on the application without violating the
regulation.
[Reg. B, 68 FR 13161, Mar. 18, 2003. Redesignated at 72 FR 63451, Nov.
9, 2007]
Sec. 202.17 Data collection for credit applications by women-owned, minority-
owned, or small businesses.
No motor vehicle dealer covered by section 1029(a) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 12 U.S.C. 5519(a), shall
be required to comply with the requirements of section 704B of the Equal
Credit Opportunity Act, 15 U.S.C. 1691c-2, until the effective date of
final rules issued by the Board to implement section 704B of the Act, 15
U.S.C. 1691c-2. This paragraph shall not be construed to affect the
effective date of section 704B of the Act for any person other than a
motor vehicle dealer covered by section 1029(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection Act.
[Reg. B, 76 FR 59239, Sept. 26, 2011]
Sec. Appendix A to Part 202--Federal Enforcement Agencies
The following list indicates the federal agencies that enforce
Regulation B for particular classes of creditors. Any questions
concerning a particular creditor should be directed to its enforcement
agency. Terms that are not defined in the Federal Deposit Insurance Act
(12 U.S.C. 1813(s)) shall have the meaning given to them in the
International Banking Act of 1978 (12 U.S.C. 3101).
National banks, and federal branches and federal agencies of foreign
banks: Office of the Comptroller of the Currency, Customer Assistance
Group, 1301 McKinney Street, Suite 3450, Houston, TX 77010-9050
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 Consumer Help Center, P.O. Box
1200, Minneapolis, MN 55480.
Nonmember Insured Banks and Insured State Branches of Foreign Banks:
FDIC Consumer Response Center, 1100 Walnut Street, Box 11,
Kansas City, MO 64106.
Savings institutions 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, Consumer Response Unit, 1700 G Street, NW., Washington, DC
20552.
Federal Credit Unions: Regional office of the National Credit Union
Administration serving the area in which the federal credit union is
located.
Air carriers: Assistant General Counsel for Aviation Enforcement and
Proceedings, Department of Transportation, 400 Seventh Street, SW.,
Washington, DC 20590
Creditors Subject to Surface Transportation Board: Office of
Proceedings, Surface Transportation Board, Department of Transportation,
1925 K Street NW., Washington, DC 20423
Creditors Subject to Packers and Stockyards Act: Nearest Packers and
Stockyards Administration area supervisor.
Small Business Investment Companies: Associate Deputy Administrator for
Capital Access, United States Small Business Administration, 409 Third
Street, SW., 8th Floor, Washington, DC 20416.
Brokers and Dealers: Securities and Exchange Commission, Washington, DC
20549.
Federal Land Banks, Federal Land Bank Associations, Federal Intermediate
Credit Banks, and Production Credit Associations: Farm Credit
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
Retailers, Finance Companies, and All Other Creditors Not Listed Above:
FTC Regional Office for region in which the creditor operates or Federal
Trade Commission, Equal Credit Opportunity, Washington, DC 20580.
[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 71 FR 11296, Mar. 7,
2006; 71 FR 28563, May 17, 2006; 72 FR 55020, Sept. 28, 2007; 73 FR
33663, June 13, 2008; 73 FR 53685, Sept. 17, 2008; 76 FR 31451, June 1,
2011]
[[Page 33]]
Sec. Appendix B to Part 202--Model Application Forms
1. This appendix contains five model credit application forms, each
designated for use in a particular type of consumer credit transaction
as indicated by the bracketed caption on each form. The first sample
form is intended for use in open-end, unsecured transactions; the second
for closed-end, secured transactions; the third for closed-end
transactions, whether unsecured or secured; the fourth in transactions
involving community property or occurring in community property states;
and the fifth in residential mortgage transactions which contains a
model disclosure for use in complying with Sec. 202.13 for certain
dwelling-related loans. All forms contained in this appendix are models;
their use by creditors is optional.
2. The use or modification of these forms is governed by the
following instructions. A creditor may change the forms: by asking for
additional information not prohibited by Sec. 202.5; by deleting any
information request; or by rearranging the format without modifying the
substance of the inquiries. In any of these three instances, however,
the appropriate notices regarding the optional nature of courtesy
titles, the option to disclose alimony, child support, or separate
maintenance, and the limitation concerning marital status inquiries must
be included in the appropriate places if the items to which they relate
appear on the creditor's form.
3. If a creditor uses an appropriate Appendix B model form, or
modifies a form in accordance with the above instructions, that creditor
shall be deemed to be acting in compliance with the provisions of
paragraphs (b), (c) and (d) of Sec. 202.5 of this regulation.
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[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 68 FR 53491, Sept.
11, 2003]
[[Page 46]]
Sec. Appendix C to Part 202--Sample Notification Forms
1. This appendix contains ten sample notification forms. Forms C-1
through C-4 are intended for use in notifying an applicant that adverse
action has been taken on an application or account under Sec. Sec.
202.9(a)(1) and (2)(i) of this regulation. Form C-5 is a notice of
disclosure of the right to request specific reasons for adverse action
under Sec. Sec. 202.9(a)(1) and (2)(ii). Form C-6 is designed for use
in notifying an applicant, under Sec. 202.9(c)(2), that an application
is incomplete. Forms C-7 and C-8 are intended for use in connection with
applications for business credit under Sec. 202.9(a)(3). Form C-9 is
designed for use in notifying an applicant of the right to receive a
copy of an appraisal under Sec. 202.14. Form C-10 is designed for use
in notifying an applicant for nonmortgage credit that the creditor is
requesting applicant characteristic information.
2. Form C-1 contains the Fair Credit Reporting Act disclosure as
required by sections 615(a) and (b) of that act. Forms C-2 through C-5
contain only the section 615(a) disclosure (that a creditor obtained
information from a consumer reporting agency that was considered in the
credit decision and, as applicable, a credit score used in taking
adverse action along with related information). A creditor must provide
the section 615(a) disclosure when adverse action is taken against a
consumer based on information from a consumer reporting agency. A
creditor must provide the section 615(b) disclosure when adverse action
is taken based on information from an outside source other than a
consumer reporting agency. In addition, a creditor must provide the
section 615(b) disclosure if the creditor obtained information from an
affiliate other than information in a consumer report or other than
information concerning the affiliate's own transactions or experiences
with the consumer. Creditors may comply with the disclosure requirements
for adverse action based on information in a consumer report obtained
from an affiliate by providing either the section 615(a) or section
615(b) disclosure. Optional language in Forms C-1 through C-5 may be
used to direct the consumer to the entity that provided the credit score
for any questions about the credit score, along with the entity's
contact information. Creditors may use or not use this additional
language without losing the safe harbor, since the language is optional.
3. The sample forms are illustrative and may not be appropriate for
all creditors. They were designed to include some of the factors that
creditors most commonly consider. If a creditor chooses to use the
checklist of reasons provided in one of the sample forms in this
appendix and if reasons commonly used by the creditor are not provided
on the form, the creditor should modify the checklist by substituting or
adding other reasons. For example, if ``inadequate down payment'' or
``no deposit relationship with us'' are common reasons for taking
adverse action on an application, the creditor ought to add or
substitute such reasons for those presently contained on the sample
forms.
4. If the reasons listed on the forms are not the factors actually
used, a creditor will not satisfy the notice requirement by simply
checking the closest identifiable factor listed. For example, some
creditors consider only references from banks or other depository
institutions and disregard finance company references altogether; their
statement of reasons should disclose ``insufficient bank references,''
not ``insufficient credit references.'' Similarly, a creditor that
considers bank references and other credit references as distinct
factors should treat the two factors separately and disclose them as
appropriate. The creditor should either add such other factors to the
form or check ``other'' and include the appropriate explanation. The
creditor need not, however, describe how or why a factor adversely
affected the application. For example, the notice may say ``length of
residence'' rather than ``too short a period of residence.''
5. A creditor may design its own notification forms or use all or a
portion of the forms contained in this appendix. Proper use of Forms C-1
through C-4 will satisfy the requirement of Sec. 202.9(a)(2)(i). Proper
use of Forms C-5 and C-6 constitutes full compliance with Sec. Sec.
202.9(a)(2)(ii) and 202.9(c)(2), respectively. Proper use of Forms C-7
and C-8 will satisfy the requirements of Sec. 202.9(a)(2)(i) and (ii),
respectively, for applications for business credit. Proper use of Form
C-9 will satisfy the requirements of Sec. 202.14 of this part. Proper
use of Form C-10 will satisfy the requirements of Sec. 202.5(b)(1).
Form C-1--Sample Notice of Action Taken and Statement of Reasons
Statement of Credit Denial, Termination or Change
Date:__________________________________________________________________
Applicant's Name:______________________________________________________
Applicant's Address:___________________________________________________
Description of Account, Transaction, or Requested Credit:
________________________________________________________________________
________________________________________________________________________
Description of Action Taken:
________________________________________________________________________
________________________________________________________________________
Part I--Principal Reason(s) for Credit Denial, Termination, or Other
Action Taken Concerning Credit
This section must be completed in all instances.
[[Page 47]]
----Credit application incomplete
----Insufficient number of credit references provided
----Unacceptable type of credit references provided
----Unable to verify credit references
----Temporary or irregular employment
----Unable to verify employment
----Length of employment
----Income insufficient for amount of credit requested
----Excessive obligations in relation to income
----Unable to verify income
----Length of residence
----Temporary residence
----Unable to verify residence
----No credit file
----Limited credit experience
----Poor credit performance with us
----Delinquent past or present credit obligations with others
----Collection action or judgment
----Garnishment or attachment
----Foreclosure or repossession
----Bankruptcy
----Number of recent inquiries on credit bureau report
----Value or type of collateral not sufficient
----Other, specify:------------
Part II--Disclosure of Use of Information Obtained From an Outside
Source
This section should be completed if the credit decision was based in
whole or in part on information that has been obtained from an outside
source.
----Our credit decision was based in whole or in part on information
obtained in a report from the consumer reporting agency listed below.
You have a right under the Fair Credit Reporting Act to know the
information contained in your credit file at the consumer reporting
agency. The reporting agency played no part in our decision and is
unable to supply specific reasons why we have denied credit to you. You
also have a right to a free copy of your report from the reporting
agency, if you request it no later than 60 days after you receive this
notice. In addition, if you find that any information contained in the
report you receive is inaccurate or incomplete, you have the right to
dispute the matter with the reporting agency.
Name:__________________________________________________________________
Address:_______________________________________________________________
________________________________________________________________________
[Toll-free] Telephone number:__________________________________________
[We also obtained your credit score from this consumer reporting
agency and used it in making our credit decision. Your credit score is a
number that reflects the information in your consumer report. Your
credit score can change, depending on how the information in your
consumer report changes.
Your credit score:------------
Date:------------
Scores range from a low of------------to a high of------------
Key factors that adversely affected your credit score:
------------
------------
------------
------------
[Number of recent inquiries on consumer report, as a key factor]
[If you have any questions regarding your credit score, you should
contact [entity that provided the credit score] at:
Address:_______________________________________________________________
________________________________________________________________________
[Toll-free] Telephone number:]]________________________________________
----Our credit decision was based in whole or in part on information
obtained from an affiliate or from an outside source other than a
consumer reporting agency. Under the Fair Credit Reporting Act, you have
the right to make a written request, no later than 60 days after you
receive this notice, for disclosure of the nature of this information.
If you have any questions regarding this notice, you should contact:
Creditor's name:_______________________________________________________
Creditor's address:____________________________________________________
Creditor's telephone number:___________________________________________
Notice: The federal Equal Credit Opportunity Act prohibits creditors
from discriminating against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, age (provided the
applicant has the capacity to enter into a binding contract); because
all or part of the applicant's income derives from any public assistance
program; or because the applicant has in good faith exercised any right
under the Consumer Credit Protection Act. The federal agency that
administers compliance with this law concerning this creditor is (name
and address as specified by the appropriate agency listed in appendix
A).
Form C-2--Sample Notice of Action Taken and Statement of Reasons
Date
Dear Applicant: Thank you for your recent application. Your request
for [a loan/a credit card/an increase in your credit limit] was
carefully considered, and we regret that we are unable to approve your
application at this time, for the following reason(s):
Your Income:
----is below our minimum requirement.
----is insufficient to sustain payments on the amount of credit
requested.
----could not be verified.
Your Employment:
----is not of sufficient length to qualify.
----could not be verified.
[[Page 48]]
Your Credit History:
----of making payments on time was not satisfactory.
----could not be verified.
Your Application:
----lacks a sufficient number of credit references.
----lacks acceptable types of credit references.
----reveals that current obligations are excessive in relation to
income.
Other:_________________________________________________________________
The consumer reporting agency contacted that provided information
that influenced our decision in whole or in part was [name, address and
[toll-free] telephone number of the reporting agency]. The reporting
agency played no part in our decision and is unable to supply specific
reasons why we have denied credit to you. You have a right under the
Fair Credit Reporting Act to know the information contained in your
credit file at the consumer reporting agency. You also have a right to a
free copy of your report from the reporting agency, if you request it no
later than 60 days after you receive this notice. In addition, if you
find that any information contained in the report you receive is
inaccurate or incomplete, you have the right to dispute the matter with
the reporting agency. Any questions regarding such information should be
directed to [consumer reporting agency]. If you have any questions
regarding this letter, you should contact us at [creditor's name,
address and telephone number].
[We also obtained your credit score from this consumer reporting
agency and used it in making our credit decision. Your credit score is a
number that reflects the information in your consumer report. Your
credit score can change, depending on how the information in your
consumer report changes.
Your credit score:_____________________________________________________
Date:__________________________________________________________________
Scores range from a low of------------to a high of------------
Key factors that adversely affected your credit score:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
[Number of recent inquiries on consumer report, as a key factor]
[If you have any questions regarding your credit score, you should
contact [entity that provided the credit score] at:
Address:_______________________________________________________________
________________________________________________________________________
[Toll-free] Telephone number:--------------------]]
Notice: The federal Equal Credit Opportunity Act prohibits creditors
from discriminating against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, age (provided the
applicant has the capacity to enter into a binding contract); because
all or part of the applicant's income derives from any public assistance
program; or because the applicant has in good faith exercised any right
under the Consumer Credit Protection Act. The federal agency that
administers compliance with this law concerning this creditor is (name
and address as specified by the appropriate agency listed in appendix
A).
Form C-3--Sample Notice of Action Taken and Statement of Reasons
[(Credit Scoring)]
Date
Dear Applicant: Thank you for your recent application for --------.
We regret that we are unable to approve your request.
[Reasons for Denial of Credit]
Your application was processed by a [credit scoring] system that
assigns a numerical value to the various items of information we
consider in evaluating an application. These numerical values are based
upon the results of analyses of repayment histories of large numbers of
customers.
The information you provided in your application did not score a
sufficient number of points for approval of the application. The reasons
you did not score well compared with other applicants were:
Insufficient bank references
Type of occupation
Insufficient credit experience
Number of recent inquiries on credit bureau
report
[Your Right to Get Your Consumer Report]
In evaluating your application the consumer reporting agency listed
below provided us with information that in whole or in part influenced
our decision. The consumer reporting agency played no part in our
decision and is unable to supply specific reasons why we have denied
credit to you. You have a right under the Fair Credit Reporting Act to
know the information contained in your credit file at the consumer
reporting agency. It can be obtained by contacting: [name, address, and
[toll-free] telephone number of the consumer reporting agency]. You also
have a right to a free copy of your report from the reporting agency, if
you request it no later than 60 days after you receive this notice. In
addition, if you find that any information contained in the report you
receive is inaccurate or incomplete, you have the right to dispute the
matter with the reporting agency.
[Information about Your Credit Score]
We also obtained your credit score from this consumer reporting
agency and used it in making our credit decision. Your credit
[[Page 49]]
score is a number that reflects the information in your consumer report.
Your credit score can change, depending on how the information in your
consumer report changes.
Your credit score:_____________________________________________________
Date:__________________________________________________________________
Scores range from a low of --------to a high of--------
Key factors that adversely affected your credit score:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
[Number of recent inquiries on consumer report, as a key factor]
[If you have any questions regarding your credit score, you should
contact [entity that provided the credit score] at:
Address:_______________________________________________________________
________________________________________________________________________
[Toll-free] Telephone number:--------------------]]
If you have any questions regarding this letter, you should contact
us at
Creditor's Name:_______________________________________________________
Address:_______________________________________________________________
________________________________________________________________________
Telephone:_____________________________________________________________
Sincerely,
Notice: The federal Equal Credit Opportunity Act prohibits creditors
from discriminating against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, age (with certain
limited exceptions); because all or part of the applicant's income
derives from any public assistance program; or because the applicant has
in good faith exercised any right under the Consumer Credit Protection
Act. The federal agency that administers compliance with this law
concerning this creditor is (name and address as specified by the
appropriate agency listed in appendix A).
Form C-4--Sample Notice of Action Taken, Statement of Reasons and
Counteroffer
Date
Dear Applicant: Thank you for your application for --------. We are
unable to offer you credit on the terms that you requested for the
following reason(s):
________________________________________________________________________
We can, however, offer you credit on the following terms:
________________________________________________________________________
If this offer is acceptable to you, please notify us within [amount
of time] at the following address: --------.
Our credit decision on your application was based in whole or in
part on information obtained in a report from [name, address and [toll-
free] telephone number of the consumer reporting agency]. You have a
right under the Fair Credit Reporting Act to know the information
contained in your credit file at the consumer reporting agency. The
reporting agency played no part in our decision and is unable to supply
specific reasons why we have denied credit to you. You also have a right
to a free copy of your report from the reporting agency, if you request
it no later than 60 days after you receive this notice. In addition, if
you find that any information contained in the report you receive is
inaccurate or incomplete, you have the right to dispute the matter with
the reporting agency.
[We also obtained your credit score from this consumer reporting
agency and used it in making our credit decision. Your credit score is a
number that reflects the information in your consumer report. Your
credit score can change, depending on how the information in your
consumer report changes.
Your credit score:______________________________________________________
Date:___________________________________________________________________
Scores range from a low of ------------ to a high of ------------
Key factors that adversely affected your credit score:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
[Number of recent inquiries on consumer report, as a key factor]
[If you have any questions regarding your credit score, you should
contact [entity that provided the credit score] at:
Address:________________________________________________________________
________________________________________________________________________
[Toll-free] Telephone
number:--------------------]]
You should know that the federal Equal Credit Opportunity Act
prohibits creditors, such as ourselves, from discriminating against
credit applicants on the basis of their race, color, religion, national
origin, sex, marital status, age (provided the applicant has the
capacity to enter into a binding contract), because they receive income
from a public assistance program, or because they may have exercised
their rights under the Consumer Credit Protection Act. If you believe
there has been discrimination in handling your application you should
contact the [name and address of the appropriate federal enforcement
agency listed in appendix A].
Sincerely,
[[Page 50]]
Form C-5--Sample Disclosure of Right to Request Specific Reasons for
Credit Denial Date
Dear Applicant: Thank you for applying to us for --------.
After carefully reviewing your application, we are sorry to advise
you that we cannot [open an account for you/grant a loan to you/increase
your credit limit] at this time. If you would like a statement of
specific reasons why your application was denied, please contact [our
credit service manager] shown below within 60 days of the date of this
letter. We will provide you with the statement of reasons within 30 days
after receiving your request.
Creditor's Name
Address
Telephone Number
If we obtained information from a consumer reporting agency as part
of our consideration of your application, its name, address, and [toll-
free] telephone number is shown below. The reporting agency played no
part in our decision and is unable to supply specific reasons why we
have denied credit to you. [You have a right under the Fair Credit
Reporting Act to know the information contained in your credit file at
the consumer reporting agency.] You have a right to a free copy of your
report from the reporting agency, if you request it no later than 60
days after you receive this notice. In addition, if you find that any
information contained in the report you received is inaccurate or
incomplete, you have the right to dispute the matter with the reporting
agency. You can find out about the information contained in your file
(if one was used) by contacting:
Consumer reporting agency's name
Address
[Toll-free] Telephone number
[We also obtained your credit score from this consumer reporting
agency and used it in making our credit decision. Your credit score is a
number that reflects the information in your consumer report. Your
credit score can change, depending on how the information in your
consumer report changes.
Your credit score:______________________________________________________
Date:___________________________________________________________________
Scores range from a low of ------------ to a high of ------------
Key factors that adversely affected your credit score:
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
[Number of recent inquiries on consumer report, as a key factor]
[If you have any questions regarding your credit score, you should
contact [entity that provided the credit score] at:
Address:________________________________________________________________
________________________________________________________________________
[Toll-free] Telephone number:--------------------]]
Sincerely,
Notice: The federal Equal Credit Opportunity Act prohibits creditors
from discriminating against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, age (provided the
applicant has the capacity to enter into a binding contract); because
all or part of the applicant's income derives from any public assistance
program; or because the applicant has in good faith exercised any right
under the Consumer Credit Protection Act. The federal agency that
administers compliance with this law concerning this creditor is (name
and address as specified by the appropriate agency listed in appendix
A).
Form C-6--Sample Notice of Incomplete Application and Request for
Additional Information
Creditor's name
Address
Telephone number
Date
Dear Applicant: Thank you for your application for credit. The
following information is needed to make a decision on your application:
----------
________________________________________________________________________
We need to receive this information by ----------(date). If we do
not receive it by that date, we will regrettably be unable to give
further consideration to your credit request.
Sincerely,
Form C-7--Sample Notice of Action Taken and Statement of Reasons
(Business Credit)
Creditor's Name
Creditor's address
Date
Dear Applicant: Thank you for applying to us for credit. We have
given your request careful consideration, and regret that we are unable
to extend credit to you at this time for the following reasons:
(Insert appropriate reason, such as: Value or type of collateral not
sufficient; Lack of established earnings record; Slow or past due in
trade or loan payments)
Sincerely,
Notice: The federal Equal Credit Opportunity Act prohibits creditors
from discriminating against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, age (provided the
applicant
[[Page 51]]
has the capacity to enter into a binding contract); because all or part
of the applicant's income derives from any public assistance program; or
because the applicant has in good faith exercised any right under the
Consumer Credit Protection Act. The federal agency that administers
compliance with this law concerning this creditor is [name and address
as specified by the appropriate agency listed in appendix A].
Form C-8--Sample Disclosure of Right To Request Specific Reasons for
Credit Denial Given at Time of Application (Business Credit)
Creditor's name
Creditor's address
If your application for business credit is denied, you have the
right to a written statement of the specific reasons for the denial. To
obtain the statement, please contact [name, address and telephone number
of the person or office from which the statement of reasons can be
obtained] within 60 days from the date you are notified of our decision.
We will send you a written statement of reasons for the denial within 30
days of receiving your request for the statement.
Notice: The federal Equal Credit Opportunity Act prohibits creditors
from discriminating against credit applicants on the basis of race,
color, religion, national origin, sex, marital status, age (provided the
applicant has the capacity to enter into a binding contract); because
all or part of the applicant's income derives from any public assistance
program; or because the applicant has in good faith exercised any right
under the Consumer Credit Protection Act. The federal agency that
administers compliance with this law concerning this creditor is [name
and address as specified by the appropriate agency listed in appendix
A].
Form C-9--Sample Disclosure of Right To Receive a Copy of an Appraisal
You have the right to a copy of the appraisal report used in
connection with your application for credit. If you wish a copy, please
write to us at the mailing address we have provided. We must hear from
you no later than 90 days after we notify you about the action taken on
your credit application or you withdraw your application.
[In your letter, give us the following information:]
Form C-10--Sample Disclosure About Voluntary Data Notation
We are requesting the following information to monitor our
compliance with the federal Equal Credit Opportunity Act, which
prohibits unlawful discrimination. You are not required to provide this
information. We will not take this information (or your decision not to
provide this information) into account in connection with your
application or credit transaction. The law provides that a creditor may
not discriminate based on this information, or based on whether or not
you choose to provide it. [If you choose not to provide the information,
we will note it by visual observation or surname].
[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 76 FR 41600, July 15,
2011]
Sec. Appendix D to Part 202--Issuance of Staff Interpretations
1. Official Staff Interpretations. Officials in the Board's Division
of Consumer and Community Affairs are authorized to issue official staff
interpretations of this regulation. These interpretations provide the
protection afforded under section 706(e) of the Act. Except in unusual
circumstances, such interpretations will not be issued separately but
will be incorporated in an official commentary to the regulation, which
will be amended periodically.
2. Requests for Issuance of Official Staff Interpretations. A
request for an official staff interpretation should be in writing and
addressed to the Director, Division of Consumer and Community Affairs,
Board of Governors of the Federal Reserve System, Washington, DC 20551.
The request should contain a complete statement of all relevant facts
concerning the issue, including copies of all pertinent documents.
3. Scope of Interpretations. No staff interpretations will be issued
approving creditors' forms or statements. This restriction does not
apply to forms or statements whose use is required or sanctioned by a
government agency.
Sec. Supplement I to Part 202--Official Staff Interpretations
Following is an official staff interpretation of Regulation B (12
CFR part 202) issued under authority delegated by the Federal Reserve
Board to officials in the Division of Consumer and Community Affairs.
References are to sections of the regulation or the Equal Credit
Opportunity Act (15 U.S.C. 1601 et seq.).
Introduction
1. Official status. Section 706(e) of the Equal Credit Opportunity
Act protects a creditor from civil liability for any act done or omitted
in good faith in conformity with an interpretation issued by a duly
authorized official of the Federal Reserve Board. This commentary is the
means by which the Division of Consumer and Community Affairs of the
Federal Reserve Board issues official staff interpretations of
Regulation B. Good-faith compliance with this commentary affords a
[[Page 52]]
creditor protection under section 706(e) of the Act.
2. Issuance of interpretations. Under Appendix D to the regulation,
any person may request an official staff interpretation. Interpretations
will be issued at the discretion of designated officials and
incorporated in this commentary following publication for comment in the
Federal Register. Except in unusual circumstances, official staff
interpretations will be issued only by means of this commentary.
3. Status of previous interpretations. Interpretations of Regulation
B previously issued by the Federal Reserve Board and its staff have been
incorporated into this commentary as appropriate. All other previous
Board and staff interpretations, official and unofficial, are superseded
by this commentary.
4. Footnotes. Footnotes in the regulation have the same legal effect
as the text of the regulation, whether they are explanatory or
illustrative in nature.
5. Comment designations. The comments are designated with as much
specificity as possible according to the particular regulatory provision
addressed. Each comment in the commentary is identified by a number and
the regulatory section or paragraph that it interprets. For example,
comments to Sec. 202.2(c) are further divided by subparagraph, such as
comment 2(c)(1)(ii)-1 and comment 2(c)(2)(ii)-1.
Section 202.1--Authority, Scope, and Purpose
1(a) Authority and scope.
1. Scope. The Equal Credit Opportunity Act and Regulation B apply to
all credit--commercial as well as personal--without regard to the nature
or type of the credit or the creditor. If a transaction provides for the
deferral of the payment of a debt, it is credit covered by Regulation B
even though it may not be a credit transaction covered by Regulation Z
(Truth in Lending) (12 CFR part 226). Further, the definition of
creditor is not restricted to the party or person to whom the obligation
is initially payable, as is the case under Regulation Z. Moreover, the
Act and regulation apply to all methods of credit evaluation, whether
performed judgmentally or by use of a credit scoring system.
2. Foreign applicability. Regulation B generally does not apply to
lending activities that occur outside the United States. The regulation
does apply to lending activities that take place within the United
States (as well as the Commonwealth of Puerto Rico and any territory or
possession of the United States), whether or not the applicant is a
citizen.
3. Board. The term Board, as used in this regulation, means the
Board of Governors of the Federal Reserve System.
Section 202.2--Definitions
2(c) Adverse action.
Paragraph 2(c)(1)(i)
1. Application for credit. If the applicant applied in accordance
with the creditor's procedures, a refusal to refinance or extend the
term of a business or other loan is adverse action.
Paragraph 2(c)(1)(ii)
1. Move from service area. If a credit card issuer terminates the
open-end account of a customer because the customer has moved out of the
card issuer's service area, the termination is adverse action unless
termination on this ground was explicitly provided for in the credit
agreement between the parties. In cases where termination is adverse
action, notification is required under Sec. 202.9.
2. Termination based on credit limit. If a creditor terminates
credit accounts that have low credit limits (for example, under $400)
but keeps open accounts with higher credit limits, the termination is
adverse action and notification is required under Sec. 202.9.
Paragraph 2(c)(2)(ii)
1. Default--exercise of due-on-sale clause. If a mortgagor sells or
transfers mortgaged property without the consent of the mortgagee, and
the mortgagee exercises its contractual right to accelerate the mortgage
loan, the mortgagee may treat the mortgagor as being in default. An
adverse action notice need not be given to the mortgagor or the
transferee. (See comment 2(e)-1 for treatment of a purchaser who
requests to assume the loan.)
2. Current delinquency or default. The term adverse action does not
include a creditor's termination of an account when the accountholder is
currently in default or delinquent on that account. Notification in
accordance with Sec. 202.9 of the regulation generally is required,
however, if the creditor's action is based on a past delinquency or
default on the account.
Paragraph 2(c)(2)(iii)
1. Point-of-sale transactions. Denial of credit at point of sale is
not adverse action except under those circumstances specified in the
regulation. For example, denial at point of sale is not adverse action
in the following situations:
i. A credit cardholder presents an expired card or a card that has
been reported to the card issuer as lost or stolen.
ii. The amount of a transaction exceeds a cash advance or credit
limit.
iii. The circumstances (such as excessive use of a credit card in a
short period of time) suggest that fraud is involved.
[[Page 53]]
iv. The authorization facilities are not functioning.
v. Billing statements have been returned to the creditor for lack of
a forwarding address.
2. Application for increase in available credit. A refusal or
failure to authorize an account transaction at the point of sale or loan
is not adverse action except when the refusal is a denial of an
application, submitted in accordance with the creditor's procedures, for
an increase in the amount of credit.
Paragraph 2(c)(2)(v)
1. Terms of credit versus type of credit offered. When an applicant
applies for credit and the creditor does not offer the credit terms
requested by the applicant (for example, the interest rate, length of
maturity, collateral, or amount of downpayment), a denial of the
application for that reason is adverse action (unless the creditor makes
a counteroffer that is accepted by the applicant) and the applicant is
entitled to notification under Sec. 202.9.
2(e) Applicant.
1. Request to assume loan. If a mortgagor sells or transfers the
mortgaged property and the buyer makes an application to the creditor to
assume the mortgage loan, the mortgagee must treat the buyer as an
applicant unless its policy is not to permit assumptions.
2(f) Application.
1. General. A creditor has the latitude under the regulation to
establish its own application process and to decide the type and amount
of information it will require from credit applicants.
2. Procedures used. The term ``procedures'' refers to the actual
practices followed by a creditor for making credit decisions as well as
its stated application procedures. For example, if a creditor's stated
policy is to require all applications to be in writing on the creditor's
application form, but the creditor also makes credit decisions based on
oral requests, the creditor's procedures are to accept both oral and
written applications.
3. When an inquiry or prequalification request becomes an
application. A creditor is encouraged to provide consumers with
information about loan terms. However, if in giving information to the
consumer the creditor also evaluates information about the consumer,
decides to decline the request, and communicates this to the consumer,
the creditor has treated the inquiry or prequalification request as an
application and must then comply with the notification requirements
under Sec. 202.9. Whether the inquiry or prequalification request
becomes an application depends on how the creditor responds to the
consumer, not on what the consumer says or asks. (See comment 9-5 for
further discussion of prequalification requests; see comment 2(f)-5 for
a discussion of preapproval requests.)
4. Examples of inquiries that are not applications. The following
examples illustrate situations in which only an inquiry has taken place:
i. A consumer calls to ask about loan terms and an employee explains
the creditor's basic loan terms, such as interest rates, loan-to-value
ratio, and debt-to-income ratio.
ii. A consumer calls to ask about interest rates for car loans, and,
in order to quote the appropriate rate, the loan officer asks for the
make and sales price of the car and the amount of the downpayment, then
gives the consumer the rate.
iii. A consumer asks about terms for a loan to purchase a home and
tells the loan officer her income and intended downpayment, but the loan
officer only explains the creditor's loan-to-value ratio policy and
other basic lending policies, without telling the consumer whether she
qualifies for the loan.
iv. A consumer calls to ask about terms for a loan to purchase
vacant land and states his income and the sales price of the property to
be financed, and asks whether he qualifies for a loan; the employee
responds by describing the general lending policies, explaining that he
would need to look at all of the consumer's qualifications before making
a decision, and offering to send an application form to the consumer.
5. Examples of an application. An application for credit includes
the following situations:
i. A person asks a financial institution to ``preapprove'' her for a
loan (for example, to finance a house or a vehicle she plans to buy) and
the institution reviews the request under a program in which the
institution, after a comprehensive analysis of her creditworthiness,
issues a written commitment valid for a designated period of time to
extend a loan up to a specified amount. The written commitment may not
be subject to conditions other than conditions that require the
identification of adequate collateral, conditions that require no
material change in the applicant's financial condition or
creditworthiness prior to funding the loan, and limited conditions that
are not related to the financial condition or creditworthiness of the
applicant that the lender ordinarily attaches to a traditional
application (such as certification of a clear termite inspection for a
home purchase loan, or a maximum mileage requirement for a used car
loan). But if the creditor's program does not provide for giving written
commitments, requests for preapprovals are treated as prequalification
requests for purposes of the regulation.
ii. Under the same facts as above, the financial institution
evaluates the person's
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creditworthiness and determines that she does not qualify for a
preapproval.
6. Completed application--diligence requirement. The regulation
defines a completed application in terms that give a creditor the
latitude to establish its own information requirements. Nevertheless,
the creditor must act with reasonable diligence to collect information
needed to complete the application. For example, the creditor should
request information from third parties, such as a credit report,
promptly after receiving the application. If additional information is
needed from the applicant, such as an address or a telephone number to
verify employment, the creditor should contact the applicant promptly.
(But see comment 9(a)(1)-3, which discusses the creditor's option to
deny an application on the basis of incompleteness.)
2(g) Business credit.
1. Definition. The test for deciding whether a transaction qualifies
as business credit is one of primary purpose. For example, an open-end
credit account used for both personal and business purposes is not
business credit unless the primary purpose of the account is business-
related. A creditor may rely on an applicant's statement of the purpose
for the credit requested.
2(j) Credit.
1. General. Regulation B covers a wider range of credit transactions
than Regulation Z (Truth in Lending). Under Regulation B, a transaction
is credit if there is a right to defer payment of a debt--regardless of
whether the credit is for personal or commercial purposes, the number of
installments required for repayment, or whether the transaction is
subject to a finance charge.
2(l) Creditor.
1. Assignees. The term creditor includes all persons participating
in the credit decision. This may include an assignee or a potential
purchaser of the obligation who influences the credit decision by
indicating whether or not it will purchase the obligation if the
transaction is consummated.
2. Referrals to creditors. For certain purposes, the term creditor
includes persons such as real estate brokers, automobile dealers, home
builders, and home-improvement contractors who do not participate in
credit decisions but who only accept applications and refer applicants
to creditors, or select or offer to select creditors to whom credit
requests can be made. These persons must comply with Sec. 202.4(a), the
general rule prohibiting discrimination, and with Sec. 202.4(b), the
general rule against discouraging applications.
2(p) Empirically derived and other credit scoring systems.
1. Purpose of definition. The definition under Sec. 202.2(p)(1)(i)
through (iv) sets the criteria that a credit system must meet in order
to use age as a predictive factor. Credit systems that do not meet these
criteria are judgmental systems and may consider age only for the
purpose of determining a ``pertinent element of creditworthiness.''
(Both types of systems may favor an elderly applicant. See Sec.
202.6(b)(2).)
2. Periodic revalidation. The regulation does not specify how often
credit scoring systems must be revalidated. The credit scoring system
must be revalidated frequently enough to ensure that it continues to
meet recognized professional statistical standards for statistical
soundness. To ensure that predictive ability is being maintained, the
creditor must periodically review the performance of the system. This
could be done, for example, by analyzing the loan portfolio to determine
the delinquency rate for each score interval, or by analyzing population
stability over time to detect deviations of recent applications from the
applicant population used to validate the system. If this analysis
indicates that the system no longer predicts risk with statistical
soundness, the system must be adjusted as necessary to reestablish its
predictive ability. A creditor is responsible for ensuring its system is
validated and revalidated based on the creditor's own data.
3. Pooled data scoring systems. A scoring system or the data from
which to develop such a system may be obtained from either a single
credit grantor or multiple credit grantors. The resulting system will
qualify as an empirically derived, demonstrably and statistically sound,
credit scoring system provided the criteria set forth in paragraph
(p)(1)(i) through (iv) of this section are met. A creditor is
responsible for ensuring its system is validated and revalidated based
on the creditor's own data when it becomes available.
4. Effects test and disparate treatment. An empirically derived,
demonstrably and statistically sound, credit scoring system may include
age as a predictive factor (provided that the age of an elderly
applicant is not assigned a negative factor or value). Besides age, no
other prohibited basis may be used as a variable. Generally, credit
scoring systems treat all applicants objectively and thus avoid problems
of disparate treatment. In cases where a credit scoring system is used
in conjunction with individual discretion, disparate treatment could
conceivably occur in the evaluation process. In addition, neutral
factors used in credit scoring systems could nonetheless be subject to
challenge under the effects test. (See comment 6(a)-2 for a discussion
of the effects test).
2(w) Open-end credit.
1. Open-end real estate mortgages. The term ``open-end credit'' does
not include negotiated advances under an open-end real estate mortgage
or a letter of credit.
2(z) Prohibited basis.
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1. Persons associated with applicant. As used in this regulation,
prohibited basis refers not only to characteristics--the race, color,
religion, national origin, sex, marital status, or age--of an applicant
(or officers of an applicant in the case of a corporation) but also to
the characteristics of individuals with whom an applicant is affiliated
or with whom the applicant associates. This means, for example, that
under the general rule stated in Sec. 202.4(a), a creditor may not
discriminate against an applicant because of that person's personal or
business dealings with members of a certain religion, because of the
national origin of any persons associated with the extension of credit
(such as the tenants in the apartment complex being financed), or
because of the race of other residents in the neighborhood where the
property offered as collateral is located.
2. National origin. A creditor may not refuse to grant credit
because an applicant comes from a particular country but may take the
applicant's immigration status into account. A creditor may also take
into account any applicable law, regulation, or executive order
restricting dealings with citizens (or the government) of a particular
country or imposing limitations regarding credit extended for their use.
3. Public assistance program. Any federal, state, or local
governmental assistance program that provides a continuing, periodic
income supplement, whether premised on entitlement or need, is ``public
assistance'' for purposes of the regulation. The term includes (but is
not limited to) Temporary Aid to Needy Families, food stamps, rent and
mortgage supplement or assistance programs, social security and
supplemental security income, and unemployment compensation. Only
physicians, hospitals, and others to whom the benefits are payable need
consider Medicare and Medicaid as public assistance.
Section 202.3--Limited Exceptions for Certain Classes of Transactions
1. Scope. Under this section, procedural requirements of the
regulation do not apply to certain types of credit. All classes of
transactions remain subject to Sec. 202.4(a), the general rule barring
discrimination on a prohibited basis, and to any other provision not
specifically excepted.
3(a) Public-utilities credit.
1. Definition. This definition applies only to credit for the
purchase of a utility service, such as electricity, gas, or telephone
service. Credit provided or offered by a public utility for some other
purpose--such as for financing the purchase of a gas dryer, telephone
equipment, or other durable goods, or for insulation or other home
improvements--is not excepted.
2. Security deposits. A utility company is a creditor when it
supplies utility service and bills the user after the service has been
provided. Thus, any credit term (such as a requirement for a security
deposit) is subject to the regulation's bar against discrimination on a
prohibited basis.
3. Telephone companies. A telephone company's credit transactions
qualify for the exceptions provided in Sec. 202.3(a)(2) only if the
company is regulated by a government unit or files the charges for
service, delayed payment, or any discount for prompt payment with a
government unit.
3(c) Incidental credit.
1. Examples. If a service provider (such as a hospital, doctor,
lawyer, or merchant) allows the client or customer to defer the payment
of a bill, this deferral of debt is credit for purposes of the
regulation, even though there is no finance charge and no agreement for
payment in installments. Because of the exceptions provided by this
section, however, these particular credit extensions are excepted from
compliance with certain procedural requirements as specified in Sec.
202.3(c).
3(d) Government credit.
1. Credit to governments. The exception relates to credit extended
to (not by) governmental entities. For example, credit extended to a
local government is covered by this exception, but credit extended to
consumers by a federal or state housing agency does not qualify for
special treatment under this category.
Section 202.4--General Rules
Paragraph 4(a)
1. Scope of rule. The general rule stated in Sec. 202.4(a) covers
all dealings, without exception, between an applicant and a creditor,
whether or not addressed by other provisions of the regulation. Other
provisions of the regulation identify specific practices that the Board
has decided are impermissible because they could result in credit
discrimination on a basis prohibited by the Act. The general rule
covers, for example, application procedures, criteria used to evaluate
creditworthiness, administration of accounts, and treatment of
delinquent or slow accounts. Thus, whether or not specifically
prohibited elsewhere in the regulation, a credit practice that treats
applicants differently on a prohibited basis violates the law because it
violates the general rule. Disparate treatment on a prohibited basis is
illegal whether or not it results from a conscious intent to
discriminate.
2. Examples.
i. Disparate treatment would exist, for example, in the following
situations:
A. A creditor provides information only on ``subprime'' and similar
products to minority applicants who request information about the
creditor's mortgage products, but provides information on a wider
variety of
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mortgage products to similarly situated nonminority applicants.
B. A creditor provides more comprehensive information to men than to
similarly situated women.
C. A creditor requires a minority applicant to provide greater
documentation to obtain a loan than a similarly situated nonminority
applicant.
D. A creditor waives or relaxes credit standards for a nonminority
applicant but not for a similarly situated minority applicant.
ii. Treating applicants differently on a prohibited basis is
unlawful if the creditor lacks a legitimate nondiscriminatory reason for
its action, or if the asserted reason is found to be a pretext for
discrimination.
Paragraph 4(b)
1. Prospective applicants. Generally, the regulation's protections
apply only to persons who have requested or received an extension of
credit. In keeping with the purpose of the Act--to promote the
availability of credit on a nondiscriminatory basis--Sec. 202.4(b)
covers acts or practices directed at prospective applicants that could
discourage a reasonable person, on a prohibited basis, from applying for
credit. Practices prohibited by this section include:
i. A statement that the applicant should not bother to apply, after
the applicant states that he is retired.
ii. The use of words, symbols, models or other forms of
communication in advertising that express, imply, or suggest a
discriminatory preference or a policy of exclusion in violation of the
Act.
iii. The use of interview scripts that discourage applications on a
prohibited basis.
2. Affirmative advertising. A creditor may affirmatively solicit or
encourage members of traditionally disadvantaged groups to apply for
credit, especially groups that might not normally seek credit from that
creditor.
Paragraph 4(c)
1. Requirement for written applications. Model application forms are
provided in Appendix B to the regulation, although use of a printed form
is not required. A creditor will satisfy the requirement by writing down
the information that it normally considers in making a credit decision.
The creditor may complete an application on behalf of an applicant and
need not require the applicant to sign the application.
2. Telephone applications. A creditor that accepts applications by
telephone for dwelling-related credit covered by Sec. 202.13 can meet
the requirement for written applications by writing down pertinent
information that is provided by the applicant.
3. Computerized entry. Information entered directly into and
retained by a computerized system qualifies as a written application
under this paragraph. (See the commentary to Sec. 202.13(b),
Applications through electronic media and Applications through video.)
Paragraph 4(d)
1. Clear and conspicuous. This standard requires that disclosures be
presented in a reasonably understandable format in a way that does not
obscure the required information. No minimum type size is mandated, but
the disclosures must be legible, whether typewritten, handwritten, or
printed by computer.
2. Form of disclosures. Whether the disclosures required to be on or
with an application must be in electronic form depends upon the
following:
i. If an applicant accesses a credit 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 website) 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
applicant, this requirement would not be met.
ii. In contrast, if an applicant is physically present in the
creditor's office, and accesses a credit application electronically,
such as via a terminal or kiosk (or if the applicant 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.
Section 202.5--Rules Concerning Requests for Information
5(a) General rules.
Paragraph 5(a)(1)
1. Requests for information. This section governs the types of
information that a creditor may gather. Section 202.6 governs how
information may be used.
Paragraph 5(a)(2)
1. Local laws. Information that a creditor is allowed to collect
pursuant to a ``state'' statute or regulation includes information
required by a local statute, regulation, or ordinance.
2. Information required by Regulation C. Regulation C generally
requires creditors covered by the Home Mortgage Disclosure Act (HMDA) to
collect and report information about the race, ethnicity, and sex of
applicants for home-improvement loans and home-purchase loans, including
some types of loans not covered by Sec. 202.13.
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3. Collecting information on behalf of creditors. Persons such as
loan brokers and correspondents do not violate the ECOA or Regulation B
if they collect information that they are otherwise prohibited from
collecting, where the purpose of collecting the information is to
provide it to a creditor that is subject to the Home Mortgage Disclosure
Act or another federal or state statute or regulation requiring data
collection.
5(d) Other limitations on information requests.
Paragraph 5(d)(1)
1. Indirect disclosure of prohibited information. The fact that
certain credit-related information may indirectly disclose marital
status does not bar a creditor from seeking such information. For
example, the creditor may ask about:
i. The applicant's obligation to pay alimony, child support, or
separate maintenance income.
ii. The source of income to be used as the basis for repaying the
credit requested, which could disclose that it is the income of a
spouse.
iii. Whether any obligation disclosed by the applicant has a co-
obligor, which could disclose that the co-obligor is a spouse or former
spouse.
iv. The ownership of assets, which could disclose the interest of a
spouse.
Paragraph 5(d)(2)
1. Disclosure about income. The sample application forms in appendix
B to the regulation illustrate how a creditor may inform an applicant of
the right not to disclose alimony, child support, or separate
maintenance income.
2. General inquiry about source of income. Since a general inquiry
about the source of income may lead an applicant to disclose alimony,
child support, or separate maintenance income, a creditor making such an
inquiry on an application form should preface the request with the
disclosure required by this paragraph.
3. Specific inquiry about sources of income. A creditor need not
give the disclosure if the inquiry about income is specific and worded
in a way that is unlikely to lead the applicant to disclose the fact
that income is derived from alimony, child support, or separate
maintenance payments. For example, an application form that asks about
specific types of income such as salary, wages, or investment income
need not include the disclosure.
Section 202.6--Rules Concerning Evaluation of Applications
6(a) General rule concerning use of information.
1. General. When evaluating an application for credit, a creditor
generally may consider any information obtained. However, a creditor may
not consider in its evaluation of creditworthiness any information that
it is barred by Sec. 202.5 from obtaining or from using for any purpose
other than to conduct a self-test under Sec. 202.15.
2. Effects test. The effects test is a judicial doctrine that was
developed in a series of employment cases decided by the U.S. Supreme
Court under Title VII of the Civil Rights Act of 1964 (42 U.S.C. 2000e
et seq.), and the burdens of proof for such employment cases were
codified by Congress in the Civil Rights Act of 1991 (42 U.S.C. 2000e-
2). Congressional intent that this doctrine apply to the credit area is
documented in the Senate Report that accompanied H.R. 6516, No. 94-589,
pp. 4-5; and in the House Report that accompanied H.R. 6516, No. 94-210,
p.5. The Act and regulation may prohibit a creditor practice that is
discriminatory in effect because it has a disproportionately negative
impact on a prohibited basis, even though the creditor has no intent to
discriminate and the practice appears neutral on its face, unless the
creditor practice meets a legitimate business need that cannot
reasonably be achieved as well by means that are less disparate in their
impact. For example, requiring that applicants have income in excess of
a certain amount to qualify for an overdraft line of credit could mean
that women and minority applicants will be rejected at a higher rate
than men and nonminority applicants. If there is a demonstrable
relationship between the income requirement and creditworthiness for the
level of credit involved, however, use of the income standard would
likely be permissible.
6(b) Specific rules concerning use of information.
Paragraph 6(b)(1)
1. Prohibited basis--special purpose credit. In a special purpose
credit program, a creditor may consider a prohibited basis to determine
whether the applicant possesses a characteristic needed for eligibility.
(See Sec. 202.8.)
Paragraph 6(b)(2)
1. Favoring the elderly. Any system of evaluating creditworthiness
may favor a credit applicant who is age 62 or older. A credit program
that offers more favorable credit terms to applicants age 62 or older is
also permissible; a program that offers more favorable credit terms to
applicants at an age lower than 62 is permissible only if it meets the
special-purpose credit requirements of Sec. 202.8.
2. Consideration of age in a credit scoring system. Age may be taken
directly into account in a credit scoring system that is ``demonstrably
and statistically sound,'' as defined in Sec. 202.2(p), with one
limitation: applicants age 62 years or older must be treated at least as
favorably as applicants who are under age
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62. If age is scored by assigning points to an applicant's age category,
elderly applicants must receive the same or a greater number of points
as the most favored class of nonelderly applicants.
i. Age-split scorecards. Some credit systems segment the population
and use different scorecards based on the age of an applicant. In such a
system, one card may cover a narrow age range (for example, applicants
in their twenties or younger) who are evaluated under attributes
predictive for that age group. A second card may cover all other
applicants, who are evaluated under the attributes predictive for that
broader class. When a system uses a card covering a wide age range that
encompasses elderly applicants, the credit scoring system is not deemed
to score age. Thus, the system does not raise the issue of assigning a
negative factor or value to the age of elderly applicants. But if a
system segments the population by age into multiple scorecards, and
includes elderly applicants in a narrower age range, the credit scoring
system does score age. To comply with the Act and regulation in such a
case, the creditor must ensure that the system does not assign a
negative factor or value to the age of elderly applicants as a class.
3. Consideration of age in a judgmental system. In a judgmental
system, defined in Sec. 202.2(t), a creditor may not decide whether to
extend credit or set the terms and conditions of credit based on age or
information related exclusively to age. Age or age-related information
may be considered only in evaluating other ``pertinent elements of
creditworthiness'' that are drawn from the particular facts and
circumstances concerning the applicant. For example, a creditor may not
reject an application or terminate an account because the applicant is
60 years old. But a creditor that uses a judgmental system may relate
the applicant's age to other information about the applicant that the
creditor considers in evaluating creditworthiness. As the following
examples illustrate, the evaluation must be made in an individualized,
case-by-case manner:
i. A creditor may consider the applicant's occupation and length of
time to retirement to ascertain whether the applicant's income
(including retirement income) will support the extension of credit to
its maturity.
ii. A creditor may consider the adequacy of any security offered
when the term of the credit extension exceeds the life expectancy of the
applicant and the cost of realizing on the collateral could exceed the
applicant's equity. An elderly applicant might not qualify for a 5
percent down, 30-year mortgage loan but might qualify with a larger
downpayment or a shorter loan maturity.
iii. A creditor may consider the applicant's age to assess the
significance of length of employment (a young applicant may have just
entered the job market) or length of time at an address (an elderly
applicant may recently have retired and moved from a long-term
residence).
4. Consideration of age in a reverse mortgage. A reverse mortgage is
a home-secured loan in which the borrower receives payments from the
creditor, and does not become obligated to repay these amounts (other
than in the case of default) until the borrower dies, moves permanently
from the home, or transfers title to the home, or upon a specified
maturity date. Disbursements to the borrower under a reverse mortgage
typically are determined by considering the value of the borrower's
home, the current interest rate, and the borrower's life expectancy. A
reverse mortgage program that requires borrowers to be age 62 or older
is permissible under Sec. 202.6(b)(2)(iv). In addition, under Sec.
202.6(b)(2)(iii), a creditor may consider a borrower's age to evaluate a
pertinent element of creditworthiness, such as the amount of the credit
or monthly payments that the borrower will receive, or the estimated
repayment date.
5. Consideration of age in a combined system. A creditor using a
credit scoring system that qualifies as ``empirically derived'' under
Sec. 202.2(p) may consider other factors (such as a credit report or
the applicant's cash flow) on a judgmental basis. Doing so will not
negate the classification of the credit scoring component of the
combined system as ``demonstrably and statistically sound.'' While age
could be used in the credit scoring portion, however, in the judgmental
portion age may not be considered directly. It may be used only for the
purpose of determining a ``pertinent element of creditworthiness.'' (See
comment 6(b)(2)-3.)
6. Consideration of public assistance. When considering income
derived from a public assistance program, a creditor may take into
account, for example:
i. The length of time an applicant will likely remain eligible to
receive such income.
ii. Whether the applicant will continue to qualify for benefits
based on the status of the applicant's dependents (as in the case of
Temporary Aid to Needy Families, or social security payments to a
minor).
iii. Whether the creditor can attach or garnish the income to assure
payment of the debt in the event of default.
Paragraph 6(b)(5)
1. Consideration of an individual applicant. A creditor must
evaluate income derived from part-time employment, alimony, child
support, separate maintenance payments, retirement benefits, or public
assistance on an
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individual basis, not on the basis of aggregate statistics; and must
assess its reliability or unreliability by analyzing the applicant's
actual circumstances, not by analyzing statistical measures derived from
a group.
2. Payments consistently made. In determining the likelihood of
consistent payments of alimony, child support, or separate maintenance,
a creditor may consider factors such as whether payments are received
pursuant to a written agreement or court decree; the length of time that
the payments have been received; whether the payments are regularly
received by the applicant; the availability of court or other procedures
to compel payment; and the creditworthiness of the payor, including the
credit history of the payor when it is available to the creditor.
3. Consideration of income.
i. A creditor need not consider income at all in evaluating
creditworthiness. If a creditor does consider income, there are several
acceptable methods, whether in a credit scoring or a judgmental system:
A. A creditor may score or take into account the total sum of all
income stated by the applicant without taking steps to evaluate the
income for reliability.
B. A creditor may evaluate each component of the applicant's income,
and then score or take into account income determined to be reliable
separately from other income; or the creditor may disregard that portion
of income that is not reliable when it aggregates reliable income.
C. A creditor that does not evaluate all income components for
reliability must treat as reliable any component of protected income
that is not evaluated.
ii. In considering the separate components of an applicant's income,
the creditor may not automatically discount or exclude from
consideration any protected income. Any discounting or exclusion must be
based on the applicant's actual circumstances.
4. Part-time employment, sources of income. A creditor may score or
take into account the fact that an applicant has more than one source of
earned income--a full-time and a part-time job or two part-time jobs. A
creditor may also score or treat earned income from a secondary source
differently than earned income from a primary source. The creditor may
not, however, score or otherwise take into account the number of sources
for income such as retirement income, social security, supplemental
security income, and alimony. Nor may the creditor treat negatively the
fact that an applicant's only earned income is derived from, for
example, a part-time job.
Paragraph 6(b)(6)
1. Types of credit references. A creditor may restrict the types of
credit history and credit references that it will consider, provided
that the restrictions are applied to all credit applicants without
regard to sex, marital status, or any other prohibited basis. On the
applicant's request, however, a creditor must consider credit
information not reported through a credit bureau when the information
relates to the same types of credit references and history that the
creditor would consider if reported through a credit bureau.
Paragraph 6(b)(7)
1. National origin--immigration status. The applicant's immigration
status and ties to the community (such as employment and continued
residence in the area) could have a bearing on a creditor's ability to
obtain repayment. Accordingly, the creditor may consider immigration
status and differentiate, for example, between a noncitizen who is a
long-time resident with permanent resident status and a noncitizen who
is temporarily in this country on a student visa.
2. National origin--citizenship. A denial of credit on the ground
that an applicant is not a United States citizen is not per se
discrimination based on national origin.
Paragraph 6(b)(8)
1. Prohibited basis--marital status. A creditor may consider the
marital status of an applicant or joint applicant for the purpose of
ascertaining the creditor's rights and remedies applicable to the
particular extension of credit. For example, in a secured transaction
involving real property, a creditor could take into account whether
state law gives the applicant's spouse an interest in the property being
offered as collateral.
Section 202.7--Rules Concerning Extensions of Credit
7(a) Individual accounts.
1. Open-end credit--authorized user. A creditor may not require a
creditworthy applicant seeking an individual credit account to provide
additional signatures. But the creditor may condition the designation of
an authorized user by the account holder on the authorized user's
becoming contractually liable for the account, as long as the creditor
does not differentiate on any prohibited basis in imposing this
requirement.
2. Open-end credit--choice of authorized user. A creditor that
permits an account holder to designate an authorized user may not
restrict this designation on a prohibited basis. For example, if the
creditor allows the designation of spouses as authorized users, the
creditor may not refuse to accept a nonspouse as an authorized user.
3. Overdraft authority on transaction accounts. If a transaction
account (such as a checking account or NOW account) includes an
overdraft line of credit, the creditor may require that all persons
authorized to draw
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on the transaction account assume liability for any overdraft.
7(b) Designation of name.
1. Single name on account. A creditor may require that joint
applicants on an account designate a single name for purposes of
administering the account and that a single name be embossed on any
credit cards issued on the account. But the creditor may not require
that the name be the husband's name. (See Sec. 202.10 for rules
governing the furnishing of credit history on accounts held by spouses.)
7(c) Action concerning existing open-end accounts.
Paragraph 7(c)(1)
1. Termination coincidental with marital status change. When an
account holder's marital status changes, a creditor generally may not
terminate the account unless it has evidence that the account holder is
now unable or unwilling to repay. But the creditor may terminate an
account on which both spouses are jointly liable, even if the action
coincides with a change in marital status, when one or both spouses:
i. Repudiate responsibility for future charges on the joint account.
ii. Request separate accounts in their own names.
iii. Request that the joint account be closed.
2. Updating information. A creditor may periodically request updated
information from applicants but may not use events related to a
prohibited basis--such as an applicant's retirement or reaching a
particular age, or a change in name or marital status--to trigger such a
request.
Paragraph 7(c)(2)
1. Procedure pending reapplication. A creditor may require a
reapplication from an account holder, even when there is no evidence of
unwillingness or inability to repay, if (1) the credit was based on the
qualifications of a person who is no longer available to support the
credit and (2) the creditor has information indicating that the account
holder's income may be insufficient to support the credit. While a
reapplication is pending, the creditor must allow the account holder
full access to the account under the existing contract terms. The
creditor may specify a reasonable time period within which the account
holder must submit the required information.
7(d) Signature of spouse or other person.
1. Qualified applicant. The signature rules ensure that qualified
applicants are able to obtain credit in their own names. Thus, when an
applicant requests individual credit, a creditor generally may not
require the signature of another person unless the creditor has first
determined that the applicant alone does not qualify for the credit
requested.
2. Unqualified applicant. When an applicant requests individual
credit but does not meet a creditor's standards, the creditor may
require a cosigner, guarantor, endorser, or similar partie--but cannot
require that it be the spouse. (See commentary to Sec. 202.7(d)(5) and
(6).)
Paragraph 7(d)(1)
1. Signature of another person. It is impermissible for a creditor
to require an applicant who is individually creditworthy to provide a
cosigner--even if the creditor applies the requirement without regard to
sex, marital status, or any other prohibited basis. (But see comment
7(d)(6)-1 concerning guarantors of closely held corporations.)
2. Joint applicant. The term ``joint applicant'' refers to someone
who applies contemporaneously with the applicant for shared or joint
credit. It does not refer to someone whose signature is required by the
creditor as a condition for granting the credit requested.
3. Evidence of joint application. A person's intent to be a joint
applicant must be evidenced at the time of application. Signatures on a
promissory note may not be used to show intent to apply for joint
credit. On the other hand, signatures or initials on a credit
application affirming applicants' intent to apply for joint credit may
be used to establish intent to apply for joint credit. (See Appendix B).
The method used to establish intent must be distinct from the means used
by individuals to affirm the accuracy of information. For example,
signatures on a joint financial statement affirming the veracity of
information are not sufficient to establish intent to apply for joint
credit.
Paragraph 7(d)(2)
1. Jointly owned property. If an applicant requests unsecured
credit, does not own sufficient separate property, and relies on joint
property to establish creditworthiness, the creditor must value the
applicant's interest in the jointly owned property. A creditor may not
request that a nonapplicant joint owner sign any instrument as a
condition of the credit extension unless the applicant's interest does
not support the amount and terms of the credit sought.
i. Valuation of applicant's interest. In determining the value of an
applicant's interest in jointly owned property, a creditor may consider
factors such as the form of ownership and the property's susceptibility
to attachment, execution, severance, or partition; the value of the
applicant's interest after such action; and the cost associated with the
action. This determination must be based on the existing form of
ownership, and not on the possibility of a subsequent change. For
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example, in determining whether a married applicant's interest in
jointly owned property is sufficient to satisfy the creditor's standards
of creditworthiness for individual credit, a creditor may not consider
that the applicant's separate property could be transferred into tenancy
by the entirety after consummation. Similarly, a creditor may not
consider the possibility that the couple may divorce. Accordingly, a
creditor may not require the signature of the nonapplicant spouse in
these or similar circumstances.
ii. Other options to support credit. If the applicant's interest in
jointly owned property does not support the amount and terms of credit
sought, the creditor may offer the applicant other options to qualify
for the extension of credit. For example:
A. Providing a co-signer or other party (Sec. 202.7(d)(5));
B. Requesting that the credit be granted on a secured basis (Sec.
202.7(d)(4)); or
C. Providing the signature of the joint owner on an instrument that
ensures access to the property in the event of the applicant's death or
default, but does not impose personal liability unless necessary under
state law (such as a limited guarantee). A creditor may not routinely
require, however, that a joint owner sign an instrument (such as a
quitclaim deed) that would result in the forfeiture of the joint owner's
interest in the property.
2. Need for signature--reasonable belief. A creditor's reasonable
belief as to what instruments need to be signed by a person other than
the applicant should be supported by a thorough review of pertinent
statutory and decisional law or an opinion of the state attorney
general.
Paragraph 7(d)(3)
1. Residency. In assessing the creditworthiness of a person who
applies for credit in a community property state, a creditor may assume
that the applicant is a resident of the state unless the applicant
indicates otherwise.
Paragraph 7(d)(4)
1. Creation of enforceable lien. Some state laws require that both
spouses join in executing any instrument by which real property is
encumbered. If an applicant offers such property as security for credit,
a creditor may require the applicant's spouse to sign the instruments
necessary to create a valid security interest in the property. The
creditor may not require the spouse to sign the note evidencing the
credit obligation if signing only the mortgage or other security
agreement is sufficient to make the property available to satisfy the
debt in the event of default. However, if under state law both spouses
must sign the note to create an enforceable lien, the creditor may
require the signatures.
2. Need for signature--reasonable belief. Generally, a signature to
make the secured property available will only be needed on a security
agreement. A creditor's reasonable belief that, to ensure access to the
property, the spouse's signature is needed on an instrument that imposes
personal liability should be supported by a thorough review of pertinent
statutory and decisional law or an opinion of the state attorney
general.
3. Integrated instruments. When a creditor uses an integrated
instrument that combines the note and the security agreement, the spouse
cannot be asked to sign the integrated instrument if the signature is
only needed to grant a security interest. But the spouse could be asked
to sign an integrated instrument that makes clear--for example, by a
legend placed next to the spouse's signature--that the spouse's
signature is only to grant a security interest and that signing the
instrument does not impose personal liability.
Paragraph 7(d)(5)
1. Qualifications of additional parties. In establishing guidelines
for eligibility of guarantors, cosigners, or similar additional parties,
a creditor may restrict the applicant's choice of additional parties but
may not discriminate on the basis of sex, marital status, or any other
prohibited basis. For example, the creditor could require that the
additional party live in the creditor's market area.
2. Reliance on income of another person--individual credit. An
applicant who requests individual credit relying on the income of
another person (including a spouse in a non-community property state)
may be required to provide the signature of the other person to make the
income available to pay the debt. In community property states, the
signature of a spouse may be required if the applicant relies on the
spouse's separate income. If the applicant relies on the spouse's future
earnings that as a matter of state law cannot be characterized as
community property until earned, the creditor may require the spouse's
signature, but need not do so--even if it is the creditor's practice to
require the signature when an applicant relies on the future earnings of
a person other than a spouse. (See Sec. 202.6(c) on consideration of
state property laws.)
3. Renewals. If the borrower's creditworthiness is reevaluated when
a credit obligation is renewed, the creditor must determine whether an
additional party is still warranted and, if not warranted, release the
additional party.
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Paragraph 7(d)(6)
1. Guarantees. A guarantee on an extension of credit is part of a
credit transaction and therefore subject to the regulation. A creditor
may require the personal guarantee of the partners, directors, or
officers of a business, and the shareholders of a closely held
corporation, even if the business or corporation is creditworthy. The
requirement must be based on the guarantor's relationship with the
business or corporation, however, and not on a prohibited basis. For
example, a creditor may not require guarantees only for women-owned or
minority-owned businesses. Similarly, a creditor may not require
guarantees only of the married officers of a business or the married
shareholders of a closely held corporation.
2. Spousal guarantees. The rules in Sec. 202.7(d) bar a creditor
from requiring the signature of a guarantor's spouse just as they bar
the creditor from requiring the signature of an applicant's spouse. For
example, although a creditor may require all officers of a closely held
corporation to personally guarantee a corporate loan, the creditor may
not automatically require that spouses of married officers also sign the
guarantee. If an evaluation of the financial circumstances of an officer
indicates that an additional signature is necessary, however, the
creditor may require the signature of another person in appropriate
circumstances in accordance with Sec. 202.7(d)(2).
7(e) Insurance.
1. Differences in terms. Differences in the availability, rates, and
other terms on which credit-related casualty insurance or credit life,
health, accident, or disability insurance is offered or provided to an
applicant does not violate Regulation B.
2. Insurance information. A creditor may obtain information about an
applicant's age, sex, or marital status for insurance purposes. The
information may only be used for determining eligibility and premium
rates for insurance, however, and not in making the credit decision.
Section 202.8--Special Purpose Credit Programs
8(a) Standards for programs.
1. Determining qualified programs. The Board does not determine
whether individual programs qualify for special purpose credit status,
or whether a particular program benefits an ``economically disadvantaged
class of persons.'' The agency or creditor administering or offering the
loan program must make these decisions regarding the status of its
program.
2. Compliance with a program authorized by federal or state law. A
creditor does not violate Regulation B when it complies in good faith
with a regulation promulgated by a government agency implementing a
special purpose credit program under Sec. 202.8(a)(1). It is the
agency's responsibility to promulgate a regulation that is consistent
with federal and state law.
3. Expressly authorized. Credit programs authorized by federal or
state law include programs offered pursuant to federal, state, or local
statute, regulation or ordinance, or pursuant to judicial or
administrative order.
4. Creditor liability. A refusal to grant credit to an applicant is
not a violation of the Act or regulation if the applicant does not meet
the eligibility requirements under a special purpose credit program.
5. Determining need. In designing a special purpose credit program
under Sec. 202.8(a), a for-profit organization must determine that the
program will benefit a class of people who would otherwise be denied
credit or would receive it on less favorable terms. This determination
can be based on a broad analysis using the organization's own research
or data from outside sources, including governmental reports and
studies. For example, a creditor might design new products to reach
consumers who would not meet, or have not met, its traditional standards
of creditworthiness due to such factors as credit inexperience or the
use of credit sources that may not report to consumer reporting
agencies. Or, a bank could review Home Mortgage Disclosure Act data
along with demographic data for its assessment area and conclude that
there is a need for a special purpose credit program for low-income
minority borrowers.
6. Elements of the program. The written plan must contain
information that supports the need for the particular program. The plan
also must either state a specific period of time for which the program
will last, or contain a statement regarding when the program will be
reevaluated to determine if there is a continuing need for it.
8(b) Rules in other sections.
1. Applicability of rules. A creditor that rejects an application
because the applicant does not meet the eligibility requirements (common
characteristic or financial need, for example) must nevertheless notify
the applicant of action taken as required by Sec. 202.9.
8(c) Special rule concerning requests and use of information.
1. Request of prohibited basis information. This section permits a
creditor to request and consider certain information that would
otherwise be prohibited by Sec. Sec. 202.5 and 202.6 to determine an
applicant's eligibility for a particular program.
2. Examples. Examples of programs under which the creditor can ask
for and consider information about a prohibited basis are:
i. Energy conservation programs to assist the elderly, for which the
creditor must consider the applicant's age.
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ii. Programs under a Minority Enterprise Small Business Investment
Corporation, for which a creditor must consider the applicant's minority
status.
8(d) Special rule in the case of financial need.
1. Request of prohibited basis information. This section permits a
creditor to request and consider certain information that would
otherwise be prohibited by Sec. Sec. 202.5 and 202.6, and to require
signatures that would otherwise be prohibited by Sec. 202.7(d).
2. Examples. Examples of programs in which financial need is a
criterion are:
i. Subsidized housing programs for low- to moderate-income
households, for which a creditor may have to consider the applicant's
receipt of alimony or child support, the spouse's or parents' income,
etc.
ii. Student loan programs based on the family's financial need, for
which a creditor may have to consider the spouse's or parents' financial
resources.
3. Student loans. In a guaranteed student loan program, a creditor
may obtain the signature of a parent as a guarantor when required by
federal or state law or agency regulation, or when the student does not
meet the creditor's standards of creditworthiness. (See Sec.
202.7(d)(1) and (5).) The creditor may not require an additional
signature when a student has a work or credit history that satisfies the
creditor's standards.
Section 202.9--Notifications
1. Use of the term adverse action. The regulation does not require
that a creditor use the term adverse action in communicating to an
applicant that a request for an extension of credit has not been
approved. In notifying an applicant of adverse action as defined by
Sec. 202.2(c)(1), a creditor may use any words or phrases that describe
the action taken on the application.
2. Expressly withdrawn applications. When an applicant expressly
withdraws a credit application, the creditor is not required to comply
with the notification requirements under Sec. 202.9. (The creditor must
comply, however, with the record retention requirements of the
regulation. See Sec. 202.12(b)(3).)
3. When notification occurs. Notification occurs when a creditor
delivers or mails a notice to the applicant's last known address or, in
the case of an oral notification, when the creditor communicates the
credit decision to the applicant.
4. Location of notice. The notifications required under Sec. 202.9
may appear on either or both sides of a form or letter.
5. Prequalification requests. Whether a creditor must provide a
notice of action taken for a prequalification request depends on the
creditor's response to the request, as discussed in comment 2(f)-3. For
instance, a creditor may treat the request as an inquiry if the creditor
evaluates specific information about the consumer and tells the consumer
the loan amount, rate, and other terms of credit the consumer could
qualify for under various loan programs, explaining the process the
consumer must follow to submit a mortgage application and the
information the creditor will analyze in reaching a credit decision. On
the other hand, a creditor has treated a request as an application, and
is subject to the adverse action notice requirements of Sec. 202.9 if,
after evaluating information, the creditor decides that it will not
approve the request and communicates that decision to the consumer. For
example, if the creditor tells the consumer that it would not approve an
application for a mortgage because of a bankruptcy in the consumer's
record, the creditor has denied an application for credit.
9(a) Notification of action taken, ECOA notice, and statement of
specific reasons.
Paragraph 9(a)(1)
1. Timing of notice--when an application is complete. Once a
creditor has obtained all the information it normally considers in
making a credit decision, the application is complete and the creditor
has 30 days in which to notify the applicant of the credit decision.
(See also comment 2(f)-6.)
2. Notification of approval. Notification of approval may be express
or by implication. For example, the creditor will satisfy the
notification requirement when it gives the applicant the credit card,
money, property, or services requested.
3. Incomplete application--denial for incompleteness. When an
application is incomplete regarding information that the applicant can
provide and the creditor lacks sufficient data for a credit decision,
the creditor may deny the application giving as the reason for denial
that the application is incomplete. The creditor has the option,
alternatively, of providing a notice of incompleteness under Sec.
202.9(c).
4. Incomplete application--denial for reasons other than
incompleteness. When an application is missing information but provides
sufficient data for a credit decision, the creditor may evaluate the
application, make its credit decision, and notify the applicant
accordingly. If credit is denied, the applicant must be given the
specific reasons for the credit denial (or notice of the right to
receive the reasons); in this instance missing information or
``incomplete application'' cannot be given as the reason for the denial.
5. Length of counteroffer. Section 202.9(a)(1)(iv) does not require
a creditor to hold a counteroffer open for 90 days or any other
particular length of time.
6. Counteroffer combined with adverse action notice. A creditor that
gives the applicant a combined counteroffer and adverse action notice
that complies with Sec. 202.9(a)(2) need not send a second adverse
action notice if the applicant does not accept the
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counteroffer. A sample of a combined notice is contained in form C-4 of
Appendix C to the regulation.
7. Denial of a telephone application. When an application is made by
telephone and adverse action is taken, the creditor must request the
applicant's name and address in order to provide written notification
under this section. If the applicant declines to provide that
information, then the creditor has no further notification
responsibility.
Paragraph 9(a)(3)
1. Coverage. In determining which rules in this paragraph apply to a
given business credit application, a creditor may rely on the
applicant's assertion about the revenue size of the business.
(Applications to start a business are governed by the rules in Sec.
202.9(a)(3)(i).) If an applicant applies for credit as a sole
proprietor, the revenues of the sole proprietorship will determine which
rules govern the application. However, if an applicant applies for
business credit as an individual, the rules in Sec. 202.9(a)(3)(i)
apply unless the application is for trade or similar credit.
2. Trade credit. The term trade credit generally is limited to a
financing arrangement that involves a buyer and a seller--such as a
supplier who finances the sale of equipment, supplies, or inventory; it
does not apply to an extension of credit by a bank or other financial
institution for the financing of such items.
3. Factoring. Factoring refers to a purchase of accounts receivable,
and thus is not subject to the Act or regulation. If there is a credit
extension incident to the factoring arrangement, the notification rules
in Sec. 202.9(a)(3)(ii) apply, as do other relevant sections of the Act
and regulation.
4. Manner of compliance. In complying with the notice provisions of
the Act and regulation, creditors offering business credit may follow
the rules governing consumer credit. Similarly, creditors may elect to
treat all business credit the same (irrespective of revenue size) by
providing notice in accordance with Sec. 202.9(a)(3)(i).
5. Timing of notification. A creditor subject to Sec.
202.9(a)(3)(ii)(A) is required to notify a business credit applicant,
orally or in writing, of action taken on an application within a
reasonable time of receiving a completed application. Notice provided in
accordance with the timing requirements of Sec. 202.9(a)(1) is deemed
reasonable in all instances.
9(b) Form of ECOA notice and statement of specific reasons.
Paragraph 9(b)(1)
1. Substantially similar notice. The ECOA notice sent with a
notification of a credit denial or other adverse action will comply with
the regulation if it is ``substantially similar'' to the notice
contained in Sec. 202.9(b)(1). For example, a creditor may add a
reference to the fact that the ECOA permits age to be considered in
certain credit scoring systems, or add a reference to a similar state
statute or regulation and to a state enforcement agency.
Paragraph 9(b)(2)
1. Number of specific reasons. A creditor must disclose the
principal reasons for denying an application or taking other adverse
action. The regulation does not mandate that a specific number of
reasons be disclosed, but disclosure of more than four reasons is not
likely to be helpful to the applicant.
2. Source of specific reasons. The specific reasons disclosed under
Sec. Sec. 202.9(a)(2) and (b)(2) must relate to and accurately describe
the factors actually considered or scored by a creditor.
3. Description of reasons. A creditor need not describe how or why a
factor adversely affected an applicant. For example, the notice may say
``length of residence'' rather than ``too short a period of residence.''
4. Credit scoring system. If a creditor bases the denial or other
adverse action on a credit scoring system, the reasons disclosed must
relate only to those factors actually scored in the system. Moreover, no
factor that was a principal reason for adverse action may be excluded
from disclosure. The creditor must disclose the actual reasons for
denial (for example, ``age of automobile'') even if the relationship of
that factor to predicting creditworthiness may not be clear to the
applicant.
5. Credit scoring--method for selecting reasons. The regulation does
not require that any one method be used for selecting reasons for a
credit denial or other adverse action that is based on a credit scoring
system. Various methods will meet the requirements of the regulation.
One method is to identify the factors for which the applicant's score
fell furthest below the average score for each of those factors achieved
by applicants whose total score was at or slightly above the minimum
passing score. Another method is to identify the factors for which the
applicant's score fell furthest below the average score for each of
those factors achieved by all applicants. These average scores could be
calculated during the development or use of the system. Any other method
that produces results substantially similar to either of these methods
is also acceptable under the regulation.
6. Judgmental system. If a creditor uses a judgmental system, the
reasons for the denial or other adverse action must relate to those
factors in the applicant's record actually reviewed by the person making
the decision.
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7. Combined credit scoring and judgmental system. If a creditor
denies an application based on a credit evaluation system that employs
both credit scoring and judgmental components, the reasons for the
denial must come from the component of the system that the applicant
failed. For example, if a creditor initially credit scores an
application and denies the credit request as a result of that scoring,
the reasons disclosed to the applicant must relate to the factors scored
in the system. If the application passes the credit scoring stage but
the creditor then denies the credit request based on a judgmental
assessment of the applicant's record, the reasons disclosed must relate
to the factors reviewed judgmentally, even if the factors were also
considered in the credit scoring component. If the application is not
approved or denied as a result of the credit scoring, but falls into a
gray band, and the creditor performs a judgmental assessment and denies
the credit after that assessment, the reasons disclosed must come from
both components of the system. The same result applies where a
judgmental assessment is the first component of the combined system. As
provided in comment 9(b)(2)-1, disclosure of more than a combined total
of four reasons is not likely to be helpful to the applicant.
8. Automatic denial. Some credit decision methods contain features
that call for automatic denial because of one or more negative factors
in the applicant's record (such as the applicant's previous bad credit
history with that creditor, the applicant's declaration of bankruptcy,
or the fact that the applicant is a minor). When a creditor denies the
credit request because of an automatic-denial factor, the creditor must
disclose that specific factor.
9. Combined ECOA-FCRA disclosures. The ECOA requires disclosure of
the principal reasons for denying or taking other adverse action on an
application for an extension of credit. The Fair Credit Reporting Act
(FCRA) requires a creditor to disclose when it has based its decision in
whole or in part on information from a source other than the applicant
or its own files. Disclosing that a consumer report was obtained and
used in the denial of the application, as the FCRA requires, does not
satisfy the ECOA requirement to disclose specific reasons. For example,
if the applicant's credit history reveals delinquent credit obligations
and the application is denied for that reason, to satisfy Sec.
202.9(b)(2) the creditor must disclose that the application was denied
because of the applicant's delinquent credit obligations. The FCRA also
requires a creditor to disclose, as applicable, a credit score it used
in taking adverse action along with related information, including up to
four key factors that adversely affected the consumer's credit score (or
up to five factors if the number of inquiries made with respect to that
consumer report is a key factor). Disclosing the key factors that
adversely affected the consumer's credit score does not satisfy the ECOA
requirement to disclose specific reasons for denying or taking other
adverse action on an application or extension of credit. Sample forms C-
1 through C-5 of appendix C of the regulation provide for both the ECOA
and FCRA disclosures. See also comment 9(a)(2)-1.
9(c) Incomplete applications.
Paragraph 9(c)(1)
1. Exception for preapprovals. The requirement to provide a notice
of incompleteness does not apply to preapprovals that constitute
applications under Sec. 202.2(f).
Paragraph 9(c)(2)
1. Reapplication. If information requested by a creditor is
submitted by an applicant after the expiration of the time period
designated by the creditor, the creditor may require the applicant to
make a new application.
Paragraph 9(c)(3)
1. Oral inquiries for additional information. If an applicant fails
to provide the information in response to an oral request, a creditor
must send a written notice to the applicant within the 30-day period
specified in Sec. 202.9(c)(1) and (2). If the applicant provides the
information, the creditor must take action on the application and notify
the applicant in accordance with Sec. 202.9(a).
9(g) Applications submitted through a third party.
1. Third parties. The notification of adverse action may be given by
one of the creditors to whom an application was submitted, or by a
noncreditor third party. If one notification is provided on behalf of
multiple creditors, the notice must contain the name and address of each
creditor. The notice must either disclose the applicant's right to a
statement of specific reasons within 30 days, or give the primary
reasons each creditor relied upon in taking the adverse action--clearly
indicating which reasons relate to which creditor.
2. Third party notice--enforcement agency. If a single adverse
action notice is being provided to an applicant on behalf of several
creditors and they are under the jurisdiction of different federal
enforcement agencies, the notice need not name each agency; disclosure
of any one of them will suffice.
3. Third-party notice--liability. When a notice is to be provided
through a third party, a creditor is not liable for an act or omission
of the third party that constitutes a violation of the regulation if the
creditor accurately and in a timely manner provided the third party with
the information necessary
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for the notification and maintains reasonable procedures adapted to
prevent such violations.
Section 202.10--Furnishing of Credit Information
1. Scope. The requirements of Sec. 202.10 for designating and
reporting credit information apply only to consumer credit transactions.
Moreover, they apply only to creditors that opt to furnish credit
information to credit bureaus or to other creditors; there is no
requirement that a creditor furnish credit information on its accounts.
2. Reporting on all accounts. The requirements of Sec. 202.10 apply
only to accounts held or used by spouses. However, a creditor has the
option to designate all joint accounts (or all accounts with an
authorized user) to reflect the participation of both parties, whether
or not the accounts are held by persons married to each other.
3. Designating accounts. In designating accounts and reporting
credit information, a creditor need not distinguish between accounts on
which the spouse is an authorized user and accounts on which the spouse
is a contractually liable party.
4. File and index systems. The regulation does not require the
creation or maintenance of separate files in the name of each
participant on a joint or user account, or require any other particular
system of recordkeeping or indexing. It requires only that a creditor be
able to report information in the name of each spouse on accounts
covered by Sec. 202.10. Thus, if a creditor receives a credit inquiry
about the wife, it should be able to locate her credit file without
asking the husband's name.
10(a) Designation of accounts.
1. New parties. When new parties who are spouses undertake a legal
obligation on an account, as in the case of a mortgage loan assumption,
the creditor must change the designation on the account to reflect the
new parties and must furnish subsequent credit information on the
account in the new names.
2. Request to change designation of account. A request to change the
manner in which information concerning an account is furnished does not
alter the legal liability of either spouse on the account and does not
require a creditor to change the name in which the account is
maintained.
Section 202.11--Relation to State Law
11(a) Inconsistent state laws.
1. Preemption determination--New York. The Board has determined that
the following provisions in the state law of New York are preempted by
the federal law, effective November 11, 1988:
i. Article 15, section 296a(1)(b)--Unlawful discriminatory practices
in relation to credit on the basis of race, creed, color, national
origin, age, sex, marital status, or disability. This provision is
preempted to the extent that it bars taking a prohibited basis into
account when establishing eligibility for certain special-purpose credit
programs.
ii. Article 15, section 296a(1)(c)'Unlawful discriminatory practice
to make any record or inquiry based on race, creed, color, national
origin, age, sex, marital status, or disability. This provision is
preempted to the extent that it bars a creditor from requesting and
considering information regarding the particular characteristics (for
example, race, national origin, or sex) required for eligibility for
special-purpose credit programs.
2. Preemption determination--Ohio. The Board has determined that the
following provision in the state law of Ohio is preempted by the federal
law, effective July 23, 1990:
i. Section 4112.021(B)(1)--Unlawful discriminatory practices in
credit transactions. This provision is preempted to the extent that it
bars asking or favorably considering the age of an elderly applicant;
prohibits the consideration of age in a credit scoring system; permits
without limitation the consideration of age in real estate transactions;
and limits the consideration of age in special-purpose credit programs
to certain government-sponsored programs identified in the state law.
Section 202.12--Record Retention
12(a) Retention of prohibited information.
1. Receipt of prohibited information. Unless the creditor
specifically requested such information, a creditor does not violate
this section when it receives prohibited information from a consumer
reporting agency.
2. Use of retained information. Although a creditor may keep in its
files prohibited information as provided in Sec. 202.12(a), the
creditor may use the information in evaluating credit applications only
if permitted to do so by Sec. 202.6.
12(b) Preservation of records.
1. Copies. Copies of the original record include carbon copies,
photocopies, microfilm or microfiche copies, or copies produced by any
other accurate retrieval system, such as documents stored and reproduced
by computer. A creditor that uses a computerized or mechanized system
need not keep a paper copy of a document (for example, of an adverse
action notice) if it can regenerate all pertinent information in a
timely manner for examination or other purposes.
2. Computerized decisions. A creditor that enters information items
from a written application into a computerized or mechanized system and
makes the credit decision mechanically, based only on the items of
information entered into the system, may comply with Sec. 202.12(b) by
retaining the information actually entered. It is not required to store
the complete written application, nor is it
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required to enter the remaining items of information into the system. If
the transaction is subject to Sec. 202.13, however, the creditor is
required to enter and retain the data on personal characteristics in
order to comply with the requirements of that section.
Paragraph 12(b)(3)
1. Withdrawn and brokered applications. In most cases, the 25-month
retention period for applications runs from the date a notification is
sent to the applicant granting or denying the credit requested. In
certain transactions, a creditor is not obligated to provide a notice of
the action taken. (See, for example, comment 9-2.) In such cases, the
25-month requirement runs from the date of application, as when:
i. An application is withdrawn by the applicant.
ii. An application is submitted to more than one creditor on behalf
of the applicant, and the application is approved by one of the other
creditors.
12(b)(6) Self-tests
1. The rule requires all written or recorded information about a
self-test to be retained for 25 months after a self-test has been
completed. For this purpose, a self-test is completed after the creditor
has obtained the results and made a determination about what corrective
action, if any, is appropriate. Creditors are required to retain
information about the scope of the self-test, the methodology used and
time period covered by the self-test, the report or results of the self-
test including any analysis or conclusions, and any corrective action
taken in response to the self-test.
12(b)(7) Preapplication marketing information.
1. Prescreened credit solicitations. The rule requires creditors to
retain copies of prescreened credit solicitations. For purposes of this
regulation, a prescreened solicitation is an ``offer of credit'' as
described in 15 U.S.C. 1681a(1) of the Fair Credit Reporting Act. A
creditor complies with this rule if it retains a copy of each
solicitation mailing that contains different terms, such as the amount
of credit offered, annual percentage rate, or annual fee.
2. List of criteria. A creditor must retain the list of criteria
used to select potential recipients. This includes the criteria used by
the creditor both to determine the potential recipients of the
particular solicitation and to determine who will actually be offered
credit.
3. Correspondence. A creditor may retain correspondence relating to
consumers' complaints about prescreened solicitations in any manner that
is reasonably accessible and is understandable to examiners. There is no
requirement to establish a separate database or set of files for such
correspondence, or to match consumer complaints with specific
solicitation programs.
Section 202.13--Information for Monitoring Purposes
13(a) Information to be requested.
1. Natural person. Section 202.13 applies only to applications from
natural persons.
2. Principal residence. The requirements of Sec. 202.13 apply only
if an application relates to a dwelling that is or will be occupied by
the applicant as the principal residence. A credit application related
to a vacation home or a rental unit is not covered. In the case of a
two- to four-unit dwelling, the application is covered if the applicant
intends to occupy one of the units as a principal residence.
3. Temporary financing. An application for temporary financing to
construct a dwelling is not subject to Sec. 202.13. But an application
for both a temporary loan to finance construction of a dwelling and a
permanent mortgage loan to take effect upon the completion of
construction is subject to Sec. 202.13.
4. New principal residence. A person can have only one principal
residence at a time. However, if a person buys or builds a new dwelling
that will become that person's principal residence within a year or upon
completion of construction, the new dwelling is considered the principal
residence for purposes of Sec. 202.13.
5. Transactions not covered. The information-collection requirements
of this section apply to applications for credit primarily for the
purchase or refinancing of a dwelling that is or will become the
applicant's principal residence. Therefore, applications for credit
secured by the applicant's principal residence but made primarily for a
purpose other than the purchase or refinancing of the principal
residence (such as loans for home improvement and debt consolidation)
are not subject to the information-collection requirements. An
application for an open-end home equity line of credit is not subject to
this section unless it is readily apparent to the creditor when the
application is taken that the primary purpose of the line is for the
purchase or refinancing of a principal dwelling.
6. Refinancings. A refinancing occurs when an existing obligation is
satisfied and replaced by a new obligation undertaken by the same
borrower. A creditor that receives an application to refinance an
existing extension of credit made by that creditor for the purchase of
the applicant's dwelling may request the monitoring information again
but is not required to do so if it was obtained in the earlier
transaction.
7. Data collection under Regulation C. See comment 5(a)(2)-2.
13(b) Obtaining of information.
1. Forms for collecting data. A creditor may collect the information
specified in Sec. 202.13(a)
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either on an application form or on a separate form referring to the
application. The applicant must be offered the option to select more
than one racial designation.
2. Written applications. The regulation requires written
applications for the types of credit covered by Sec. 202.13. A creditor
can satisfy this requirement by recording on paper or by means of
computer the information that the applicant provides orally and that the
creditor normally considers in a credit decision.
3. Telephone, mail applications.
i. A creditor that accepts an application by telephone or mail must
request the monitoring information.
ii. A creditor that accepts an application by mail need not make a
special request for the monitoring information if the applicant has
failed to provide it on the application form returned to the creditor.
iii. If it is not evident on the face of an application that it was
received by mail, telephone, or via an electronic medium, the creditor
should indicate on the form or other application record how the
application was received.
4. Video and other electronic-application processes.
i. If a creditor takes an application through an electronic medium
that allows the creditor to see the applicant, the creditor must treat
the application as taken in person. The creditor must note the
monitoring information on the basis of visual observation or surname, if
the applicant chooses not to provide the information.
ii. If an applicant applies through an electronic medium without
video capability, the creditor treats the application as if it were
received by mail.
5. Applications through loan-shopping services. When a creditor
receives an application through an unaffiliated loan-shopping service,
it does not have to request the monitoring information for purposes of
the ECOA or Regulation B. Creditors subject to the Home Mortgage
Disclosure Act should be aware, however, that data collection may be
called for under Regulation C (12 CFR part 203), which generally
requires creditors to report, among other things, the sex and race of an
applicant on brokered applications or applications received through a
correspondent.
6. Inadvertent notation. If a creditor inadvertently obtains the
monitoring information in a dwelling-related transaction not covered by
Sec. 202.13, the creditor may process and retain the application
without violating the regulation.
13(c) Disclosure to applicants.
1. Procedures for providing disclosures. The disclosure to an
applicant regarding the monitoring information may be provided in
writing. Appendix B contains a sample disclosure. A creditor may devise
its own disclosure so long as it is substantially similar. The creditor
need not orally request the monitoring information if it is requested in
writing.
13(d) Substitute monitoring program.
1. Substitute program. An enforcement agency may adopt, under its
established rulemaking or enforcement procedures, a program requiring
creditors under its jurisdiction to collect information in addition to
information required by this section.
Section 202.14--Rules on Providing Appraisal Reports
14(a) Providing appraisals.
1. Coverage. This section covers applications for credit to be
secured by a lien on a dwelling, as that term is defined in Sec.
202.14(c), whether the credit is for a business purpose (for example, a
loan to start a business) or a consumer purpose (for example, a loan to
finance a child's education).
2. Renewals. This section applies when an applicant requests the
renewal of an existing extension of credit and the creditor obtains a
new appraisal report. This section does not apply when a creditor uses
the appraisal report previously obtained to evaluate the renewal
request.
14(a)(2)(i) Notice.
1. Multiple applicants. When an application that is subject to this
section involves more than one applicant, the notice about the appraisal
report need only be given to one applicant, but it must be given to the
primary applicant where one is readily apparent.
14(a)(2)(ii) Delivery.
1. Reimbursement. Creditors may charge for photocopy and postage
costs incurred in providing a copy of the appraisal report, unless
prohibited by state or other law. If the consumer has already paid for
the report--for example, as part of an application fee--the creditor may
not require additional fees for the appraisal (other than photocopy and
postage costs).
14(c) Definitions.
1. Appraisal reports. Examples of appraisal reports are:
i. A report prepared by an appraiser (whether or not licensed or
certified), including written comments and other documents submitted to
the creditor in support of the appraiser's estimate or opinion of the
property's value.
ii. A document prepared by the creditor's staff that assigns value
to the property, if a third-party appraisal report has not been used.
iii. An internal review document reflecting that the creditor's
valuation is different from a valuation in a third party's appraisal
report (or different from valuations that are publicly available or
valuations such as manufacturers' invoices for mobile homes).
2. Other reports. The term ``appraisal report'' does not cover all
documents relating
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to the value of the applicant's property. Examples of reports not
covered are:
i. Internal documents, if a third-party appraisal report was used to
establish the value of the property.
ii. Governmental agency statements of appraised value.
iii. Valuations lists that are publicly available (such as published
sales prices or mortgage amounts, tax assessments, and retail price
ranges) and valuations such as manufacturers' invoices for mobile homes.
Section 202.15--Incentives for Self-Testing and Self-Correction
15(a) General rules.
15(a)(1) Voluntary self-testing and correction.
1. Activities required by any governmental authority are not
voluntary self-tests. A governmental authority includes both
administrative and judicial authorities for federal, state, and local
governments.
15(a)(2) Corrective action required.
1. To qualify for the privilege, appropriate corrective action is
required when the results of a self-test show that it is more likely
than not that there has been a violation of the ECOA or this regulation.
A self-test is also privileged when it identifies no violations.
2. In some cases, the issue of whether certain information is
privileged may arise before the self-test is complete or corrective
actions are fully under way. This would not necessarily prevent a
creditor from asserting the privilege. In situations where the self-test
is not complete, for the privilege to apply the lender must satisfy the
regulation's requirements within a reasonable period of time. To assert
the privilege where the self-test shows a likely violation, the rule
requires, at a minimum, that the creditor establish a plan for
corrective action and a method to demonstrate progress in implementing
the plan. Creditors must take appropriate corrective action on a timely
basis after the results of the self-test are known.
3. A creditor's determination about the type of corrective action
needed, or a finding that no corrective action is required, is not
conclusive in determining whether the requirements of this paragraph
have been satisfied. If a creditor's claim of privilege is challenged,
an assessment of the need for corrective action or the type of
corrective action that is appropriate must be based on a review of the
self-testing results, which may require an in camera inspection of the
privileged documents.
15(a)(3) Other privileges.
1. A creditor may assert the privilege established under this
section in addition to asserting any other privilege that may apply,
such as the attorney-client privilege or the work-product privilege.
Self-testing data may be privileged under this section whether or not
the creditor's assertion of another privilege is upheld.
15(b) Self-test defined.
15(b)(1) Definition.
Paragraph 15(b)(1)(i)
1. To qualify for the privilege, a self-test must be sufficient to
constitute a determination of the extent or effectiveness of the
creditor's compliance with the Act and Regulation B. Accordingly, a
self-test is only privileged if it was designed and used for that
purpose. A self-test that is designed or used to determine compliance
with other laws or regulations or for other purposes is not privileged
under this rule. For example, a self-test designed to evaluate employee
efficiency or customers' satisfaction with the level of service provided
by the creditor is not privileged even if evidence of discrimination is
uncovered incidentally. If a self-test is designed for multiple
purposes, only the portion designed to determine compliance with the
ECOA is eligible for the privilege.
Paragraph 15(b)(1)(ii)
1. The principal attribute of self-testing is that it constitutes a
voluntary undertaking by the creditor to produce new data or factual
information that otherwise would not be available and could not be
derived from loan or application files or other records related to
credit transactions. Self-testing includes, but is not limited to, the
practice of using fictitious applicants for credit (testers), either
with or without the use of matched pairs. A creditor may elect to test a
defined segment of its business, for example, loan applications
processed by a specific branch or loan officer, or applications made for
a particular type of credit or loan program. A creditor also may use
other methods of generating information that is not available in loan
and application files, such as surveying mortgage loan applicants. To
the extent permitted by law, creditors might also develop new methods
that go beyond traditional pre-application testing, such as hiring
testers to submit fictitious loan applications for processing.
2. The privilege does not protect a creditor's analysis performed as
part of processing or underwriting a credit application. A creditor's
evaluation or analysis of its loan files, Home Mortgage Disclosure Act
data, or similar types of records (such as broker or loan officer
compensation records) does not produce new information about a
creditor's compliance and is not a self-test for purposes of this
section. Similarly, a statistical analysis of data derived from existing
loan files is not privileged.
15(b)(3) Types of information not privileged.
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Paragraph 15(b)(3)(i)
1. The information listed in this paragraph is not privileged and
may be used to determine whether the prerequisites for the privilege
have been satisfied. Accordingly, a creditor might be asked to identify
the self-testing method, for example, whether preapplication testers
were used or data were compiled by surveying loan applicants.
Information about the scope of the self-test (such as the types of
credit transactions examined, or the geographic area covered by the
test) also is not privileged.
Paragraph 15(b)(3)(ii)
1. Property appraisal reports, minutes of loan committee meetings or
other documents reflecting the basis for a decision to approve or deny
an application, loan policies or procedures, underwriting standards, and
broker compensation records are examples of the types of records that
are not privileged. If a creditor arranges for testers to submit loan
applications for processing, the records are not related to actual
credit transactions for purposes of this paragraph and may be privileged
self-testing records.
15(c) Appropriate corrective action.
1. The rule only addresses the corrective actions required for a
creditor to take advantage of the privilege in this section. A creditor
may be required to take other actions or provide additional relief if a
formal finding of discrimination is made.
15(c)(1) General requirement.
1. Appropriate corrective action is required even though no
violation has been formally adjudicated or admitted by the creditor. In
determining whether it is more likely than not that a violation
occurred, a creditor must treat testers as if they are actual applicants
for credit. A creditor may not refuse to take appropriate corrective
action under this section because the self-test used fictitious loan
applicants. The fact that a tester's agreement with the creditor waives
the tester's legal right to assert a violation does not eliminate the
requirement for the creditor to take corrective action, although no
remedial relief for the tester is required under paragraph 15(c)(3).
15(c)(2) Determining the scope of appropriate corrective action.
1. Whether a creditor has taken or is taking corrective action that
is appropriate will be determined on a case-by-case basis. Generally,
the scope of the corrective action that is needed to preserve the
privilege is governed by the scope of the self-test. For example, a
creditor that self-tests mortgage loans and discovers evidence of
discrimination may focus its corrective actions on mortgage loans, and
is not required to expand its testing to other types of loans.
2. In identifying the policies or practices that are a likely cause
of the violation, a creditor might identify inadequate or improper
lending policies, failure to implement established policies, employee
conduct, or other causes. The extent and scope of a likely violation may
be assessed by determining which areas of operations are likely to be
affected by those policies and practices, for example, by determining
the types of loans and stages of the application process involved and
the branches or offices where the violations may have occurred.
3. Depending on the method and scope of the self-test and the
results of the test, appropriate corrective action may include one or
more of the following:
i. If the self-test identifies individuals whose applications were
inappropriately processed, offering to extend credit if the application
was improperly denied and compensating such persons for out-of-pocket
costs and other compensatory damages;
ii. Correcting institutional policies or procedures that may have
contributed to the likely violation, and adopting new policies as
appropriate;
iii. Identifying and then training and/or disciplining the employees
involved;
iv. Developing outreach programs, marketing strategies, or loan
products to serve more effectively segments of the lender's markets that
may have been affected by the likely discrimination; and
v. Improving audit and oversight systems to avoid a recurrence of
the likely violations.
15(c)(3) Types of relief.
Paragraph 15(c)(3)(ii)
1. The use of pre-application testers to identify policies and
practices that illegally discriminate does not require creditors to
review existing loan files for the purpose of identifying and
compensating applicants who might have been adversely affected.
2. If a self-test identifies a specific applicant who was
discriminated against on a prohibited basis, to qualify for the
privilege in this section the creditor must provide appropriate remedial
relief to that applicant; the creditor is not required to identify other
applicants who might also have been adversely affected.
Paragraph 15(c)(3)(iii)
1. A creditor is not required to provide remedial relief to an
applicant that would not be available by law. An applicant might also be
ineligible for certain types of relief due to changed circumstances. For
example, a creditor is not required to offer credit to a denied
applicant if the applicant no longer qualifies for the credit due to a
change in financial circumstances, although some other type of relief
might be appropriate.
15(d)(1) Scope of privilege.
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1. The privilege applies with respect to any examination,
investigation or proceeding by federal, state, or local government
agencies relating to compliance with the Act or this regulation.
Accordingly, in a case brought under the ECOA, the privilege established
under this section preempts any inconsistent laws or court rules to the
extent they might require disclosure of privileged self-testing data.
The privilege does not apply in other cases (such as in litigation filed
solely under a state's fair lending statute). In such cases, if a court
orders a creditor to disclose self-test results, the disclosure is not a
voluntary disclosure or waiver of the privilege for purposes of
paragraph 15(d)(2); a creditor may protect the information by seeking a
protective order to limit availability and use of the self-testing data
and prevent dissemination beyond what is necessary in that case.
Paragraph 15(d)(1) precludes a party who has obtained privileged
information from using it in a case brought under the ECOA, provided the
creditor has not lost the privilege through voluntary disclosure under
paragraph 15(d)(2).
15(d)(2) Loss of privilege.
Paragraph 15(d)(2)(i)
1. A creditor's corrective action, by itself, is not considered a
voluntary disclosure of the self-test report or results. For example, a
creditor does not disclose the results of a self-test merely by offering
to extend credit to a denied applicant or by inviting the applicant to
reapply for credit. Voluntary disclosure could occur under this
paragraph, however, if the creditor disclosed the self-test results in
connection with a new offer of credit.
2. The disclosure of self-testing results to an independent
contractor acting as an auditor or consultant for the creditor on
compliance matters does not result in loss of the privilege.
Paragraph 15(d)(2)(ii)
1. The privilege is lost if the creditor discloses privileged
information, such as the results of the self-test. The privilege is not
lost if the creditor merely reveals or refers to the existence of the
self-test.
Paragraph 15(d)(2)(iii)
1. A creditor's claim of privilege may be challenged in a court or
administrative law proceeding with appropriate jurisdiction. In
resolving the issue, the presiding officer may require the creditor to
produce privileged information about the self-test.
Paragraph 15(d)(3) Limited use of privileged information
1. A creditor may be required to produce privileged documents for
the purpose of determining a penalty or remedy after a violation of the
ECOA or Regulation B has been formally adjudicated or admitted. A
creditor's compliance with such a requirement does not evidence the
creditor's intent to forfeit the privilege.
Section 202.16--Enforcement, Penalties, and Liabilities
17(c) Failure of compliance.
1. Inadvertent errors. Inadvertent errors include, but are not
limited to, clerical mistake, calculation error, computer malfunction,
and printing error. An error of legal judgment is not an inadvertent
error under the regulation.
2. Correction of error. For inadvertent errors that occur under
Sec. Sec. 202.12 and 202.13, this section requires that they be
corrected prospectively.
Appendix B--Model Application Forms
1. Freddie Mac/Fannie Mae form--residential loan application. The
uniform residential loan application form (Freddie Mac 65/Fannie Mae
1003), including supplemental form (Freddie Mac 65A/Fannie Mae 1003A),
prepared by the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association and dated October 1992 may be used by
creditors without violating this regulation. Creditors that are governed
by the monitoring requirements of this regulation (which limits
collection to applications primarily for the purchase or refinancing of
the applicant's principal residence) should delete, strike, or modify
the data-collection section on the form when using it for transactions
not covered by Sec. 202.13(a) to ensure that they do not collect the
information. Creditors that are subject to more extensive collection
requirements by a substitute monitoring program under Sec. 202.13(d) or
by the Home Mortgage Disclosure Act (HMDA) may use the form as issued,
in compliance with the substitute program or HMDA.
2. FHLMC/FNMA form--home improvement loan application. The home-
improvement and energy loan application form (FHLMC 703/FNMA 1012),
prepared by the Federal Home Loan Mortgage Corporation and the Federal
National Mortgage Association and dated October 1986, complies with the
requirements of the regulation for some creditors but not others because
of the form's section ``Information for Government Monitoring
Purposes.'' Creditors that are governed by Sec. 202.13(a) of the
regulation (which limits collection to applications primarily for the
purchase or refinancing of the applicant's principal residence) should
delete, strike, or modify the data-collection section on the form when
using it for transactions not covered by Sec. 202.13(a) to ensure that
they do not collect the information. Creditors that are subject to more
extensive collection requirements by a substitute monitoring program
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under Sec. 202.13(d) may use the form as issued, in compliance with
that substitute program.
Appendix C--Sample Notification Forms
1. Form C-9. Creditors may design their own form, add to, or modify
the model form to reflect their individual policies and procedures. For
example, a creditor may want to add:
i. A telephone number that applicants may call to leave their name
and the address to which an appraisal report should be sent.
ii. A notice of the cost the applicant will be required to pay the
creditor for the appraisal or a copy of the report.
[Reg. B, 68 FR 13161, Mar. 18, 2003, as amended at 72 FR 63451, Nov. 9,
2007; 72 FR 71057, Dec. 14, 2007; 76 FR 41602, July 15, 2011]
PART 203_HOME MORTGAGE DISCLOSURE (REGULATION C)--Table of Contents
Sec.
203.1 Authority, purpose, and scope.
203.2 Definitions.
203.3 Exempt institutions.
203.4 Compilation of loan data.
203.5 Disclosure and reporting.
203.6 Enforcement.
Appendix A to Part 203--Form and Instructions for Completion of HMDA
Loan/Application Register
Appendix B to Part 203--Form and Instructions for Data Collection on
Ethnicity, Race, and Sex
Supplement I to Part 203--Staff Commentary
Authority: 12 U.S.C. 2801-2810.
Source: Reg. C, 67 FR 7236, Feb. 15, 2002, unless otherwise noted.
Sec. 203.1 Authority, purpose, and scope.
(a) Authority. This regulation is issued by the Board of Governors
of the Federal Reserve System (``Board'') pursuant to the Home Mortgage
Disclosure Act (``HMDA'') (12 U.S.C. 2801 et seq.), as amended. The
information-collection requirements have been approved by the U.S.
Office of Management and Budget (``OMB'') under 44 U.S.C. 3501 et seq.
and have been assigned OMB numbers for institutions reporting data to
the Office of the Comptroller of the Currency (1557-0159), the Federal
Deposit Insurance Corporation (3064-0046), the Office of Thrift
Supervision (1550-0021), the Federal Reserve System (7100-0247), and the
Department of Housing and Urban Development (``HUD'') (2502-0529). A
number for the National Credit Union Administration is pending.
(b) Purpose. (1) This regulation implements the Home Mortgage
Disclosure Act, which is intended to provide the public with loan data
that can be used:
(i) To help determine whether financial institutions are serving the
housing needs of their communities;
(ii) To assist public officials in distributing public-sector
investment so as to attract private investment to areas where it is
needed; and
(iii) To assist in identifying possible discriminatory lending
patterns and enforcing antidiscrimination statutes.
(2) Neither the act nor this regulation is intended to encourage
unsound lending practices or the allocation of credit.
(c) Scope. This regulation applies to certain financial
institutions, including banks, savings associations, credit unions, and
other mortgage lending institutions, as defined in Sec. 203.2(e). The
regulation requires an institution to report data to its supervisory
agency about home purchase loans, home improvement loans, and
refinancings that it originates or purchases, or for which it receives
applications; and to disclose certain data to the public.
Sec. 203.2 Definitions.
In this regulation:
(a) Act means the Home Mortgage Disclosure Act (``HMDA'') (12 U.S.C.
2801 et seq.), as amended.
(b) Application--(1) In general. Application means an oral or
written request for a home purchase loan, a home improvement loan, or a
refinancing that is made in accordance with procedures used by a
financial institution for the type of credit requested.
(2) Preapproval programs. A request for preapproval for a home
purchase loan is an application under paragraph (b)(1) of this section
if the request is reviewed under a program in which the financial
institution, after a comprehensive analysis of the creditworthiness of
the applicant, issues a written commitment to the applicant valid for a
designated period of time to extend a home purchase loan up to a
specified amount. The written commitment may not be subject to
conditions other than:
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(i) Conditions that require the identification of a suitable
property;
(ii) Conditions that require that no material change has occurred in
the applicant's financial condition or creditworthiness prior to
closing; and
(iii) Limited conditions that are not related to the financial
condition or creditworthiness of the applicant that the lender
ordinarily attaches to a traditional home mortgage application (such as
certification of a clear termite inspection).
(c) Branch office means:
(1) Any office of a bank, savings association, or credit union that
is approved as a branch by a federal or state supervisory agency, but
excludes free-standing electronic terminals such as automated teller
machines; and
(2) Any office of a for-profit mortgage-lending institution (other
than a bank, savings association, or credit union) that takes
applications from the public for home purchase loans, home improvement
loans, or refinancings. A for-profit mortgage-lending institution is
also deemed to have a branch office in an MSA or in a Metropolitan
Division, if, in the preceding calendar year, it received applications
for, originated, or purchased five or more home purchase loans, home
improvement loans, or refinancings related to property located in that
MSA or Metropolitan Division, respectively.
(d) Dwelling means a residential structure (whether or not attached
to real property) located in a state of the United States of America,
the District of Columbia, or the Commonwealth of Puerto Rico. The term
includes an individual condominium unit, cooperative unit, or mobile or
manufactured home.
(e) Financial institution means:
(1) A bank, savings association, or credit union that:
(i) On the preceding December 31 had assets in excess of the asset
threshold established and published annually by the Board for coverage
by the act, based on the year-to-year change in the average of the
Consumer Price Index for Urban Wage Earners and Clerical Workers, not
seasonally adjusted, for each twelve month period ending in November,
with rounding to the nearest million;
(ii) On the preceding December 31, had a home or branch office in an
MSA;
(iii) In the preceding calendar year, originated at least one home
purchase loan (excluding temporary financing such as a construction
loan) or refinancing of a home purchase loan, secured by a first lien on
a one-to four-family dwelling; and
(iv) Meets one or more of the following three criteria:
(A) The institution is federally insured or regulated;
(B) The mortgage loan referred to in paragraph (e)(1)(iii) of this
section was insured, guaranteed, or supplemented by a federal agency; or
(C) The mortgage loan referred to in paragraph (e)(1)(iii) of this
section was intended by the institution for sale to Fannie Mae or
Freddie Mac; and
(2) A for-profit mortgage-lending institution (other than a bank,
savings association, or credit union) that:
(i) In the preceding calendar year, either:
(A) Originated home purchase loans, including refinancings of home
purchase loans, that equaled at least 10 percent of its loan-origination
volume, measured in dollars; or
(B) Originated home purchase loans, including refinancings of home
purchase loans, that equaled at least $25 million; and
(ii) On the preceding December 31, had a home or branch office in an
MSA; and
(iii) Either:
(A) On the preceding December 31, had total assets of more than $10
million, counting the assets of any parent corporation; or
(B) In the preceding calendar year, originated at least 100 home
purchase loans, including refinancings of home purchase loans.
(f) Home-equity line of credit means an open-end credit plan secured
by a dwelling as defined in Regulation Z (Truth in Lending), 12 CFR part
226.
(g) Home improvement loan means:
(1) A loan secured by a lien on a dwelling that is for the purpose,
in whole or in part, of repairing, rehabilitating, remodeling, or
improving a dwelling or the real property on which it is located; and
[[Page 74]]
(2) A non-dwelling secured loan that is for the purpose, in whole or
in part, of repairing, rehabilitating, remodeling, or improving a
dwelling or the real property on which it is located, and that is
classified by the financial institution as a home improvement loan.
(h) Home purchase loan means a loan secured by and made for the
purpose of purchasing a dwelling.
(i) Manufactured home means any residential structure as defined
under regulations of the Department of Housing and Urban Development
establishing manufactured home construction and safety standards (24 CFR
3280.2).
(j)(1) Metropolitan Statistical Area or MSA means a metropolitan
statistical area as defined by the U.S. Office of Management and Budget.
(2) Metropolitan Division or MD means a metropolitan division of an
MSA, as defined by the U.S. Office of Management and Budget.
(k) Refinancing means a new obligation that satisfies and replaces
an existing obligation by the same borrower, in which:
(1) For coverage purposes, the existing obligation is a home
purchase loan (as determined by the lender, for example, by reference to
available documents; or as stated by the applicant), and both the
existing obligation and the new obligation are secured by first liens on
dwellings; and
(2) For reporting purposes, both the existing obligation and the new
obligation are secured by liens on dwellings.
[67 FR 7236, Feb. 15, 2002, as amended at 68 FR 74830, Dec. 29, 2003]
Sec. 203.3 Exempt institutions.
(a) Exemption based on state law. (1) A state-chartered or state-
licensed financial institution is exempt from the requirements of this
regulation if the Board determines that the institution is subject to a
state disclosure law that contains requirements substantially similar to
those imposed by this regulation and that contains adequate provisions
for enforcement.
(2) Any state, state-chartered or state-licensed financial
institution, or association of such institutions, may apply to the Board
for an exemption under paragraph (a) of this section.
(3) An institution that is exempt under paragraph (a) of this
section shall use the disclosure form required by its state law and
shall submit the data required by that law to its state supervisory
agency for purposes of aggregation.
(b) Loss of exemption. An institution losing a state-law exemption
under paragraph (a) of this section shall comply with this regulation
beginning with the calendar year following the year for which it last
reported loan data under the state disclosure law.
Sec. 203.4 Compilation of loan data.
(a) Data format and itemization. A financial institution shall
collect data regarding applications for, and originations and purchases
of, home purchase loans, home improvement loans, and refinancings for
each calendar year. An institution is required to collect data regarding
requests under a preapproval program (as defined in Sec. 203.2(b)) only
if the preapproval request is denied or results in the origination of a
home purchase loan. All reportable transactions shall be recorded,
within thirty calendar days after the end of the calendar quarter in
which final action is taken (such as origination or purchase of a loan,
or denial or withdrawal of an application), on a register in the format
prescribed in Appendix A of this part. The data recorded shall include
the following items:
(1) An identifying number for the loan or loan application, and the
date the application was received.
(2) The type of loan or application.
(3) The purpose of the loan or application.
(4) Whether the application is a request for preapproval and whether
it resulted in a denial or in an origination.
(5) The property type to which the loan or application relates.
(6) The owner-occupancy status of the property to which the loan or
application relates.
(7) The amount of the loan or the amount applied for.
(8) The type of action taken, and the date.
(9) The location of the property to which the loan or application
relates, by MSA or by Metropolitan Division,
[[Page 75]]
by state, by county, and by census tract, if the institution has a home
or branch office in that MSA or Metropolitan Division.
(10) The ethnicity, race, and sex of the applicant or borrower, and
the gross annual income relied on in processing the application.
(11) The type of entity purchasing a loan that the institution
originates or purchases and then sells within the same calendar year
(this information need not be included in quarterly updates).
(12)(i) For originated loans subject to Regulation Z, 12 CFR part
226, the difference between the loan's annual percentage rate (APR) and
the average prime offer rate for a comparable transaction as of the date
the interest rate is set, if that difference is equal to or greater than
1.5 percentage points for loans secured by a first lien on a dwelling,
or equal to or greater than 3.5 percentage points for loans secured by a
subordinate lien on a dwelling.
(ii) ``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 loans that have low-risk pricing
characteristics. The Board publishes average prime offer rates for a
broad range of types of transactions in tables updated at least weekly,
as well as the methodology the Board uses to derive these rates.
(13) Whether the loan is subject to the Home Ownership and Equity
Protection Act of 1994, as implemented in Regulation Z (12 CFR 226.32).
(14) The lien status of the loan or application (first lien,
subordinate lien, or not secured by a lien on a dwelling).
(b) Collection of data on ethnicity, race, sex, and income. (1) A
financial institution shall collect data about the ethnicity, race, and
sex of the applicant or borrower as prescribed in Appendix B of this
part.
(2) Ethnicity, race, sex, and income data may but need not be
collected for loans purchased by the financial institution.
(c) Optional data. A financial institution may report:
(1) The reasons it denied a loan application;
(2) Requests for preapproval that are approved by the institution
but not accepted by the applicant; and
(3) Home-equity lines of credit made in whole or in part for the
purpose of home improvement or home purchase.
(d) Excluded data. A financial institution shall not report:
(1) Loans originated or purchased by the financial institution
acting in a fiduciary capacity (such as trustee);
(2) Loans on unimproved land;
(3) Temporary financing (such as bridge or construction loans);
(4) The purchase of an interest in a pool of loans (such as
mortgage-participation certificates, mortgage-backed securities, or real
estate mortgage investment conduits);
(5) The purchase solely of the right to service loans; or
(6) Loans acquired as part of a merger or acquisition, or as part of
the acquisition of all of the assets and liabilities of a branch office
as defined in Sec. 203.2(c)(1).
(e) Data reporting for banks and savings associations that are
required to report data on small business, small farm, and community
development lending under CRA. Banks and savings associations that are
required to report data on small business, small farm, and community
development lending under regulations that implement the Community
Reinvestment Act of 1977 (12 U.S.C. 2901 et seq.) shall also collect the
location of property located outside MSAs and Metropolitan Divisions in
which the institution has a home or branch office, or outside any MSA.
[67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43223, June 27, 2002; 68
FR 74830, Dec. 29, 2003; 73 FR 63335, Oct. 24, 2008]
Sec. 203.5 Disclosure and reporting.
(a) Reporting to agency. (1) By March 1 following the calendar year
for which the loan data are compiled, a financial institution shall send
its complete loan/application register to the agency office specified in
Appendix A of this part. The institution shall retain a copy for its
records for at least three years.
(2) A subsidiary of a bank or savings association shall complete a
separate
[[Page 76]]
loan/application register. The subsidiary shall submit the register,
directly or through its parent, to the agency that supervises its
parent.
(b) Public disclosure of statement. (1) The Federal Financial
Institutions Examination Council (``FFIEC'') will prepare a disclosure
statement from the data each financial institution submits.
(2) An institution shall make its disclosure statement (prepared by
the FFIEC) available to the public at its home office no later than
three business days after receiving it from the FFIEC.
(3) In addition, an institution shall either:
(i) Make its disclosure statement available to the public, within
ten business days of receiving it, in at least one branch office in each
other MSA and each other Metropolitan Division where the institution has
offices (the disclosure statement need only contain data relating to the
MSA or Metropolitan Division where the branch is located); or
(ii) Post the address for sending written requests in the lobby of
each branch office in other MSAs and Metropolitan Divisions where the
institution has offices; and mail or deliver a copy of the disclosure
statement within fifteen calendar days of receiving a written request
(the disclosure statement need only contain data relating to the MSA or
Metropolitan Division for which the request is made). Including the
address in the general notice required under paragraph (e) of this
section satisfies this requirement.
(c) Public disclosure of modified loan/application register. A
financial institution shall make its loan/application register available
to the public after removing the following information regarding each
entry: the application or loan number, the date that the application was
received, and the date action was taken. An institution shall make its
modified register available following the calendar year for which the
data are compiled, by March 31 for a request received on or before March
1, and within thirty calendar days for a request received after March 1.
The modified register need only contain data relating to the MSA or
Metropolitan Division for which the request is made.
(d) Availability of data. A financial institution shall make its
modified register available to the public for a period of three years
and its disclosure statement available for a period of five years. An
institution shall make the data available for inspection and copying
during the hours the office is normally open to the public for business.
It may impose a reasonable fee for any cost incurred in providing or
reproducing the data.
(e) Notice of availability. A financial institution shall post a
general notice about the availability of its HMDA data in the lobby of
its home office and of each branch office located in an MSA and
Metropolitan Division. An institution shall provide promptly upon
request the location of the institution's offices where the statement is
available for inspection and copying, or it may include the location in
the lobby notice.
(f) Loan aggregation and central data depositories. Using the loan
data submitted by financial institutions, the FFIEC will produce reports
for individual institutions and reports of aggregate data for each MSA
and Metropolitan Division, showing lending patterns by property
location, age of housing stock, and income level, sex, ethnicity, and
race. These reports will be available to the public at central data
depositories located in each MSA and Metropolitan Division. A listing of
central data depositories can be obtained from the Federal Financial
Institutions Examination Council, Washington, DC 20006.
[67 FR 7236, Feb. 15, 2002, as amended at 68 FR 74830, Dec. 29, 2003]
Sec. 203.6 Enforcement.
(a) Administrative enforcement. A violation of the Act or this
regulation is subject to administrative sanctions as provided in section
305 of the Act, including the imposition of civil money penalties, where
applicable. Compliance is enforced by the agencies listed in section
305(b) of the Act (12 U.S.C. 2804(b).
(b) Bona fide errors. (1) An error in compiling or recording loan
data is not a violation of the act or this regulation
[[Page 77]]
if the error was unintentional and occurred despite the maintenance of
procedures reasonably adapted to avoid such errors.
(2) An incorrect entry for a census tract number is deemed a bona
fide error, and is not a violation of the act or this regulation,
provided that the institution maintains procedures reasonably adapted to
avoid such errors.
(3) If an institution makes a good-faith effort to record all data
concerning covered transactions fully and accurately within thirty
calendar days after the end of each calendar quarter, and some data are
nevertheless inaccurate or incomplete, the error or omission is not a
violation of the act or this regulation provided that the institution
corrects or completes the information prior to submitting the loan/
application register to its regulatory agency.
Sec. Appendix A to Part 203--Form and Instructions for Completion of
HMDA Loan/Application Register
Paperwork Reduction Act Notice
This report is required by law (12 U.S.C. 2801-2810 and 12 CFR 203).
An agency may not conduct or sponsor, and an organization is not
required to respond to, a collection of information unless it displays a
valid Office of Management and Budget (OMB) Control Number. See 12 CFR
203.1(a) for the valid OMB Control Numbers, applicable to this
information collection. Send comments regarding this burden estimate or
any other aspect of this collection of information, including
suggestions for reducing the burden, to the respective agencies and to
OMB, Office of Information and Regulatory Affairs, Paperwork Reduction
Project, Washington, DC 20503. Be sure to reference the applicable
agency and the OMB Control Number, as found in 12 CFR 203.1(a), when
submitting comments to OMB.
I. Instructions for Completion of Loan/Application Regsiter
A. Application or Loan Information
1. Application or Loan Number
a. Enter an identifying loan number that can be used later to
retrieve the loan or application file. It can be any number of your
institution's choosing (not exceeding 25 characters). You may use
letters, numerals, or a combination of both.
2. Date Application Received
a. Enter the date the loan application was received by your
institution by month, day, and year. If your institution normally
records the date shown on the application form you may use that date
instead. Enter ``NA'' for loans purchased by your institution. For paper
submissions only, use numerals in the form MM/DD/CCYY (for example, 01/
15/2003). For submissions in electronic form, the proper format is
CCYYMMDD.
3. Type of Loan or Application
Indicate the type of loan or application by entering the applicable
code from the following:
Code 1--Conventional (any loan other than FHA, VA, FSA, or RHS loans)
Code 2--FHA-insured (Federal Housing Administration)
Code 3--VA-guaranteed (Veterans Administration)
Code 4--FSA/RHS-guaranteed (Farm Service Agency or Rural Housing
Service)
4. Property Type
Indicate the property type by entering the applicable code from the
following:
Code 1--One-to four-family dwelling (other than manufactured housing)
Code 2--Manufactured housing
Code 3--Multifamily dwelling
a. Use Code 1, not Code 3, for loans on individual condominium or
cooperative units.
b. If you cannot determine (despite reasonable efforts to find out)
whether the loan or application relates to a manufactured home, use Code
1.
5. Purpose of Loan or Application
Indicate the purpose of the loan or application by entering the
applicable code from the following:
Code 1--Home purchase
Code 2--Home improvement
Code 3--Refinancing
a. Do not report a refinancing if, under the loan agreement, you
were unconditionally obligated to refinance the obligation, or you were
obligated to refinance the obligation subject to conditions within the
borrower's control.
6. Owner Occupancy
Indicate whether the property to which the loan or loan application
relates is to be owner-occupied as a principal residence by entering the
applicable code from the following:
Code 1--Owner-occupied as a principal dwelling
Code 2--Not owner-occupied as a principal dwelling
Code 3--Not applicable
[[Page 78]]
a. For purchased loans, use Code 1 unless the loan documents or
application indicate that the property will not be owner-occupied as a
principal residence.
b. Use Code 2 for second homes or vacation homes, as well as for
rental properties.
c. Use Code 3 if the property to which the loan relates is a
multifamily dwelling; is not located in an MSA; or is located in an MSA
or an MD in which your institution has neither a home nor a branch
office. Alternatively, at your institution's option, you may report the
actual occupancy status, using Code 1 or 2 as applicable.
7. Loan Amount
Enter the amount of the loan or application. Do not report loans
below $500. Show the amount in thousands, rounding to the nearest
thousand (round $500 up to the next $1,000). For example, a loan for
$167,300 should be entered as 167 and one for $15,500 as 16.
a. For a home purchase loan that you originated, enter the principal
amount of the loan.
b. For a home purchase loan that you purchased, enter the unpaid
principal balance of the loan at the time of purchase.
c. For a home improvement loan, enter the entire amount of the
loan--including unpaid finance charges if that is how such loans are
recorded on your books--even if only a part of the proceeds is intended
for home improvement.
d. If you opt to report home-equity lines of credit, report only the
portion of the line intended for home improvement or home purchase.
e. For refinancings, indicate the total amount of the refinancing,
including both the amount outstanding on the original loan and any
amount of ``new money.''
f. For a loan application that was denied or withdrawn, enter the
amount applied for.
8. Request for Preapproval of a Home Purchase Loan
Indicate whether the application or loan involved a request for
preapproval of a home purchase loan by entering the applicable code from
the following:
Code 1--Preapproval requested
Code 2--Preapproval not requested
Code 3--Not applicable
a. Enter code 2 if your institution has a covered preapproval
program but the applicant does not request a preapproval.
b. Enter code 3 if your institution does not have a preapproval
program as defined in Sec. 203.2(b).
c. Enter code 3 for applications or loans for home improvement or
refinancing, and for purchased loans.
B. Action Taken
1. Type of Action
Indicate the type of action taken on the application or loan by
using one of the following codes.
Code 1--Loan originated
Code 2--Application approved but not accepted
Code 3--Application denied
Code 4--Application withdrawn
Code 5--File closed for incompleteness
Code 6--Loan purchased by your institution
Code 7--Preapproval request denied
Code 8--Preapproval request approved but not accepted (optional
reporting)
a. Use Code 1 for a loan that is originated, including one resulting
from a request for preapproval.
b. For a counteroffer (your offer to the applicant to make the loan
on different terms or in a different amount from the terms or amount
applied for), use Code 1 if the applicant accepts. Use Code 3 if the
applicant turns down the counteroffer or does not respond.
c. Use Code 2 when the application is approved but the applicant (or
the loan broker or correspondent) fails to respond to your notification
of approval or your commitment letter within the specified time. Do not
use this code for a preapproval request.
d. Use Code 4 only when the application is expressly withdrawn by
the applicant before a credit decision is made. Do not use code 4 if a
request for preapproval is withdrawn; preapproval requests that are
withdrawn are not reported under HMDA.
e. Use Code 5 if you sent a written notice of incompleteness under
Sec. 202.9(c)(2) of Regulation B (Equal Credit Opportunity) and the
applicant did not respond to your request for additional information
within the period of time specified in your notice. Do not use this code
for requests for preapproval that are incomplete; these preapproval
requests are not reported under HMDA.
2. Date of Action
For paper submissions only, enter the date by month, day, and year,
using numerals in the form MM/DD/CCYY (for example, 02/22/2003). For
submissions in electronic form, the proper format is CCYYMMDD.
a. For loans originated, enter the settlement or closing date.
b. For loans purchased, enter the date of purchase by your
institution.
c. For applications and preapprovals denied, applications and
preapprovals approved but not accepted by the applicant, and files
closed for incompleteness, enter the date that the action was taken by
your institution or the date the notice was sent to the applicant.
[[Page 79]]
d. For applications withdrawn, enter the date you received the
applicant's express withdrawal, or enter the date shown on the
notification from the applicant, in the case of a written withdrawal.
e. For preapprovals that lead to a loan origination, enter the date
of the origination.
C. Property Location. Except as otherwise provided, enter in these
columns the applicable codes for the MSA, or the MD if the MSA is
divided into MDs, state, county, and census tract to indicate the
location of the property to which a loan relates.
1. MSA or Metropolitan Division. For each loan or loan application,
enter the MSA, or the MD number if the MSA is divided into MDs. MSA and
MD boundaries are defined by OMB; use the boundaries that were in effect
on January 1 of the calendar year for which you are reporting. A listing
of MSAs and MDs is available from your supervisory agency or the FFIEC.
2. State and County
Use the Federal Information Processing Standard (FIPS) two-digit
numerical code for the state and the three-digit numerical code for the
county. These codes are available from your supervisory agency or the
FFIEC.
3. Census Tract. Indicate the census tract where the property is
located. Notwithstanding paragraph 6, if the property is located in a
county with a population of 30,000 or less in the 2000 Census, enter
``NA'' (even if the population has increased above 30,000 since 2000),
or enter the census tract number. County population data can be obtained
from the U.S. Census Bureau.
4. Census Tract Number. For the census tract number, consult the
resources provided by the U.S. Census Bureau or the FFIEC.
5. Property Located Outside MSAs or Metropolitan Divisions. For
loans on property located outside the MSAs and MDs in which an
institution has a home or branch office, or for property located outside
of any MSA or MD, the institution may choose one of the following two
options. Under option one, the institution may enter the MSA or MD,
state and county codes and the census tract number; and if the property
is not located in any MSA or MD, it may enter ``NA'' in the MSA or MD
column. (Codes exist for all states and counties and numbers exist for
all census tracts.) Under this first option, the codes and census tract
number must accurately identify the property location. Under the second
option, which is not available if paragraph 6 applies, an institution
may enter ``NA'' in all four columns, whether or not the codes or
numbers exist for the property location.
6. Data Reporting for Banks and Savings Associations Required to
Report Data on Small Business, Small Farm, and Community Development
Lending Under the CRA Regulations. If your institution is a bank or
savings association that is required to report data under the
regulations that implement the CRA, you must enter the property location
on your HMDA/LAR even if the property is outside the MSAs or MDs in
which you have a home or branch office, or is not located in any MSA.
7. Requests for Preapproval
Notwithstanding paragraphs 1 through 6, if the application is a
request for preapproval that is denied or that is approved but not
accepted by the applicant, you may enter ``NA'' in all four columns.
D. Applicant Information--Ethnicity, Race, Sex, and Income
Appendix B contains instructions for the collection of data on
ethnicity, race, and sex, and also contains a sample form for data
collection.
1. Applicability
Report this information for loans that you originate as well as for
applications that do not result in an origination.
a. You need not collect or report this information for loans
purchased. If you choose not to, use the Codes for ``not applicable.''
b. If the borrower or applicant is not a natural person (a
corporation or partnership, for example), use the Codes for ``not
applicable.''
2. Mail, Internet, or Telephone Applications. All loan applications,
including applications taken by mail, Internet, or telephone must use a
collection form similar to that shown in appendix B regarding ethnicity,
race, and sex. For applications taken by telephone, the information in
the collection form must be stated orally by the lender, except for
information that pertains uniquely to applications taken in writing. If
the applicant does not provide these data in an application taken by
mail or telephone or on the Internet, enter the code for ``information
not provided by applicant in mail, Internet, or telephone application''
specified in paragraphs I.D.3., 4., and 5. of this appendix. (See
appendix B for complete information on the collection of these data in
mail, Internet, or telephone applications.)
3. Ethnicity of Borrower or Applicant
Use the following codes to indicate the ethnicity of the applicant
or borrower under column ``A'' and of any co-applicant or co-borrower
under column ``CA.''
Code 1--Hispanic or Latino
Code 2--Not Hispanic or Latino
Code 3--Information not provided by applicant in mail, Internet, or
telephone application
Code 4--Not applicable
Code 5--No co-applicant
[[Page 80]]
4. Race of Borrower or Applicant
Use the following Codes to indicate the race of the applicant or
borrower under column ``A'' and of any co-applicant or co-borrower under
column ``CA.''
Code 1--American Indian or Alaska Native
Code 2--Asian
Code 3--Black or African American
Code 4--Native Hawaiian or Other Pacific Islander
Code 5--White
Code 6--Information not provided by applicant in mail, Internet, or
telephone application
Code 7--Not applicable
Code 8--No co-applicant
a. If an applicant select more than one racial designation, enter
all Codes corresponding to the applicant's selections.
b. Use code 4 (for ethnicity) and code 7 (for race) for ``not
applicable'' only when the applicant or co-applicant is not a natural
person or when applicant or co-applicant information is unavailable
because the loan has been purchased by your institution.
c. If there is more than one co-applicant, provide the required
information only for the first co-applicant listed on the application
form. If there are no co-applicants or co-borrowers, use Code 5 (for
ethnicity) and Code 8 (for race) for ``no co-applicant'' in the co-
applicant column.
5. Sex of Borrower or Applicant
Use the following Codes to indicate the sex of the applicant or
borrower under column ``A'' and of any co-applicant or co-borrower under
column ``CA.''
Code 1--Male
Code 2--Female
Code 3--Information not provided by applicant in mail, Internet, or
telephone application
Code 4--Not applicable
Code 5--No co-applicant or co-borrower
a. Use code 4 for ``not applicable'' only when the applicant or co-
applicant is not a natural person or when applicant or co-applicant
information is unavailable because the loan has been purchased by your
institution.
b. If there is more than one co-applicant, provide the required
information only for the first co-applicant listed on the application
form. If there are no co-applicants or co-borrowers, use Code 5 for ``no
co-applicant'' in the co-applicant column.
6. Income
Enter the gross annual income that your institution relied on in
making the credit decision.
a. Round all dollar amounts to the nearest thousand (round $500 up
to the next $1,000), and show in thousands. For example, report $35,500
as 36.
b. For loans on multifamily dwellings, enter ``NA.''
c. If no income information is asked for or relied on in the credit
decision, enter ``NA.''
d. If the applicant or co-applicant is not a natural person or the
applicant or co-applicant information is unavailable because the loan
has been purchased by your institution, enter ``NA.''
E. Type of Purchaser
Enter the applicable code to indicate whether a loan that your
institution originated or purchased was then sold to a secondary market
entity within the same calendar year:
Code 0--Loan was not originated or was not sold in calendar year covered
by register
Code 1--Fannie Mae
Code 2--Ginnie Mae
Code 3--Freddie Mac
Code 4--Farmer Mac
Code 5--Private securitization
Code 6--Commercial bank, savings bank or savings association
Code 7--Life insurance company, credit union, mortgage bank, or finance
company
Code 8--Affiliate institution
Code 9--Other type of purchaser
a. Use Code 0 for applications that were denied, withdrawn, or
approved but not accepted by the applicant; and for files closed for
incompleteness.
b. Use Code 0 if you originated or purchased a loan and did not sell
it during that same calendar year. If you sell the loan in a succeeding
year, you need not report the sale.
c. Use Code 2 if you conditionally assign a loan to Ginnie Mae in
connection with a mortgage-backed security transaction.
d. Use Code 8 for loans sold to an institution affiliated with you,
such as your subsidiary or a subsidiary of your parent corporation.
F. Reasons for Denial
1. You may report the reason for denial, and you may indicate up to
three reasons, using the following codes. Leave this column blank if the
``action taken'' on the application is not a denial. For example, do not
complete this column if the application was withdrawn or the file was
closed for incompleteness.
Code 1--Debt-to-income ratio
Code 2--Employment history
Code 3--Credit history
Code 4--Collateral
Code 5--Insufficient cash (downpayment, closing costs)
Code 6--Unverifiable information
Code 7--Credit application incomplete
Code 8--Mortgage insurance denied
Code 9--Other
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2. If your institution uses the model form for adverse action
contained in the Appendix to Regulation B (Form C-1 in Appendix C,
Sample Notification Form), use the foregoing codes as follows:
a. Code 1 for: Income insufficient for amount of credit requested,
and Excessive obligations in relation to income.
b. Code 2 for: Temporary or irregular employment, and Length of
employment.
c. Code 3 for: Insufficient number of credit references provided;
Unacceptable type of credit references provided; No credit file; Limited
credit experience; Poor credit performance with us; Delinquent past or
present credit obligations with others; Garnishment, attachment,
foreclosure, repossession, collection action, or judgment; and
Bankruptcy.
d. Code 4 for: Value or type of collateral not sufficient.
e. Code 6 for: Unable to verify credit references; Unable to verify
employment; Unable to verify income; and Unable to verify residence.
f. Code 7 for: Credit application incomplete.
g. Code 9 for: Length of residence; Temporary residence; and Other
reasons specified on notice.
G. Pricing-Related Data
1. Rate Spread
a. For a home-purchase loan, a refinancing, or a dwelling-secured
home improvement loan that you originated, report the spread between the
annual percentage rate (APR) and the average prime offer rate for a
comparable transaction if the spread is equal to or greater than 1.5
percentage points for first-lien loans or 3.5 percentage points for
subordinate-lien loans. To determine whether the rate spread meets this
threshold, use the average prime offer rate in effect for the type of
transaction as of the date the interest rate was set, and use the APR
for the loan, as calculated and disclosed to the consumer under Sec.
226.6 or 226.18, as applicable, of Regulation Z (12 CFR part 226).
Current and historic average prime offer rates are set forth in the
tables published on the FFIEC's Web site (http://www.ffiec.gov/hmda)
entitled ``Average Prime Offer Rates--Fixed'' and ``Average Prime Offer
Rates--Adjustable.'' Use the most recently available average prime offer
rate. ``Most recently available'' means the average prime offer rate set
forth in the applicable table with the most recent effective date as of
the date the interest rate was set. Do not use an average prime offer
rate before its effective date.
b. If the loan is not subject to Regulation Z, or is a home
improvement loan that is not dwelling-secured, or is a loan that you
purchased, enter ``NA.''
c. Enter ``NA'' in the case of an application that does not result
in a loan origination.
d. Enter the rate spread to two decimal places, and use a leading
zero. For example, enter 03.29. If the difference between the APR and
the average prime offer rate is a figure with more than two decimal
places, round the figure or truncate the digits beyond two decimal
places.
e. If the difference between the APR and the average prime offer
rate is less than 1.5 percentage points for a first-lien loan and less
than 3.5 percentage points for a subordinate-lien loan, enter ``NA.''
2. Date the interest rate was set. The relevant date to use to
determine the average prime offer rate for a comparable transaction is
the date on which the loan's interest rate was set by the financial
institution for the final time before closing. If an interest rate is
set pursuant to a ``lock-in'' agreement between the lender and the
borrower, then the date on which the agreement fixes the interest rate
is the date the rate was set. If a rate is re-set after a lock-in
agreement is executed (for example, because the borrower exercises a
float-down option or the agreement expires), then the relevant date is
the date the rate is re-set for the final time before closing. If no
lock-in agreement is executed, then the relevant date is the date on
which the institution sets the rate for the final time before closing.
3. HOEPA Status
a. For a loan that you originated or purchased that is subject to
the Home Ownership and Equity Protection Act of 1994 (HOEPA), as
implemented in Regulation Z (12 CFR 226.32), because the APR or the
points and fees on the loan exceed the HOEPA triggers, enter Code 1.
b. Enter code 2 in all other cases. For example, enter code 2 for a
loan that you originated or purchased that is not subject to the
requirements of HOEPA for any reason; also enter code 2 in the case of
an application that does not result in a loan origination.
H. Lien Status
Use the following codes for loans that you originate and for
applications that do not result in an origination:
Code 1--Secured by a first lien.
Code 2--Secured by a subordinate lien.
Code 3--Not secured by a lien.
Code 4--Not applicable (purchased loan).
a. Use Codes 1 through 3 for loans that you originate, as well as
for applications that do not result in an origination (applications that
are approved but not accepted, denied, withdrawn, or closed for
incompleteness).
b. Use Code 4 for loans that you purchase.
II. Federal Supervisory Agencies
A. You are strongly encouraged to submit your loan/application
register via Internet e-mail. If you elect to use this method of
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transmission and your institution is regulated by the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, or the Office of Thrift
Supervision, then you should submit your institution's files to the
Internet e-mail address dedicated to that purpose by the Federal Reserve
Board, which can be found on the Web site of the FFIEC. If your
institution is regulated by one of the foregoing agencies and you elect
to submit your data by regular mail, then use the following address:
HMDA, Federal Reserve Board, Attention: HMDA Processing, (insert name of
your institution's regulatory agency), 20th & Constitution Ave, NW., MS
N502, Washington, DC 20551-0001.
B. If your institution is regulated by the Federal Reserve System,
you should use the Internet e-mail or regular mail address of your
district bank indicated on the Web site of the FFIEC. If your
institution is regulated by the Department of Housing and Urban
Development, then you should use the Internet e-mail or regular mail
address indicated on the Web site of the FFIEC.
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[67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43223, June 27, 2002; 68
FR 74831, Dec. 29, 2003; 73 FR 63335, Oct. 24, 2008]
Sec. Appendix B to Part 203--Form and Instructions for Data Collection
on Ethnicity, Race, and Sex
I. Instructions on Collection of Data on Ethnicity, Race, and Sex
You may list questions regarding the ethnicity, race, and sex of the
applicant on your loan application form, or on a separate form that
refers to the application. (See the sample form below for model
language.)
II. Procedures
A. You must ask the applicant for this information (but you cannot
require the applicant to provide it) whether the application is taken in
person, by mail or telephone, or on the Internet. For applications taken
by telephone, the information in the collection form must be stated
orally by the lender, except for that information which pertains
uniquely to applications taken in writing.
B. Inform the applicant that the federal government requests this
information in order to monitor compliance with federal statutes that
prohibit lenders from discriminating against applicants on these bases.
Inform the applicant that if the information is not provided where the
application is taken in person, you are required to note the data on the
basis of visual observation or surname.
C. You must offer the applicant the option of selecting one or more
racial designations.
D. If the applicant chooses not to provide the information for an
application taken in person, note this fact on the form and then note
the applicant's ethnicity, race, and sex on the basis of visual
observation and surname, to the extent possible.
E. If the applicant declines to answer these questions or fails to
provide the information on an application taken by mail or telephone or
on the Internet, the data need not be provided. In such a case, indicate
that the application was received by mail, telephone, or Internet, if it
is not otherwise evident on the face of the application.
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[67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43227, June 27, 2002]
Sec. Supplement I to Part 203--Staff Commentary
Introduction
1. Status. The commentary in this supplement is the vehicle by which
the Division of Consumer and Community Affairs of the Federal Reserve
Board issues formal staff interpretations of Regulation C (12 CFR part
203).
Section 203.1--Authority, Purpose, and Scope
1(c) Scope. 1. General. The comments in this section address issues
affecting coverage of institutions and exemptions from coverage.
2. The broker rule and the meaning of ``broker'' and ``investor.''
For the purposes of the guidance given in this commentary, an
institution that takes and processes a loan application and arranges for
another institution to acquire the loan at or after closing is acting as
a ``broker,'' and an institution that acquires a loan from a broker at
or after closing is acting as an ``investor.'' (The terms used in this
commentary may have different meanings in certain parts of the mortgage
lending industry, and other terms may be used in place of these terms,
for example in the Federal Housing Administration mortgage insurance
programs.) Depending on the facts, a broker may or may not make a credit
decision on an application (and thus it may or may not have reporting
responsibilities). If the broker makes a credit decision, it reports
that decision; if it does not make a credit decision, it does not
report. If an investor reviews an application and makes a credit
decision prior to closing, the investor reports that decision. If the
investor does not review the application prior to closing, it reports
only the loans that it purchases; it does not report the loans it does
not purchase. An institution that makes a credit decision on an
application prior to closing reports that decision regardless of whose
name the loan closes in.
3. Illustrations of the broker rule. Assume that, prior to closing,
four investors receive the same application from a broker; two deny it,
one approves it, and one approves it and acquires the loan. In these
circumstances, the first two report denials, the third reports the
transaction as approved but not accepted, and the fourth reports an
origination (whether the loan closes in the name of the broker or the
investor). Alternatively, assume that the broker denies a loan before
sending it to an investor; in this situation, the broker reports a
denial.
4. Broker's use of investor's underwriting criteria. If a broker
makes a credit decision based on underwriting criteria set by an
investor, but without the investor's review prior to closing, the broker
has made the credit decision. The broker reports as an origination a
loan that it approves and closes, and reports as a denial an application
that it turns down (either because the application does not meet the
investor's underwriting guidelines or for some other reason). The
investor reports as purchases only those loans it purchases.
5. Insurance and other criteria. If an institution evaluates an
application based on the criteria or actions of a third party other than
an investor (such as a government or private insurer or guarantor), the
institution must report the action taken on the application (loan
originated, approved but not accepted, or denied, for example).
6. Credit decision of agent is decision of principal. If an
institution approves loans through the actions of an agent, the
institution must report the action taken on the application (loan
originated, approved but not accepted, or denied, for example). State
law determines whether one party is the agent of another.
7. Affiliate bank underwriting (250.250 review). If an institution
makes an independent evaluation of the creditworthiness of an applicant
(for example, as part of a preclosing review by an affiliate bank under
12 CFR 250.250, which interprets section 23A of the Federal Reserve
Act), the institution is making a credit decision. If the institution
then acquires the loan, it reports the loan as an origination whether
the loan closes in the name of the institution or its affiliate. An
institution that does not acquire the loan but takes some other action
reports that action.
8. Participation loan. An institution that originates a loan and
then sells partial interests to other institutions reports the loan as
an origination. An institution that acquires only a partial interest in
such a loan does not report the transaction even if it has participated
in the underwriting and origination of the loan.
9. Assumptions. An assumption occurs when an institution enters into
a written agreement accepting a new borrower as the obligor on an
existing obligation. An institution reports as a home purchase loan an
assumption (or an application for an assumption) in the amount of the
outstanding principal. If a transaction does not involve a written
agreement between a new borrower and the institution, it is not an
assumption for HMDA purposes and is not reported.
Section 203.2--Definitions
2(b) Application. 1. Consistency with Regulation B. Board
interpretations that appear in the official staff commentary to
Regulation B (Equal Credit Opportunity, 12 CFR part 202, Supplement 1)
are generally applicable to the definition of an application under
Regulation C. However, under Regulation C
[[Page 89]]
the definition of an application does not include prequalification
requests.
2. Prequalification. A prequalification request is a request by a
prospective loan applicant (other than a request for preapproval) for a
preliminary determination on whether the prospective applicant would
likely qualify for credit under an institution's standards, or for a
determination on the amount of credit for which the prospective
applicant would likely qualify. Some institutions evaluate
prequalification requests through a procedure that is separate from the
institution's normal loan application process; others use the same
process. In either case, Regulation C does not require an institution to
report prequalification requests on the HMDA/LAR, even though these
requests may constitute applications under Regulation B for purposes of
adverse action notices.
3. Requests for preapproval. To be a covered preapproval program,
the written commitment issued under the program must result from a full
review of the creditworthiness of the applicant, including such
verification of income, resources and other matters as is typically done
by the institution as part of its normal credit evaluation program. In
addition to conditions involving the identification of a suitable
property and verification that no material change has occurred in the
applicant's financial condition or creditworthiness, the written
commitment may be subject only to other conditions (unrelated to the
financial condition or creditworthiness of the applicant) that the
lender ordinarily attaches to a traditional home mortgage application
approval. These conditions are limited to conditions such as requiring
an acceptable title insurance binder or a certificate indicating clear
termite inspection, and, in the case where the applicant plans to use
the proceeds from the sale of the applicant's present home to purchase a
new home, a settlement statement showing adequate proceeds from the sale
of the present home.
2(c) Branch office. 1. Credit union. For purposes of Regulation C, a
``branch'' of a credit union is any office where member accounts are
established or loans are made, whether or not the office has been
approved as a branch by a federal or state agency. (See 12 U.S.C. 1752.)
2. Depository institution. A branch of a depository institution does
not include a loan-production office, the office of an affiliate, or the
office of a third party such as a loan broker. (But see Appendix A,
paragraph I.C.6, which requires certain depository institutions to
report property location even for properties located outside those MSAs
or Metropolitan Divisions in which the institution has a home or branch
office.)
3. Nondepository institution. For a nondepository institution,
``branch office'' does not include the office of an affiliate or other
third party such as a loan broker. (But note that certain nondepository
institutions must report property location even in MSAs or Metropolitan
Divisions where they do not have a physical location.)
2(d) Dwelling. 1. Coverage. The definition of ``dwelling'' is not
limited to the principal or other residence of the applicant or
borrower, and thus includes vacation or second homes and rental
properties. A dwelling also includes a multifamily structure such as an
apartment building.
2. Exclusions. Recreational vehicles such as boats or campers are
not dwellings for purposes of HMDA. Also excluded are transitory
residences such as hotels, hospitals, and college dormitories--whose
occupants have principal residences elsewhere.
2(e) Financial institution. 1. General. An institution that met the
test for coverage under HMDA in year 1, and then ceases to meet the test
(for example, because its assets fall below the threshold on December 31
of year 2) stops collecting HMDA data beginning with year 3. Similarly,
an institution that did not meet the coverage test for a given year, and
then meets the test in the succeeding year, begins collecting HMDA data
in the calendar year following the year in which it meets the test for
coverage. For example, a for-profit mortgage lending institution (other
than a bank, savings association, or credit union) that, in year 1,
falls below the thresholds specified in Sec. 203.2(e)(2)(ii)(A) and
(B), but meets one of them in year 2, need not collect data in year 2,
but begins collecting data in year 3.
2. Adjustment of exemption threshold for depository institutions.
For data collection in 2011, the asset-size exemption threshold is $40
million. Depository institutions with assets at or below $40 million as
of December 31, 2010 are exempt from collecting data for 2011.
3. Coverage after a merger. Several scenarios of data-collection
responsibilities for the calendar year of a merger are described below.
Under all the scenarios, if the merger results in a covered institution,
that institution must begin data collection January I of the following
calendar year.
i. Two institutions are not covered by Regulation C because of asset
size. The institutions merge. No data collection is required for the
year of the merger (even if the merger results in a covered
institution).
ii. A covered institution and an exempt institution merge. The
covered institution is the surviving institution. For the year of the
merger, data collection is required for the covered institution's
transactions. Data collection is optional for transactions handled in
offices of the previously exempt institution.
iii. A covered institution and an exempt institution merge. The
exempt institution is
[[Page 90]]
the surviving institution, or a new institution is formed. Data
collection is required for transactions of the covered institution that
take place prior to the merger. Data collection is optional for
transactions taking place after the merger date.
iv. Two covered institutions merge. Data collection is required for
the entire year. The surviving or resulting institution files either a
consolidated submission or separate submissions for that year.
4. Originations. HMDA coverage depends in part on whether an
institution has originated home purchase loans. To determine whether
activities with respect to a particular loan constitute an origination,
institutions should consult, among other parts of the staff commentary,
the discussion of the broker rule under Sec. Sec. 203.1(c) and
203.4(a).
5. Branches of foreign banks--treated as banks. A federal branch or
a state-licensed insured branch of a foreign bank is a ``bank'' under
section 3(a)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1813(a)), and is covered by HMDA if it meets the tests for a depository
institution found in Sec. 203.2(e)(1) of Regulation C.
6. Branches and offices of foreign banks--treated as for-profit
mortgage lending institutions. Federal agencies, state-licensed
agencies, state-licensed uninsured branches of foreign banks, commercial
lending companies owned or controlled by foreign banks, and entities
operating under section 25 or 25A of the Federal Reserve Act, 12 U.S.C.
601 and 611 (Edge Act and agreement corporations) are not ``banks''
under the Federal Deposit Insurance Act. These entities are nonetheless
covered by HMDA if they meet the tests for a for-profit nondepository
mortgage lending institution found in Sec. 203.2(e)(2) of Regulation C.
2(g) Home improvement loan. 1. Classification requirement for loans
not secured by a lien on a dwelling. An institution has ``classified'' a
loan that is not secured by a lien on a dwelling as a home improvement
loan if it has entered the loan on its books as a home improvement loan,
or has otherwise coded or identified the loan as a home improvement
loan. For example, an institution that has booked a loan or reported it
on a ``call report'' as a home improvement loan has classified it as a
home improvement loan. An institution may also classify loans as home
improvement loans in other ways (for example, by color-coding loan
files).
2. Improvements to real property. Home improvements include
improvements both to a dwelling and to the real property on which the
dwelling is located (for example, installation of a swimming pool,
construction of a garage, or landscaping).
3. Commercial and other loans. A home improvement loan may include a
loan originated outside an institution's residential mortgage lending
division (such as a loan to improve an apartment building made through
the commercial loan department).
4. Mixed-use property. A loan to improve property used for
residential and commercial purposes (for example, a building containing
apartment units and retail space) is a home improvement loan if the loan
proceeds are used primarily to improve the residential portion of the
property. If the loan proceeds are used to improve the entire property
(for example, to replace the heating system), the loan is a home
improvement loan if the property itself is primarily residential. An
institution may use any reasonable standard to determine the primary use
of the property, such as by square footage or by the income generated.
An institution may select the standard to apply on a case-by-case basis.
If the loan is unsecured, to report the loan as a home improvement loan
the institution must also have classified it as such.
5. Multiple-category loans. If a loan is a home improvement loan as
well as a refinancing, an institution reports the loan as a home
improvement loan.
2(h) Home purchase loan. 1. Multiple properties. A home purchase
loan includes a loan secured by one dwelling and used to purchase
another dwelling.
2. Mixed-use property. A dwelling-secured loan to purchase property
used primarily for residential purposes (for example, an apartment
building containing a convenience store) is a home purchase loan. An
institution may use any reasonable standard to determine the primary use
of the property, such as by square footage or by the income generated.
An institution may select the standard to apply on a case-by-case basis.
3. Farm loan. A loan to purchase property used primarily for
agricultural purposes is not a home purchase loan even if the property
includes a dwelling. An institution may use any reasonable standard to
determine the primary use of the property, such as by reference to the
exemption from Regulation X (Real Estate Settlement Procedures, 24 CFR
3500.5(b)(1)) for a loan on property of 25 acres or more. An institution
may select the standard to apply on a case-by-case basis.
4. Commercial and other loans. A home purchase loan may include a
loan originated outside an institution's residential mortgage lending
division (such as a loan for the purchase of an apartment building made
through the commercial loan department).
5. Construction and permanent financing. A home purchase loan
includes both a combined construction/permanent loan and the permanent
financing that replaces a construction-only loan. It does not include a
construction-only loan, which is considered ``temporary financing''
under Regulation C and is not reported.
6. Second mortgages that finance the downpayments on first
mortgages. If an institution making a first mortgage loan to a home
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purchaser also makes a second mortgage loan to the same purchaser to
finance part or all the home purchaser's downpayment, the institution
reports each loan separately as a home purchase loan.
7. Multiple-category loans. If a loan is a home purchase loan as
well as a home improvement loan, or a refinancing, an institution
reports the loan as a home purchase loan.
2(i) Manufactured home. 1. Definition of a manufactured home. The
definition in Sec. 203.2(i) refers to the federal building code for
factory-built housing established by the Department of Housing and Urban
Development (HUD). The HUD code requires generally that housing be
essentially ready for occupancy upon leaving the factory and being
transported to a building site. Modular homes that meet all of the HUD
code standards are included in the definition because they are ready for
occupancy upon leaving the factory. Other factory-built homes, such as
panelized and pre-cut homes, generally do not meet the HUD code because
they require a significant amount of construction on site before they
are ready for occupancy. Loans and applications relating to manufactured
homes that do not meet the HUD code should not be identified as
manufactured housing under HMDA.
2(j) Metropolitan Statistical Areas and Metropolitan Divisions. 1.
Use of terms ``Metropolitan Statistical Area'' and ``Metropolitan
Division.'' The U.S. Office of Management and Budget defines
Metropolitan Statistical Areas and Metropolitan Divisions to provide
nationally consistent definitions for collecting, tabulating, and
publishing Federal statistics for a set of geographic areas. OMB divides
every Metropolitan Statistical Area (MSA) with a population of 2.5
million or more into Metropolitan Divisions (MDs); MSAs with populations
under 2.5 million population are not so divided. 67 FR 82228 (December
27, 2000). For all purposes under Regulation C, if an MSA is divided by
OMB into MDs, the appropriate geographic unit to be used is the MD; if
an MSA is not so divided by OMB into MDs, the appropriate geographic
unit to be used is the MSA.
Section 203.4--Compilation of Loan Data
4(a) Data Format and Itemization. 1. Reporting requirements.
i. An institution reports data on loans that it originated and loans
that it purchased during the calendar year described in the report. An
institution reports these data even if the loans were subsequently sold
by the institution.
ii. An institution reports the data for loan applications that did
not result in originations--for example, applications that the
institution denied or that the applicant withdrew during the calendar
year covered by the report.
iii. In the case of brokered loan applications or applications
forwarded through a correspondent, the institution reports as
originations the loans that it approved and subsequently acquired per a
pre-closing arrangement (whether or not they closed in the institution's
name). Additionally, the institution reports the data for all
applications that did not result in originations--for example,
applications that the institution denied or that the applicant withdrew
during the calendar year covered by the report (whether or not they
would have closed in the institution's name). For all of these loans and
applications, the institution reports the required data regarding the
borrower's or applicant's ethnicity, race, sex, and income.
iv. Loan originations are to be reported only once. If the
institution is the loan broker or correspondent, it does not report as
originations the loans that it forwarded to another lender for approval
prior to closing, and that were approved and subsequently acquired by
that lender (whether or not they closed in the institution's name).
v. An institution reports applications that were received in the
previous calendar year but were acted upon during the calendar year
covered by the current register.
vi. A financial institution submits all required data to its
supervisory agency in one package, with the prescribed transmittal
sheet. An officer of the institution certifies to the accuracy of the
data.
vii. The transmittal sheet states the total number of line entries
contained in the accompanying data transmission.
2. Updating--agency requirements. Certain state or federal
regulations, such as the Federal Deposit Insurance Corporation's
regulations, may require an institution to update its data more
frequently than is required under Regulation C.
3. Form of quarterly updating. An institution may maintain the
quarterly updates of the HMDA/LAR in electronic or any other format,
provided the institution can make the information available to its
regulatory agency in a timely manner upon request.
4. Transition rules for applications received before January 1,
2004, when final action is taken on or after January 1, 2004. For
applications received before January 1, 2004, on which final action is
taken on or after January 1, 2004, data must be collected and reported
on the HMDA/LAR under the revisions to Regulation C that take effect on
January 1, 2004, subject to the exceptions for property type, loan
purpose, requests for preapproval, applicant information, and rate
spread set forth in this comment.
i. Property type. Lenders need not determine whether an application
received before January 1, 2004, involves a manufactured home, and may
report the property type as 1-to 4-family.
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ii. Loan purpose. For applications received before January 1, 2004,
lenders may use the definitions of a home improvement loan and a
refinancing that were in effect in 2003. For example, a lender need not
report data on an application received before January 1, 2004, for a
dwelling-secured loan made for the purpose of home improvement, if the
lender did not classify the loan as a home improvement loan. Similarly,
a lender may report data on an application for a refinancing received in
2003, where the new obligation will be, but the existing obligation was
not, secured by a lien on a dwelling.
iii. Requests for preapproval. For requests received before January
1, 2004, lenders need not report requests for preapproval (as that term
is defined in Sec. 203.2(b)(2) of the revised Regulation C) that do not
result in a traditional loan application. Lenders may, at their option,
report requests for preapproval that are denied or that are approved but
not accepted. In addition, lenders need not specify whether an
application for a home purchase loan involved a request for preapproval,
and should use code 3 (Not Applicable) in the preapproval field on the
HMDA/LAR.
iv. Applicant information. For applications received before January
1, 2004, lenders must collect data on race or national origin using the
categories in effect in 2003, and must convert the data to the codes in
effect in 2004 for reporting, using the following conversion guide:
(A) Ethnicity. The revised Regulation C requires lenders to request
an applicant's ethnicity first (Hispanic or Latino, Not Hispanic or
Latino), and then to request the applicant's race. The HMDA/LAR has been
revised accordingly, so that ethnicity and race are distinct fields.
(1) If the applicant's race was identified as Hispanic (code 4) in
2003, use code 1 (Hispanic or Latino) for reporting ethnicity.
(2) If the applicant's race was identified as American Indian or
Alaskan Native, Asian or Pacific Islander, Black, White, Other, or Not
Applicable (codes 1, 2, 3, 5, 6, or 8) in 2003, use code 4 (Not
Applicable) for reporting ethnicity.
(3) If the applicant did not provide information on race in a mail,
Internet, or telephone application (code 7) in 2003, use code 3
(information not provided by applicant in mail, Internet, or telephone
application) for reporting ethnicity.
(B) Race.
(1) If the applicant's race was identified as American Indian or
Alaskan Native, Black, or White in 2003, use the corresponding code for
2004. For example, if the applicant's race was identified as Black (code
3) in 2003, use code 3 (Black or African-American) for reporting race in
2004.
(2) If the applicant's race was identified as Asian or Pacific
Islander in 2003, use code 2 (Asian).
(3) If the applicant's race was identified as Hispanic in 2003, use
code 7 (Not Applicable).
(4) If the applicant's race was identified as Other in 2003, use
code 7 (Not Applicable).
(5) If the applicant did not provide information on race in a mail,
Internet, or telephone application (code 7) in 2003, use code 6
(Information not provided by applicant in mail, Internet, or telephone
application).
(6) If the applicant's race was identified as Not Applicable (code
8) in 2003, use code 7 (Not Applicable).
(C) Sex. For applications received before January 1, 2004, in which
there is no co-applicant, the lender may use code 4 (Not Applicable) in
the field provided for the co-applicant's sex.
v. Rate Spread. For applications received before January 1, 2004, in
which the rate lock occurred before January 1, 2004, lenders may report
NA (Not Applicable) for rate spread. For applications received before
January 1, 2004, for which the rate lock occurred after January 1, 2004,
lenders must calculate and report the rate spread in accordance with the
rules set forth in new section 202.4(a)(12) (see 67 FR 7222 (Feb. 15,
2002); 67 FR 43223 (June 27, 2002)).
(A) Example: Assume an application is received on December 1, 2003;
the rate lock occurs on December 26, 2003, and the loan is originated on
January 15, 2004. The lender may report NA (Not Applicable) for rate
spread.
(B) Example: Assume an application is received on December 15, 2003;
the rate lock occurs on January 3, 2004, and the loan is originated on
January 15, 2004. The lender must calculate and report the rate spread
in accordance with the rules in new section 202.4(a)(12) (see 67 FR 7222
(Feb. 15, 2002); 67 FR 43223 (June 27, 2002)).
4(a)(1) Application number and application date. 1. Application
date--consistency. In reporting the date of application, an institution
reports the date the application was received or the date shown on the
application. Although an institution need not choose the same approach
for its entire HMDA submission, it should be generally consistent (such
as by routinely using one approach within a particular division of the
institution or for a category of loans).
2. Application date--application forwarded by a broker. For an
application forwarded by a broker, an institution reports the date the
application was received by the broker, the date the application was
received by the institution, or the date shown on the application.
Although an institution need not choose the same approach for its entire
HMDA submission, it should be generally consistent (such as by routinely
using one
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approach within a particular division of the institution or for a
category of loans).
3. Application date--reinstated application. If, within the same
calendar year, an applicant asks an institution to reinstate a
counteroffer that the applicant previously did not accept (or asks the
institution to reconsider an application that was denied, withdrawn, or
closed for incompleteness), the institution may treat that request as
the continuation of the earlier transaction or as a new transaction. If
the institution treats the request for reinstatement or reconsideration
as a new transaction, it reports the date of the request as the
application date.
4. Application or loan number. An institution must ensure that each
identifying number is unique within the institution. If an institution's
register contains data for branch offices, for example, the institution
could use a letter or a numerical code to identify the loans or
applications of different branches, or could assign a certain series of
numbers to particular branches to avoid duplicate numbers. Institutions
are strongly encouraged not to use the applicant's or borrower's name or
social security number, for privacy reasons.
5. Application--year action taken. An institution must report an
application in the calendar year in which the institution takes final
action on the application.
Paragraph 4(a)(3) Purpose.
1. Purpose--statement of applicant. An institution may rely on the
oral or written statement of an applicant regarding the proposed use of
loan proceeds. For example, a lender could use a check-box, or a purpose
line, on a loan application to determine whether or not the applicant
intends to use loan proceeds for home improvement purposes.
2. Purpose--multiple-purpose loan. If a loan is a home purchase loan
as well as a home improvement loan, or a refinancing, an institution
reports the loan as a home purchase loan. If a loan is a home
improvement loan as well as a refinancing, an institution reports the
loan as a home improvement loan.
Paragraph 4(a)(6) Occupancy.
1. Occupancy--multiple properties. If a loan relates to multiple
properties, the institution reports the owner occupancy status of the
property for which property location is being reported. (See the
comments to paragraph 4(a)(9), Property location.)
Paragraph 4(a)(7) Loan amount.
1. Loan amount--counteroffer. If an applicant accepts a counteroffer
for an amount different from the amount initially requested, the
institution reports the loan amount granted. If an applicant does not
accept a counteroffer or fails to respond, the institution reports the
loan amount initially requested.
2. Loan amount--multiple-purpose loan. Except in the case of a home-
equity line of credit, an institution reports the entire amount of the
loan, even if only a part of the proceeds is intended for home purchase
or home improvement.
3. Loan amount--home-equity line. An institution that has chosen to
report home-equity lines of credit reports only the part that is
intended for home-improvement or home-purchase purposes.
4. Loan amount--assumption. An institution that enters into a
written agreement accepting a new party as the obligor on a loan reports
the amount of the outstanding principal on the assumption as the loan
amount.
Paragraph 4(a)(8) Type of action taken and date.
1. Action taken--counteroffers. If an institution makes a
counteroffer to lend on terms different from the applicant's initial
request (for example, for a shorter loan maturity or in a different
amount) and the applicant does not accept the counteroffer or fails to
respond, the institution reports the action taken as a denial on the
original terms requested by the applicant.
2. Action taken--rescinded transactions. If a borrower rescinds a
transaction after closing, the institution may report the transaction
either as an origination or as an application that was approved but not
accepted.
3. Action taken--purchased loans. An institution reports the loans
that it purchased during the calendar year, and does not report the
loans that it declined to purchase.
4. Action taken--conditional approvals. If an institution issues a
loan approval subject to the applicant's meeting underwriting conditions
(other than customary loan commitment or loan-closing conditions, such
as a clear-title requirement or an acceptable property survey) and the
applicant does not meet them, the institution reports the action taken
as a denial.
5. Action taken date--approved but not accepted. For a loan approved
by an institution but not accepted by the applicant, the institution
reports any reasonable date, such as the approval date, the deadline for
accepting the offer, or the date the file was closed. Although an
institution need not choose the same approach for its entire HMDA
submission, it should be generally consistent (such as by routinely
using one approach within a particular division of the institution or
for a category of loans).
6. Action taken date--originations. For loan originations, an
institution generally reports the settlement or closing date. For loan
originations that an institution acquires through a broker, the
institution reports either the settlement or closing date, or the date
the institution acquired the loan from the broker. If the disbursement
of funds takes place on a date later than the settlement or closing
date, the institution may use the date of disbursement. For a
construction/permanent loan, the institution reports
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either the settlement or closing date, or the date the loan converts to
the permanent financing. Although an institution need not choose the
same approach for its entire HMDA submission, it should be generally
consistent (such as by routinely using one approach within a particular
division of the institution or for a category of loans). Notwithstanding
this flexibility regarding the use of the closing date in connection
with reporting the date action was taken, the year in which an
origination goes to closing is the year in which the institution must
report the origination.
7. Action taken--pending applications. An institution does not
report any loan application still pending at the end of the calendar
year; it reports that application on its register for the year in which
final action is taken.
Paragraph 4(a)(9) Property location.
1. Property location--multiple properties (home improvement/
refinance of home improvement). For a home improvement loan, an
institution reports the property being improved. If more than one
property is being improved, the institution reports the location of one
of the properties or reports the loan using multiple entries on its
HMDA/LAR (with unique identifiers) and allocating the loan amount among
the properties.
2. Property location--multiple properties (home purchase/refinance
of home purchase). For a home purchase loan, an institution reports the
property taken as security. If an institution takes more than one
property as security, the institution reports the location of the
property being purchased if there is just one. If the loan is to
purchase multiple properties and is secured by multiple properties, the
institution reports the location of one of the properties or reports the
loan using multiple entries on its HMDA/LAR (with unique identifiers)
and allocating the loan amount among the properties.
3. Property location--loans purchased from another institution. The
requirement to report the property location by census tract in an MSA or
Metropolitan Division where the institution has a home or branch office
applies not only to loan applications and originations but also to loans
purchased from another institution. This includes loans purchased from
an institution that did not have a home or branch office in that MSA or
Metropolitan Division and did not collect the property-location
information.
4. Property location--mobile or manufactured home. If information
about the potential site of a mobile or manufactured home is not
available, an institution reports using the code for ``not applicable.''
Paragraph 4(a)(10) Applicant and income data.
1. Applicant data--completion by applicant. An institution reports
the monitoring information as provided by the applicant. For example, if
an applicant checks the ``Asian'' box the institution reports using the
``Asian'' code.
2. Applicant data--completion by lender. If an applicant fails to
provide the requested information for an application taken in person,
the institution reports the data on the basis of visual observation or
surname.
3. Applicant data--application completed in person. When an
applicant meets in person with a lender to complete an application that
was begun by mail, Internet, or telephone, the institution must request
the monitoring information. If the meeting occurs after the application
process is complete, for example, at closing, the institution is not
required to obtain monitoring information.
4. Applicant data--joint applicant. A joint applicant may enter the
government monitoring information on behalf of an absent joint
applicant. If the information is not provided, the institution reports
using the code for ``information not provided by applicant in mail,
Internet, or telephone application.''
5. Applicant data--video and other electronic-application processes.
An institution that accepts applications through electronic media with a
video component treats the applications as taken in person and collects
the information about the ethnicity, race, and sex of applicants. An
institution that accepts applications through electronic media without a
video component (for example, the Internet or facsimile) treats the
applications as accepted by mail.
6. Income data--income relied on. An institution reports the gross
annual income relied on in evaluating the creditworthiness of
applicants. For example, if an institution relies on an applicant's
salary to compute a debt-to-income ratio but also relies on the
applicant's annual bonus to evaluate creditworthiness, the institution
reports the salary and the bonus to the extent relied upon. Similarly,
if an institution relies on the income of a cosigner to evaluate
creditworthiness, the institution includes this income to the extent
relied upon. But an institution does not include the income of a
guarantor who is only secondarily liable.
7. Income data--co-applicant. If two persons jointly apply for a
loan and both list income on the application, but the institution relies
only on the income of one applicant in computing ratios and in
evaluating creditworthiness, the institution reports only the income
relied on.
8. Income data--loan to employee. An institution may report ``NA''
in the income field for loans to its employees to protect their privacy,
even though the institution relied on their income in making its credit
decisions.
Paragraph 4(a)(11) Purchaser.
1. Type of purchaser--loan-participation interests sold to more than
one entity. An institution that originates a loan, and then sells it to
more than one entity, reports the ``type of
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purchaser'' based on the entity purchasing the greatest interest, if
any. If an institution retains a majority interest, it does not report
the sale.
2. Type of purchaser--swapped loans. Loans ``swapped'' for mortgage-
backed securities are to be treated as sales; the purchaser is the type
of entity receiving the loans that are swapped.
Paragraph 4(a)(12) Rate spread information.
Paragraph 4(a)(12)(ii).
1. Average prime offer rate. Average prime offer rates are annual
percentage rates derived from average interest rates, points, and other
loan pricing terms offered to borrowers by a representative sample of
lenders for mortgage loans 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 lenders that both meets the criteria of Sec.
203.4(a)(12)(ii) 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. The rate spread reporting requirement
applies to a reportable loan with an annual percentage rate that exceeds
by the specified margin (or more) the average prime offer rate for a
comparable transaction as of the date the interest rate is set. The
tables of average prime offer rates published by the Board (see comment
4(a)(12)(ii)-3) indicate how to identify the comparable transaction.
3. Board tables. The Board publishes on the FFIEC's Web site (http:/
/www.ffiec.gov/hmda), 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 12 CFR 226.22 and
part 226, appendix J), for each transaction type for which pricing terms
are available from the survey described in comment 4(a)(12)(ii)-1. 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 FFIEC's Web site the methodology it uses to arrive at these
estimates.
Paragraph 4(a)(14) Lien status.
1. Determining lien status for applications and loans originated. i.
Lenders are required to report lien status for loans they originate and
applications that do not result in originations. Lien status is
determined by reference to the best information readily available to the
lender at the time final action is taken and to the lender's own
procedures. Thus, lenders may rely on the title search they routinely
perform as part of their underwriting procedures--for example, for home
purchase loans. Regulation C does not require lenders to perform title
searches solely to comply with HMDA reporting requirements. Lenders may
rely on other information that is readily available to them at the time
final action is taken and that they reasonably believe is accurate, such
as the applicant's statement on the application or the applicant's
credit report. For example, where the applicant indicates on the
application that there is a mortgage on the property or where the
applicant's credit report shows that the applicant has a mortgage--and
that mortgage is not going to be paid off as part of the transaction--
the lender may assume that the loan it originates is secured by a
subordinate lien. If the same application did not result in an
origination--for example, because the application is denied or
withdrawn--the lender would report the application as an application for
a subordinate-lien loan.
ii. Lenders may also consider their established procedures when
determining lien status for applications that do not result in
originations. For example, a consumer applies to a lender to refinance a
$100,000 first mortgage; the consumer also has a home equity line of
credit for $20,000. If the lender's practice in such a case is to ensure
that it will have first-lien position--through a subordination agreement
with the holder of the mortgage on the home equity line--then the lender
should report the application as an application for a first-lien loan.
Paragraph 4(c)(3) Optional data--home-equity lines of credit.
1. An institution that opts to report home-equity lines reports the
disposition of all applications, not just originations.
Paragraph 4(d) Excluded data.
1. Mergers, purchases in bulk, and branch acquisitions. If a covered
institution acquires loans in bulk from another institution (for
example, from the receiver for a failed institution) but no merger or
acquisition of the institution, or acquisition of a branch, is involved,
the institution reports the loans as purchased loans.
Section 203.5(a)--Disclosure and Reporting
Paragraph 5(a) Reporting to agency.
1. Submission of data. Institutions submit data to their supervisory
agencies in an automated, machine-readable form. The format must conform
to that of the HMDA/LAR. An institution should contact its federal
supervisory agency for information regarding procedures and technical
specifications for automated data submission; in some cases, agencies
also make software available for automated data submission.
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The data are edited before submission, using the edits included in the
agency-supplied software or equivalent edits in software available from
vendors or developed in-house.
2. Submission in paper form. Institutions that report twenty-five or
fewer entries on their HMDA/LAR may collect and report the data in paper
form. An institution that submits its register in nonautomated form
sends two copies that are typed or computer printed and must use the
format of the HMDA/LAR (but need not use the form itself). Each page
must be numbered along with the total number of pages (for example,
``Page 1 of 3'').
3. Procedures for entering data. The required data are entered in
the register for each loan origination, each application acted on, and
each loan purchased during the calendar year. The institution should
decide on the procedure it wants to follow--for example, whether to
begin entering the required data, when an application is received, or to
wait until final action is taken (such as when a loan goes to closing or
an application is denied).
4. Options for collection. An institution may collect data on
separate registers at different branches, or on separate registers for
different loan types (such as for home purchase or home improvement
loans, or for loans on multifamily dwellings). Entries need not be
grouped on the register by MSA or Metropolitan Division, or
chronologically, or by census tract numbers, or in any other particular
order.
5. Change in supervisory agency. If the supervisory agency for a
covered institution changes (as a consequence of a merger or a change in
the institution's charter, for example), the institution must report
data to its new supervisory agency beginning with the year of the
change.
6. Subsidiaries. An institution is a subsidiary of a bank or savings
association (for purposes of reporting HMDA data to the parent's
supervisory agency) if the bank or savings association holds or controls
an ownership interest that is greater than 50 percent of the
institution.
7. Transmittal sheet--additional data submissions. If an additional
data submission becomes necessary (for example, because the institution
discovers that data were omitted from the initial submission, or because
revisions are called for, that submission must be accompanied by a
transmittal sheet.
8. Transmittal sheet--revisions or deletions. If a data submission
involves revisions or deletions of previously submitted data, it must
state the total of all line entries contained in that submission,
including both those representing revisions or deletions of previously
submitted entries, and those that are being resubmitted unchanged or are
being submitted for the first time. Depository institutions must provide
a list of the MSAs or Metropolitan Divisions in which they have home or
branch offices.
Paragraph 5(b) Public disclosure of statement.
1. Business day. For purposes of Sec. 203.5, a business day is any
calendar day other than a Saturday, Sunday, or legal public holiday.
2. Format. An institution may make the disclosure statement
available in paper form or, if the person requesting the data agrees, in
automated form (such as by PC diskette or CD Rom).
Paragraph 5(c) Public disclosure of modified loan/application
register.
1. Format. An institution may make the modified register available
in paper or automated form (such as by PC diskette or computer tape).
Although institutions are not required to make the modified register
available in census tract order, they are strongly encouraged to do so
in order to enhance its utility to users.
Paragraph 5(e) Notice of availability.
1. Poster--suggested text. An institution may use any text that
meets the requirements of the regulation. Some of the federal financial
regulatory agencies and HUD provide HMDA posters that an institution can
use to inform the public of the availability of its HMDA data, or the
institution may create its own posters. If an institution prints its
own, the following language is suggested but is not required:
Home Mortgage Disclosure Act Notice
The HMDA data about our residential mortgage lending are available
for review. The data show geographic distribution of loans and
applications; ethnicity, race, sex, and income of applicants and
borrowers; and information about loan approvals and denials. Inquire at
this office regarding the locations where HMDA data may be inspected.
2. Additional language for institutions making the disclosure
statement available on request. An institution that posts a notice
informing the public of the address to which a request should be sent
could include the following sentence, for example, in its general
notice: ``To receive a copy of these data send a written request to
[address].''
Section 203.6--Enforcement
Paragraph 6(b) Bona fide errors.
1. Bona fide error--information from third parties. An institution
that obtains the property-location information for applications and
loans from third parties (such as appraisers or vendors of ``geocoding''
services)
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is responsible for ensuring that the information reported on its HMDA/
LAR is correct.
[Reg. C, 67 FR 7236, Feb. 15, 2002, as amended at 67 FR 43227, June 27,
2002; 68 FR 31592, May 28, 2003; 68 FR 74833, Dec. 29, 2003; 69 FR
77139, Dec. 27, 2004; 70 FR 75719, Dec. 21, 2005; 71 FR 77247, Dec. 26,
2006; 72 FR 72235, Dec. 20, 2007; 73 FR 78616, Dec. 23, 2008; 73 FR
63336, Oct. 24, 2008; 74 FR 68499, Dec. 28, 2009; 75 FR 80675, Dec. 23,
2010]
PART 204_RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS (REGULATION D)--Table
of Contents
Sec.
204.1 Authority, purpose and scope.
204.2 Definitions.
204.3 Reporting and location.
204.4 Computation of required services.
204.5 Maintenance of required reserves.
204.6 Charges for reserve deficiencies.
204.7 Supplemental reserve requirement.
204.8 International banking facilities.
204.9 Emergency reserve requirement.
204.10 Payment of interest on balances.
Interpretations
204.121 Bankers' banks.
204.122 Secondary market activities of international banking facilities.
204.123 Sale of Federal funds by investment companies or trusts in which
the entire beneficial interest is held exclusively by
depository institutions.
204.124 Repurchase agreement involving shares of a money market mutual
fund whose portfolio consists wholly of United States Treasury
and Federal agency securities.
204.125 Foreign, international, and supranational entities referred to
in Sec. Sec. 204.2(c)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5).
204.126 Depository institution participation in ``Federal funds''
market.
204.127 Nondepository participation in ``Federal funds'' market.
204.128 Deposits at foreign branches guaranteed by domestic office of a
depository institution.
204.130 Eligibility for NOW accounts.
204.131 Participation by a depository institution in the secondary
market for its own time deposits.
204.132 Treatment of loan strip participations.
204.133 Multiple savings deposits treated as a transaction account.
204.134 Linked time deposits and transaction accounts.
204.135 Shifting funds between depository institutions to make use of
the low reserve tranche.
204.136 Treatment of trust overdrafts for reserve requirement reporting
purposes.
Authority: 12 U.S.C. 248(a), 248(c), 461, 601, 611, and 3105.
Sec. 204.1 Authority, purpose and scope.
(a) Authority. This part is issued under the authority of section 19
(12 U.S.C. 461 et seq.) and other provisions of the Federal Reserve Act
and of section 7 of the International Banking Act of 1978 (12 U.S.C.
3105).
(b) Purpose. This part relates to reserves that depository
institutions are required to maintain for the purpose of facilitating
the implementation of monetary policy by the Federal Reserve System.
(c) Scope. (1) The following depository institutions are required to
maintain reserves in accordance with this part:
(i) Any insured bank as defined in section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813(h)) or any bank that is eligible to apply
to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
(ii) Any savings bank or mutual savings bank as defined in section 3
of the Federal Deposit Insurance Act (12 U.S.C. 1813(f), (g));
(iii) Any insured credit union as defined in section 101 of the
Federal Credit Union Act (12 U.S.C. 1752(7)) or any credit union that is
eligible to apply to become an insured credit union under section 201 of
such Act (12 U.S.C. 1781);
(iv) Any member as defined in section 2 of the Federal Home Loan
Bank Act (12 U.S.C. 1422(4)); and
(v) Any insured institution as defined in section 401 of the
National Housing Act (12 U.S.C. 1724(a)) or any institution which is
eligible to apply to become an insured institution under section 403 of
such Act (12 U.S.C. 1726).
(2) Except as may be otherwise provided by the Board, a foreign
bank's branch or agency located in the United States is required to
comply with the provisions of this part in the same manner and to the
same extent as if the branch or agency were a member bank, if its parent
foreign bank (i) has total worldwide consolidated bank assets in excess
of $1 billion; or (ii) is controlled by a foreign company or by a group
of foreign companies that own
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or control foreign banks that in the aggregate have total worldwide
consolidated bank assets in excess of $1 billion. In addition, any other
foreign bank's branch located in the United States that is eligible to
apply to become an insured bank under section 5 of the Federal Deposit
Insurance Act (12 U.S.C. 1815) is required to maintain reserves in
accordance with this part as a nonmember depository institution.
(3) Except as may be otherwise provided by the Board, an Edge
Corporation (12 U.S.C. 611 et seq.) or an Agreement Corporation (12
U.S.C. 601 et seq.) is required to comply with the provisions of this
part in the same manner and to the same extent as a member bank.
(4) This part does not apply to any financial institution that (i)
is organized solely to do business with other financial institutions;
(ii) is owned primarily by the financial institutions with which it does
business; and (iii) does not do business with the general public.
(5) The provisions of this part do not apply to any deposit that is
payable only at an office located outside the United States.
[45 FR 56018, Aug. 22, 1980]
Sec. 204.2 Definitions.
For purposes of this part, the following definitions apply unless
otherwise specified:
(a)(1) Deposit means:
(i) The unpaid balance of money or its equivalent received or held
by a depository institution in the usual course of business and for
which it has given or is obligated to give credit, either conditionally
or unconditionally, to an account, including interest credited, or which
is evidenced by an instrument on which the depository institution is
primarily liable;
(ii) Money received or held by a depository institution, or the
credit given for money or its equivalent received or held by the
depository institution in the usual course of business for a special or
specific purpose, regardless of the legal relationships established
thereby, including escrow funds, funds held as security for securities
loaned by the depository institution, funds deposited as advance payment
on subscriptions to United States government securities, and funds held
to meet its acceptances;
(iii) An outstanding teller's check, or an outstanding draft,
certified check, cashier's check, money order, or officer's check drawn
on the depository institution, issued in the usual course of business
for any purpose, including payment for services, dividends or purchases;
(iv) Any due bill or other liability or undertaking on the part of a
depository institution to sell or deliver securities to, or purchase
securities for the account of, any customer (including another
depository institution), involving either the receipt of funds by the
depository institution, regardless of the use of the proceeds, or a
debit to an account of the customer before the securities are delivered.
A deposit arises thereafter, if after three business days from the date
of issuance of the obligation, the depository institution does not
deliver the securities purchased or does not fully collateralize its
obligation with securities similar to the securities purchased. A
security is similar if it is of the same type and if it is of comparable
maturity to that purchased by the customer;
(v) Any liability of a depository institution's affiliate that is
not a depository institution, on any promissory note, acknowledgment of
advance, due bill, or similar obligation (written or oral), with a
maturity of less than one and one-half years, to the extent that the
proceeds are used to supply or to maintain the availability of funds
(other than capital) to the depository institution, except any such
obligation that, had it been issued directly by the depository
institution, would not constitute a deposit. If an obligation of an
affiliate of a depository institution is regarded as a deposit and is
used to purchase assets from the depository institution, the maturity of
the deposit is determined by the shorter of the maturity of the
obligation issued or the remaining maturity of the assets purchased. If
the proceeds from an affiliate's obligation are placed in the depository
institution in the form of a reservable deposit, no reserves need be
maintained against the obligation of the affiliate since reserves are
required
[[Page 99]]
to be maintained against the deposit issued by the depository
institution. However, the maturity of the deposit issued to the
affiliate shall be the shorter of the maturity of the affiliate's
obligation or the maturity of the deposit;
(vi) Credit balances;
(vii) Any liability of a depository institution on any promissory
note, acknowledgment of advance, bankers' acceptance, or similar
obligation (written or oral), including mortgage-backed bonds, that is
issued or undertaken by a depository institution as a means of obtaining
funds, except any such obligation that:
(A) Is issued or undertaken and held for the account of:
(1) An office located in the United States of another depository
institution, foreign bank, Edge or Agreement Corporation, or New York
Investment (Article XII) Company;
(2) The United States government or an agency thereof; or
(3) The Export-Import Bank of the United States, Minbanc Capital
Corporation, the Government Development Bank for Puerto Rico, a Federal
Reserve Bank, a Federal Home Loan Bank, or the National Credit Union
Administration Central Liquidity Facility;
(B) Arises from a transfer of direct obligations of, or obligations
that are fully guaranteed as to principal and interest by, the United
States Government or any agency thereof that the depository institution
is obligated to repurchase;
(C) Is not insured by a Federal agency, is subordinated to the
claims of depositors, has a weighted average maturity of five years or
more, and is issued by a depository institution with the approval of, or
under the rules and regulations of, its primary Federal supervisor;
(D) Arises from a borrowing by a depository institution from a
dealer in securities, for one business day, of proceeds of a transfer of
deposit credit in a Federal Reserve Bank or other immediately available
funds (commonly referred to as Federal funds), received by such dealer
on the date of the loan in connection with clearance of securities
transactions; or
(E) Arises from the creation, discount and subsequent sale by a
depository institution of its bankers' acceptance of the type described
in paragraph 7 of section 13 of the Federal Reserve Act (12 U.S.C. 372).
(viii) Any liability of a depository institution that arises from
the creation after June 20, 1983, of a bankers' acceptance that is not
of the type described in paragraph 7 of section 13 of the Federal
Reserve Act (12 U.S.C. 372) except any such liability held for the
account of an entity specified in Sec. 204.2(a)(1)(vii)(A); or
(2) Deposit does not include:
(i) Trust funds received or held by the depository institution that
it keeps properly segregated as trust funds and apart from its general
assets or which it deposits in another institution to the credit of
itself as trustee or other fiduciary. If trust funds are deposited with
the commercial department of the depository institution or otherwise
mingled with its general assets, a deposit liability of the institution
is created;
(ii) An obligation that represents a conditional, contingent or
endorser's liability;
(iii) Obligations, the proceeds of which are not used by the
depository institution for purposes of making loans, investments, or
maintaining liquid assets such as cash or ``due from'' depository
institutions or other similar purposes. An obligation issued for the
purpose of raising funds to purchase business premises, equipment,
supplies, or similar assets is not a deposit;
(iv) Accounts payable;
(v) Hypothecated deposits created by payments on an installment loan
where (A) the amounts received are not used immediately to reduce the
unpaid balance due on the loan until the sum of the payments equals the
entire amount of loan principal and interest; (B) and where such amounts
are irrevocably assigned to the depository institution and cannot be
reached by the borrower or creditors of the borrower;
(vi) Dealer reserve and differential accounts that arise from the
financing of dealer installment accounts receivable, and which provide
that the dealer may not have access to the funds in the account until
the installment loans are
[[Page 100]]
repaid, as long as the depository institution is not actually (as
distinguished from contingently) obligated to make credit or funds
available to the dealer;
(vii) A dividend declared by a depository institution for the period
intervening between the date of the declaration of the dividend and the
date on which it is paid;
(viii) An obligation representing a pass through account, as defined
in this section;
(ix) An obligation arising from the retention by the depository
institution of no more than a 10 per cent interest in a pool of
conventional 1-4 family mortgages that are sold to third parties;
(x) An obligation issued to a State or municipal housing authority
under a loan-to-lender program involving the issuance of tax exempt
bonds and the subsequent lending of the proceeds to the depository
institution for housing finance purposes;
(xi) Shares of a credit union held by the National Credit Union
Administration or the National Credit Union Administration Central
Liquidity Facility under a statutorily authorized assistance program;
and
(xii) Any liability of a United States branch or agency of a foreign
bank to another United States branch or agency of the same foreign bank,
or the liability of the United States office of an Edge Corporation to
another United States office of the same Edge Corporation.
(b)(1) Demand deposit means a deposit that is payable on demand, or
a deposit issued with an original maturity or required notice period of
less than seven days, or a deposit representing funds for which the
depository institution does not reserve the right to require at least
seven days' written notice of an intended withdrawal. Demand deposits
may be in the form of:
(i) Checking accounts;
(ii) Certified, cashier's, teller's, and officer's checks (including
such checks issued in payment of dividends);
(iii) Traveler's checks and money orders that are primary
obligations of the issuing institution;
(iv) Checks or drafts drawn by, or on behalf of, a non-United States
office of a depository institution on an account maintained at any of
the institution's United States offices;
(v) Letters of credit sold for cash or its equivalent;
(vi) Withheld taxes, withheld insurance and other withheld funds;
(vii) Time deposits that have matured or time deposits upon which
the contractually required notice of withdrawal as given and the notice
period has expired and which have not been renewed (either by action of
the depositor or automatically under the terms of the deposit
agreement); and
(viii) An obligation to pay, on demand or within six days, a check
(or other instrument, device, or arrangement for the transfer of funds)
drawn on the depository institution, where the account of the
institution's customer already has been debited.
(2) The term demand deposit also means deposits or accounts on which
the depository institution has reserved the right to require at least
seven days' written notice prior to withdrawal or transfer of any funds
in the account and from which the depositor is authorized to make
withdrawals or transfers in excess of the withdrawal or transfer
limitations specified in paragraph (d)(2) of this section for such an
account and the account is not a NOW account, or an ATS account or other
account that meets the criteria specified in either paragraph (b)(3)(ii)
or (iii) of this section.
(3) Demand deposit does not include:
(i) Any account that is a time deposit or a savings deposit under
this part;
(ii) Any deposit or account on which the depository institution has
reserved the right to require at least seven days' written notice prior
to withdrawal or transfer of any funds in the account and either--
(A) Is subject to check, draft, negotiable order of withdrawal,
share draft, or similar item, such as an account authorized by 12 U.S.C.
1832(a) (NOW account) and a savings deposit described in Sec.
204.2(d)(2), provided that the depositor is eligible to hold a NOW
account; or
(B) From which the depositor is authorized to make transfers by
preauthorized transfer or telephonic (including data transmission)
agreement, order or instruction to another
[[Page 101]]
account or to a third party, provided that the depositor is eligible to
hold a NOW account;
(iii) Any deposit or account on which the depository institution has
reserved the right to require at least seven days' written notice prior
to withdrawal or transfer of any funds in the account and from which
withdrawals may be made automatically through payment to the depository
institution itself or through transfer of credit to a demand deposit or
other account in order to cover checks or drafts drawn upon the
institution or to maintain a specified balance in, or to make periodic
transfers to such other account, such as accounts authorized by 12
U.S.C. 371a (automatic transfer account or ATS account), provided that
the depositor is eligible to hold an ATS account; or
(iv) IBF time deposits meeting the requirements of Sec.
204.8(a)(2).
(c)(1) Time deposit means:
(i) A deposit that the depositor does not have a right and is not
permitted to make withdrawals from within six days after the date of
deposit unless the deposit is subject to an early withdrawal penalty of
at least seven days' simple interest on amounts withdrawn within the
first six days after deposit. \1\ A time deposit from which partial
early withdrawals are permitted must impose additional early withdrawal
penalties of at least seven days' simple interest on amounts withdrawn
within six days after each partial withdrawal. If such additional early
withdrawal penalties are not imposed, the account ceases to be a time
deposit. The account may become a savings deposit if it meets the
requirements for a saving deposit; otherwise it becomes a transaction
account. Time deposit includes funds--
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\1\ A time deposit, or a portion thereof, may be paid during the
period when an early withdrawal penalty would otherwise be required
under this part without imposing an early withdrawal penalty specified
by this part:
(a) Where the time deposit is maintained in an individual retirement
account established in accordance with 26 U.S.C. 408 and is paid within
seven days after establishment of the individual retirement account
pursuant to 26 CFR 1.408-6(d)(4), where it is maintained in a Keogh
(H.R. 10) plan, or where it is maintained in a 401(k) plan under 26
U.S.C. 401(k); Provided that the depositor forfeits an amount at least
equal to the simple interest earned on the amount withdrawn;
(b) Where the depository institution pays all or a portion of a time
deposit representing funds contributed to an individual retirement
account or a Keogh (H.R.10) plan established pursuant to 26 U.S.C. 408
or 26 U.S.C. 401 or to a 401(k) plan established pursuant to 26 U.S.C.
401(k) when the individual for whose benefit the account is maintained
attains age 59\1/2\ or is disabled (as defined in 26 U.S.C. 72(m)(7)) or
thereafter;
(c) Where the depository institution pays that portion of a time
deposit on which federal deposit insurance has been lost as a result of
the merger of two or more federally insured banks in which the depositor
previously maintained separate time deposits, for a period of one year
from the date of the merger;
(d) Upon the death of any owner of the time deposit funds;
(e) When any owner of the time deposit is determined to be legally
incompetent by a court or other administrative body of competent
jurisdiction; or
(f) Where a time deposit is withdrawn within ten days after a
specified maturity date even though the deposit contract provided for
automatic renewal at the maturity date.
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(A) Payable on a specified date not less than seven days after the
date of deposit;
(B) Payable at the expiration of a specified time not less than
seven days after the date of deposit;
(C) Payable only upon written notice that is actually required to be
given by the depositor not less than seven days prior to withdrawal;
(D) Held in club accounts (such as Christmas club accounts and
vacation club accounts that are not maintained as savings deposits) that
are deposited under written contracts providing that no withdrawal shall
be made until a certain number of periodic deposits have been made
during a period of not less than three months even though some of the
deposits may be made within six days from the end of the period; or
(E) Share certificates and certificates of indebtedness issued by
credit unions, and certificate accounts and notice accounts issued by
savings and loan associations;
(ii) A savings deposit;
(iii) An IBF time deposit meeting the requirements of Sec.
204.8(a)(2); and
[[Page 102]]
(iv) Borrowings, regardless of maturity, represented by a promissory
note, an acknowledgment of advance, or similar obligation described in
Sec. 204.2(a)(1)(vii) that is issued to, or any bankers' acceptance
(other than the type described in 12 U.S.C. 372) of the depository
institution held by--
(A) Any office located outside the United States of another
depository institution or Edge or agreement corporation organized under
the laws of the United States;
(B) Any office located outside the United States of a foreign bank;
(C) A foreign national government, or an agency or instrumentality
thereof, \2\ engaged principally in activities which are ordinarily
performed in the United States by governmental entities;
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\2\ Other than states, provinces, municipalities, or other regional
or local governmental units or agencies or instrumentalities thereof.
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(D) An international entity of which the United States is a member;
or
(E) Any other foreign, international, or supranational entity
specifically designated by the Board. \3\
---------------------------------------------------------------------------
\3\ The designated entities are specified in 12 CFR 204.125.
---------------------------------------------------------------------------
(2) A time deposit may be represented by a transferable or
nontransferable, or a negotiable or nonnegotiable, certificate,
instrument, passbook, or statement, or by book entry or otherwise.
(d)(1) Savings deposit means a deposit or account with respect to
which the depositor is not required by the deposit contract but may at
any time be required by the depository institution to give written
notice of an intended withdrawal not less than seven days before
withdrawal is made, and that is not payable on a specified date or at
the expiration of a specified time after the date of deposit. The term
savings deposit includes a regular share account at a credit union and a
regular account at a savings and loan association.
(2) The term ``savings deposit'' also means: A deposit or account,
such as an account commonly known as a passbook savings account, a
statement savings account, or as a money market deposit account (MMDA),
that otherwise meets the requirements of Sec. 204.2(d)(1) and from
which, under the terms of the deposit contract or by practice of the
depository institution, the depositor is permitted or authorized to make
no more than six transfers and withdrawals, or a combination of such
transfers and withdrawals, per calendar month or statement cycle (or
similar period) of at least four weeks, to another account (including a
transaction account) of the depositor at the same institution or to a
third party by means of a preauthorized or automatic transfer, or
telephonic (including data transmission) agreement, order or
instruction, or by check, draft, debit card, or similar order made by
the depositor and payable to third parties. A preauthorized transfer
includes any arrangement by the depository institution to pay a third
party from the account of a depositor upon written or oral instruction
(including an order received through an automated clearing house (ACH))
or any arrangement by a depository institution to pay a third party from
the account of the depositor at a predetermined time or on a fixed
schedule. Such an account is not a transaction account by virtue of an
arrangement that permits transfers for the purpose of repaying loans and
associated expenses at the same depository institution (as originator or
servicer) or that permits transfers of funds from this account to
another account of the same depositor at the same institution or permits
withdrawals (payments directly to the depositor) from the account when
such transfers or withdrawals are made by mail, messenger, automated
teller machine, or in person or when such withdrawals are made by
telephone (via check mailed to the depositor) regardless of the number
of such transfers or withdrawals.\4\
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\4\ In order to ensure that no more than the permitted number of
withdrawals or transfers are made, for an account to come within the
definition of ``savings deposit,'' a depository institution must either:
(a) Prevent withdrawals or transfers of funds from this account that
are in excess of the limits established by paragraph (d)(2) of this
section, or
(b) Adopt procedures to monitor those transfers on an ex post basis
and contact customers who exceed the established limits on more than
occasional basis. For customers who continue to violate those limits
after they have been contacted by the depository institution, the
depository institution must either close the account and place the funds
in another account that the depositor is eligible to maintain or take
away the transfer and draft capacities of the account. An account that
authorizes withdrawals or transfers in excess of the permitted number is
a transaction account regardless of whether the authorized number of
transactions is actually made. For accounts described in paragraph
(d)(2) of this section, the institution at its option may use, on a
consistent basis, either the date on the check, draft, or similar item,
or the date the item is paid in applying the limits imposed by that
section.
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[[Page 103]]
(3) A deposit may continue to be classified as a savings deposit
even if the depository institution exercises its right to require notice
of withdrawal.
(4) Savings deposit does not include funds deposited to the credit
of the depository institution's own trust department where the funds
involved are utilized to cover checks or drafts. Such funds are
transaction accounts.
(e) Transaction account means a deposit or account from which the
depositor or account holder is permitted to make transfers or
withdrawals by negotiable or transferable instrument, payment order of
withdrawal, telephone transfer, or other similar device for the purpose
of making payments or transfers to third persons or others or from which
the depositor may make third party payments at an automated teller
machine (ATM) or a remote service unit, or other electronic device,
including by debit card, but the term does not include savings deposits
or accounts described in paragraph (d)(2) of this section even though
such accounts permit third party transfers. Transaction account
includes:
(1) Demand deposits;
(2) Deposits or accounts on which the depository institution has
reserved the right to require at least seven days' written notice prior
to withdrawal or transfer of any funds in the account and that are
subject to check, draft, negotiable order of withdrawal, share draft, or
other similar item, except accounts described in paragraph (d)(2) of
this section (savings deposits), but including accounts authorized by 12
U.S.C. 1832(a) (NOW accounts).
(3) Deposits or accounts on which the depository institution has
reserved the right to require at least seven days' written notice prior
to withdrawal or transfer of any funds in the account and from which
withdrawals may be made automatically through payment to the depository
institution itself or through transfer or credit to a demand deposit or
other account in order to cover checks or drafts drawn upon the
institution or to maintain a specified balance in, or to make periodic
transfers to such accounts, except accounts described in paragraph
(d)(2) of this section, but including accounts authorized by 12 U.S.C.
371a (automatic transfer accounts or ATS accounts).
(4) Deposits or accounts on which the depository institution has
reserved the right to require at least seven days' written notice prior
to withdrawal or transfer of any funds in the account and under the
terms of which, or by practice of the depository institution, the
depositor is permitted or authorized to make more than six withdrawals
per month or statement cycle (or similar period) of at least four weeks
for the purposes of transferring funds to another account of the
depositor at the same institution (including transaction account) or for
making payment to a third party by means of a preauthorized transfer, or
telephonic (including data transmission) agreement, order or
instruction, except accounts described in paragraph (d)(2) of this
section. An account that authorizes more than six such withdrawals in a
calendar month, or statement cycle (or similar period) of at least four
weeks, is a transaction account whether or not more than six such
transfers are made during such period. A preauthorized transfer includes
any arrangement by the depository institution to pay a third party from
the account of a depositor upon written or oral instruction (including
an order received through an automated clearing house (ACH)), or any
arrangement by a depository institution to pay a third party from the
account of the depositor at a predetermined time or on a fixed schedule.
Such an account is not a transaction account by virtue of an arrangement
that permits transfers for the purpose of repaying loans and associated
expenses at the same depository institution (as originator or servicer)
or that permits transfers of funds from this account to another account
of the
[[Page 104]]
same depositor at the same institution or permits withdrawals (payments
directly to the depositor) from the account when such transfers or
withdrawals are made by mail, messenger, automated teller machine or in
person or when such withdrawals are made by telephone (via check mailed
to the depositor) regardless of the number of such transfers or
withdrawals.
(5) Deposits or accounts maintained in connection with an
arrangement that permits the depositor to obtain credit directly or
indirectly through the drawing of a negotiable or nonnegotiable check,
draft, order or instruction or other similar device (including telephone
or electronic order or instruction) on the issuing institution that can
be used for the purpose of making payments or transfers to third persons
or others or to a deposit account of the depositor.
(6) All deposits other than time and savings accounts, including
those accounts that are time and savings deposits in form but that the
Board has determined, by rule or order, to be transaction accounts.
(f)(1) Nonpersonal time deposit means:
(i) A time deposit, including an MMDA or any other savings deposit,
representing funds in which any beneficial interest is held by a
depositor which is not a natural person;
(ii) A time deposit, including an MMDA or any other savings deposit,
that represents funds deposited to the credit of a depositor that is not
a natural person, other than a deposit to the credit of a trustee or
other fiduciary if the entire beneficial interest in the deposit is held
by one or more natural persons;
(iii) A transferable time deposit. A time deposit is transferable
unless it contains a specific statement on the certificate, instrument,
passbook, statement or other form representing the account that it is
not transferable. A time deposit that contains a specific statement that
it is not transferable is not regarded as transferable even if the
following transactions can be effected: a pledge as collateral for a
loan, a transaction that occurs due to circumstances arising from death,
incompetency, marriage, divorce, attachment, or otherwise by operation
of law or a transfer on the books or records of the institution; and
(iv) A time deposit represented by a promissory note, an
acknowledgment of advance, or similar obligation described in paragraph
(a)(1)(vii) of this section that is issued to, or any bankers'
acceptance (other than the type described in 12 U.S.C. 372) of the
depository institution held by:
(A) Any office located outside the United States of another
depository institution or Edge or agreement corporation organized under
the laws of the United States;
(B) Any office located outside the United States of a foreign bank;
(C) A foreign national government, or an agency or instrumentality
thereof, \5\ engaged principally in activities which are ordinarily
performed in the United States by governmental entities;
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\5\ Other than states, provinces, municipalities, or other regional
or local governmental units or agencies or instrumentalities thereof.
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(D) An international entity of which the United States is a member;
or
(E) Any other foreign, international, or supranational entity
specifically designated by the Board. \6\
---------------------------------------------------------------------------
\6\ The designated entities are specified in 12 CFR 217.126.
---------------------------------------------------------------------------
(2) Nonpersonal time deposit does not include nontransferable time
deposits to the credit of or in which the entire beneficial interest is
held by an individual pursuant to an individual retirement account or
Keogh (H.R. 10) plan under 26 U.S.C. 408, 401, or non-transferable time
deposits held by an employer as part of an unfunded deferred-
compensation plan established pursuant to subtitle D of the Revenue Act
of 1978 (Pub. L. 95-600, 92 Stat. 2763), or a 401(k) plan under 26
U.S.C. 401(k).
(g) Natural person means an individual or a sole proprietorship. The
term does not mean a corporation owned by an individual, a partnership
or other association.
(h) Eurocurrency liabilities means:
(1) For a depository institution or an Edge or Agreement Corporation
organized under the laws of the United States, the sum, if positive, of
the following:
(i) Net balances due to its non-United States offices and its
international
[[Page 105]]
banking facilities (IBFs) from its United States offices;
(ii)(A) For a depository institution organized under the laws of the
United States, assets (including participations) acquired from its
United States offices and held by its non-United States offices, by its
IBF, or by non-United States offices of an affiliated Edge or Agreement
Corporation; \7\ or
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\7\ This paragraph does not apply to assets that were acquired by an
IBF from its establishing entity before the end of the second reserve
computation period after its establishment.
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(B) For an Edge or Agreement Corporation, assets (including
participations) acquired from its United States offices and held by its
non-United States offices, by its IBF, by non-United States offices of
its U.S. or foreign parent institution, or by non-United States offices
of an affiliated Edge or Agreement Corporation; and
(iii) Credit outstanding from its non-United States offices to
United States residents (other than assets acquired and net balances due
from its United States offices), except credit extended (A) from its
non-United States offices in the aggregate amount of $100,000 or less to
any United States resident, (B) by a non-United States office that at no
time during the computation period had credit outstanding to United
States residents exceeding $1 million, (C) to an international banking
facility, or (D) to an institution that will be maintaining reserves on
such credit pursuant to this part. Credit extended from non-United
States offices or from IBFs to a foreign branch, office, subsidiary,
affiliate of other foreign establishment (foreign affiliate) controlled
by one or more domestic corporations is not regarded as credit extended
to a United States resident if the proceeds will be used to finance the
operations outside the United States of the borrower or of other foreign
affiliates of the controlling domestic corporation(s).
(2) For a United States branch or agency of a foreign bank, the sum,
if positive, of the following:
(i) Net balances due to its foreign bank (including offices thereof
located outside the United States) and its international banking
facility after deducting an amount equal to 8 per cent of the following:
the United States branch's or agency's total assets less the sum of (A)
cash items in process of collection; (B) unposted debits; (C) demand
balances due from depository institutions organized under the laws of
the United States and from other foreign banks; (D) balances due from
foreign central banks; and (E) positive net balances due from its IBF,
its foreign bank, and the foreign bank's United States and non-United
States offices; and
(ii) Assets (including participations) acquired from the United
States branch or agency (other than assets required to be sold by
Federal or State supervisory authorities) and held by its foreign bank
(including offices thereof located outside the United States), by its
parent holding company, by non-United States offices or an IBF of an
affiliated Edge or Agreement Corporation, or by its IBFs. \8\
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\8\ See footnote 7.
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(i)(1) Cash item in process of collection means:
(i) Checks in the process of collection, drawn on a bank or other
depository institution that are payable immediately upon presentation in
the United States, including checks forwarded to a Federal Reserve Bank
in process of collection and checks on hand that will be presented for
payment or forwarded for collection on the following business day;
(ii) Government checks drawn on the Treasury of the United States
that are in the process of collection; and
(iii) Such other items in the process of collection, that are
payable immediately upon presentation in the United States and that are
customarily cleared or collected by depository institutions as cash
items, including:
(A) Drafts payable through another depository institution;
(B) Matured bonds and coupons (including bonds and coupons that have
been called and are payable on presentation);
(C) Food coupons and certificates;
(D) Postal and other money orders, and traveler's checks;
(E) Amounts credited to deposit accounts in connection with
automated
[[Page 106]]
payment arrangements where such credits are made one business day prior
to the scheduled payment date to insure that funds are available on the
payment date;
(F) Commodity or bill of lading drafts payable immediately upon
presentation in the United States;
(G) Returned items and unposted debits; and
(H) Broker security drafts.
(2) Cash item in process of collection does not include items
handled as noncash collections and credit card sales slips and drafts.
(j) Net transaction accounts means the total amount of a depository
institution's transaction accounts less the deductions allowed under the
provisions of Sec. 204.3.
(k)(1) Vault cash means United States currency and coin owned and
booked as an asset by a depository institution that may, at any time, be
used to satisfy claims of that depository institution's depositors and
that meets the requirements of paragraph (k)(2)(i) or (k)(2)(ii) of this
section.
(2) Vault cash must be either:
(i) Held at a physical location of the depository institution
(including the depository institution's proprietary ATMs) from which the
institution's depositors may make cash withdrawals; or
(ii) Held at an alternate physical location if--
(A) The depository institution claiming the currency and coin as
vault cash at all times retains full rights of ownership in and to the
currency and coin held at the alternate physical location;
(B) The depository institution claiming the currency and coin as
vault cash at all times books the currency and coin held at the
alternate physical location as an asset of the depository institution;
(C) No other depository institution claims the currency and coin
held at the alternate physical location as vault cash in satisfaction of
that other depository institution's reserve requirements;
(D) The currency and coin held at the alternate physical location is
reasonably nearby a location of the depository institution claiming the
currency and coin as vault cash at which its depositors may make cash
withdrawals (an alternate physical location is considered ``reasonably
nearby'' if the depository institution that claims the currency and coin
as vault cash can recall the currency and coin from the alternate
physical location by 10 a.m. and, relying solely on ground
transportation, receive the currency and coin not later than 4 p.m. on
the same calendar day at a location of the depository institution at
which its depositors may make cash withdrawals); and
(E) The depository institution claiming the currency and coin as
vault cash has in place a written cash delivery plan and written
contractual arrangements necessary to implement that plan that
demonstrate that the currency and coin can be recalled and received in
accordance with the requirements of paragraph (k)(2)(ii)(D) of this
section at any time. The depository institution shall provide copies of
the written cash delivery plan and written contractual arrangements to
the Federal Reserve Bank that holds its account or to the Board upon
request.
(3) ``Vault cash'' includes United States currency and coin in
transit to a Federal Reserve Bank or a correspondent depository
institution for which the reporting depository institution has not yet
received credit, and United States currency and coin in transit from a
Federal Reserve Bank or a correspondent depository institution when the
reporting depository institution's account at the Federal Reserve or
correspondent bank has been charged for such shipment.
(4) Silver and gold coin and other currency and coin whose
numismatic or bullion value is substantially in excess of face value is
not vault cash for purposes of this part.
(l) Pass-through account means a balance maintained by a depository
institution with a correspondent institution under Sec. 204.5(d).
(m)(1) Depository institution means:
(i) Any insured bank as defined in section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813(h)) or any bank that is eligible to apply
to become an insured bank under section 5 of such Act (12 U.S.C. 1815);
(ii) Any savings bank or mutual savings bank as defined in section 3
of the
[[Page 107]]
Federal Deposit Insurance Act (12 U.S.C. 1813(f), (g));
(iii) Any insured credit union as defined in section 101 of the
Federal Credit Union Act (12 U.S.C. 1752(7)) or any credit union that is
eligible to apply to become an insured credit union under section 201 of
such Act (12 U.S.C. 1781);
(iv) Any member as defined in section 2 of the Federal Home Loan
Bank Act (12 U.S.C. 1422(4)); and
(v) Any insured institution as defined in section 401 of the
National Housing Act (12 U.S.C. 1724(a)) or any institution which is
eligible to apply to become an insured institution under section 403 of
such Act (12 U.S.C. 1726).
(2) Depository institution does not include international
organizations such as the World Bank, the Inter-American Development
Bank, and the Asian Development Bank.
(n) Member bank means a depository institution that is a member of
the Federal Reserve System.
(o) Foreign bank means any bank or other similar institution
organized under the laws of any country other than the United States or
organized under the laws of Puerto Rico, Guam, American Samoa, the
Virgin Islands, or other territory or possession of the United States.
(p) [Reserved]
(q) Affiliate includes any corporation, association, or other
organization:
(1) Of which a depository institution, directly or indirectly, owns
or controls either a majority of the voting shares or more than 50
percent of the numbers of shares voted for the election of its
directors, trustees, or other persons exercising similar functions at
the preceding election, or controls in any manner the election of a
majority of its directors, trustees, or other persons exercising similar
functions;
(2) Of which control is held, directly or indirectly, through stock
ownership or in any other manner, by the shareholders of a depository
institution who own or control either a majority of the shares of such
depository institution or more than 50 percent of the number of shares
voted for the election of directors of such depository institution at
the preceding election, or by trustees for the benefit of the
shareholders of any such depository institution;
(3) Of which a majority of its directors, trustees, or other persons
exercising similar functions are directors of any one depository
institution; or
(4) Which owns or controls, directly or indirectly, either a
majority of the shares of capital stock of a depository institution or
more than 50 percent of the number of shares voted for the election of
directors, trustees or other persons exercising similar functions of a
depository institution at the preceding election, or controls in any
manner the election of a majority of the directors, trustees, or other
persons exercising similar functions of a depository institution, or for
the benefit of whose shareholders or members all or substantially all
the capital stock of a depository institution is held by trustees.
(r) United States means the States of the United States and the
District of Columbia.
(s) United States resident means (1) any individual residing (at the
time of the transaction) in the United States; (2) any corporation,
partnership, association or other entity organized in the United States
(domestic corporation); and (3) any branch or office located in the
United States of any entity that is not organized in the United States.
(t) Any deposit that is payable only at an office located outside
the United States means (1) a deposit of a United States resident \9\
that is in a denomination of $100,000 or more, and as to which the
depositor is entitled, under the agreement with the institution, to
demand payment only outside the United States or (2) a deposit of a
person who is not a United States resident \9\ as to which the depositor
is entitled, under the agreement with the institution, to demand payment
only outside the United States.
---------------------------------------------------------------------------
\9\ A deposit of a foreign branch, office, subsidiary, affiliate or
other foreign establishment (foreign affiliate) controlled by one or
more domestic corporations is not regarded as a deposit of a United
States resident if the funds serve a purpose in connection with its
foreign or international business or that of other foreign affiliates of
the controlling domestic corporation(s).
---------------------------------------------------------------------------
(u) Teller's check means a check drawn by a depository institution
on
[[Page 108]]
another depository institution, a Federal Reserve Bank, or a Federal
Home Loan Bank, or payable at or through a depository institution, a
Federal Reserve Bank, or a Federal Home Loan Bank, and which the drawing
depository institution engages or is obliged to pay upon dishonor.
(v) Clearing balance means the average balance held in an account at
a Federal Reserve Bank by an institution over a reserve maintenance
period to satisfy its contractual clearing balance with a Reserve Bank.
(w) Clearing balance allowance means the greater of $25,000 or two
percent of an institution's contractual clearing balance.
(x) Contractual clearing balance means an amount that an institution
agrees or is required to maintain in its account at a Federal Reserve
Bank in addition to any reserve balance requirement. An institution that
has a reserve balance requirement of zero may still have a contractual
clearing balance.
(y) Eligible institution means--
(1) Any depository institution as described in Sec. 204.1(c) of
this part;
(2) Any trust company;
(3) Any corporation organized under section 25A of the Federal
Reserve Act (12 U.S.C. 611 et seq.) or having an agreement with the
Board under section 25 of the Federal Reserve Act (12 U.S.C. 601 et
seq.); and
(4) Any branch or agency of a foreign bank (as defined in section
1(b) of the International Banking Act of 1978, 12 U.S.C. 3101(b)).
(z) Excess balance means the average balance held in an account at a
Federal Reserve Bank by or on behalf of an institution over a reserve
maintenance period that exceeds the sum of the required reserve balance
and any clearing balance.
(aa) Excess balance account means an account at a Reserve Bank
pursuant to Sec. 204.10(d) of this part that is established by one or
more eligible institutions through an agent and in which only excess
balances of the participating eligible institutions may at any time be
maintained. An excess balance account is not a ``pass-through account''
for purposes of this part.
(bb) Required reserve balance means the average balance held in an
account at a Federal Reserve Bank by or on behalf of an institution over
a reserve maintenance period to satisfy the reserve requirements of this
part.
(cc) Targeted federal funds rate means the federal funds rate
established from time to time by the Federal Open Market Committee.
(dd) Term deposit means those funds of an eligible institution that
are maintained by that institution for a specified maturity at a Federal
Reserve Bank pursuant to section 204.10(e) of this part.
[Reg. D, 45 FR 56018, Aug. 22, 1980]
Editorial Note: For Federal Register citations affecting Sec.
204.2, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 204.3 Reporting and location.
(a) Every depository institution, U.S. branch or agency of a foreign
bank, and Edge or Agreement corporation shall file a report of deposits
(or any other form or statement that may be required by the Board or by
a Federal Reserve Bank) with the Federal Reserve Bank in the Federal
Reserve District in which it is located, regardless of the manner in
which it chooses to maintain required reserve balances.
(b) A foreign bank's U.S. branches and agencies and an Edge or
Agreement corporation's offices operating within the same State and the
same Federal Reserve District shall prepare and file a report of
deposits on an aggregated basis.
(c) For purposes of this part, the obligations of a majority-owned
(50 percent or more) U.S. subsidiary (except an Edge or Agreement
corporation) of a depository institution shall be regarded as
obligations of the parent depository institution.
(d) A depository institution, a foreign bank, or an Edge or
Agreement corporation shall, if possible, assign the low reserve tranche
and reserve requirement exemption prescribed in Sec. 204.4(f) to only
one office or to a group of offices filing a single aggregated report of
deposits. The amount of the reserve requirement exemption allocated to
an office or group of offices may not exceed the amount of the low
reserve
[[Page 109]]
tranche allocated to such office or offices. If the low reserve tranche
or reserve requirement exemption cannot be fully utilized by a single
office or by a group of offices filing a single report of deposits, the
unused portion of the tranche or exemption may be assigned to other
offices or groups of offices of the same institution until the amount of
the tranche (or net transaction accounts) or exemption (or reservable
liabilities) is exhausted. The tranche or exemption may be reallocated
each year concurrent with implementation of the indexed tranche and
exemption, or, if necessary during the course of the year to avoid
underutilization of the tranche or exemption, at the beginning of a
reserve computation period.
(e) Computation of transaction accounts. Overdrafts in demand
deposit or other transaction accounts are not to be treated as negative
demand deposits or negative transaction accounts and shall not be netted
since overdrafts are properly reflected on an institution's books as
assets. However, where a customer maintains multiple transaction
accounts with a depository institution, overdrafts in one account
pursuant to a bona fide cash management arrangement are permitted to be
netted against balances in other related transaction accounts for
reserve requirement purposes.
(f) The Board and the Federal Reserve Banks will not hold a pass-
through correspondent responsible for guaranteeing the accuracy of the
reports of deposits submitted by its respondents.
(g)(1) For purposes of this section, a depository institution, a
U.S. branch or agency of a foreign bank, or an Edge or Agreement
corporation is located in the Federal Reserve District that contains the
location specified in the institution's charter, organizing certificate,
license, or articles of incorporation, or as specified by the
institution's primary regulator, or if no such location is specified,
the location of its head office, unless otherwise determined by the
Board under paragraph (g)(2) of this section.
(2) If the location specified in paragraph (g)(1) of this section,
in the Board's judgment, is ambiguous, would impede the ability of the
Board or the Federal Reserve Banks to perform their functions under the
Federal Reserve Act, or would impede the ability of the institution to
operate efficiently, the Board will determine the Federal Reserve
District in which the institution is located, after consultation with
the institution and the relevant Federal Reserve Banks. The relevant
Federal Reserve Banks are the Federal Reserve Bank whose District
contains the location specified in paragraph (g)(1) of this section and
the Federal Reserve Bank in whose District the institution is proposed
to be located. In making this determination, the Board will consider any
applicable laws, the business needs of the institution, the location of
the institution's head office, the locations where the institution
performs its business, and the locations that would allow the
institution, the Board, and the Federal Reserve Banks to perform their
functions efficiently and effectively.
[45 FR 56018, Aug. 22, 1980]
Editorial Note: For Federal Register citations affecting Sec.
204.3, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. 204.4 Computation of required reserves.
(a) In determining the reserve requirement under this part, the
amount of cash items in process of collection and balances subject to
immediate withdrawal due from other depository institutions located in
the United States (including such amounts due from United States
branches and agencies of foreign banks and Edge and Agreement
corporations) may be deducted from the amount of gross transaction
accounts. The amount that may be deducted may not exceed the amount of
gross transaction accounts.
(b) United States branches and agencies of a foreign bank may not
deduct balances due from another United States branch or agency of the
same foreign bank, and United States offices of an Edge or Agreement
Corporation may not deduct balances due from another United States
office of the same Edge or Agreement Corporation.
[[Page 110]]
(c) Balances ``due from other depository institutions'' do not
include balances due from Federal Reserve Banks, pass-through accounts,
or balances (payable in dollars or otherwise) due from banking offices
located outside the United States. An institution exercising fiduciary
powers may not include in balances ``due from other depository
institutions'' amounts of trust funds deposited with other banks and due
to it as a trustee or other fiduciary.
(d) For institutions that file a report of deposits weekly, required
reserves are computed on the basis of the institution's daily average
balances of deposits and Eurocurrency liabilities during a 14-day
computation period ending every second Monday.
(e) For institutions that file a report of deposits quarterly,
required reserves are computed on the basis of the institution's daily
average balances of deposits and Eurocurrency liabilities during the 7-
day computation period that begins on the third Tuesday of March, June,
September, and December.
(f) For all depository institutions, Edge and Agreement
corporations, and United States branches and agencies of foreign banks,
required reserves are computed by applying the reserve requirement
ratios below to net transaction accounts, nonpersonal time deposits, and
Eurocurrency liabilities of the institution during the computation
period.
------------------------------------------------------------------------
Reservable liability Reserve requirement
------------------------------------------------------------------------
Net Transaction Accounts:
$0 to reserve requirement exemption 0 percent of amount.
amount ($11.5 million).
Over reserve requirement exemption 3 percent of amount.
amount $11.5 million) and up to low
reserve tranche ($71.0 million).
Over low reserve tranche ($71.0 $1,785,000 plus 10 percent
million). of amount over $71.0
million.
Nonpersonal time deposits................. 0 percent.
Eurocurrency liabilities.................. 0 percent.
------------------------------------------------------------------------
[Reg. D, 74 FR 25637, May 29, 2009, as amended at 74 FR 52875, Oct. 15,
2009; 75 FR 65564, Oct. 26, 2010; 76 FR 68066, Nov. 3, 2011]
Sec. 204.5 Maintenance of required reserves.
(a)(1) A depository institution, a U.S. branch or agency of a
foreign bank, and an Edge or Agreement corporation shall maintain
required reserves in the form of vault cash and, if vault cash does not
fully satisfy the institution's required reserves, in the form of a
balance maintained
(i) Directly with the Federal Reserve Bank in the Federal Reserve
District in which the institution is located, or
(ii) With a pass-through correspondent in accordance with Sec.
204.5(d).
(2) Each individual institution subject to this part is responsible
for satisfying its reserve balance requirement, if any, either directly
with a Federal Reserve Bank or through a pass-through correspondent.
(b)(1) For institutions that file a report of deposits weekly, the
balances that are required to be maintained with the Federal Reserve
shall be maintained during a 14-day maintenance period that begins on
the third Thursday following the end of a given computation period.
(2) For institutions that file a report of deposits quarterly, the
balances that are required to be maintained with the Federal Reserve
shall be maintained during each of the 7-day maintenance periods during
the interval that begins on the fourth Thursday following the end of the
institution's computation period and ends on the fourth Wednesday after
the close of the institution's next computation period.
(c) Cash items forwarded to a Federal Reserve Bank for collection
and credit shall not be counted as part of the reserve balance to be
carried with the Federal Reserve until the expiration of the time
specified in the appropriate time schedule established under Regulation
J, ``Collection of Checks and Other Items by Federal Reserve Banks and
Funds Transfers Through Fedwire'' (12 CFR part 210). If a depository
institution draws against items before that time, the charge will be
made to its account if the balance is sufficient to pay it; any
resulting impairment of reserve balances will be subject to the
penalties provided by law and to the reserve-deficiency charges provided
by
[[Page 111]]
this part. However, the Federal Reserve Bank may, at its discretion,
refuse to permit the withdrawal or other use of credit given in an
account for any time for which the Federal Reserve Bank has not received
payment in actually and finally collected funds.
(d)(1) A depository institution, a U.S. branch or agency of a
foreign bank, or an Edge or Agreement corporation required to maintain
reserve balances (``respondent'') may select only one pass-through
correspondent institution to pass through its required reserve balances,
unless otherwise permitted by the Federal Reserve Bank in whose District
the respondent is located. Eligible pass-through correspondent
institutions are Federal Home Loan Banks, the National Credit Union
Administration Central Liquidity Facility, depository institutions, U.S.
branches or agencies of foreign banks, and Edge and Agreement
corporations that maintain required reserve balances, which may be zero,
at a Federal Reserve Bank. In addition, the Board reserves the right to
permit other institutions, on a case-by-case basis, to serve as pass-
through correspondents. The correspondent chosen must subsequently pass
through the required reserve balances of its respondents directly to a
Federal Reserve Bank. The correspondent placing funds with a Federal
Reserve Bank on behalf of respondents will be responsible for account
maintenance as described in paragraph (d)(4) of this section.
(2) Respondents or correspondents may institute, terminate, or
change pass-through agreements for the maintenance of required reserve
balances by providing all documentation required for the establishment
of the new agreement or termination of the existing agreement to the
Federal Reserve Banks involved within the time period provided for such
a change by those Reserve Banks.
(3) A correspondent that passes through required reserve balances of
respondents shall maintain such balances, along with the correspondent's
own required reserve balances (if any), in a single commingled account
at the Federal Reserve Bank in whose District the correspondent is
located. The balances held by the correspondent in an account at a
Reserve Bank are the property of the correspondent and represent a
liability of the Reserve Bank solely to the correspondent, regardless of
whether the funds represent the reserve balances of another institution
that have been passed through the correspondent.
(4)(i) A pass-through correspondent shall be responsible for
assuring the maintenance of the appropriate aggregate level of its
respondents' required reserve balances. A Federal Reserve Bank will
compare the total reserve balance required to be maintained with the
total actual reserve balance held in such account for purposes of
determining required-reserve deficiencies, imposing or waiving charges
for deficiencies in required reserves, and for other reserve maintenance
purposes. A charge for a deficiency in the aggregate level of the
required reserve balance will be imposed by the Reserve Bank on the
correspondent maintaining the account.
(ii) Each correspondent is required to maintain detailed records for
each of its respondents in a manner that permits Reserve Banks to
determine whether the respondent has provided a sufficient required
reserve balance to the correspondent. A correspondent passing through a
respondent's required reserve balance shall maintain records and make
such reports as the Board or Reserve Bank requires in order to ensure
the correspondent's compliance with its responsibilities for the
maintenance of a respondent's reserve balance. Such records shall be
available to the Reserve Banks as required.
(iii) The Federal Reserve Bank may terminate any pass-through
agreement under which the correspondent is deficient in its
recordkeeping or other responsibilities.
(iv) Interest paid on supplemental reserves (if such reserves are
required under Sec. 204.7) held by a respondent will be credited to the
account maintained by the correspondent.
(e) Any excess or deficiency in an institution's required reserve
balance shall be carried over and applied against the balance maintained
in the next maintenance period as specified in this paragraph. The
amount of any
[[Page 112]]
such excess or deficiency that is carried over shall not exceed the
greater of:
(1) The amount obtained by multiplying 0.04 times the sum of
depository institution's required reserves and the depository
institution's contractual clearing balance, if any, and then subtracting
from this product the depository institution's clearing balance
allowance, if any; or
(2) $50,000, minus the depository institution's clearing balance
allowance, if any. Any carryover not offset during the next period may
not be carried over to subsequent periods.
[Reg. D, 74 FR 25638, May 29, 2009]
Sec. 204.6 Charges for reserve deficiencies.
(a) Deficiencies in a depository institution's required reserve
balance, after application of the carryover provided in Sec. 204.5(e),
are subject reserve-deficiency charges. Federal Reserve Banks are
authorized to assess charges for deficiencies in required reserves at a
rate of 1 percentage point per year above the primary credit rate, as
provided in Sec. 201.51(a) of this chapter, in effect for borrowings
from the Federal Reserve Bank on the first day of the calendar month in
which the deficiencies occurred. Charges shall be assessed on the basis
of daily average deficiencies during each maintenance period. Reserve
Banks may, as an alternative to levying monetary charges, after
consideration of the circumstances involved, permit a depository
institution to eliminate deficiencies in its required reserve balance by
maintaining additional reserves during subsequent reserve maintenance
periods.
(b) Reserve Banks may waive the charges for reserve deficiencies
except when the deficiency arises out of a depository institution's
gross negligence or conduct that is inconsistent with the principles and
purposes of reserve requirements. Decisions by Reserve Banks to waive
charges are based on an evaluation of the circumstances in each
individual case and the depository institution's reserve maintenance
record. For example, a waiver may be appropriate for a small charge or
once during a two-year period for a deficiency that does not exceed a
certain percentage of the depository institution's required reserves. If
a depository institution has demonstrated a lack of due regard for the
proper maintenance of required reserves, the Reserve Bank may decline to
exercise the waiver privilege and assess all charges regardless of
amount or reason for the deficiency.
(c) In individual cases, where a Federal supervisory authority
waives a liquidity requirement, or waives the penalty for failing to
satisfy a liquidity requirement, the Reserve Bank in the District where
the involved depository institution is located shall waive the reserve
requirement imposed under this part for such depository institution when
requested by the Federal supervisory authority involved.
(d) Violations of this part may be subject to assessment of civil
money penalties by the Board under authority of Section 19(1) of the
Federal Reserve Act (12 U.S.C. 505) as implemented in 12 CFR part 263.
In addition, the Board and any other Federal financial institution
supervisory authority may enforce this part with respect to depository
institutions subject to their jurisdiction under authority conferred by
law to undertake cease and desist proceedings.
[Reg. D, 74 FR 25639, May 29, 2009]
Sec. 204.7 Supplemental reserve requirement.
(a) Finding by Board. Upon the affirmative vote of at least five
members of the Board and after consultation with the Board of Directors
of the Federal Deposit Insurance Corporation, the Federal Home Loan Bank
Board, and the National Credit Union Administration Board, the Board may
impose a supplemental reserve requirement on every depository
institution of not more than 4 percent of its total transaction
accounts. A supplemental reserve requirement may be imposed if:
(1) The sole purpose of the requirement is to increase the amount of
reserves maintained to a level essential for the conduct of monetary
policy;
(2) The requirement is not imposed for the purpose of reducing the
cost burdens resulting from the imposition of basic reserve
requirements;
[[Page 113]]
(3) Such requirement is not imposed for the purpose of increasing
the amount of balances needed for clearing purposes; and
(4) On the date on which supplemental reserve requirements are
imposed, the total amount of basic reserve requirements is not less than
the amount of reserves that would be required on transaction accounts
and nonpersonal time deposits under the initial reserve ratios
established by the Monetary Control Act of 1980 (Pub. L. 96-221) in
effect on September 1, 1980.
(b) Term. (1) If a supplemental reserve requirement has been imposed
for a period of one year or more, the Board shall review and determine
the need for continued maintenance of supplemental reserves and shall
transmit annual reports to the Congress regarding the need for
continuing such requirement.
(2) Any supplemental reserve requirement shall terminate at the
close of the first 90-day period after the requirement is imposed during
which the average amount of supplemental reserves required are less than
the amount of reserves which would be required if the ratios in effect
on September 1, 1980, were applied.
(c) Earnings Participation Account. A depository institutions's
supplemental reserve requirement shall be maintained by the Federal
Reserve Banks in an Earnings Participation Account. Such balances shall
receive earnings to be paid by the Federal Reserve Banks during each
calendar quarter at a rate not to exceed the rate earned on the
securities portfolio of the Federal Reserve System during the previous
calendar quarter. Additional rules and regulations maybe prescribed by
the Board concerning the payment of earnings on Earnings Participation
Accounts by Federal Reserve Banks.
(d) Report to Congress. The Board shall transmit promptly to the
Congress a report stating the basis for exercising its authority to
require a supplemental reserve under this section.
(e) Reserve requirements. At present, there are no supplemental
reserve requirements imposed under this section.
[45 FR 56018, Aug. 22, 1980, as amended at 45 FR 81537, Dec. 11, 1980.
Redesignated at 74 FR 25639, May 29, 2009]
Sec. 204.8 International banking facilities.
(a) Definitions. For purposes of this part, the following
definitions apply:
(1) International banking facility or IBF means a set of asset and
liability accounts segregated on the books and records of a depository
institution, United States branch or agency of a foreign bank, or an
Edge or Agreement Corporation that includes only international banking
facility time deposits and international banking facility extensions of
credit.
(2) International banking facility time deposit or IBF time deposit
means a deposit, placement, borrowing or similar obligation represented
by a promissory note, acknowledgment of advance, or similar instrument
that is not issued in negotiable or bearer form, and
(i)(A) That must remain on deposit at the IBF at least overnight;
and
(B) That is issued to
(1) Any office located outside the United States of another
depository institution organized under the laws of the United States or
of an Edge or Agreement Corporation;
(2) Any office located outside the United States of a foreign bank;
(3) A United States office or a non-United States office of the
entity establishing the IBF;
(4) Another IBF; or
(5) A foreign national government, or an agency or instrumentality
thereof, \10\ engaged principally in activities which are ordinarily
performed in the United States by governmental entities; an
international entity of which the United States is a member; or any
other foreign international or supranational entity specifically
designated by the Board;\11\ or
---------------------------------------------------------------------------
\10\ Other than states, provinces, municipalities, or other regional
or local governmental units or agencies or instrumentalities thereof.
\11\ The designated entities are specified in 12 CFR 204.125.
---------------------------------------------------------------------------
(ii) (A) That is payable
(1) On a specified date not less than two business days after the
date of deposit;
(2) Upon expiration of a specified period of time not less than two
business days after the date of deposit; or
[[Page 114]]
(3) Upon written notice that actually is required to be given by the
depositor not less than two business days prior to the date of
withdrawal;
(B) That represents funds deposited to the credit of a non-United
States resident or a foreign branch, office, subsidiary, affiliate, or
other foreign establishment (foreign affiliate) controlled by one or
more domestic corporations provided that such funds are used only to
support the operations outside the United States of the depositor or of
its affiliates located outside the United States; and
(C) That is maintained under an agreement or arrangement under which
no deposit or withdrawal of less than $100,000 is permitted, except that
a withdrawal of less than $100,000 is permitted if such withdrawal
closes an account.
(3) International banking facility extension of credit or IBF loan
means any transaction where an IBF supplies funds by making a loan, or
placing funds in a deposit account. Such transactions may be represented
by a promissory note, security, acknowledgment of advance, due bill,
repurchase agreement, or any other form of credit transaction. Such
credit may be extended only to:
(i) Any office located outside the United States of another
depository institution organized under the laws of the United States or
of an Edge or Agreement Corporation;
(ii) Any office located outside the United States of a foreign bank;
(iii) A United States or a non-United States office of the
institution establishing the IBF;
(iv) Another IBF;
(v) A foreign national government, or an agency or instrumentality
thereof, \12\ engaged principally in activities which are ordinarily
performed in the United States by governmental entities; an
international entity of which the United States is a member; or any
other foreign international or supranational entity specifically
designated by the Board; \13\ or
---------------------------------------------------------------------------
\12\ See footnote 10.
\13\ See footnote 11.
---------------------------------------------------------------------------
(vi) A non-United States resident or a foreign branch, office,
subsidiary, affiliate or other foreign establishment (foreign affiliate)
controlled by one or more domestic corporations provided that the funds
are used only to finance the operations outside the United States of the
borrower or of its affiliates located outside the United States.
(b) Acknowledgment of use of IBF deposits and extensions of credit.
An IBF shall provide written notice to each of its customers (other than
those specified in Sec. 204.8(a)(2)(i)(B) and Sec. 204.8(a)(3) (i)
through (v)) at the time a deposit relationship or a credit relationship
is first established that it is the policy of the Board of Governors of
the Federal Reserve System that deposits received by international
banking facilities may be used only to support the depositor's
operations outside the United States as specified in Sec.
204.8(a)(2)(ii)(B) and that extensions of credit by IBFs may be used
only to finance operations outside of the United States as specified in
Sec. 204.8(a)(3)(vi). In the case of loans to or deposits from foreign
affiliates of U.S. residents, receipt of such notice must be
acknowledged in writing whenever a deposit or credit relationship is
first established with the IBF.
(c) Exemption from reserve requirements. An institution that is
subject to the reserve requirements of this part is not required to
maintain reserves against its IBF time deposits or IBF loans. Deposit-
taking activities of IBFs are limited to accepting only IBF time
deposits and lending activities of IBFs are restricted to making only
IBF loans.
(d) Establishment of an international banking facility. A depository
institution, an Edge or Agreement Corporation or a United States branch
or agency of a foreign bank may establish an IBF in any location where
it is legally authorized to engage in IBF business. However, only one
IBF may be established for each reporting entity that is required to
submit a Report of Transaction Accounts, Other Deposits and Vault Cash
(Form FR 2900).
(e) Notification to Federal Reserve. At least fourteen days prior to
the first reserve computation period that an institution intends to
establish an IBF it shall notify the Federal Reserve Bank of the
district in which it is located of
[[Page 115]]
its intent. Such notification shall include a statement of intention by
the institution that it will comply with the rules of this part
concerning IBFs, including restrictions on sources and uses of funds,
and recordkeeping and accounting requirements. Failure to comply with
the requirements of this part shall subject the institution to reserve
requirements under this part or result in the revocation of the
institution's ability to operate an IBF.
(f) Recordkeeping requirements. A depository institution shall
segregate on its books and records the asset and liability accounts of
its IBF and submit reports concerning the operations of its IBF as
required by the Board.
[46 FR 32429, June 23, 1981, as amended at 51 FR 9636, Mar. 20, 1986; 56
FR 15495, Apr. 17, 1991; 61 FR 69025, Dec. 31, 1996]
Sec. 204.9 Emergency reserve requirement.
(a) Finding by Board. The Board may impose, after consulting with
the appropriate committees of Congress, additional reserve requirements
on depository institutions at any ratio on any liability upon a finding
by at least five members of the Board that extraordinary circumstances
require such action.
(b) Term. Any action taken under this section shall be valid for a
period not exceeding 180 days, and may be extended for further periods
of up to 180 days each by affirmative action of at least five members of
the Board for each extension.
(c) Reports to Congress. The Board shall transmit promptly to
Congress a report of any exercise of its authority under this paragraph
and the reasons for the exercise of authority.
(d) Reserve requirements. At present, there are no emergency reserve
requirements imposed under this section.
[45 FR 56018, Aug. 22, 1980. Redesignated at 74 FR 25638, May 29, 2009]
Sec. 204.10 Payment of interest on balances.
(a) Payment of interest. The Federal Reserve Banks shall pay
interest on balances maintained at Federal Reserve Banks by or on behalf
of an eligible institution as provided in this section and under such
other terms and conditions as the Board may prescribe.
(b) Rate. Except as provided in paragraph (c) of this section,
Federal Reserve Banks shall pay interest at the following rates--
(1) For required reserve balances, at \1/4\ percent;
(2) For excess balances, at \1/4\ percent; or
(3) For required reserve balances, excess balances, and term
deposits, at any other rate or rates as determined by the Board from
time to time, not to exceed the general level of short-term interest
rates. For purposes of this subsection, ``short-term interest rates''
are rates on obligations with maturities of no more than one year, such
as the primary credit rate and rates on term federal funds, term
repurchase agreements, commercial paper, term Eurodollar deposits, and
other similar instruments.
(c) Pass-through balances. A pass-through correspondent that is an
eligible institution may pass back to its respondent interest paid on
balances held on behalf of that respondent. In the case of balances held
by a pass-through correspondent that is not an eligible institution, a
Reserve Bank shall pay interest only on the required reserve balances
held on behalf of one or more respondents, and the correspondent shall
pass back to its respondents interest paid on balances in the
correspondent's account.
(d) Excess balance accounts. (1) A Reserve Bank may establish an
excess balance account for eligible institutions under the provisions of
this paragraph (d). Notwithstanding any other provisions of this part,
the excess balances of eligible institutions in an excess balance
account represent a liability of the Reserve Bank solely to those
participating eligible institutions.
(2) The participating eligible institutions in an excess balance
account shall authorize another institution to act as agent of the
participating institutions for purposes of general account management,
including but not limited to transferring the excess balances of
participating institutions in and out of the excess balance account. An
excess balance account must be established at the Reserve Bank where the
agent
[[Page 116]]
maintains its master account, unless otherwise determined by the Board.
The agent may not commingle its own funds in the excess balance account.
(3) No required reserve balances or clearing balances may be
maintained at any time in an excess balance account, and balances
maintained in an excess balance account will not satisfy any
institution's reserve balance requirement or contractual clearing
balance.
(4) An excess balance account must be used exclusively for the
purpose of maintaining the excess balances of participants and may not
be used for general payments or other activities.
(5) Interest shall be paid on excess balances of eligible
institutions maintained in an excess balance account in accordance with
paragraph (b)(2) or (b)(3) of this section.
(6) A Reserve Bank may establish additional terms and conditions
consistent with this part with respect to the operation of an excess
balance account, including, but not limited to, terms of and fees for
services, conditions under which an institution may act as agent for an
account, restrictions on the agent with respect to account management,
penalties for noncompliance with this section or any terms and
conditions, and account termination.
(e) Term deposits. (1) A Federal Reserve Bank may accept term
deposits from eligible institutions under the provisions of this
paragraph (e) subject to such terms and conditions as the Board may
establish from time to time, including but not limited to conditions
regarding the maturity of the term deposits being offered, maximum and
minimum amounts that may be maintained by an eligible institution in a
term deposit, the interest rate or rates offered, early withdrawal of
term deposits, pledging term deposits as collateral and, if term
deposits are offered through an auction mechanism, the size of the
offering, maximum and minimum bid amounts, and other relevant terms.
(2) A term deposit will not satisfy any institution's required
reserve balance or contractual clearing balance.
(3) A term deposit may not be used for general payments or
settlement activities.
[Reg. D, 74 FR 25629, May 29, 2009, as amended at 75 FR 24389, May 5,
2010; 76 FR 42019, July 18, 2011]
Interpretations
Sec. 204.121 Bankers' banks.
(a)(1) The Federal Reserve Act, as amended by the Monetary Control
Act of 1980 (title I of Pub. L. 96-221), imposes Federal reserve
requirements on depository institutions that maintain transaction
accounts or nonpersonal time deposits. Under section 19(b)(9), however,
a depository institution is not required to maintain reserves if it:
(i) Is organized solely to do business with other financial
institutions;
(ii) Is owned primarily by the financial institutions with which it
does business; and
(iii) Does not do business with the general public.
Depository institutions that satisfy all of these requirements are
regarded as bankers' banks.
(2) In its application of these requirements to specific
institutions, the Board will use the following standards:
(i) A depository institution may be regarded as organized solely to
do business with other depository institutions even if, as an incidental
part to its activities, it does business to a limited extent with
entities other than depository institutions. The extent to which the
institution may do business with other entities and continue to be
regarded as a bankers' bank is specified in paragraph (a)(2)(iii) of
this section.
(ii) A depository institution will be regarded as being owned
primarily by the institutions with which it does business if 75 per cent
or more of its capital is owned by other depository institutions. The 75
per cent or more ownership rule applies regardless of the type of
depository institution.
(iii) A depository institution will not be regarded as doing
business with the general public if it meets two conditions. First, the
range of customers
[[Page 117]]
with which the institution does business must be limited to depository
institutions, including subsidiaries or organizations owned by
depository institutions; directors, officers or employees of the same or
other depository institutions; individuals whose accounts are acquired
at the request of the institution's supervisory authority due to the
actual or impending failure of another depository institution; share
insurance funds; depository institution trade associations; and such
others as the Board may determine on a case-by-case basis consistent
with the purposes of the Act and the bankers' bank exemption. Second,
the extent to which the depository institution makes loans to, or
investments in, the above entities (other than depository institutions)
cannot exceed 10 per cent of total assets, and the extent to which it
receives deposits (or shares if the institution does not receive
deposits) from or issues other liabilities to the above entities (other
than depository institutions) cannot exceed 10 per cent of total
liabilities (or net worth if the institution does not receive deposits).
If a depository institution is unable to meet all of these requirements
on a continuing basis, it will not be regarded as a bankers' bank and
will be required to satisfy Federal reserve requirements on all of its
transaction accounts and nonpersonal time deposits.
(b) (1) Section 19(c)(1) of the Federal Reserve Act, as amended by
the Monetary Control Act of 1980 (title I of Pub. L. 96-221) provides
that Federal reserve requirements may be satisfied by the maintenance of
vault cash or balances in a Federal Reserve Bank. Depository
institutions that are not members of the Federal Reserve System may also
satisfy reserve requirements by maintaining a balance in another
depository institution that maintains required reserve balances at a
Federal Reserve Bank, in a Federal Home Loan Bank, or in the National
Credit Union Administration Central Liquidity Facility if the balances
maintained by such institutions are subsequently passed through to the
Federal Reserve Bank.
(2) On August 27, 1980, the Board announced the procedures that will
apply to such pass-through arrangements (45 FR 58099). Section
204.3(i)(1) provides that the Board may permit, on a case-by-case basis,
depository institutions that are not themselves required to maintain
reserves (bankers' banks) to act as pass-through correspondents if
certain criteria are satisfied. The Board has determined that a bankers'
bank may act as a pass-through correspondent if it enters into an
agreement with the Federal Reserve to accept responsibility for the
maintenance of pass-through reserve accounts in accordance with
Regulation D (12 CFR 204.3(i)) and if the Federal Reserve is satisfied
that the quality of management and financial resources of the
institution are adequate in order to enable the institution to serve as
a pass-through correspondent in accordance with Regulation D.
Satisfaction of these criteria will assure that pass-through
arrangements are maintained properly without additional financial risk
to the Federal Reserve.
(3) In order to determine uniformly the adequacy of managerial and
financial resources, the Board will consult with the Federal supervisor
for the type of institution under consideration. Because the Board does
not possess direct experience with supervising depository institutions
other than commerical banks, and does not intend to involve itself in
the direct supervision of such institutions, it will request the
National Credit Union Administration to review requests from credit
unions that qualify as bankers' banks and the Federal Home Loan Bank
Board to review requests from savings and loan associations that qualify
as bankers' banks, regardless of charter or insurance status. (The
Board, itself, will consider requests from all commercial banks that
qualify as bankers' banks.) If the Federal supervisor does not find the
institution's managerial or financial resources to be adequate, the
Board will not permit the institution to act as a pass-through
correspondent. In order to assure the continued adequacy of managerial
and financial resources, it is anticipated that the appropriate Federal
supervisor will, on a periodic basis, review and evaluate the managerial
and financial resources of the institution in order to determine whether
it should continue to be permitted to act as a pass-
[[Page 118]]
through correspondent. It is anticipated that, with respect to state
chartered institutions, the Federal supervisor may discuss the request
with the institute State supervisor. The Board believes that this
procedure will promote uniformity of treatment for all types of bankers'
banks, and provide consistent advice concerning managerial ability and
financial strength from supervisory authorities that are in a better
position to evaluate these criteria for depository institutions that are
not commercial banks.
(4) Requests for a determination as to whether a depository
institution will be regarded as a bankers' bank for purposes of the
Federal Reserve Act or for permission to act as a pass-through
correspondent may be addressed to the Federal Reserve Bank in whose
District the main office of the depository institution is located or to
the Secretary, Board of Governors of the Federal Reserve System,
Washington, DC 20551. The Board will act promptly on all requests
received directly or through Federal Reserve Banks.
[45 FR 69879, Oct. 22, 1980, as amended by Reg. D, 72 FR 16990, Apr. 6,
2007]
Sec. 204.122 Secondary market activities of international banking facilities.
(a) Questions have been raised concerning the extent to which
international banking facilities may purchase (or sell) IBF-eligible
assets such as loans (including loan participations), securities, CDs,
and bankers' acceptances from (or to) third parties. Under the Board's
regulations, as specified in Sec. 204.8 of Regulation D, IBFs are
limited, with respect to making loans and accepting deposits, to dealing
only with certain customers, such as other IBFs and foreign offices of
other organizations, and with the entity establishing the IBF. In
addition, an IBF may extend credit to a nonbank customer only to finance
the borrower's non-U.S. operations and may accept deposits from a
nonbank customer that are used only to support the depositor's non-U.S.
business.
(b) Consistent with the Board's intent, IBFs may purchase IBF-
eligible assets \1\ from, or sell such assets to, any domestic or
foreign customer provided that the transactions are at arm's length
without recourse. However, an IBF of a U.S. depository institution may
not purchase assets from, or sell such assets to, any U.S. affiliate of
the institution establishing the IBF; an IBF of an Edge or Agreement
corporation may not purchase assets from, or sell assets to, any U.S.
affiliate of the Edge or Agreement corporation or to U.S. branches of
the Edge or Agreement corporation or to U.S. branches of the Edge or
Agreement corporation other than the branch \2\ establishing the IBF;
and an IBF of a U.S. branch or agency of a foreign bank may not purchase
assets from, or sell assets to any U.S. affiliates of the foreign bank
or to any other U.S. branch or agency of the same foreign bank. \2\
(This would not prevent an IBF from purchasing (or selling) assets
directly from (or to) any IBF, including an IBF of an affiliate, or to
the institution establishing the IBF; such purchases from the
institution establishing the IBF would continue to be subject to
Eurocurrency reserve requirements except during the initial four-week
transition period.) Since repurchase agreements are regarded as loans,
transactions involving repurchase agreements are permitted only with
customers who are otherwise eligible to deal with IBFs, as specified in
Regulation D.
---------------------------------------------------------------------------
\1\ In order for an asset to be eligible to be held by an IBF, the
obligor or issuer of the instrument, or in the case of bankers'
acceptances, the customer and any endorser or acceptor, must be an IBF-
eligible customer.
\2\ Branches of Edge or Agreement corporations and agencies and
branches of foreign banks that file a consolidated report for reserve
requirements purposes (FR 2900) are considered to be the establishing
entity of an IBF.
---------------------------------------------------------------------------
(c) In the case of purchases of assets, in order to determine that
the Board's use-of-proceeds requirement has been met, it is necessary
for the IBF (1) to ascertain that the applicable IBF notices and
acknowledgments have been provided, or (2) in the case of loans or
securities, to review the documentation underlying the loan or security,
or accompanying the security (e.g., the prospectus or offering
statement), to
[[Page 119]]
determine that the proceeds are being used only to finance the obligor's
operations outside the U.S., or (3) in the case of loans, to obtain a
statement from either the seller or borrower that the proceeds are being
used only to finance operations outside the U.S., or in the case of
securities, to obtain such a statement from the obligor, or (4) in the
case of bankers' acceptances, to review the underlying documentation to
determine that the proceeds are being used only to finance the parties'
operations outside the United States.
(d) Under the Board's regulations, IBFs are not permitted to issue
negotiable Euro-CDs, bankers' acceptances, or similar instruments.
Accordingly, consistent with the Board's intent in this area, IBFs may
sell such instruments issued by third parties that qualify as IBF-
eligible assets provided that the IBF, its establishing institution and
any affiliate of the institution establishing the IBF do not endorse,
accept, or otherwise guarantee the instrument.
[46 FR 62812, Dec. 29, 1981, as amended at 52 FR 47694, Dec. 16, 1987]
Sec. 204.123 Sale of Federal funds by investment companies or trusts in which
the entire beneficial interest is held exclusively by depository institutions.
(a) The Federal Reserve Act, as amended by the Monetary Control Act
of 1980 (Title I of Pub. L. 96-221) imposes Federal Reserve requirements
on transaction accounts and nonpersonnel time deposits held by
depository institutions. The Board is empowered under the Act to
determine what types of obligations shall be deemed a deposit.
Regulation D--Reserve Requirements of Depository Institutions exempts
from the definition of deposit those obligations of a depository
institution that are issued or undertaken and held for the account of a
domestic office of another depository institution (12 CFR
204.2(a)(1)(vii)(A)(1)). These exemptions from the definition of deposit
are known collectively as the Federal funds or interbank exemption.
(b) Title IV of the Depository Institutions Deregulation and
Monetary Control Act of 1980 authorizes Federal savings and loan
associations to invest in open-ended management investment companies
provided the funds' investment portfolios are limited to the types of
investments that a Federal savings and loan association could hold
without limit as to percentage of assets (12 U.S.C. 1464(c)(1)(Q)). Such
investments include mortgages, U.S. Government and agency securities,
securities of states and political subdivisions, sales of Federal funds
and deposits held at banks insured by the Federal Deposit Insurance
Corporation. The Federal Credit Union Act authorizes Federal credit
unions to aggregate their funds in trusts provided the trust is limited
to such investments that Federal credit unions could otherwise make.
Such investments include loans to credit union members, obligations of
the U.S. government or secured by the U.S. government, loans to other
credit unions, shares or accounts held at savings and loan associations
or mutual savings banks insured by FSLIC or FDIC, sales of Federal funds
and shares of any central credit union whose investments are
specifically authorized by the board of directors of the Federal credit
union making the investment (12 U.S.C. 1757(7)).
(c) The Board has considered whether an investment company or trust
whose entire beneficial interest is held by depository institutions, as
defined in Regulation D, would be eligible for the Federal funds
exemption from Reserve requirements and interest rate limitations. The
Board has determined that such investment companies or trusts are
eligible to participate in the Federal funds market because, in effect,
they act as mere conduits for the holders of their beneficial interest.
To be regarded by the Board as acting as a conduit and, thus, be
eligible for participation in the Federal funds market, an investment
company or trust must meet each of the following conditions:
(1) The entire beneficial interest in the investment company or
trust must be held by depository institutions, as defined in Regulation
D. These institutions presently may participate directly in the Federal
funds market. If the entire beneficial interest in the investment
company or trust is held only by depository institutions, the Board will
regard the investment company or
[[Page 120]]
trust as a mere conduit for the holders of its beneficial interest.
(2) The assets of the investment company or trust must be limited to
investments that all of the holders of the beneficial interest could
make directly without limit.
(3) Holders of the beneficial interest in the investment company or
trust must not be allowed to make third party payments from their
accounts with the investment company or trust. The Board does not regard
an investment company or trust that offers third party payment
capabilities or other similar services which actively transform the
nature of the funds passing between the holders of the beneficial
interest and the Federal funds market as mere conduits.
The Board expects that the above conditions will be included in
materials filed by an investment company or trust with the appropriate
regulatory agencies.
(d) The Board believes that permitting sales of Federal funds by
investment companies or trusts whose beneficial interests are held
exclusively by depository institutions, that invest solely in assets
that the holders of their beneficial interests can otherwise invest in
without limit, and do not provide third party payment capabilities offer
the potential for an increased yield for thrifts. This is consistent
with Congressional intent to provide thrifts with convenient liquidity
vehicles.
[47 FR 8987, Mar. 3, 1982, as amended at 52 FR 47695, Dec. 16, 1987]
Sec. 204.124 Repurchase agreement involving shares of a money market mutual
fund whose portfolio consists wholly of United States Treasury and Federal
agency securities.
(a) The Federal Reserve Act, as amended by the Monetary Control Act
of 1980 (title I of Pub. L. 96-221) imposes Federal reserve requirements
on transaction accounts and nonpersonal time deposits held by depository
institutions. The Board is empowered under the Act to determine what
types of obligations shall be deemed a deposit (12 U.S.C. 461).
Regulation D--Reserve Requirements of Depository Institutions exempts
from the definition of deposit those obligations of a depository
institution that arise from a transfer of direct obligations of, or
obligations that are fully guaranteed as to principal and interest by,
the United States government or any agency thereof that the depository
institution is obligated to repurchase (12 CFR 204.2(a)(1)(vii)(B)).
(b) The National Bank Act provides that a national bank may purchase
for its own account investment securities under limitations and
restrictions as the Comptroller may prescribe (12 U.S.C. 24, ] 7). The
statute defines investment securities to mean marketable obligations
evidencing indebtedness of any person in the form of bonds, notes, and
debentures. The Act further limits a national bank's holdings of any one
security to no more than an amount equal to 10 percent of the bank's
capital stock and surplus. However, these limitations do not apply to
obligations issued by the United States, general obligations of any
state and certain obligations of Federal agencies. In addition,
generally a national bank is not permitted to purchase for its own
account stock of any corporation. These restrictions also apply to state
member banks (12 U.S.C. 335).
(c) The Comptroller of the Currency has permitted national banks to
purchase for their own accounts shares of open-end investment companies
that are purchased and sold at par (i.e., money market mutual funds)
provided the portfolios of such companies consist solely of securities
that a national bank may purchase directly (Banking Bulletin B-83-58).
The Board of Governors has permitted state member banks to purchase, to
the extent permitted under applicable state law, shares of money market
mutual funds (MMMF) whose portfolios consist solely of securities that
the state member bank may purchase directly (12 CFR 208.123).
(d) The Board has determined that an obligation arising from a
repurchase agreement involving shares of a MMMF whose portfolio consists
wholly of securities of the United States government or any agency
thereof \1\ would
[[Page 121]]
not be a deposit for purposes of Regulations D and Q. The Board believes
that a repurchase agreement involving shares of such a MMMF is the
functional equivalent of a repurchase agreement directly involving
United States government or agency obligations. A purchaser of shares of
a MMMF obtains an interest in a pro rata portion of the assets that
comprise the MMMF's portfolio. Accordingly, regardless of whether the
repurchase agreement involves United States government or agency
obligations directly or shares in a MMMF whose portfolio consists
entirely of United States government or agency obligations, an equitable
and undivided interest in United States and agency government
obligations is being transferred. Moreover, the Board believes that this
interpretation will further the purpose of the exemption in Regulations
D and Q for repurchase agreements involving United States government or
Federal obligations by enhancing the market for such obligations.
---------------------------------------------------------------------------
\1\ The term United States government or any agency thereof as used
herein shall have the same meaning as in Sec. 204.2(a)(1)(vii)(B) of
Regulation D, 12 CFR 204.2(a)(1)(vii)(B).
[50 FR 13011, Apr. 2, 1985, as amended at 52 FR 47695, Dec. 16, 1987]
Sec. 204.125 Foreign, international, and supranational entities referred to
in Sec. Sec. 204.2(c)(1)(iv)(E) and 204.8(a)(2)(i)(B)(5).
The entities referred to in Sec. Sec. 204.2(c)(1)(iv)(E) and
204.8(a)(2)(i)(B)(5) are:
Europe
Bank for International Settlements.
European Atomic Energy Community.
European Central Bank.
European Coal and Steel Community.
The European Communities.
European Development Fund.
European Economic Community.
European Free Trade Association.
European Fund.
European Investment Bank.
Latin America
Andean Development Corporation.
Andean Subregional Group.
Caribbean Development Bank.
Caribbean Free Trade Association
Caribbean Regional Development Agency.
Central American Bank for Economic Integration.
The Central American Institute for Industrial Research and Technology.
Central American Monetary Stabilization Fund.
East Caribbean Common Market.
Latin American Free Trade Association.
Organization for Central American States.
Permanent Secretariat of the Central American General Treaty of Economic
Integration.
River Plate Basin Commission.
Africa
African Development Bank.
Banque Centrale des Etats de l'Afrique Equatorial et du Cameroun.
Banque Centrale des Etats d'Afrique del'Ouest.
Conseil de l'Entente.
East African Community.
Organisation Commune Africaine et Malagache.
Organization of African Unity.
Union des Etats de l'Afrique Centrale.
Union Douaniere et Economique de l'Afrique Centrale.
Union Douaniere des Etats de l'Afrique de l'Ouest.
Asia
Asia and Pacific Council.
Association of Southeast Asian Nations.
Bank of Taiwan.
Korea Exchange Bank.
Middle East
Central Treaty Organization.
Regional Cooperation for Development.
[Reg. D, 52 FR 47695, Dec. 16, 1987, as amended at 56 FR 15495, Apr. 17,
1991; 65 FR 12917, Mar. 10, 2000]
Sec. 204.126 Depository institution participation in ``Federal funds''
market.
(a) Under Sec. 204.2(a)(1)(vii)(A), there is an exemption from
Regulation D for member bank obligations in nondeposit form to another
bank. To assure the effectiveness of the limitations on persons who sell
Federal funds to depository institutions, Regulation D applies to
nondocumentary obligations undertaken by a depository institution to
obtain funds for use in its banking business, as well as to documentary
obligations. Under Sec. 204.2(a)(1)(vii) of Regulation D, a depository
institution's liability under informal arrangements as well as those
formally embodied in a document are within the coverage of Regulation D.
[[Page 122]]
(b) The exemption in Sec. 204.2(a)(1)(vii)(A) applies to
obligations owed by a depository institution to a domestic office of any
entity listed in that section (the exempt institutions). The exempt
institutions explicitly include another depository institution, foreign
bank, Edge or agreement corporation, New York Investment (article XII)
Company, the Export-Import Bank of the United States, Minbanc Capital
Corp., and certain other credit sources. The term exempt institutions
also includes subsidiaries of depository institutions:
(1) That engage in businesses in which their parents are authorized
to engage; or
(2) The stock of which by statute is explicitly eligible for
purchase by national banks.
(c) To assure that this exemption for liabilities to exempt
institutions is not used as a means by which nondepository institutions
may arrange through an exempt institution to sell Federal funds to a
depository institution, obligations within the exemption must be issued
to an exempt institution for its own account. In view of this
requirement, a depository institution that purchases Federal funds
should ascertain the character (not necessarily the identity) of the
actual seller in order to justify classification of its liability on the
transaction as Federal funds purchased rather than as a deposit. Any
exempt institution that has given general assurance to the purchasing
depository institution that sales by it of Federal funds ordinarily will
be for its own account and thereafter executes such transactions for the
account of others, should disclose the nature of the actual lender with
respect to each such transaction. If it fails to do so, the depository
institution would be deemed by the Board as indirectly violating section
19 of the Federal Reserve Act and Regulation D.
[52 FR 47695, Dec. 16, 1987]
Sec. 204.127 Nondepository participation in ``Federal funds'' market.
(a) The Board has considered whether the use of interdepository
institution loan participations (IDLPs) which involve participation by
third parties other than depository institutions in Federal funds
transactions, comes within the exemption from deposit classification for
certain obligations owed by a depository institution to an institution
exempt in Sec. 204.2(a)(1)(vii)(A) of Regulation D. An IDLP transaction
is one through which an institution that has sold Federal funds to a
depository institution, subsequently sells or participates out that
obligation to a nondepository third party without notifying the
obligated institution.
(b) The Board's interpretation regarding Federal funds transactions
(12 CFR 204.126) clarified that a depository institutions's liability
must be issued to an exempt institution described in Sec.
204.2(a)(1)(vii)(A) of Regulation D for its own account in order to come
within the nondeposit exemption for interdepository liabilities. The
Board regards transactions which result in third parties gaining access
to the Federal funds market as contrary to the exemption contained in
Sec. 204.2(a)(1)(vii)(A) of Regulation D regardless of whether the
nondepository institution third party is a party to the initial
transaction or thereafter becomes a participant in the transaction
through purchase of all or part of the obligation held by the selling
depository institution.
(c) The Board regards the notice requirements set out in 12 CFR
204.126 as applicable to IDLP-type transactions as described herein so
that a depository institution selling Federal funds must provide to the
purchaser--
(1) Notice of its intention, at the time of the initial transaction,
to sell or participate out its loan contract to a nondepository third
party, and
(2) Full and prompt notice whenever it (the selling depository
institution) subsequently sells or participates out its loan contract to
a non-depository third party.
[52 FR 47695, Dec. 16, 1987]
Sec. 204.128 Deposits at foreign branches guaranteed by domestic office of a
depository institution.
(a) In accepting deposits at branches abroad, some depository
institutions may enter into agreements from time to time with depositors
that in effect guarantee payment of such deposits in the United States
if the foreign branch
[[Page 123]]
is precluded from making payment. The question has arisen whether such
deposits are subject to Regulation D, and this interpretation is
intended as clarification.
(b) Section 19 of the Federal Reserve Act which establishes reserve
requirements does not apply to deposits of a depository institution
``payable only at an office thereof located outside of the States of the
United States and the District of Columbia'' (12 U.S.C. 371a; 12 CFR
204.1(c)(5)). The Board rule in 1918 that the requirements of section 19
as to reserves to be carried by member banks do not apply to foreign
branches (1918 Fed. Res. Bull. 1123). The Board has also defined the
phrase Any deposit that is payable only at an office located outside the
United States, in Sec. 204.2(t) of Regulation D, 12 CFR 204.2(t).
(c) The Board believes that this exemption from reserve requirements
should be limited to deposits in foreign branches as to which the
depositor is entitled, under his agreement with the depository
institution, to demand payment only outside the United States,
regardless of special circumstances. The exemption is intended
principally to enable foreign branches of U.S. depository institutions
to compete on a more nearly equal basis with banks in foreign countries
in accordance with the laws and regulations of those countries. A
customer who makes a deposit that is payable solely at a foreign branch
of the depository institution assumes whatever risk may exist that the
foreign country in which a branch is located might impose restrictions
on withdrawals. When payment of a deposit in a foreign branch is
guaranteed by a promise of payment at an office in the United States if
not paid at the foreign office, the depositor no longer assumes this
risk but enjoys substantially the same rights as if the deposit had been
made in a U.S. office of the depository institution. To assure the
effectiveness of Regulation D and to prevent evasions thereof, the Board
considers that such guaranteed foreign-branch deposits must be subject
to that regulation.
(d) Accordingly, a deposit in a foreign branch of a depository
institution that is guaranteed by a domestic office is subject to the
reserve requirements of Regulation D the same as if the deposit had been
made in the domestic office. This interpretation is not designed in any
respect to prevent the head office of a U.S. bank from repaying
borrowings from, making advances to, or supplying capital funds to its
foreign branches, subject to Eurocurrency liability reserve
requirements.
[52 FR 47696, Dec. 16, 1987]
Sec. 204.130 Eligibility for NOW accounts.
(a) Summary. In response to many requests for rulings, the Board has
determined to clarify the types of entities that may maintain NOW
accounts at member banks.
(b) Individuals. (1) Any individual may maintain a NOW account
regardless of the purposes that the funds will serve. Thus, deposits of
an individual used in his or her business including a sole proprietor or
an individual doing business under a trade name is eligible to maintain
a NOW account in the individual's name or in the ``DBA'' name. However,
other entities organized or operated to make a profit such as
corporations, partnerships, associations, business trusts, or other
organizations may not maintain NOW accounts.
(2) Pension funds, escrow accounts, security deposits, and other
funds held under various agency agreements may also be classified as NOW
accounts if the entire beneficial interest is held by individuals or
other entities eligible to maintain NOW accounts directly. The Board
believes that these accounts are similar in nature to trust accounts and
should be accorded identical treatment. Therefore, such funds may be
regarded as eligible for classification as NOW accounts.
(c) Nonprofit organizations. (1) A nonprofit organization that is
operated primarily for religious, philanthropic, charitable,
educational, political or other similar purposes may maintain a NOW
account. The Board regards the following kinds of organizations as
eligible for NOW accounts under this standard if they are not operated
for profit:
(i) Organizations described in section 501(c)(3) through (13), and
(19) of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section
501(c)(3) through (13) and (19));
[[Page 124]]
(ii) Political organizations described in section 527 of the
Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 527); and
(iii) Homeowners and condominium owners associations described in
section 528 of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954)
section 528), including housing cooperative associations that perform
similar functions.
(2) All organizations that are operated for profit are not eligible
to maintain NOW accounts at depository institutions.
(3) The following types of organizations described in the cited
provisions of the Internal Revenue Code are among those not eligible to
maintain NOW accounts:
(i) Credit unions and other mutual depository institutions described
in section 501(c)(14) of the Internal Revenue Code (26 U.S.C. (I.R.C.
1954) section 501(c)(14));
(ii) Mutual insurance companies described in section 501(c)(15) of
the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(15));
(iii) Crop financing organizations described in section 501(c)(16)
of the Internal Revenue Code (26 U.S.C. (I.R.C. 1954) section
501(c)(16));
(iv) Organizations created to function as part of a qualified group
legal services plan described in section 501(c)(20) of the Internal
Revenue Code (26 U.S.C. (I.R.C. 1954) section 501(c)(20)); or
(v) Farmers' cooperatives described in section 521 of the Internal
Revenue Code (26 U.S.C. (I.R.C. 1954) section 521).
(d) Governmental units. Governmental units are generally eligible to
maintain NOW accounts at member banks. NOW accounts may consist of funds
in which the entire beneficial interest is held by the United States,
any State of the United States, county, municipality, or political
subdivision thereof, the District of Columbia, the Commonwealth of
Puerto Rico, American Samoa, Guam, any territory or possession of the
United States, or any political subdivision thereof.
(e) Funds held by a fiduciary. Under current provisions, funds held
in a fiduciary capacity (either by an individual fiduciary or by a
corporate fiduciary such as a bank trust department or a trustee in
bankruptcy), including those awaiting distribution or investment, may be
held in the form of NOW accounts if all of the beneficiaries are
otherwise eligible to maintain NOW accounts. The Board believes that
such a classification should continue since fiduciaries are required to
invest even temporarily idle balances to the greatest extent feasible in
order to responsibly carry out their fiduciary duties. The availability
of NOW accounts provides a convenient vehicle for providing a short-term
return on temporarily idle trust funds of beneficiaries eligible to
maintain accounts in their own names.
(f) Grandfather provision. In order to avoid unduly disrupting
account relationships, a NOW account established at a member bank on or
before August 31, 1981, that represents funds of a nonqualifying entity
that previously qualified to maintain a NOW account may continue to be
maintained in a NOW account.
[52 FR 47697, Dec. 16, 1987]
Sec. 204.131 Participation by a depository institution in the secondary
market for its own time deposits.
(a) Background. In 1982, the Board issued an interpretation
concerning the effect of a member bank's purchase of its own time
deposits in the secondary market in order to ensure compliance with
regulatory restrictions on the payment of interest on time deposits,
with the prohibition against payment of interest on demand deposits, and
with regulatory requirements designed to distinguish between time
deposits and demand deposits for federal reserve requirement purposes
(47 FR 37878, Aug. 27, 1982). The interpretation was designed to ensure
that the regulatory early withdrawal penalties in Regulation Q used to
achieve these three purposes were not evaded through the purchase by a
member bank or its affiliate of a time deposit of the member bank prior
to the maturity of the deposit.
(b) Because the expiration of the Depository Institutions
Deregulation Act (title II of Pub. L. 96-221) on April 1, 1986, removed
the authority to set interest rate ceilings on deposits, one of the
purposes for adopting the interpretation was eliminated. The removal of
[[Page 125]]
the authority to set interest rate ceilings on deposits required the
Board to revise the early withdrawal penalties which were also used to
distinguish between types of deposits for reserve requirement purposes.
Effective April 1, 1986, the Board amended its Regulation D to
incorporate early withdrawal penalties applicable to all depository
institutions for this purpose (51 FR 9629, Mar. 20, 1986). Although the
new early withdrawal penalties differ from the penalties used to enforce
interest rate ceilings, secondary market purchases still effectively
shorten the maturities of deposits and may be used to evade reserve
requirements. This interpretation replaces the prior interpretation and
states the application of the new early withdrawal penalties to
purchases by depository institutions and their affiliates of the
depository institution's time deposits. The interpretation applies only
to situations in which the Board's regulatory penalties apply.
(c) Secondary market purchases under the rule. The Board has
determined that a depository institution purchasing a time deposit it
has issued should be regarded as having paid the time deposit prior to
maturity. The effect of the transaction is that the depository
institution has cancelled a liability as opposed to having acquired an
asset for its portfolio. Thus, the depository institution is required to
impose any early withdrawal penalty required by Regulation D on the
party from whom it purchases the instrument by deducting the amount of
the penalty from the purchase price. The Board recognizes, however, that
secondary market sales of time deposits are often done without regard to
the identity of the original owner of the deposit. Such sales typically
involve a pool of time deposits with the price based on the aggregate
face value and average rate of return on the deposits. A depository
institution purchasing time deposits from persons other than the person
to whom the deposit was originally issued should be aware of the parties
named on each of the deposits it is purchasing but through failure to
inspect the deposits prior to the purchase may not be aware at the time
it purchases a pool of time deposits that it originally issued one or
more of the deposits in the pool. In such cases, if a purchasing
depository institution does not wish to assess an applicable early
withdrawal penalty, the deposit may be sold immediately in the secondary
market as an alternative to imposing the early withdrawal penalty.
(d) Purchases by affiliates. On a consolidated basis, if an
affiliate (as defined in Sec. 204.2(q) of Regulation D) of a depository
institution purchases a CD issued by the depository institution, the
purchase does not reduce their consolidated liabilities and could be
accomplished primarily to assist the depository institution in avoiding
the requirements of the Board's Regulation D. Because the effect of the
early withdrawal penalty rule could be easily circumvented by purchases
of time deposits by affiliates, such purchases are also regarded as an
early withdrawals of the time deposit, and the purchase should be
treated as if the depository institution made the purchase directly.
Thus, the regulatory requirements for early withdrawal penalties apply
to affiliates of a depository institution as well as to the institution
itself.
(e) Depository institution acting as broker. The Board believes that
it is permissible for a depository institution to facilitate the
secondary market for its own time deposits by finding a purchaser for a
time deposit that a customer is trying to sell. In such instances, the
depository institution will not be paying out any of its own funds, and
the depositor does not have a guarantee that the depository institution
will actually be able to find a buyer.
(f) Third-party market-makers. A depository institution may also
establish and advertise arrangements whereby an unaffiliated third party
agrees in advance to purchase time deposits issued by the institution.
The Board would not regard these transactions as inconsistent with the
purposes that the early withdrawal penalty is intended to serve unless a
depository institution pays a fee to the third party purchaser as
compensation for making the purchases or to remove the risk from
purchasing the deposits. In this regard, any interim financing provided
to such
[[Page 126]]
a third party by a depository institution in connection with the
institution's secondary market activity involving the institution's time
deposits must be made substantially on the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other similarly situated persons and may
not involve more than the normal risk of repayment.
(g) Reciprocal arrangements. Finally, while a depository institution
may enter into an arrangement with an unaffiliated third party wherein
the third party agrees to stand ready to purchase time deposits held by
the depository institution's customers, the Board will regard a
reciprocal arrangement with another depository institution for purchase
of each other's time deposits as a circumvention of the early withdrawal
penalty rule and the purposes it is designed to serve.
[52 FR 47697, Dec. 16, 1987]
Sec. 204.132 Treatment of loan strip participations.
(a) Effective March 31, 1988, the glossary section of the
instructions for the Report of Condition and Income (FFIEC 031-034; OMB
control number 7100-0036; available from a depository institution's
primary federal regulator) (Call Report) was amended to clarify that
certain short-term loan participation arrangements (sometimes known or
styled as loan strips or strip participations) are regarded as
borrowings rather than sales for Call Report purposes in certain
circumstances. Through this interpretation, the Board is clarifying that
such transactions should be treated as deposits for purposes of
Regulation D.
(b) These transactions involve the sale (or placement) of a short-
term loan by a depository institution that has been made under a long-
term commitment of the depository institution to advance funds. For
example, a 90-day loan made under a five-year revolving line of credit
may be sold to or placed with a third party by the depository
institution originating the loan. The depository institution originating
the loan is obligated to renew the 90-day note itself (by advancing
funds to its customer at the end of the 90-day period) in the event the
original participant does not wish to renew the credit. Since, under
these arrangements, the depository institution is obligated to make
another loan at the end of 90 days (absent any event of default on the
part of the borrower), the depository institution selling the loan or
participation in effect must buy back the loan or participation at the
maturity of the 90-day loan sold to or funded by the purchaser at the
option of the purchaser. Accordingly, these transactions bear the
essential characteristics of a repurchase agreement and, therefore, are
reportable and reservable under Regulation D.
(c) Because many of these transactions give rise to deposit
liabilities in the form of promissory notes, acknowledgments of advance
or similar obligations (written or oral) as described in Sec.
204.2(a)(1)(vii) of Regulation D, the exemptions from the definition of
deposit incorporated in that section may apply to the liability incurred
by a depository institution when it offers or originates a loan strip
facility. Thus, for example, loan strips sold to domestic offices of
other depository institutions are exempt from Regulation D under Sec.
204.2(a)(1)(vii)(A)(1) because they are obligations issued or undertaken
and held for the account of a U.S. office of another depository
institution. Similarly, some of these transactions result in
Eurocurrency liabilities and are reportable and reservable as such.
[53 FR 24931, July 1, 1988]
Sec. 204.133 Multiple savings deposits treated as a transaction account.
(a) Authority. Under section 19(a) of the Federal Reserve Act, the
Board is authorized to define the terms used in section 19, and to
prescribe regulations to implement and prevent evasions of the
requirements of that section. Section 19(b) establishes general reserve
requirements on transaction accounts and nonpersonal time deposits.
Under section 19(b)(1)(F), the Board also is authorized to determine, by
regulation or order, that an account or deposit is a transaction account
if such account is
[[Page 127]]
used directly or indirectly for the purpose of making payments to third
persons or others. This interpretation is adopted under these
authorities.
(b) Background. Under Regulation D, 12 CFR 204.2(d)(2), the term
``savings deposit'' includes a deposit or an account that meets the
requirements of Sec. 204.2(d)(1) and from which, under the terms of the
deposit contract or by practice of the depository institution, the
depositor is permitted or authorized to make up to six transfers or
withdrawals per month or statement cycle of at least four weeks. The
depository institution may authorize up to three of these six transfers
to be made by check, draft, debit card, or similar order drawn by the
depositor and payable to third parties. If more than six transfers (or
more than three third party transfers by check, etc.) are permitted or
authorized per month or statement cycle, the depository institution may
not classify the account as a savings deposit. If the depositor, during
the period, makes more than six transfers or withdrawals (or more than
three third party transfers by check, etc.), the depository institution
may, depending upon the facts and circumstances, be required by
Regulation D (Footnote 5 at Sec. 204.2(d)(2)) to reclassify or close
the account.
(c) Use of multiple savings deposits. Depository institutions have
asked for guidance as to when a depositor may maintain more than one
savings deposit and be permitted to make all the transfers or
withdrawals authorized for savings deposits under Regulation D from each
savings deposit. The Board has determined that, if a depository
institution suggests or otherwise promotes the establishment of or
operation of multiple savings accounts with transfer capabilities in
order to permit transfers and withdrawals in excess of those permitted
by Regulation D for an individual savings account, the accounts
generally should be considered to be transaction accounts. This
determination applies regardless of whether the deposits have entirely
separate account numbers or are subsidiary accounts of a master deposit
account. Multiple savings accounts, however, should not be considered to
be transaction accounts if there is a legitimate purpose, other than
increasing the number of transfers or withdrawals, for opening more than
one savings deposit.
(d) Examples. The distinction between appropriate and inappropriate
uses of multiple accounts is illustrated by the following examples:
Example 1. (i) X wishes to open an account that maximizes his
interest earnings but also permits X to draw up to ten checks a month
against the account. X's Bank suggests an arrangement under which X
establishes four savings deposits at Bank. Under the arrangement, X
deposits funds in the first account and then draws three checks against
that account. X then instructs Bank to transfer all funds in excess of
the amount of the three checks to the second account and draws an
additional three checks. Funds are continually shifted between accounts
when additional checks are drawn so that no more than three checks are
drawn against each account each month.
(ii) Suggesting the use of four savings accounts in the name of X in
this example is designed solely to permit the customer to exceed the
transfer limitations on savings accounts. Accordingly, the savings
accounts should be classified as transaction accounts.
Example 2. (i) X is trustee of separate trusts for each of his four
children. X's Bank suggests that X, as trustee, open a savings deposit
in a depository institution for each of his four children in order to
ensure an independent accounting of the funds held by each trust.
(ii) X's Bank's suggestion to use four savings deposits in the name
of X in this example is appropriate, and the third party transfers from
one account should not be considered in determining whether the transfer
and withdrawal limit was exceeded on any other account. X established a
legitimate purpose, the segregation of the trust assets, for each
account separate from the need to make third party transfers.
Furthermore, there is no indication, such as by the direct or indirect
transfer of funds from one account to another, that the accounts are
being used for any purpose other than to make transfers to the
appropriate trust.
Example 3. (i) X opens four savings accounts with Bank. X regularly
draws up to three checks against each account and transfers funds
between the accounts in order to ensure that the checks on the separate
accounts are covered. X's Bank did not suggest or otherwise promote the
arrangement.
(ii) X's Bank may treat the multiple accounts as savings deposits
for Regulation D purposes, even if it discovers that X is using the
accounts to increase the transfer limits applicable to savings accounts
because X's Bank did not suggest or otherwise promote
[[Page 128]]
the establishment of or operation of the arrangement.
[57 FR 38427, Aug. 25, 1992]
Sec. 204.134 Linked time deposits and transaction accounts.
(a) Authority. Under section 19(a) of the Federal Reserve Act (12
U.S.C. 461(a)), the Board is authorized to define the terms used in
section 19, and to prescribe regulations to implement and prevent
evasions of the requirements of that section. Section 19(b)(2)
establishes general reserve requirements on transaction accounts and
nonpersonal time deposits. Under section 19(b)(1)(F), the Board also is
authorized to determine, by regulation or order, that an account or
deposit is a transaction account if such account is used directly or
indirectly for the purpose of making payments to third persons or
others. This interpretation is adopted under these authorities.
(b) Linked time deposits and transaction accounts. Some depository
institutions are offering or proposing to offer account arrangements
under which a group of participating depositors maintain transaction
accounts and time deposits with a depository institution in an
arrangement under which each depositor may draw checks up to the
aggregate amount held by that depositor in these accounts. Under this
account arrangement, at the end of the day funds over a specified
balance in each depositor's transaction account are swept from the
transaction account into a commingled time deposit. A separate time
deposit is opened on each business day with the balance of deposits
received that day, as well as the proceeds of any time deposit that has
matured that day that are not used to pay checks or withdrawals from the
transaction accounts. The time deposits, which generally have maturities
of seven days, are staggered so that one or more time deposits mature
each business day. Funds are apportioned among the various time deposits
in a manner calculated to minimize the possibility that the funds
available on any given day would be insufficient to pay all items
presented.
(1) The time deposits involved in such an arrangement may be held
directly by the depositor or indirectly through a trust or other
arrangement. The individual depositor's interest in time deposits may be
identifiable, with an agreement by the depositors that balances held in
the arrangement may be used to pay checks drawn by other depositors
participating in the arrangement, or the depositor may have an undivided
interest in a series of time deposits.
(2) Each day funds from the maturing time deposits are available to
pay checks or other charges to the depositor's transaction account. The
depository institution's decision concerning whether to pay checks drawn
on an individual depositor's transaction account is based on the
aggregate amount of funds that the depositor has invested in the
arrangement, including any amount that may be invested in unmatured time
deposits. Only if checks drawn by all participants in the arrangement
exceed the total balance of funds available that day (i.e. funds from
the time deposit that has matured that day as well as any deposits made
to participating accounts during the day) is a time deposit withdrawn
prior to maturity so as to incur an early withdrawal penalty. The
arrangement may be marketed as providing the customer unlimited access
to its funds with a high rate of interest.
(c) Determination. In these arrangements, the aggregate deposit
balances of all participants generally vary by a comparatively small
amount, allowing the time deposits maturing on any day safely to cover
any charges to the depositors' transaction accounts and avoiding any
early withdrawal penalties. Thus, this arrangement substitutes time
deposit balances for transaction accounts balances with no practical
restrictions on the depositors' access to their funds, and serves no
business purpose other than to allow the payment of higher interest
through the avoidance of reserve requirements. As the time deposits may
be used to provide funds indirectly for the purposes of making payments
or transfers to third persons, the Board has determined that the time
deposits should be considered to be transaction
[[Page 129]]
accounts for the purposes of Regulation D.
[57 FR 38428, Aug. 25, 1992]
Sec. 204.135 Shifting funds between depository institutions to make use of
the low reserve tranche.
(a) Authority. Under section 19(a) of the Federal Reserve Act (12
U.S.C. 461(a)) the Board is authorized to define terms used in section
19, and to prescribe regulations to implement and to prevent evasions of
the requirements of that section. Section 19(b)(2) establishes general
reserve requirements on transaction accounts and nonpersonal time
deposits. In addition to its authority to define terms under section
19(a), section 19(g) of the Federal Reserve Act also give the Board the
specific authority to define terms relating to deductions allowed in
reserve computation, including ``balances due from other banks.'' This
interpretation is adopted under these authorities.
(b) Background. (1) Currently, the Board requires reserves of zero,
three, or ten percent on transaction accounts, depending upon the amount
of transaction deposits in the depository institution, and of zero
percent on nonpersonal time deposits. In determining its reserve balance
under Regulation D, a depository institution may deduct the balances it
maintains in another depository institution located in the United States
if those balances are subject to immediate withdrawal by the depositing
depository institution (Sec. 204.3(f)). This deduction is commonly
known as the ``due from'' deduction. In addition, Regulation D at Sec.
204.2(a)(1)(vii)(A) exempts from the definition of ``deposit'' any
liability of a depository institution on a promissory note or similar
obligation that is issued or undertaken and held for the account of an
office located in the United States of another depository institution.
Transactions falling within this exemption from the definition of
``deposit'' include federal funds or ``fed funds'' transactions.
(2) Under section 19(b)(2) of the Federal Reserve Act (12 U.S.C.
461(b)(2)), the Board is required to impose reserves of three percent on
total transaction deposits at or below an amount determined under a
formula. Transaction deposits falling within this amount are in the
``low reserve tranche.'' Currently the low reserve tranche runs up to
$42.2 million. Under section 19(b)(11) of the Federal Reserve Act (12
U.S.C. 461(b)(11)) the Board is also required to impose reserves of zero
percent on reservable liabilities at or below an amount determined under
a formula. Currently that amount is $3.6 million.
(c) Shifting funds between depository institutions. The Board is
aware that certain depository institutions with transaction account
balances in an amount greater than the low reserve tranche have entered
into transactions with affiliated depository institutions that have
transaction account balances below the maximum low reserve tranche
amount. These transactions are intended to lower the transaction
reserves of the larger depository institution and leave the economic
position of the smaller depository institutions unaffected, and have no
apparent purpose other than to reduce required reserves of the larger
institution. The larger depository institution places funds in a demand
deposit at a small domestic depository institution. The larger
depository institution considers those funds to be subject to the ``due
from'' deduction, and accordingly reduces its transaction reserves in
the amount of the demand deposit. The larger depository institution then
reduces its transaction account reserves by 10 percent of the deposited
amount. The small depository institution, because it is within the low
reserve tranche, must maintain transaction account reserves of 3 percent
on the funds deposited by the larger depository institution. The small
depository institution then transfers all but 3 percent of the funds
deposited by the larger depository institution back to the larger
depository institution in a transaction that qualifies as a ``fed
funds'' transaction. The 3 percent not transferred to the larger
depository institution is the amount of the larger depository
institution's deposit that the small depository institution must
maintain as transaction account reserves. Because the larger depository
institution books this second part of the transaction as a ``fed funds''
transaction, the larger depository institution does not maintain
[[Page 130]]
reserves on the funds that it receives back from the small depository
institution. As a consequence, the larger depository institution has
available for its use 97 percent of the amount transferred to the small
depository institution. Had the larger depository institution not
entered into the transaction, it would have maintained transaction
account reserves of 10 percent on that amount, and would have had only
90 percent of that amount for use in its business.
(d) Determination. The Board believes that the practice described
above generally is a device to evade the reserves imposed by Regulation
D. Consequently, the Board has determined that, in the circumstances
described above, the larger depository institution depositing funds in
the smaller institution may not take a ``due from'' deduction on account
of the funds in the demand deposit account if, and to the extent that,
funds flow back to the larger depository institution from the small
depository institution by means of a transaction that is exempt from
transaction account reserve requirements.
[57 FR 38429, Aug. 25, 1992]
Sec. 204.136 Treatment of trust overdrafts for reserve requirement reporting
purposes.
(a) Authority. Under section 19(a) of the Federal Reserve Act (12
U.S.C. 461(a)), the Board is authorized to define the terms used in
section 19, and to prescribe regulations to implement and prevent
evasions of the requirements of that section. Section 19(b) establishes
general reserve requirements on transaction accounts and nonpersonal
time deposits. Under section 19(b)(1)(F), the Board also is authorized
to determine, by regulation or order, that an account or deposit is a
transaction account if such account is used directly or indirectly for
the purpose of making payments to third persons or others. This
interpretation is adopted under these authorities.
(b) Netting of trust account balances. (1) Not all depository
institutions have treated overdrafts in trust accounts administered by a
trust department in the same manner when calculating the balance in a
commingled transaction account in the depository institution for the
account of the trust department of the institution. In some cases,
depository institutions carry the aggregate of the positive balances in
the individual trust accounts as the balance on which reserves are
computed for the commingled account. In other cases depository
institutions net positive balances in some trust accounts against
negative balances in other trust accounts, thus reducing the balance in
the commingled account and lowering the reserve requirements. Except in
limited circumstances, negative balances in individual trust accounts
should not be netted against positive balances in other trust accounts
when determining the balance in a trust department's commingled
transaction account maintained in a depository institution's commercial
department. The netting of positive and negative balances has the effect
of reducing the aggregate of a commingled transaction account reported
by the depository institution to the Federal Reserve and reduces the
reserves the institution must hold against transaction accounts under
Regulation D. Unless the governing trust agreement or state law
authorizes the depository institution, as trustee, to lend money in one
trust to another trust, the negative balances in effect, for purposes of
Regulation D, represent a loan from the depository institution.
Consequently, negative balances in individual trust accounts should not
be netted against positive balances in other individual trust accounts,
and the balance in any transaction account containing commingled trust
balances should reflect positive or zero balances for each individual
trust.
(2) For example, where a trust department engages in securities
lending activities for trust accounts, overdrafts might occur because of
the trust department's attempt to ``normalize'' the effects of timing
delays between the depository institution's receipt of the cash
collateral from the broker and the trust department's posting of the
transaction to the lending trust account. When securities are lent from
a trust customer to a broker that pledges cash as collateral, the broker
usually transfers the cash collateral to the depository institution on
the day that
[[Page 131]]
the securities are made available. While the institution has the use of
the funds from the time of the transfer, the trust department's normal
posting procedures may not reflect receipt of the cash collateral by the
individual account until the next day. On the day that the loan is
terminated, the broker returns the securities to the lending trust
account and the trust customer's account is debited for the amount of
the cash collateral that is returned by the depository institution to
the broker. The trust department, however, often does not liquidate the
investment made with the cash collateral until the day after the loan
terminates, a delay that normally causes a one day overdraft in the
trust account. Regulation D requires that, on the day the loan is
terminated, the depository institution regard the negative balance in
the customer's account as zero for reserve requirement reporting
purposes and not net the overdraft against positive balances in other
accounts.
(c) Procedures. In order to meet the requirements of Regulation D, a
depository institution must have procedures to determine the aggregate
of trust department transaction account balances for Regulation D on a
daily basis. The procedures must consider only the positive balances in
individual trust accounts without netting negative balances except in
those limited circumstances where loans are legally permitted from one
trust to another, or where offsetting is permitted pursuant to trust law
or written agreement, or where the amount that caused the overdraft is
still available in a settlement, suspense or other trust account within
the trust department and may be used to offset the overdraft.
[57 FR 38429, Aug. 25, 1992]
PART 205_ELECTRONIC FUND TRANSFERS (REGULATION E)--Table of Contents
Sec.
205.1 Authority and purpose.
205.2 Definitions.
205.3 Coverage.
205.4 General disclosure requirements; jointly offered services.
205.5 Issuance of access devices.
205.6 Liability of consumer for unauthorized transfers.
205.7 Initial disclosures.
205.8 Change in terms notice; error resolution notice.
205.9 Receipts at electronic terminals; periodic statements.
205.10 Preauthorized transfers.
205.11 Procedures for resolving errors.
205.12 Relation to other laws.
205.13 Administrative enforcement; record retention.
205.14 Electronic fund transfer service provider not holding consumer's
account.
205.15 Electronic fund transfer of government benefits.
205.16 Disclosures at automated teller machines.
205.17 Requirements for overdraft services.
205.18 Requirements for financial institutions offering payroll card
accounts.
205.20 Requirements for gift cards and gift certificates.
Appendix A to Part 205--Model Disclosure Clauses and Forms
Appendix B to Part 205--Federal Enforcement Agencies
Appendix C to Part 205--Issuance of Staff Interpretations
Supplement I to Part 205--Official Staff Interpretations
Authority: 15 U.S.C. 1693b.
Source: Reg. E, 61 FR 19669, May 2, 1996, unless otherwise noted.
Sec. 205.1 Authority and purpose.
(a) Authority. The regulation in this part, known as Regulation E,
is issued by the Board of Governors of the Federal Reserve System
pursuant to the Electronic Fund Transfer Act (15 U.S.C. 1693 et seq.).
The information-collection requirements have been approved by the Office
of Management and Budget under 44 U.S.C. 3501 et seq. and have been
assigned OMB No. 7100-0200.
(b) Purpose. This part carries out the purposes of the Electronic
Fund Transfer Act, which establishes the basic rights, liabilities, and
responsibilities of consumers who use electronic fund transfer services
and of financial institutions that offer these services. The primary
objective of the act and this part is the protection of individual
consumers engaging in electronic fund transfers.
Sec. 205.2 Definitions.
For purposes of this part, the following definitions apply:
[[Page 132]]
(a)(1) Access device means a card, code, or other means of access to
a consumer's account, or any combination thereof, that may be used by
the consumer to initiate electronic fund transfers.
(2) An access device becomes an accepted access device when the
consumer:
(i) Requests and receives, or signs, or uses (or authorizes another
to use) the access device to transfer money between accounts or to
obtain money, property, or services;
(ii) Requests validation of an access device issued on an
unsolicited basis; or
(iii) Receives an access device in renewal of, or in substitution
for, an accepted access device from either the financial institution
that initially issued the device or a successor.
(b)(1) Account means a demand deposit (checking), savings, or other
consumer asset account (other than an occasional or incidental credit
balance in a credit plan) held directly or indirectly by a financial
institution and established primarily for personal, family, or household
purposes.
(2) The term includes a ``payroll card account'' which is an account
that is directly or indirectly established through an employer and to
which electronic fund transfers of the consumer's wages, salary, or
other employee compensation (such as commissions), are made on a
recurring basis, whether the account is operated or managed by the
employer, a third-party payroll processor, a depository institution or
any other person. For rules governing payroll card accounts, see Sec.
205.18.
(3) The term does not include an account held by a financial
institution under a bona fide trust agreement.
(c) Act means the Electronic Fund Transfer Act (title IX of the
Consumer Credit Protection Act, 15 U.S.C. 1693 et seq.).
(d) Business day means any day on which the offices of the
consumer's financial institution are open to the public for carrying on
substantially all business functions.
(e) Consumer means a natural person.
(f) Credit means the right granted by a financial institution to a
consumer to defer payment of debt, incur debt and defer its payment, or
purchase property or services and defer payment therefor.
(g) Electronic fund transfer is defined in Sec. 205.3.
(h) Electronic terminal means an electronic device, other than a
telephone operated by a consumer, through which a consumer may initiate
an electronic fund transfer. The term includes, but is not limited to,
point-of-sale terminals, automated teller machines, and cash dispensing
machines.
(i) Financial institution means a bank, savings association, credit
union, or any other person that directly or indirectly holds an account
belonging to a consumer, or that issues an access device and agrees with
a consumer to provide electronic fund transfer services.
(j) Person means a natural person or an organization, including a
corporation, government agency, estate, trust, partnership,
proprietorship, cooperative, or association.
(k) Preauthorized electronic fund transfer means an electronic fund
transfer authorized in advance to recur at substantially regular
intervals.
(l) State means any state, territory, or possession of the United
States; the District of Columbia; the Commonwealth of Puerto Rico; or
any political subdivision of the above in this paragraph (l).
(m) Unauthorized electronic fund transfer means an electronic fund
transfer from a consumer's account initiated by a person other than the
consumer without actual authority to initiate the transfer and from
which the consumer receives no benefit. The term does not include an
electronic fund transfer initiated:
(1) By a person who was furnished the access device to the
consumer's account by the consumer, unless the consumer has notified the
financial institution that transfers by that person are no longer
authorized;
(2) With fraudulent intent by the consumer or any person acting in
concert with the consumer; or
(3) By the financial institution or its employee.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 71 FR 1481, Jan. 10,
2006; 71 FR 51449, Aug. 30, 2006]
[[Page 133]]
Sec. 205.3 Coverage.
(a) General. This part applies to any electronic fund transfer that
authorizes a financial institution to debit or credit a consumer's
account. Generally, this part applies to financial institutions. For
purposes of Sec. Sec. 205.3(b)(2) and (b)(3), 205.10(b), (d), and (e),
205.13, and 205.20, this part applies to any person.
(b) Electronic fund transfer--(1) Definition. The term electronic
fund transfer means any transfer of funds that is initiated through an
electronic terminal, telephone, computer, or magnetic tape for the
purpose of ordering, instructing, or authorizing a financial institution
to debit or credit a consumer's account. The term includes, but is not
limited to--
(i) Point-of-sale transfers;
(ii) Automated teller machine transfers;
(iii) Direct deposits or withdrawals of funds;
(iv) Transfers initiated by telephone; and
(v) Transfers resulting from debit card transactions, whether or not
initiated through an electronic terminal.
(2) Electronic fund transfer using information from a check. (i)
This part applies where a check, draft, or similar paper instrument is
used as a source of information to initiate a one-time electronic fund
transfer from a consumer's account. The consumer must authorize the
transfer.
(ii) The person initiating an electronic fund transfer using the
consumer's check as a source of information for the transfer must
provide a notice that the transaction will or may be processed as an
EFT, and obtain a consumer's authorization for each transfer. A consumer
authorizes a one-time electronic fund transfer (in providing a check to
a merchant or other payee for the MICR encoding, that is, the routing
number of the financial institution, the consumer's account number and
the serial number) when the consumer receives notice and goes forward
with the underlying transaction. For point-of-sale transfers, the notice
must be posted in a prominent and conspicuous location, and a copy
thereof, or a substantially similar notice, must be provided to the
consumer at the time of the transaction.
(iii) The person that initiates an electronic fund transfer using
the consumer's check as a source of information for the transfer shall
also provide a notice to the consumer at the same time it provides the
notice required under paragraph (b)(2)(ii) that when a check is used to
initiate an electronic fund transfer, funds may be debited from the
consumer's account as soon as the same day payment is received, and, as
applicable, that the consumer's check will not be returned by the
financial institution holding the consumer's account. For point-of-sale
transfers, the person initiating the transfer may post the notice
required in this paragraph (b)(2)(iii) in a prominent and conspicuous
location and need not include this notice on the copy of the notice
given to the consumer under paragraph (b)(2)(ii). The requirements in
this paragraph (b)(2)(iii) shall remain in effect until December 31,
2009.
(iv) A person may provide notices that are substantially similar to
those set forth in appendix A-6 to comply with the requirements of this
paragraph (b)(2).
(3) Collection of returned item fees via electronic fund transfer--
(i) General. The person initiating an electronic fund transfer to
collect a fee for the return of an electronic fund transfer or a check
that is unpaid, including due to insufficient or uncollected funds in
the consumer's account, must obtain the consumer's authorization for
each transfer. A consumer authorizes a one-time electronic fund transfer
from his or her account to pay the fee for the returned item or transfer
if the person collecting the fee provides notice to the consumer stating
that the person may electronically collect the fee, and the consumer
goes forward with the underlying transaction. The notice must state that
the fee will be collected by means of an electronic fund transfer from
the consumer's account if the payment is returned unpaid and must
disclose the dollar amount of the fee. If the fee may vary due to the
amount of the transaction or due to other factors, then, except as
otherwise provided in paragraph (b)(3)(ii) of this section, the person
collecting the fee
[[Page 134]]
may disclose, in place of the dollar amount of the fee, an explanation
of how the fee will be determined.
(ii) Point-of-sale transactions. If a fee for an electronic fund
transfer or check returned unpaid may be collected electronically in
connection with a point-of-sale transaction, the person initiating an
electronic fund transfer to collect the fee must post the notice
described in paragraph (b)(3)(i) of this section in a prominent and
conspicuous location. The person also must either provide the consumer
with a copy of the posted notice (or a substantially similar notice) at
the time of the transaction, or mail the copy (or a substantially
similar notice) to the consumer's address as soon as reasonably
practicable after the person initiates the electronic fund transfer to
collect the fee. If the amount of the fee may vary due to the amount of
the transaction or due to other factors, the posted notice may explain
how the fee will be determined, but the notice provided to the consumer
must state the dollar amount of the fee if the amount can be calculated
at the time the notice is provided or mailed to the consumer.
(iii) Delayed compliance date for fee disclosure. Through December
31, 2007, the notice required to be provided to consumers under
paragraph (b)(3)(ii) of this section in connection with a point-of-sale
transaction, whether given to the consumer at the time of the
transaction or subsequently mailed to the consumer, need not include
either the dollar amount of any fee collected electronically for a check
or electronic fund transfer returned unpaid or an explanation of how the
amount of the fee will be determined.
(c) Exclusions from coverage. The term electronic fund transfer does
not include:
(1) Checks. Any transfer of funds originated by check, draft, or
similar paper instrument; or any payment made by check, draft, or
similar paper instrument at an electronic terminal.
(2) Check guarantee or authorization. Any transfer of funds that
guarantees payment or authorizes acceptance of a check, draft, or
similar paper instrument but that does not directly result in a debit or
credit to a consumer's account.
(3) Wire or other similar transfers. Any transfer of funds through
Fedwire or through a similar wire transfer system that is used primarily
for transfers between financial institutions or between businesses.
(4) Securities and commodities transfers. Any transfer of funds the
primary purpose of which is the purchase or sale of a security or
commodity, if the security or commodity is:
(i) Regulated by the Securities and Exchange Commission or the
Commodity Futures Trading Commission;
(ii) Purchased or sold through a broker-dealer regulated by the
Securities and Exchange Commission or through a futures commission
merchant regulated by the Commodity Futures Trading Commission; or
(iii) Held in book-entry form by a Federal Reserve Bank or federal
agency.
(5) Automatic transfers by account-holding institution. Any transfer
of funds under an agreement between a consumer and a financial
institution which provides that the institution will initiate individual
transfers without a specific request from the consumer:
(i) Between a consumer's accounts within the financial institution;
(ii) From a consumer's account to an account of a member of the
consumer's family held in the same financial institution; or
(iii) Between a consumer's account and an account of the financial
institution, except that these transfers remain subject to Sec.
205.10(e) regarding compulsory use and sections 915 and 916 of the act
regarding civil and criminal liability.
(6) Telephone-initiated transfers. Any transfer of funds that:
(i) Is initiated by a telephone communication between a consumer and
a financial institution making the transfer; and
(ii) Does not take place under a telephone bill-payment or other
written plan in which periodic or recurring transfers are contemplated.
(7) Small institutions. Any preauthorized transfer to or from an
account if the assets of the account-holding financial institution were
$100
[[Page 135]]
million or less on the preceding December 31. If assets of the account-
holding institution subsequently exceed $100 million, the institution's
exemption for preauthorized transfers terminates one year from the end
of the calendar year in which the assets exceed $100 million.
Preauthorized transfers exempt under this paragraph (c)(7) remain
subject to Sec. 205.10(e) regarding compulsory use and sections 915 and
916 of the act regarding civil and criminal liability.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 71 FR 1659, Jan. 10,
2006; 71 FR 51456, Aug. 30, 2006; 75 FR 16613, Apr. 1, 2010]
Sec. 205.4 General disclosure requirements; jointly offered services.
(a)(1) Form of disclosures. Disclosures required under this part
shall be clear and readily understandable, in writing, and in a form the
consumer may keep, except as otherwise provided in this part. 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.). A financial
institution may use commonly accepted or readily understandable
abbreviations in complying with the disclosure requirements of this
part.
(2) Foreign language disclosures. Disclosures required under this
part may be made in a language other than English, provided that the
disclosures are made available in English upon the consumer's request.
(b) Additional information; disclosures required by other laws. A
financial institution may include additional information and may combine
disclosures required by other laws (such as the Truth in Lending Act (15
U.S.C. 1601 et seq.) or the Truth in Savings Act (12 U.S.C. 4301 et
seq.)) with the disclosures required by this part.
(c) Multiple accounts and account holders--(1) Multiple accounts. A
financial institution may combine the required disclosures into a single
statement for a consumer who holds more than one account at the
institution.
(2) Multiple account holders. For joint accounts held by two or more
consumers, a financial institution need provide only one set of the
required disclosures and may provide them to any of the account holders.
(d) Services offered jointly. Financial institutions that provide
electronic fund transfer services jointly may contract among themselves
to comply with the requirements that this part imposes on any or all of
them. An institution need make only the disclosures required by
Sec. Sec. 205.7 and 205.8 that are within its knowledge and within the
purview of its relationship with the consumer for whom it holds an
account.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 14532, Mar. 25,
1998; 66 FR 17793, Apr. 4, 2001; 72 FR 63456, Nov. 9, 2007; 75 FR 16613,
Apr. 1, 2010]
Sec. 205.5 Issuance of access devices.
(a) Solicited issuance. Except as provided in paragraph (b) of this
section, a financial institution may issue an access device to a
consumer only:
(1) In response to an oral or written request for the device; or
(2) As a renewal of, or in substitution for, an accepted access
device whether issued by the institution or a successor.
(b) Unsolicited issuance. A financial institution may distribute an
access device to a consumer on an unsolicited basis if the access device
is:
(1) Not validated, meaning that the institution has not yet
performed all the procedures that would enable a consumer to initiate an
electronic fund transfer using the access device;
(2) Accompanied by a clear explanation that the access device is not
validated and how the consumer may dispose of it if validation is not
desired;
(3) Accompanied by the disclosures required by Sec. 205.7, of the
consumer's rights and liabilities that will apply if the access device
is validated; and
(4) Validated only in response to the consumer's oral or written
request for validation, after the institution has verified the
consumer's identity by a reasonable means.
Sec. 205.6 Liability of consumer for unauthorized transfers.
(a) Conditions for liability. A consumer may be held liable, within
the limitations described in paragraph (b) of this
[[Page 136]]
section, for an unauthorized electronic fund transfer involving the
consumer's account only if the financial institution has provided the
disclosures required by Sec. 205.7(b)(1), (2), and (3). If the
unauthorized transfer involved an access device, it must be an accepted
access device and the financial institution must have provided a means
to identify the consumer to whom it was issued.
(b) Limitations on amount of liability. A consumer's liability for
an unauthorized electronic fund transfer or a series of related
unauthorized transfers shall be determined as follows:
(1) Timely notice given. If the consumer notifies the financial
institution within two business days after learning of the loss or theft
of the access device, the consumer's liability shall not exceed the
lesser of $50 or the amount of unauthorized transfers that occur before
notice to the financial institution.
(2) Timely notice not given. If the consumer fails to notify the
financial institution within two business days after learning of the
loss or theft of the access device, the consumer's liability shall not
exceed the lesser of $500 or the sum of:
(i) $50 or the amount of unauthorized transfers that occur within
the two business days, whichever is less; and
(ii) The amount of unauthorized transfers that occur after the close
of two business days and before notice to the institution, provided the
institution establishes that these transfers would not have occurred had
the consumer notified the institution within that two-day period.
(3) Periodic statement; timely notice not given. A consumer must
report an unauthorized electronic fund transfer that appears on a
periodic statement within 60 days of the financial institution's
transmittal of the statement to avoid liability for subsequent
transfers. If the consumer fails to do so, the consumer's liability
shall not exceed the amount of the unauthorized transfers that occur
after the close of the 60 days and before notice to the institution, and
that the institution establishes would not have occurred had the
consumer notified the institution within the 60-day period. When an
access device is involved in the unauthorized transfer, the consumer may
be liable for other amounts set forth in paragraphs (b)(1) or (b)(2) of
this section, as applicable.
(4) Extension of time limits. If the consumer's delay in notifying
the financial institution was due to extenuating circumstances, the
institution shall extend the times specified above to a reasonable
period.
(5) Notice to financial institution. (i) Notice to a financial
institution is given when a consumer takes steps reasonably necessary to
provide the institution with the pertinent information, whether or not a
particular employee or agent of the institution actually receives the
information.
(ii) The consumer may notify the institution in person, by
telephone, or in writing.
(iii) Written notice is considered given at the time the consumer
mails the notice or delivers it for transmission to the institution by
any other usual means. Notice may be considered constructively given
when the institution becomes aware of circumstances leading to the
reasonable belief that an unauthorized transfer to or from the
consumer's account has been or may be made.
(6) Liability under state law or agreement. If state law or an
agreement between the consumer and the financial institution imposes
less liability than is provided by this section, the consumer's
liability shall not exceed the amount imposed under the state law or
agreement.
Sec. 205.7 Initial disclosures.
(a) Timing of disclosures. A financial institution shall make the
disclosures required by this section at the time a consumer contracts
for an electronic fund transfer service or before the first electronic
fund transfer is made involving the consumer's account.
(b) Content of disclosures. A financial institution shall provide
the following disclosures, as applicable:
(1) Liability of consumer. A summary of the consumer's liability,
under Sec. 205.6 or under state or other applicable law or agreement,
for unauthorized electronic fund transfers.
(2) Telephone number and address. The telephone number and address
of the
[[Page 137]]
person or office to be notified when the consumer believes that an
unauthorized electronic fund transfer has been or may be made.
(3) Business days. The financial institution's business days.
(4) Types of transfers; limitations. The type of electronic fund
transfers that the consumer may make and any limitations on the
frequency and dollar amount of transfers. Details of the limitations
need not be disclosed if confidentiality is essential to maintain the
security of the electronic fund transfer system.
(5) Fees. Any fees imposed by the financial institution for
electronic fund transfers or for the right to make transfers.
(6) Documentation. A summary of the consumer's right to receipts and
periodic statements, as provided in Sec. 205.9, and notices regarding
preauthorized transfers as provided in Sec. Sec. 205.10(a), and
205.10(d).
(7) Stop payment. A summary of the consumer's right to stop payment
of a preauthorized electronic fund transfer and the procedure for
placing a stop-payment order, as provided in Sec. 205.10(c).
(8) Liability of institution. A summary of the financial
institution's liability to the consumer under section 910 of the act for
failure to make or to stop certain transfers.
(9) Confidentiality. The circumstances under which, in the ordinary
course of business, the financial institution may provide information
concerning the consumer's account to third parties.
(10) Error resolution. A notice that is substantially similar to
Model Form A-3 as set out in appendix A of this part concerning error
resolution.
(11) ATM fees. A notice that a fee may be imposed by an automated
teller machine operator as defined in Sec. 205.16(a)(1), when the
consumer initiates an electronic fund transfer or makes a balance
inquiry, and by any network used to complete the transaction.
(c) Addition of electronic fund transfer services. If an electronic
fund transfer service is added to a consumer's account and is subject to
terms and conditions different from those described in the initial
disclosures, disclosures for the new service are required.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 66 FR 13412, Mar. 6,
2001; 71 FR 1659, Jan. 10, 2006]
Sec. 205.8 Change in terms notice; error resolution notice.
(a) Change in terms notice--(1) Prior notice required. A financial
institution shall mail or deliver a written notice to the consumer, at
least 21 days before the effective date, of any change in a term or
condition required to be disclosed under Sec. 205.7(b) if the change
would result in:
(i) Increased fees for the consumer;
(ii) Increased liability for the consumer;
(iii) Fewer types of available electronic fund transfers; or
(iv) Stricter limitations on the frequency or dollar amount of
transfers.
(2) Prior notice exception. A financial institution need not give
prior notice if an immediate change in terms or conditions is necessary
to maintain or restore the security of an account or an electronic fund
transfer system. If the institution makes such a change permanent and
disclosure would not jeopardize the security of the account or system,
the institution shall notify the consumer in writing on or with the next
regularly scheduled periodic statement or within 30 days of making the
change permanent.
(b) Error resolution notice. For accounts to or from which
electronic fund transfers can be made, a financial institution shall
mail or deliver to the consumer, at least once each calendar year, an
error resolution notice substantially similar to the model form set
forth in appendix A of this part (Model Form A-3). Alternatively, an
institution may include an abbreviated notice substantially similar to
the model form error resolution notice set forth in Appendix A of this
part (Model Form A-3), on or with each periodic statement required by
Sec. 205.9(b).
[[Page 138]]
Sec. 205.9 Receipts at electronic terminals; periodic statements.
(a) Receipts at electronic terminals--General. Except as provided in
paragraph (e) of this section, a financial institution shall make a
receipt available to a consumer at the time the consumer initiates an
electronic fund transfer at an electronic terminal. The receipt shall
set forth the following information, as applicable:
(1) Amount. The amount of the transfer. A transaction fee may be
included in this amount, provided the amount of the fee is disclosed on
the receipt and displayed on or at the terminal.
(2) Date. The date the consumer initiates the transfer.
(3) Type. The type of transfer and the type of the consumer's
account(s) to or from which funds are transferred. The type of account
may be omitted if the access device used is able to access only one
account at that terminal.
(4) Identification. A number or code that identifies the consumer's
account or accounts, or the access device used to initiate the transfer.
The number or code need not exceed four digits or letters to comply with
the requirements of this paragraph (a)(4).
(5) Terminal location. The location of the terminal where the
transfer is initiated, or an identification such as a code or terminal
number. Except in limited circumstances where all terminals are located
in the same city or state, if the location is disclosed, it shall
include the city and state or foreign country and one of the following:
(i) The street address; or
(ii) A generally accepted name for the specific location; or
(iii) The name of the owner or operator of the terminal if other
than the account-holding institution.
(6) Third party transfer. The name of any third party to or from
whom funds are transferred.
(b) Periodic statements. For an account to or from which electronic
fund transfers can be made, a financial institution shall send a
periodic statement for each monthly cycle in which an electronic fund
transfer has occurred; and shall send a periodic statement at least
quarterly if no transfer has occurred. The statement shall set forth the
following information, as applicable:
(1) Transaction information. For each electronic fund transfer
occurring during the cycle:
(i) The amount of the transfer;
(ii) The date the transfer was credited or debited to the consumer's
account;
(iii) The type of transfer and type of account to or from which
funds were transferred;
(iv) For a transfer initiated by the consumer at an electronic
terminal (except for a deposit of cash or a check, draft, or similar
paper instrument), the terminal location described in paragraph (a)(5)
of this section; and
(v) The name of any third party to or from whom funds were
transferred.
(2) Account number. The number of the account.
(3) Fees. The amount of any fees assessed against the account during
the statement period for electronic fund transfers, for the right to
make transfers, or for account maintenance.
(4) Account balances. The balance in the account at the beginning
and at the close of the statement period.
(5) Address and telephone number for inquiries. The address and
telephone number to be used for inquiries or notice of errors, preceded
by ``Direct inquiries to'' or similar language. The address and
telephone number provided on an error resolution notice under Sec.
205.8(b) given on or with the statement satisfies this requirement.
(6) Telephone number for preauthorized transfers. A telephone number
the consumer may call to ascertain whether preauthorized transfers to
the consumer's account have occurred, if the financial institution uses
the telephone-notice option under
Sec. 205.10(a)(1)(iii).
(c) Exceptions to the periodic statement requirement for certain
accounts--(1) Preauthorized transfers to accounts. For accounts that may
be accessed only by preauthorized transfers to the account the following
rules apply:
(i) Passbook accounts. For passbook accounts, the financial
institution need not provide a periodic statement if the institution
updates the passbook upon presentation or enters on a separate document
the amount and date of each electronic fund transfer since the passbook
was last presented.
[[Page 139]]
(ii) Other accounts. For accounts other than passbook accounts, the
financial institution must send a periodic statement at least quarterly.
(2) Intra-institutional transfers. For an electronic fund transfer
initiated by the consumer between two accounts of the consumer in the
same institution, documenting the transfer on a periodic statement for
one of the two accounts satisfies the periodic statement requirement.
(3) Relationship between paragraphs (c)(1) and (c)(2) of this
section. An account that is accessed by preauthorized transfers to the
account described in paragraph (c)(1) of this section and by intra-
institutional transfers described in paragraph (c)(2) of this section,
but by no other type of electronic fund transfers, qualifies for the
exceptions provided by paragraph (c)(1) of this section .
(d) Documentation for foreign-initiated transfers. The failure by a
financial institution to provide a terminal receipt for an electronic
fund transfer or to document the transfer on a periodic statement does
not violate this part if:
(1) The transfer is not initiated within a state; and
(2) The financial institution treats an inquiry for clarification or
documentation as a notice of error in accordance with Sec. 205.11.
(e) Exception for receipts in small-value transfers. A financial
institution is not subject to the requirement to make available a
receipt under paragraph (a) of this section if the amount of the
transfer is $15 or less.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 72 FR 36593, July 5,
2007]
Sec. 205.10 Preauthorized transfers.
(a) Preauthorized transfers to consumer's account--(1) Notice by
financial institution. When a person initiates preauthorized electronic
fund transfers to a consumer's account at least once every 60 days, the
account-holding financial institution shall provide notice to the
consumer by:
(i) Positive notice. Providing oral or written notice of the
transfer within two business days after the transfer occurs; or
(ii) Negative notice. Providing oral or written notice, within two
business days after the date on which the transfer was scheduled to
occur, that the transfer did not occur; or
(iii) Readily-available telephone line. Providing a readily
available telephone line that the consumer may call to determine whether
the transfer occurred and disclosing the telephone number on the initial
disclosure of account terms and on each periodic statement.
(2) Notice by payor. A financial institution need not provide notice
of a transfer if the payor gives the consumer positive notice that the
transfer has been initiated.
(3) Crediting. A financial institution that receives a preauthorized
transfer of the type described in paragraph (a)(1) of this section shall
credit the amount of the transfer as of the date the funds for the
transfer are received.
(b) Written authorization for preauthorized transfers from
consumer's account. Preauthorized electronic fund transfers from a
consumer's account may be authorized only by a writing signed or
similarly authenticated by the consumer. The person that obtains the
authorization shall provide a copy to the consumer.
(c) Consumer's right to stop payment--(1) Notice. A consumer may
stop payment of a preauthorized electronic fund transfer from the
consumer's account by notifying the financial institution orally or in
writing at least three business days before the scheduled date of the
transfer.
(2) Written confirmation. The financial institution may require the
consumer to give written confirmation of a stop-payment order within 14
days of an oral notification. An institution that requires written
confirmation shall inform the consumer of the requirement and provide
the address where confirmation must be sent when the consumer gives the
oral notification. An oral stop-payment order ceases to be binding after
14 days if the consumer fails to provide the required written
confirmation.
(d) Notice of transfers varying in amount--(1) Notice. When a
preauthorized electronic fund transfer from the consumer's account will
vary in amount from the previous transfer under the same authorization
or from
[[Page 140]]
the preauthorized amount, the designated payee or the financial
institution shall send the consumer written notice of the amount and
date of the transfer at least 10 days before the scheduled date of
transfer.
(2) Range. The designated payee or the institution shall inform the
consumer of the right to receive notice of all varying transfers, but
may give the consumer the option of receiving notice only when a
transfer falls outside a specified range of amounts or only when a
transfer differs from the most recent transfer by more than an agreed-
upon amount.
(e) Compulsory use--(1) Credit. No financial institution or other
person may condition an extension of credit to a consumer on the
consumer's repayment by preauthorized electronic fund transfers, except
for credit extended under an overdraft credit plan or extended to
maintain a specified minimum balance in the consumer's account.
(2) Employment or government benefit. No financial institution or
other person may require a consumer to establish an account for receipt
of electronic fund transfers with a particular institution as a
condition of employment or receipt of a government benefit.
Sec. 205.11 Procedures for resolving errors.
(a) Definition of error--(1) Types of transfers or inquiries
covered. The term error means:
(i) An unauthorized electronic fund transfer;
(ii) An incorrect electronic fund transfer to or from the consumer's
account;
(iii) The omission of an electronic fund transfer from a periodic
statement;
(iv) A computational or bookkeeping error made by the financial
institution relating to an electronic fund transfer;
(v) The consumer's receipt of an incorrect amount of money from an
electronic terminal;
(vi) An electronic fund transfer not identified in accordance with
Sec. Sec. 205.9 or 205.10(a); or
(vii) The consumer's request for documentation required by
Sec. Sec. 205.9 or 205.10(a) or for additional information or
clarification concerning an electronic fund transfer, including a
request the consumer makes to determine whether an error exists under
paragraphs (a)(1) (i) through (vi) of this section.
(2) Types of inquiries not covered. The term error does not include:
(i) A routine inquiry about the consumer's account balance;
(ii) A request for information for tax or other recordkeeping
purposes; or
(iii) A request for duplicate copies of documentation.
(b) Notice of error from consumer--(1) Timing; contents. A financial
institution shall comply with the requirements of this section with
respect to any oral or written notice of error from the consumer that:
(i) Is received by the institution no later than 60 days after the
institution sends the periodic statement or provides the passbook
documentation, required by Sec. 205.9, on which the alleged error is
first reflected;
(ii) Enables the institution to identify the consumer's name and
account number; and
(iii) Indicates why the consumer believes an error exists and
includes to the extent possible the type, date, and amount of the error,
except for requests described in paragraph (a)(1)(vii) of this section.
(2) Written confirmation. A financial institution may require the
consumer to give written confirmation of an error within 10 business
days of an oral notice. An institution that requires written
confirmation shall inform the consumer of the requirement and provide
the address where confirmation must be sent when the consumer gives the
oral notification.
(3) Request for documentation or clarifications. When a notice of
error is based on documentation or clarification that the consumer
requested under paragraph (a)(1)(vii) of this section, the consumer's
notice of error is timely if received by the financial institution no
later than 60 days after the institution sends the information
requested.
(c) Time limits and extent of investigation--(1) Ten-day period. A
financial institution shall investigate promptly and, except as
otherwise provided in
[[Page 141]]
this paragraph (c), shall determine whether an error occurred within 10
business days of receiving a notice of error. The institution shall
report the results to the consumer within three business days after
completing its investigation. The institution shall correct the error
within one business day after determining that an error occurred.
(2) Forty-five day period. If the financial institution is unable to
complete its investigation within 10 business days, the institution may
take up to 45 days from receipt of a notice of error to investigate and
determine whether an error occurred, provided the institution does the
following:
(i) Provisionally credits the consumer's account in the amount of
the alleged error (including interest where applicable) within 10
business days of receiving the error notice. If the financial
institution has a reasonable basis for believing that an unauthorized
electronic fund transfer has occurred and the institution has satisfied
the requirements of Sec. 205.6(a), the institution may withhold a
maximum of $50 from the amount credited. An institution need not
provisionally credit the consumer's account if:
(A) The institution requires but does not receive written
confirmation within 10 business days of an oral notice of error; or
(B) The alleged error involves an account that is subject to
Regulation T (Securities Credit by Brokers and Dealers, 12 CFR part
220);
(ii) Informs the consumer, within two business days after the
provisional crediting, of the amount and date of the provisional
crediting and gives the consumer full use of the funds during the
investigation;
(iii) Corrects the error, if any, within one business day after
determining that an error occurred; and
(iv) Reports the results to the consumer within three business days
after completing its investigation (including, if applicable, notice
that a provisional credit has been made final).
(3) Extension of time periods. The time periods in paragraphs (c)(1)
and (c)(2) of this section are extended as follows:
(i) The applicable time is 20 business days in place of 10 business
days under paragraphs (c)(1) and (c)(2) of this section if the notice of
error involves an electronic fund transfer to or from the account within
30 days after the first deposit to the account was made.
(ii) The applicable time is 90 days in place of 45 days under
paragraph (c)(2) of this section, for completing an investigation, if a
notice of error involves an electronic fund transfer that:
(A) Was not initiated within a state;
(B) Resulted from a point-of-sale debit card transaction; or
(C) Occurred within 30 days after the first deposit to the account
was made.
(4) Investigation. With the exception of transfers covered by Sec.
205.14, a financial institution's review of its own records regarding an
alleged error satisfies the requirements of this section if:
(i) The alleged error concerns a transfer to or from a third party;
and
(ii) There is no agreement between the institution and the third
party for the type of electronic fund transfer involved.
(d) Procedures if financial institution determines no error or
different error occurred. In addition to following the procedures
specified in paragraph (c) of this section, the financial institution
shall follow the procedures set forth in this paragraph (d) if it
determines that no error occurred or that an error occurred in a manner
or amount different from that described by the consumer:
(1) Written explanation. The institution's report of the results of
its investigation shall include a written explanation of the
institution's findings and shall note the consumer's right to request
the documents that the institution relied on in making its
determination. Upon request, the institution shall promptly provide
copies of the documents.
(2) Debiting provisional credit. Upon debiting a provisionally
credited amount, the financial institution shall:
(i) Notify the consumer of the date and amount of the debiting;
(ii) Notify the consumer that the institution will honor checks,
drafts, or similar instruments payable to third parties and
preauthorized transfers from the consumer's account (without charge to
the consumer as a result of an overdraft) for five business days
[[Page 142]]
after the notification. The institution shall honor items as specified
in the notice, but need honor only items that it would have paid if the
provisionally credited funds had not been debited.
(e) Reassertion of error. A financial institution that has fully
complied with the error resolution requirements has no further
responsibilities under this section should the consumer later reassert
the same error, except in the case of an error asserted by the consumer
following receipt of information provided under paragraph (a)(1)(vii) of
this section.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 52118, Sept. 29,
1998]
Sec. 205.12 Relation to other laws.
(a) Relation to Truth in Lending. (1) The Electronic Fund Transfer
Act and this part govern--
(i) The addition to an accepted credit card as defined in Regulation
Z (12 CFR 226.12, comment 12-2), of the capability to initiate
electronic fund transfers;
(ii) The issuance of an access device that permits credit extensions
(under a preexisting agreement between a consumer and a financial
institution) only when the consumer's account is overdrawn or to
maintain a specified minimum balance in the consumer's account, or under
an overdraft service, as defined in Sec. 205.17(a);
(iii) The addition of an overdraft service, as defined in Sec.
205.17(a), to an accepted access device; and
(iv) A consumer's liability for an unauthorized electronic fund
transfer and the investigation of errors involving an extension of
credit that occurs under an agreement between the consumer and a
financial institution to extend credit when the consumer's account is
overdrawn or to maintain a specified minimum balance in the consumer's
account, or under an overdraft service, as defined in Sec. 205.17(a).
(2) The Truth in Lending Act and Regulation Z (12 CFR part 226),
which prohibit the unsolicited issuance of credit cards, govern--
(i) The addition of a credit feature to an accepted access device;
and
(ii) Except as provided in paragraph (a)(1)(ii) of this section, the
issuance of a credit card that is also an access device.
(b) Preemption of inconsistent state laws.--(1) Inconsistent
requirements. The Board shall determine, upon its own motion or upon the
request of a state, financial institution, or other interested party,
whether the act and this part preempt state law relating to electronic
fund transfers, or dormancy, inactivity, or service fees, or expiration
dates in the case of gift certificates, store gift cards, or general-use
prepaid cards.
(2) Standards for determination. State law is inconsistent with the
requirements of the act and this part if it:
(i) Requires or permits a practice or act prohibited by the federal
law;
(ii) Provides for consumer liability for unauthorized electronic
fund transfers that exceeds the limits imposed by the federal law;
(iii) Allows longer time periods than the federal law for
investigating and correcting alleged errors, or does not require the
financial institution to credit the consumer's account during an error
investigation in accordance with Sec. 205.11(c)(2)(i); or
(iv) Requires initial disclosures, periodic statements, or receipts
that are different in content from those required by the federal law
except to the extent that the disclosures relate to consumer rights
granted by the state law and not by the federal law.
(c) State exemptions--(1) General rule. Any state may apply for an
exemption from the requirements of the act or this part for any class of
electronic fund transfers within the state. The Board shall grant an
exemption if it determines that:
(i) Under state law the class of electronic fund transfers is
subject to requirements substantially similar to those imposed by the
federal law; and
(ii) There is adequate provision for state enforcement.
(2) Exception. To assure that the federal and state courts continue
to have concurrent jurisdiction, and to aid in implementing the act:
(i) No exemption shall extend to the civil liability provisions of
section 915 of the act; and
(ii) When the Board grants an exemption, the state law requirements
shall constitute the requirements of the federal law for purposes of
section 915 of
[[Page 143]]
the act, except for state law requirements not imposed by the federal
law.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 74 FR 59052, Nov. 17,
2009; 75 FR 16614, Apr. 1, 2010]
Sec. 205.13 Administrative enforcement; record retention.
(a) Enforcement by federal agencies. Compliance with this part is
enforced by the agencies listed in Appendix B of this part.
(b) Record retention. (1) Any person subject to the act and this
part shall retain evidence of compliance with the requirements imposed
by the act and this part for a period of not less than two years from
the date disclosures are required to be made or action is required to be
taken.
(2) Any person subject to the act and this part having actual notice
that it is the subject of an investigation or an enforcement proceeding
by its enforcement agency, or having been served with notice of an
action filed under sections 910, 915, or 916(a) of the act, shall retain
the records that pertain to the investigation, action, or proceeding
until final disposition of the matter unless an earlier time is allowed
by court or agency order.
Sec. 205.14 Electronic fund transfer service provider not holding consumer's
account.
(a) Provider of electronic fund transfer service. A person that
provides an electronic fund transfer service to a consumer but that does
not hold the consumer's account is subject to all requirements of this
part if the person:
(1) Issues a debit card (or other access device) that the consumer
can use to access the consumer's account held by a financial
institution; and
(2) Has no agreement with the account-holding institution regarding
such access.
(b) Compliance by service provider. In addition to the requirements
generally applicable under this part, the service provider shall comply
with the following special rules:
(1) Disclosures and documentation. The service provider shall give
the disclosures and documentation required by Sec. Sec. 205.7, 205.8,
and 205.9 that are within the purview of its relationship with the
consumer. The service provider need not furnish the periodic statement
required by Sec. 205.9(b) if the following conditions are met:
(i) The debit card (or other access device) issued to the consumer
bears the service provider's name and an address or telephone number for
making inquiries or giving notice of error;
(ii) The consumer receives a notice concerning use of the debit card
that is substantially similar to the notice contained in appendix A of
this part;
(iii) The consumer receives, on or with the receipts required by
Sec. 205.9(a), the address and telephone number to be used for an
inquiry, to give notice of an error, or to report the loss or theft of
the debit card;
(iv) The service provider transmits to the account-holding
institution the information specified in Sec. 205.9(b)(1), in the
format prescribed by the automated clearinghouse system used to clear
the fund transfers;
(v) The service provider extends the time period for notice of loss
or theft of a debit card, set forth in Sec. 205.6(b) (1) and (2), from
two business days to four business days after the consumer learns of the
loss or theft; and extends the time periods for reporting unauthorized
transfers or errors, set forth in Sec. Sec. 205.6(b)(3) and
205.11(b)(1)(i), from 60 days to 90 days following the transmittal of a
periodic statement by the account-holding institution.
(2) Error resolution. (i) The service provider shall extend by a
reasonable time the period in which notice of an error must be received,
specified in Sec. 205.11(b)(1)(i), if a delay resulted from an initial
attempt by the consumer to notify the account-holding institution.
(ii) The service provider shall disclose to the consumer the date on
which it initiates a transfer to effect a provisional credit in
accordance with Sec. 205.11(c)(2)(ii).
(iii) If the service provider determines an error occurred, it shall
transfer funds to or from the consumer's account, in the appropriate
amount and within the applicable time period, in accordance with Sec.
205.11(c)(2)(i).
(iv) If funds were provisionally credited and the service provider
determines no error occurred, it may reverse the credit. The service
provider shall
[[Page 144]]
notify the account-holding institution of the period during which the
account-holding institution must honor debits to the account in
accordance with Sec. 205.11(d)(2)(ii). If an overdraft results, the
service provider shall promptly reimburse the account-holding
institution in the amount of the overdraft.
(c) Compliance by account-holding institution. The account-holding
institution need not comply with the requirements of the act and this
part with respect to electronic fund transfers initiated through the
service provider except as follows:
(1) Documentation. The account-holding institution shall provide a
periodic statement that describes each electronic fund transfer
initiated by the consumer with the access device issued by the service
provider. The account-holding institution has no liability for the
failure to comply with this requirement if the service provider did not
provide the necessary information; and
(2) Error resolution. Upon request, the account-holding institution
shall provide information or copies of documents needed by the service
provider to investigate errors or to furnish copies of documents to the
consumer. The account-holding institution shall also honor debits to the
account in accordance with Sec. 205.11(d)(2)(ii).
Sec. 205.15 Electronic fund transfer of government benefits.
(a) Government agency subject to regulation. (1) A government agency
is deemed to be a financial institution for purposes of the act and this
part if directly or indirectly it issues an access device to a consumer
for use in initiating an electronic fund transfer of government benefits
from an account, other than needs-tested benefits in a program
established under state or local law or administered by a state or local
agency. The agency shall comply with all applicable requirements of the
act and this part, except as provided in this section.
(2) For purposes of this section, the term account means an account
established by a government agency for distributing government benefits
to a consumer electronically, such as through automated teller machines
or point-of-sale terminals, but does not include an account for
distributing needs-tested benefits in a program established under state
or local law or administered by a state or local agency.
(b) Issuance of access devices. For purposes of this section, a
consumer is deemed to request an access device when the consumer applies
for government benefits that the agency disburses or will disburse by
means of an electronic fund transfer. The agency shall verify the
identity of the consumer receiving the device by reasonable means before
the device is activated.
(c) Alternative to periodic statement. A government agency need not
furnish the periodic statement required by Sec. 205.9(b) if the agency
makes available to the consumer:
(1) The consumer's account balance, through a readily available
telephone line and at a terminal (such as by providing balance
information at a balance-inquiry terminal or providing it, routinely or
upon request, on a terminal receipt at the time of an electronic fund
transfer); and
(2) A written history of the consumer's account transactions that is
provided promptly in response to an oral or written request and that
covers at least 60 days preceding the date of a request by the consumer.
(d) Modified requirements. A government agency that does not furnish
periodic statements, in accordance with paragraph (c) of this section,
shall comply with the following special rules:
(1) Initial disclosures. The agency shall modify the disclosures
under Sec. 205.7(b) by disclosing:
(i) Account balance. The means by which the consumer may obtain
information concerning the account balance, including a telephone
number. The agency provides a notice substantially similar to the notice
contained in paragraph A-5 in appendix A of this part.
(ii) Written account history. A summary of the consumer's right to
receive a written account history upon request, in place of the periodic
statement required by Sec. 205.7(b)(6), and the telephone number to
call to request an account history. This disclosure may
[[Page 145]]
be made by providing a notice substantially similar to the notice
contained in paragraph A-5 in appendix A of this part.
(iii) Error resolution. A notice concerning error resolution that is
substantially similar to the notice contained in paragraph A-5 in
appendix A of this part, in place of the notice required by Sec.
205.7(b)(10).
(2) Annual error resolution notice. The agency shall provide an
annual notice concerning error resolution that is substantially similar
to the notice contained in paragraph A-5 in appendix A, in place of the
notice required by Sec. 205.8(b).
(3) Limitations on liability. For purposes of Sec. 205.6(b)(3),
regarding a 60-day period for reporting any unauthorized transfer that
appears on a periodic statement, the 60-day period shall begin with
transmittal of a written account history or other account information
provided to the consumer under paragraph (c) of this section.
(4) Error resolution. The agency shall comply with the requirements
of Sec. 205.11 in response to an oral or written notice of an error
from the consumer that is received no later than 60 days after the
consumer obtains the written account history or other account
information, under paragraph (c) of this section, in which the error is
first reflected.
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 62 FR 43469, Aug. 14,
1997]
Sec. 205.16 Disclosures at automated teller machines.
(a) Definition. Automated teller machine operator means any person
that operates an automated teller machine at which a consumer initiates
an electronic fund transfer or a balance inquiry and that does not hold
the account to or from which the transfer is made, or about which an
inquiry is made.
(b) General. An automated teller machine operator that imposes a fee
on a consumer for initiating an electronic fund transfer or a balance
inquiry shall:
(1) Provide notice that a fee will be imposed for providing
electronic fund transfer services or a balance inquiry; and
(2) Disclose the amount of the fee.
(c) Notice requirement. To meet the requirements of paragraph (b) of
this section, an automated teller machine operator must comply with the
following:
(1) On the machine. Post in a prominent and conspicuous location on
or at the automated teller machine a notice that:
(i) A fee will be imposed for providing electronic fund transfer
services or for a balance inquiry; or
(ii) A fee may be imposed for providing electronic fund transfer
services or for a balance inquiry, but the notice in this paragraph
(c)(1)(ii) may be substituted for the notice in paragraph (c)(1)(i) only
if there are circumstances under which a fee will not be imposed for
such services; and
(2) Screen or paper notice. Provide the notice required by
paragraphs (b)(1) and (b)(2) of this section either by showing it on the
screen of the automated teller machine or by providing it on paper,
before the consumer is committed to paying a fee.
(d) Temporary exemption. Through December 31, 2004, the notice
requirement in paragraph (c)(2) of this section does not apply to any
automated teller machine that lacks the technical capability to provide
such information.
(e) Imposition of fee. An automated teller machine operator may
impose a fee on a consumer for initiating an electronic fund transfer or
a balance inquiry only if
(1) The consumer is provided the notices required under paragraph
(c) of this section, and
(2) The consumer elects to continue the transaction or inquiry after
receiving such notices.
[Reg. E, 66 FR 13412, Mar. 6, 2001, as amended at 71 FR 1659, Jan. 10,
2006]
Sec. 205.17 Requirements for overdraft services.
(a) Definition. For purposes of this section, the term ``overdraft
service'' means a service under which a financial institution assesses a
fee or charge on a consumer's account held by the institution for paying
a transaction (including a check or other item) when the consumer has
insufficient or unavailable funds in the account. The
[[Page 146]]
term ``overdraft service'' does not include any payment of overdrafts
pursuant to--
(1) A line of credit subject to the Federal Reserve Board's
Regulation Z (12 CFR part 226), including transfers from a credit card
account, home equity line of credit, or overdraft line of credit;
(2) A service that transfers funds from another account held
individually or jointly by a consumer, such as a savings account; or
(3) A line of credit or other transaction exempt from the Federal
Reserve Board's Regulation Z (12 CFR part 226) pursuant to 12 CFR
226.3(d).
(b) Opt-in requirement. (1) General. Except as provided under
paragraph (c) of this section, a financial institution holding a
consumer's account shall not assess a fee or charge on a consumer's
account for paying an ATM or one-time debit card transaction pursuant to
the institution's overdraft service, unless the institution:
(i) Provides the consumer with a notice in writing, or if the
consumer agrees, electronically, segregated from all other information,
describing the institution's overdraft service;
(ii) Provides a reasonable opportunity for the consumer to
affirmatively consent, or opt in, to the service for ATM and one-time
debit card transactions;
(iii) Obtains the consumer's affirmative consent, or opt-in, to the
institution's payment of ATM or one-time debit card transactions; and
(iv) Provides the consumer with confirmation of the consumer's
consent in writing, or if the consumer agrees, electronically, which
includes a statement informing the consumer of the right to revoke such
consent.
(2) Conditioning payment of other overdrafts on consumer's
affirmative consent. A financial institution shall not:
(i) Condition the payment of any overdrafts for checks, ACH
transactions, and other types of transactions on the consumer
affirmatively consenting to the institution's payment of ATM and one-
time debit card transactions pursuant to the institution's overdraft
service; or
(ii) Decline to pay checks, ACH transactions, and other types of
transactions that overdraw the consumer's account because the consumer
has not affirmatively consented to the institution's overdraft service
for ATM and one-time debit card transactions.
(3) Same account terms, conditions, and features. A financial
institution shall provide to consumers who do not affirmatively consent
to the institution's overdraft service for ATM and one-time debit card
transactions the same account terms, conditions, and features that it
provides to consumers who affirmatively consent, except for the
overdraft service for ATM and one-time debit card transactions.
(c) Timing--(1) Existing account holders. For accounts opened prior
to July 1, 2010, the financial institution must not assess any fees or
charges on a consumer's account on or after August 15, 2010 for paying
an ATM or one-time debit card transaction pursuant to the overdraft
service, unless the institution has complied with Sec. 205.17(b)(1) and
obtained the consumer's affirmative consent.
(2) New account holders. For accounts opened on or after July 1,
2010, the financial institution must comply with Sec. 205.17(b)(1) and
obtain the consumer's affirmative consent before the institution
assesses any fee or charge on the consumer's account for paying an ATM
or one-time debit card transaction pursuant to the institution's
overdraft service.
(d) Content and format. The notice required by paragraph (b)(1)(i)
of this section shall be substantially similar to Model Form A-9 set
forth in Appendix A of this part, include all applicable items in this
paragraph, and may not contain any information not specified in or
otherwise permitted by this paragraph.
(1) Overdraft service. A brief description of the financial
institution's overdraft service and the types of transactions for which
a fee or charge for paying an overdraft may be imposed, including ATM
and one-time debit card transactions.
(2) Fees imposed. The dollar amount of any fees or charges assessed
by the financial institution for paying an ATM or one-time debit card
transaction pursuant to the institution's overdraft service, including
any daily or other overdraft fees. If the amount of the fee
[[Page 147]]
is determined on the basis of the number of times the consumer has
overdrawn the account, the amount of the overdraft, or other factors,
the institution must disclose the maximum fee that may be imposed.
(3) Limits on fees charged. The maximum number of overdraft fees or
charges that may be assessed per day, or, if applicable, that there is
no limit.
(4) Disclosure of opt-in right. An explanation of the consumer's
right to affirmatively consent to the financial institution's payment of
overdrafts for ATM and one-time debit card transactions pursuant to the
institution's overdraft service, including the methods by which the
consumer may consent to the service; and
(5) Alternative plans for covering overdrafts. If the institution
offers a line of credit subject to the Board's Regulation Z (12 CFR part
226) or a service that transfers funds from another account of the
consumer held at the institution to cover overdrafts, the institution
must state that fact. An institution may, but is not required to, list
additional alternatives for the payment of overdrafts.
(6) Permitted modifications and additional content. If applicable,
the institution may modify the content required by Sec. 205.17(d) to
indicate that the consumer has the right to opt into, or opt out of, the
payment of overdrafts under the institution's overdraft service for
other types of transactions, such as checks, ACH transactions, or
automatic bill payments; to provide a means for the consumer to exercise
this choice; and to disclose the associated returned item fee and that
additional merchant fees may apply. The institution may also disclose
the consumer's right to revoke consent. For notices provided to
consumers who have opened accounts prior to July 1, 2010, the financial
institution may describe the institution's overdraft service with
respect to ATM and one-time debit card transactions with a statement
such as ``After August 15, 2010, we will not authorize and pay
overdrafts for the following types of transactions unless you ask us to
(see below).''
(e) Joint relationships. If two or more consumers jointly hold an
account, the financial institution shall treat the affirmative consent
of any of the joint consumers as affirmative consent for that account.
Similarly, the financial institution shall treat a revocation of
affirmative consent by any of the joint consumers as revocation of
consent for that account.
(f) Continuing right to opt in or to revoke the opt-in. A consumer
may affirmatively consent to the financial institution's overdraft
service at any time in the manner described in the notice required by
paragraph (b)(1)(i) of this section. A consumer may also revoke consent
at any time in the manner made available to the consumer for providing
consent. A financial institution must implement a consumer's revocation
of consent as soon as reasonably practicable.
(g) Duration and revocation of opt-in. A consumer's affirmative
consent to the institution's overdraft service is effective until
revoked by the consumer, or unless the financial institution terminates
the service.
[Reg. E, 74 FR 59052, Nov. 17, 2009, as amended at 75 FR 31671, June 4,
2010]
Sec. 205.18 Requirements for financial institutions offering payroll card
accounts.
(a) Coverage. A financial institution shall comply with all
applicable requirements of the act and this part with respect to payroll
card accounts except as provided in this section.
(b) Alternative to periodic statements. (1) A financial institution
need not furnish periodic statements required by Sec. 205.9(b) if the
institution makes available to the consumer--
(i) The consumer's account balance, through a readily available
telephone line;
(ii) An electronic history of the consumer's account transactions,
such as through an Internet Web site, that covers at least 60 days
preceding the date the consumer electronically accesses the account; and
(iii) A written history of the consumer's account transactions that
is provided promptly in response to an oral or written request and that
covers at least 60 days preceding the date the financial institution
receives the consumer's request.
[[Page 148]]
(2) The history of account transactions provided under paragraphs
(b)(1)(ii) and (iii) of this section must include the information set
forth in Sec. 205.9(b).
(c) Modified requirements. A financial institution that provides
information under paragraph (b) of this section, shall comply with the
following:
(1) Initial disclosures. The financial institution shall modify the
disclosures under Sec. 205.7(b) by disclosing--
(i) Account information. A telephone number that the consumer may
call to obtain the account balance, the means by which the consumer can
obtain an electronic account history, such as the address of an Internet
Web site, and a summary of the consumer's right to receive a written
account history upon request (in place of the summary of the right to
receive a periodic statement required by Sec. 205.7(b)(6)), including a
telephone number to call to request a history. The disclosure required
by this paragraph (c)(1)(i) may be made by providing a notice
substantially similar to the notice contained in paragraph A-7(a) in
appendix A of this part.
(ii) Error resolution. A notice concerning error resolution that is
substantially similar to the notice contained in paragraph A-7(b) in
appendix A of this part, in place of the notice required by Sec.
205.7(b)(10).
(2) Annual error resolution notice. The financial institution shall
provide an annual notice concerning error resolution that is
substantially similar to the notice contained in paragraph A-7(b) in
appendix A of this part, in place of the notice required by Sec.
205.8(b). Alternatively, a financial institution may include on or with
each electronic and written history provided in accordance with Sec.
205.18(b)(1), a notice substantially similar to the abbreviated notice
for periodic statements contained in paragraph A-3(b) in appendix A of
this part, modified as necessary to reflect the error resolution
provisions set forth in this section.
(3) Limitations on liability. (i) For purposes of Sec. 205.6(b)(3),
the 60-day period for reporting any unauthorized transfer shall begin on
the earlier of:
(A) The date the consumer electronically accesses the consumer's
account under paragraph (b)(1)(ii) of this section, provided that the
electronic history made available to the consumer reflects the transfer;
or
(B) The date the financial institution sends a written history of
the consumer's account transactions requested by the consumer under
paragraph (b)(1)(iii) of this section in which the unauthorized transfer
is first reflected.
(ii) A financial institution may comply with paragraph (c)(3)(i) of
this section by limiting the consumer's liability for an unauthorized
transfer as provided under Sec. 205.6(b)(3) for any transfer reported
by the consumer within 120 days after the transfer was credited or
debited to the consumer's account.
(4) Error resolution. (i) The financial institution shall comply
with the requirements of Sec. 205.11 in response to an oral or written
notice of an error from the consumer that is received by the earlier
of--
(A) Sixty days after the date the consumer electronically accesses
the consumer's account under paragraph (b)(1)(ii) of this section,
provided that the electronic history made available to the consumer
reflects the alleged error; or
(B) Sixty days after the date the financial institution sends a
written history of the consumer's account transactions requested by the
consumer under paragraph (b)(1)(iii) of this section in which the
alleged error is first reflected.
(ii) In lieu of following the procedures in paragraph (c)(4)(i) of
this section, a financial institution complies with the requirements for
resolving errors in Sec. 205.11 if it investigates any oral or written
notice of an error from the consumer that is received by the institution
within 120 days after the transfer allegedly in error was credited or
debited to the consumer's account.
[Reg. E, 71 FR 51449, Aug. 30, 2006]
Sec. 205.20 Requirements for gift cards and gift certificates.
(a) Definitions. For purposes of this section, except as excluded
under paragraph (b), the following definitions apply:
(1) Gift certificate means a card, code, or other device that is:
[[Page 149]]
(i) Issued on a prepaid basis primarily for personal, family, or
household purposes to a consumer in a specified amount that may not be
increased or reloaded in exchange for payment; and
(ii) Redeemable upon presentation at a single merchant or an
affiliated group of merchants for goods or services.
(2) Store gift card means a card, code, or other device that is:
(i) Issued on a prepaid basis primarily for personal, family, or
household purposes to a consumer in a specified amount, whether or not
that amount may be increased or reloaded, in exchange for payment; and
(ii) Redeemable upon presentation at a single merchant or an
affiliated group of merchants for goods or services.
(3) General-use prepaid card means a card, code, or other device
that is:
(i) Issued on a prepaid basis primarily for personal, family, or
household purposes to a consumer in a specified amount, whether or not
that amount may be increased or reloaded, in exchange for payment; and
(ii) Redeemable upon presentation at multiple, unaffiliated
merchants for goods or services, or usable at automated teller machines.
(4) Loyalty, award, or promotional gift card means a card, code, or
other device that:
(i) Is issued on a prepaid basis primarily for personal, family, or
household purposes to a consumer in connection with a loyalty, award, or
promotional program;
(ii) Is redeemable upon presentation at one or more merchants for
goods or services, or usable at automated teller machines; and
(iii) Sets forth the following disclosures, as applicable:
(A) A statement indicating that the card, code, or other device is
issued for loyalty, award, or promotional purposes, which must be
included on the front of the card, code, or other device;
(B) The expiration date for the underlying funds, which must be
included on the front of the card, code, or other device;
(C) The amount of any fees that may be imposed in connection with
the card, code, or other device, and the conditions under which they may
be imposed, which must be provided on or with the card, code, or other
device; and
(D) A toll-free telephone number and, if one is maintained, a Web
site, that a consumer may use to obtain fee information, which must be
included on the card, code, or other device.
(5) Dormancy or inactivity fee. The terms ``dormancy fee'' and
``inactivity fee'' mean a fee for non-use of or inactivity on a gift
certificate, store gift card, or general-use prepaid card.
(6) Service fee. The term ``service fee'' means a periodic fee for
holding or use of a gift certificate, store gift card, or general-use
prepaid card. A periodic fee includes any fee that may be imposed on a
gift certificate, store gift card, or general-use prepaid card from time
to time for holding or using the certificate or card.
(7) Activity. The term ``activity'' means any action that results in
an increase or decrease of the funds underlying a certificate or card,
other than the imposition of a fee, or an adjustment due to an error or
a reversal of a prior transaction.
(b) Exclusions. The terms ``gift certificate,'' ``store gift card,''
and ``general-use prepaid card'', as defined in paragraph (a) of this
section, do not include any card, code, or other device that is:
(1) Useable solely for telephone services;
(2) Reloadable and not marketed or labeled as a gift card or gift
certificate. For purposes of this paragraph (b)(2), the term
``reloadable'' includes a temporary non-reloadable card issued solely in
connection with a reloadable card, code, or other device;
(3) A loyalty, award, or promotional gift card;
(4) Not marketed to the general public;
(5) Issued in paper form only; or
(6) Redeemable solely for admission to events or venues at a
particular location or group of affiliated locations, or to obtain goods
or services in conjunction with admission to such events or venues, at
the event or venue or at specific locations affiliated with and in
geographic proximity to the event or venue.
[[Page 150]]
(c) Form of disclosures--(1) Clear and conspicuous. Disclosures made
under this section must be clear and conspicuous. The disclosures may
contain commonly accepted or readily understandable abbreviations or
symbols.
(2) Format. Disclosures made under this section generally must be
provided to the consumer in written or electronic form. Except for the
disclosures in paragraphs (c)(3) and (h)(2), written and electronic
disclosures made under this section must be in a retainable form. Only
disclosures provided under paragraphs (c)(3) and (h)(2) of this section
may be given orally.
(3) Disclosures prior to purchase. Before a gift certificate, store
gift card, or general-use prepaid card is purchased, a person that
issues or sells such certificate or card must disclose to the consumer
the information required by paragraphs (d)(2), (e)(3), and (f)(1) of
this section. The fees and terms and conditions of expiration that are
required to be disclosed prior to purchase may not be changed after
purchase.
(4) Disclosures on the certificate or card. Disclosures required by
paragraphs (a)(4)(iii), (d)(2), (e)(3), and (f)(2) of this section must
be made on the certificate or card, or in the case of a loyalty, award,
or promotional gift card, on the card, code, or other device. A
disclosure made in an accompanying terms and conditions document, on
packaging surrounding a certificate or card, or on a sticker or other
label affixed to the certificate or card does not constitute a
disclosure on the certificate or card. For an electronic certificate or
card, disclosures must be provided electronically on the certificate or
card provided to the consumer. An issuer that provides a code or
confirmation to a consumer orally must provide to the consumer a written
or electronic copy of the code or confirmation promptly, and the
applicable disclosures must be provided on the written copy of the code
or confirmation.
(d) Prohibition on imposition of fees or charges. No person may
impose a dormancy, inactivity, or service fee with respect to a gift
certificate, store gift card, or general-use prepaid card, unless:
(1) There has been no activity with respect to the certificate or
card, in the one-year period ending on the date on which the fee is
imposed;
(2) The following are stated, as applicable, clearly and
conspicuously on the gift certificate, store gift card, or general-use
prepaid card:
(i) The amount of any dormancy, inactivity, or service fee that may
be charged;
(ii) How often such fee may be assessed; and
(iii) That such fee may be assessed for inactivity; and
(3) Not more than one dormancy, inactivity, or service fee is
imposed in any given calendar month.
(e) Prohibition on sale of gift certificates or cards with
expiration dates. No person may sell or issue a gift certificate, store
gift card, or general-use prepaid card with an expiration date, unless:
(1) The person has established policies and procedures to provide
consumers with a reasonable opportunity to purchase a certificate or
card with at least five years remaining until the certificate or card
expiration date;
(2) The expiration date for the underlying funds is at least the
later of:
(i) Five years after the date the gift certificate was initially
issued, or the date on which funds were last loaded to a store gift card
or general-use prepaid card; or
(ii) The certificate or card expiration date, if any;
(3) The following disclosures are provided on the certificate or
card, as applicable:
(i) The expiration date for the underlying funds or, if the
underlying funds do not expire, that fact;
(ii) A toll-free telephone number and, if one is maintained, a Web
site that a consumer may use to obtain a replacement certificate or card
after the certificate or card expires if the underlying funds may be
available; and
(iii) Except where a non-reloadable certificate or card bears an
expiration date that is at least seven years from the date of
manufacture, a statement, disclosed with equal prominence and in close
proximity to the certificate or card expiration date, that:
[[Page 151]]
(A) The certificate or card expires, but the underlying funds either
do not expire or expire later than the certificate or card, and;
(B) The consumer may contact the issuer for a replacement card; and
(4) No fee or charge is imposed on the cardholder for replacing the
gift certificate, store gift card, or general-use prepaid card or for
providing the certificate or card holder with the remaining balance in
some other manner prior to the funds expiration date, unless such
certificate or card has been lost or stolen.
(f) Additional disclosure requirements for gift certificates or
cards. The following disclosures must be provided in connection with a
gift certificate, store gift card, or general-use prepaid card, as
applicable:
(1) Fee disclosures. For each type of fee that may be imposed in
connection with the certificate or card (other than a dormancy,
inactivity, or service fee subject to the disclosure requirements under
paragraph (d)(2) of this section), the following information must be
provided on or with the certificate or card:
(i) The type of fee;
(ii) The amount of the fee (or an explanation of how the fee will be
determined); and
(iii) The conditions under which the fee may be imposed.
(2) Telephone number for fee information. A toll-free telephone
number and, if one is maintained, a Web site, that a consumer may use to
obtain information about fees described in paragraphs (d)(2) and (f)(1)
of this section must be disclosed on the certificate or card.
(g) Compliance dates.--(1) Effective date for gift certificates,
store gift cards, and general-use prepaid cards. Except as provided in
paragraph (h), the requirements of this section apply to any gift
certificate, store gift card, or general-use prepaid card sold to a
consumer on or after August 22, 2010, or provided to a consumer as a
replacement for such certificate or card.
(2) Effective date for loyalty, award, or promotional gift cards.
The requirements in paragraph (a)(4)(iii) apply to any card, code, or
other device provided to a consumer in connection with a loyalty, award,
or promotional program if the period of eligibility for such program
began on or after August 22, 2010.
(h) Temporary exemption. (1) Delayed effective date. For any gift
certificate, store gift card, or general-use prepaid card produced prior
to April 1, 2010, the effective date of the requirements of paragraphs
(c)(3), (d)(2), (e)(1), (e)(3), and (f) of this section is January 31,
2011, provided that an issuer of such certificate or card:
(i) Complies with all other provisions of this section;
(ii) Does not impose an expiration date with respect to the funds
underlying such certificate or card;
(iii) At the consumer's request, replaces such certificate or card
if it has funds remaining at no cost to the consumer; and
(iv) Satisfies the requirements of paragraph (h)(2) of this section.
(2) Additional disclosures. Issuers relying on the delayed effective
date in Sec. 205.20(h)(1) must disclose through in-store signage,
messages during customer service calls, Web sites, and general
advertising, that:
(i) The underlying funds of such certificate or card do not expire;
(ii) Consumers holding such certificate or card have a right to a
free replacement certificate or card, which must be accompanied by the
packaging and materials typically associated with such certificate or
card; and
(iii) Any dormancy, inactivity, or service fee for such certificate
or card that might otherwise be charged will not be charged if such fees
do not comply with Section 915 of the Electronic Fund Transfer Act.
(3) Expiration of additional disclosure requirements. The
disclosures in paragraph (h)(2) of this section:
(i) Are not required to be provided on or after January 31, 2011,
with respect to in-store signage and general advertising.
(ii) Are not required to be provided on or after January 31, 2013,
with respect to messages during customer service calls and Web sites.
[Reg. E, 75 FR 16614, Apr. 1, 2010, as amended at 75 FR 50687, Aug. 17,
2010; 75 FR 66648, Oct. 29, 2010]
[[Page 152]]
Sec. Appendix A to Part 205--Model Disclosure Clauses and Forms
Table of Contents
A-1--Model Clauses for unsolicited issuance (Sec. 205.5(b)(2))
A-2--Model clauses for initial disclosures (Sec. 205.7(b))
A-3--Model forms for error resolution notice (Sec. Sec. 205.7(b)(10)
and 205.8(b))
A-4--Model form for service-providing institutions (Sec.
205.14(b)(1)(ii))
A-5--Model forms for government agencies (Sec. 205.15(d)(1) and (2))
A-9 Model Consent Form for Overdraft Services (Sec. 205.17)
A-1--Model Clauses For Unsolicited Issuance (Sec. 205.5(b)(2))
(a) Accounts using cards. You cannot use the enclosed card to
transfer money into or out of your account until we have validated it.
If you do not want to use the card, please (destroy it at once by
cutting it in half).
[Financial institution may add validation instructions here.]
(b) Accounts using codes. You cannot use the enclosed code to
transfer money into or out of your account until we have validated it.
If you do not want to use the code, please (destroy this notice at
once).
[Financial institution may add validation instructions here.]
A-2--Model Clauses For Initial Disclosures (Sec. 205.7(b))
(a) Consumer Liability (Sec. 205.7(b)(1)).
(Tell us AT ONCE if you believe your [card] [code] has been lost or
stolen, or if you believe that an electronic fund transfer has been made
without your permission using information from your check. Telephoning
is the best way of keeping your possible losses down. You could lose all
the money in your account (plus your maximum overdraft line of credit).
If you tell us within 2 business days after you learn of the loss or
theft of your [card] [code], you can lose no more than $50 if someone
used your [card][code] without your permission.)
If you do NOT tell us within 2 business days after you learn of the
loss or theft of your [card] [code], and we can prove we could have
stopped someone from using your [card] [code] without your permission if
you had told us, you could lose as much as $500.
Also, if your statement shows transfers that you did not make,
including those made by card, code or other means, tell us at once. If
you do not tell us within 60 days after the statement was mailed to you,
you may not get back any money you lost after the 60 days if we can
prove that we could have stopped someone from taking the money if you
had told us in time. If a good reason (such as a long trip or a hospital
stay) kept you from telling us, we will extend the time periods.
(b) Contact in event of unauthorized transfer (Sec. 205.7(b)(2)).
If you believe your [card] [code] has been lost or stolen, call:
[Telephone number] or write: [Name of person or office to be notified]
[Address]
You should also call the number or write to the address listed above
if you believe a transfer has been made using the information from your
check without your permission.
(c) Business days (Sec. 205.7(b)(3)). For purposes of these
disclosures, our business days are (Monday through Friday) (Monday
through Saturday) (any day including Saturdays and Sundays). Holidays
are (not) included.
(d) Transfer types and limitations (Sec. 205.7(b)(4))--(1) Account
access. You may use your [card][code] to:
(i) Withdraw cash from your [checking] [or] [savings] account.
(ii) Make deposits to your [checking] [or] [savings] account.
(iii) Transfer funds between your checking and savings accounts
whenever you request.
(iv) Pay for purchases at places that have agreed to accept the
[card] [code].
(v) Pay bills directly [by telephone] from your [checking] [or]
[savings] account in the amounts and on the days you request.
Some of these services may not be available at all terminals.
(2) Electronic check conversion. You may authorize a merchant or
other payee to make a one-time electronic payment from your checking
account using information from your check to:
(i) Pay for purchases.
(ii) Pay bills.
(3) Limitations on frequency of transfers--(i) You may make only
[insert number, e.g., 3] cash withdrawals from our terminals each
[insert time period, e.g., week].
(ii) You can use your telephone bill-payment service to pay [insert
number] bills each [insert time period] [telephone call].
(iii) You can use our point-of-sale transfer service for [insert
number] transactions each [insert time period].
(iv) For security reasons, there are limits on the number of
transfers you can make using our [terminals] [telephone bill-payment
service] [point-of-sale transfer service].
(4) Limitations on dollar amounts of transfers--(i) You may withdraw
up to [insert dollar amount] from our terminals each [insert time
period] time you use the [card] [code].
(ii) You may buy up to [insert dollar amount] worth of goods or
services each [insert time period] time you use the [card] [code] in our
point-of-sale transfer service.
(e) Fees (Sec. 205.7(b)(5))--(1) Per transfer charge. We will
charge you [insert dollar amount] for each transfer you make using our
[automated teller machines] [telephone
[[Page 153]]
bill-payment service] [point-of-sale transfer service].
(2) Fixed charge. We will charge you [insert dollar amount] each
[insert time period] for our [automated teller machine service]
[telephone bill-payment service] [point-of-sale transfer service].
(3) Average or minimum balance charge. We will only charge you for
using our [automated teller machines] [telephone bill-payment service]
[point-of-sale transfer service] if the [average] [minimum] balance in
your [checking account] [savings account] [accounts] falls below [insert
dollar amount]. If it does, we will charge you [insert dollar amount]
each [transfer] [insert time period].
(f) Confidentiality (Sec. 205.7(b)(9)). We will disclose
information to third parties about your account or the transfers you
make:
(i) Where it is necessary for completing transfers, or
(ii) In order to verify the existence and condition of your account
for a third party, such as a credit bureau or merchant, or
(iii) In order to comply with government agency or court orders, or
(iv) If you give us your written permission.
(g) Documentation (Sec. 205.7(b)(6))--(1) Terminal transfers. You
can get a receipt at the time you make any transfer to or from your
account using one of our [automated teller machines] [or] [point-of-sale
terminals].
(2) Preauthorized credits. If you have arranged to have direct
deposits made to your account at least once every 60 days from the same
person or company, (we will let you know if the deposit is [not] made.)
[the person or company making the deposit will tell you every time they
send us the money] [you can call us at (insert telephone number) to find
out whether or not the deposit has been made].
(3) Periodic statements. You will get a [monthly] [quarterly]
account statement (unless there are no transfers in a particular month.
In any case you will get the statement at least quarterly).
(4) Passbook account where the only possible electronic fund
transfers are preauthorized credits. If you bring your passbook to us,
we will record any electronic deposits that were made to your account
since the last time you brought in your passbook.
(h) Preauthorized payments (Sec. 205.7(b) (6), (7) and (8); Sec.
205.10(d))--(1) Right to stop payment and procedure for doing so. If you
have told us in advance to make regular payments out of your account,
you can stop any of these payments. Here's how:
Call us at [insert telephone number], or write us at [insert
address], in time for us to receive your request 3 business days or more
before the payment is scheduled to be made. If you call, we may also
require you to put your request in writing and get it to us within 14
days after you call. (We will charge you [insert amount] for each stop-
payment order you give.)
(2) Notice of varying amounts. If these regular payments may vary in
amount, [we] [the person you are going to pay] will tell you, 10 days
before each payment, when it will be made and how much it will be. (You
may choose instead to get this notice only when the payment would differ
by more than a certain amount from the previous payment, or when the
amount would fall outside certain limits that you set.)
(3) Liability for failure to stop payment of preauthorized transfer.
If you order us to stop one of these payments 3 business days or more
before the transfer is scheduled, and we do not do so, we will be liable
for your losses or damages.
(i) Financial institution's liability (Sec. 205.7(b)(8)). If we do
not complete a transfer to or from your account on time or in the
correct amount according to our agreement with you, we will be liable
for your losses or damages. However, there are some exceptions. We will
not be liable, for instance:
(1) If, through no fault of ours, you do not have enough money in
your account to make the transfer.
(2) If the transfer would go over the credit limit on your overdraft
line.
(3) If the automated teller machine where you are making the
transfer does not have enough cash.
(4) If the [terminal] [system] was not working properly and you knew
about the breakdown when you started the transfer.
(5) If circumstances beyond our control (such as fire or flood)
prevent the transfer, despite reasonable precautions that we have taken.
(6) There may be other exceptions stated in our agreement with you.
(j) ATM fees (Sec. 205.7(b)(11)). When you use an ATM not owned by
us, you may be charged a fee by the ATM operator [or any network used]
(and you may be charged a fee for a balance inquiry even if you do not
complete a fund transfer).
A-3--Model Forms For Error Resolution Notice (Sec. Sec. 205.7(b)(10)
and 205.8(b))
(a) Initial and annual error resolution notice (Sec. Sec.
205.7(b)(10) and 205.8(b)).
In Case of Errors or Questions About Your Electronic Transfers
Telephone us at [insert telephone number] Write us at [insert address]
[or E-mail us at [insert electronic mail address]] as soon as you can,
if you think your statement or receipt is wrong or if you need more
information about a transfer listed on the statement or receipt. We must
hear from you no later than 60 days after we sent the FIRST statement on
which the problem or error appeared.
(1) Tell us your name and account number (if any).
[[Page 154]]
(2) Describe the error or the transfer you are unsure about, and
explain as clearly as you can why you believe it is an error or why you
need more information.
(3) Tell us the dollar amount of the suspected error.
If you tell us orally, we may require that you send us your
complaint or question in writing within 10 business days.
We will determine whether an error occurred within 10 business days
after we hear from you and will correct any error promptly. If we need
more time, however, we may take up to 45 days to investigate your
complaint or question. If we decide to do this, we will credit your
account within 10 business days for the amount you think is in error, so
that you will have the use of the money during the time it takes us to
complete our investigation. If we ask you to put your complaint or
question in writing and we do not receive it within 10 business days, we
may not credit your account.
For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your
complaint or question. For new accounts, we may take up to 20 business
days to credit your account for the amount you think is in error.
We will tell you the results within three business days after
completing our investigation. If we decide that there was no error, we
will send you a written explanation. You may ask for copies of the
documents that we used in our investigation.
(b) Error resolution notice on periodic statements (Sec. 205.8(b)).
In Case of Errors or Questions About Your Electronic Transfers
Telephone us at [insert telephone number] or Write us at [insert
address] as soon as you can, if you think your statement or receipt is
wrong or if you need more information about a transfer on the statement
or receipt. We must hear from you no later than 60 days after we sent
you the FIRST statement on which the error or problem appeared.
(1) Tell us your name and account number (if any).
(2) Describe the error or the transfer you are unsure about, and
explain as clearly as you can why you believe it is an error or why you
need more information.
(3) Tell us the dollar amount of the suspected error.
We will investigate your complaint and will correct any error
promptly. If we take more than 10 business days to do this, we will
credit your account for the amount you think is in error, so that you
will have the use of the money during the time it takes us to complete
our investigation.
A-4--Model Form For Service-providing Institutions (Sec.
205.14(b)(1)(ii))
ALL QUESTIONS ABOUT TRANSACTIONS MADE WITH YOUR (NAME OF CARD) CARD
MUST BE DIRECTED TO US (NAME OF SERVICE PROVIDER), AND NOT TO THE BANK
OR OTHER FINANCIAL INSTITUTION WHERE YOU HAVE YOUR ACCOUNT. We are
responsible for the [name of service] service and for resolving any
errors in transactions made with your [name of card] card.
We will not send you a periodic statement listing transactions that
you make using your [name of card] card. The transactions will appear
only on the statement issued by your bank or other financial
institution. SAVE THE RECEIPTS YOU ARE GIVEN WHEN YOU USE YOUR [NAME OF
CARD] CARD, AND CHECK THEM AGAINST THE ACCOUNT STATEMENT YOU RECEIVE
FROM YOUR BANK OR OTHER FINANCIAL INSTITUTION. If you have any questions
about one of these transactions, call or write us at [telephone number
and address] [the telephone number and address indicated below].
IF YOUR [NAME OF CARD] CARD IS LOST OR STOLEN, NOTIFY US AT ONCE by
calling or writing to us at [telephone number and address].
A-5--Model Forms For Government Agencies(Sec. 205.15(d)(1) and (2))
(a) Disclosure by government agencies of information about obtaining
account balances and account histories (Sec. 205.15(d)(1)(i) and (ii)).
You may obtain information about the amount of benefits you have
remaining by calling [telephone number]. That information is also
available [on the receipt you get when you make a transfer with your
card at (an ATM)(a POS terminal)][when you make a balance inquiry at an
ATM][when you make a balance inquiry at specified locations].
You also have the right to receive a written summary of transactions
for the 60 days preceding your request by calling [telephone number].
[Optional: Or you may request the summary by contacting your
caseworker.]
(b) Disclosure of error resolution procedures for government
agencies that do not provide periodic statements (Sec.
205.15(d)(1)(iii) and (d)(2)).
In Case of Errors or Questions About Your Electronic Transfers
Telephone us at [telephone number] Write us at [insert address] [or E-
mail us at [insert electronic mail address]] as soon as you can, if you
think an error has occurred in your [EBT][agency's name for program]
account. We must hear from you no later than 60 days after you learn of
the error. You will need to tell us:
Your name and [case] [file] number.
[[Page 155]]
Why you believe there is an error, and the dollar
amount involved.
Approximately when the error took place.
If you tell us orally, we may require that you send us your complaint or
question in writing within 10 business days.
We will determine whether an error occurred within 10 business days
after we hear from you and will correct any error promptly. If we need
more time, however, we may take up to 45 days to investigate your
complaint or question. If we decide to do this, we will credit your
account within 10 business days for the amount you think is in error, so
that you will have the use of the money during the time it takes us to
complete our investigation. If we ask you to put your complaint or
question in writing and we do not receive it within 10 business days, we
may not credit your account.
For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your
complaint or question. For new accounts, we may take up to 20 business
days to credit your account for the amount you think is in error.
We will tell you the results within three business days after
completing our investigation. If we decide that there was no error, we
will send you a written explanation. You may ask for copies of the
documents that we used in our investigation.
If you need more information about our error resolution procedures,
call us at [telephone number][the telephone number shown above].
A-6 Model Clauses for Authorizing One-Time Electronic Fund Transfers
Using Information From a Check (Sec. 205.3(b)(2))
(a)--Notice About Electronic Check Conversion
When you provide a check as payment, you authorize us either to use
information from your check to make a one-time electronic fund transfer
from your account or to process the payment as a check transaction.
(b)--Alternative Notice About Electronic Check Conversion (Optional)
When you provide a check as payment, you authorize us to use
information from your check to make a one-time electronic fund transfer
from your account. In certain circumstances, such as for technical or
processing reasons, we may process your payment as a check transaction.
[Specify other circumstances (at payee's option).]
(c)--Notice For Providing Additional Information About Electronic Check
Conversion
When we use information from your check to make an electronic fund
transfer, funds may be withdrawn from your account as soon as the same
day [you make] [we receive] your payment[, and you will not receive your
check back from your financial institution].
A-7--Model Clauses for Financial Institutions Offering Payroll Card
Accounts (Sec. 205.18(c))
(a)--Disclosure by financial institutions of information about obtaining
account information for payroll card accounts. Sec. 205.18(c)(1).
You may obtain information about the amount of money you have
remaining in your payroll card account by calling [telephone number].
This information, along with a 60-day history of account transactions,
is also available on-line at [Internet address].
You also have the right to obtain a 60-day written history of
account transactions by calling [telephone number], or by writing us at
[address].
(b)--Disclosure of error-resolution procedures for financial
institutions that provide alternative means of obtaining payroll card
account information (Sec. 205.18(c)(1)(ii) and (c)(2)).
In Case of Errors or Questions About Your Payroll Card Account
Telephone us at [telephone number] or Write us at [address] [or E-mail
us at [electronic mail address]] as soon as you can, if you think an
error has occurred in your payroll card account. We must allow you to
report an error until 60 days after the earlier of the date you
electronically access your account, if the error could be viewed in your
electronic history, or the date we sent the FIRST written history on
which the error appeared. You may request a written history of your
transactions at any time by calling us at [telephone number] or writing
us at [address]. You will need to tell us:
Your name and [payroll card account] number.
Why you believe there is an error, and the dollar amount involved.
Approximately when the error took place.
If you tell us orally, we may require that you send us your
complaint or question in writing within 10 business days.
We will determine whether an error occurred within 10 business days
after we hear from you and will correct any error promptly. If we need
more time, however, we may take up to 45 days to investigate your
complaint or question. If we decide to do this, we will credit your
account within 10 business days for the amount you think is in error, so
that you will have the money during the time it takes us to complete our
investigation. If we ask you to put your complaint or question in
writing and we do not receive it within 10 business days, we may not
credit your account.
[[Page 156]]
For errors involving new accounts, point-of-sale, or foreign-
initiated transactions, we may take up to 90 days to investigate your
complaint or question. For new accounts, we may take up to 20 business
days to credit your account for the amount you think is in error.
We will tell you the results within three business days after
completing our investigation. If we decide that there was no error, we
will send you a written explanation.
You may ask for copies of the documents that we used in our
investigation.
If you need more information about our error-resolution procedures,
call us at [telephone number] [the telephone number shown above] [or
visit [Internet address]].
A-8 MODEL CLAUSE FOR ELECTRONIC COLLECTION OF RETURNED ITEM FEES (Sec.
205.3(b)(3))
If your payment is returned unpaid, you authorize [us/ name of
person collecting the fee electronically] to make a one-time electronic
fund transfer from your account to collect a fee of [$----]. [If your
payment is returned unpaid, you authorize [us/ name of person collecting
the fee electronically] to make a one-time electronic fund transfer from
your account to collect a fee. The fee will be determined [by]/ [as
follows]: [----------------].]
A-9 Model Consent Form for Overdraft Services (Sec. 205.17)
[[Page 157]]
[GRAPHIC] [TIFF OMITTED] TR17NO09.010
[Reg. E, 61 FR 19669, May 2, 1996, as amended at 63 FR 52118, Sept. 29,
1998; 66 FR 13412, Mar. 6, 2001; 66 FR 17793, Apr. 4, 2001; 71 FR 1659,
Jan. 10, 2006; 71 FR 51456, Aug. 30, 2006; 71 FR 69437, Dec. 1, 2006; 72
FR 51450, Aug. 30, 2006; 74 FR 59053, Nov. 17, 2009]
Sec. Appendix B to Part 205--Federal Enforcement Agencies
The following list indicates which Federal agency enforces
Regulation E (12 CFR part 205) for particular classes of institutions.
Any questions concerning compliance by a particular institution should
be directed to the appropriate enforcing agency. Terms that are not
defined in the Federal Deposit Insurance Act (12 U.S.C. 1813(s)) shall
have the meaning given to them in the International Banking Act of 1978
(12 U.S.C. 3101).
[[Page 158]]
National banks, and Federal branches and Federal agencies of foreign
banks
District office of the Office of the Comptroller of the Currency
where the institution is located.
State member banks, branches and agencies of foreign banks (other than
Federal branches, Federal agencies, and insured state branches of
foreign banks), commercial lending companies owned or controlled by
foreign banks, and organizations operating under section 25 or 25(a) of
the Federal Reserve Act
Federal Reserve Bank serving the District in which the institution
is located.
Nonmember insured banks and insured state branches of foreign banks
Federal Deposit Insurance Corporation regional director for the
region in which the institution is located.
Savings institutions insured under the Savings Association Insurance
Fund of the FDIC and federally-chartered savings banks insured under the
Bank Insurance Fund of the FDIC (but not including state-chartered
savings banks insured under the Bank Insurance Fund)
Office of Thrift Supervision Regional Director for the region in
which the institution is located.
Federal Credit Unions
Division of Consumer Affairs, National Credit Union Administration,
1775 Duke Street, Alexandria, Virginia 22314-3428
Air Carriers
Assistant General Counsel for Aviation Enforcement and Proceedings,
Department of Transportation, 400 Seventh Street, S.W., Washington, D.C.
20590.
Brokers and Dealers
Division of Market Regulation, Securities and Exchange Commission,
Washington, D.C. 20549.
Retailers, Consumer Finance Companies, Certain Other Financial
Institutions, and all others not covered above
Federal Trade Commission, Electronic Fund Transfers, Washington,
D.C. 20580.
Sec. Appendix C to Part 205--Issuance of Staff Interpretations
Official Staff Interpretations
Pursuant to section 915(d) of the act, the Board has designated the
director and other officials of the Division of Consumer and Community
Affairs as officials ``duly authorized'' to issue, at their discretion,
official staff interpretations of this part. Except in unusual
circumstances, such interpretations will not be issued separately but
will be incorporated in an official commentary to this part, which will
be amended periodically.
Requests for Issuance of Official Staff Interpretations
A request for an official staff interpretation shall be in writing
and addressed to the Director, Division of Consumer and Community
Affairs, Board of Governors of the Federal Reserve System, Washington,
D.C. 20551. The request shall contain a complete statement of all
relevant facts concerning the issue, including copies of all pertinent
documents.
Scope of Interpretations
No staff interpretations will be issued approving financial
institutions' forms or statements. This restriction does not apply to
forms or statements whose use is required or sanctioned by a government
agency.
Sec. Supplement I to Part 205--Official Staff Interpretations
Section 205.2--Definitions
2(a) Access Device
1. Examples. The term access device includes debit cards, personal
identification numbers (PINs), telephone transfer and telephone bill
payment codes, and other means that may be used by a consumer to
initiate an electronic fund transfer (EFT) to or from a consumer
account. The term does not include magnetic tape or other devices used
internally by a financial institution to initiate electronic transfers.
2. Checks used to capture information. The term ``access device''
does not include a check or draft used to capture the MICR (Magnetic Ink
Character Recognition) encoding to initiate a one-time ACH debit. For
example, if a consumer authorizes a one-time ACH debit from the
consumer's account using a blank, partially completed, or fully
completed and signed check for the merchant to capture the routing,
account, and serial numbers to initiate the debit, the check is not an
access device. (Although the check is not an access device under
Regulation E, the transaction is nonetheless covered by the regulation.
See comment 3(b)(1)-1.v.)
2(b) Account
1. Consumer asset account. The term consumer asset account includes:
i. Club accounts, such as vacation clubs. In many cases, however,
these accounts are exempt from the regulation under Sec. 205.3(c)(5)
because all electronic transfers to or from the account have been
preauthorized by the
[[Page 159]]
consumer and involve another account of the consumer at the same
institution.
ii. A retail repurchase agreement (repo), which is a loan made to a
financial institution by a consumer that is collateralized by government
or government-insured securities.
2. Certain employment-related cards not covered. The term ``payroll
card account'' does not include a card used solely to disburse
incentive-based payments (other than commissions which can represent the
primary means through which a consumer is paid), such as bonuses, which
are unlikely to be a consumer's primary source of salary or other
compensation. The term also does not include a card used solely to make
disbursements unrelated to compensation, such as petty cash
reimbursements or travel per diem payments. Similarly, a payroll card
account does not include a card that is used in isolated instances to
which an employer typically does not make recurring payments, such as
when providing final payments or in emergency situations when other
payment methods are unavailable. However, all transactions involving the
transfer of funds to or from a payroll card account are covered by the
regulation, even if a particular transaction involves payment of a
bonus, other incentive-based payment, or reimbursement, or the
transaction does not represent a transfer of wages, salary, or other
employee compensation.
3. Examples of accounts not covered by Regulation E (12 CFR part
205) include:
i. Profit-sharing and pension accounts established under a trust
agreement, which are exempt under Sec. 205.2(b)(2).
ii. Escrow accounts, such as those established to ensure payment of
items such as real estate taxes, insurance premiums, or completion of
repairs or improvements.
iii. Accounts for accumulating funds to purchase U.S. savings bonds.
Paragraph 2(b)(2)
1. Bona fide trust agreements. The term bona fide trust agreement is
not defined by the act or regulation; therefore, financial institutions
must look to state or other applicable law for interpretation.
2. Custodial agreements. An account held under a custodial agreement
that qualifies as a trust under the Internal Revenue Code, such as an
individual retirement account, is considered to be held under a trust
agreement for purposes of Regulation E.
2(d) Business Day
1. Duration. A business day includes the entire 24-hour period
ending at midnight, and a notice required by the regulation is effective
even if given outside normal business hours. The regulation does not
require, however, that a financial institution make telephone lines
available on a 24-hour basis.
2. Substantially all business functions. ``Substantially all
business functions'' include both the public and the back-office
operations of the institution. For example, if the offices of an
institution are open on Saturdays for handling some consumer
transactions (such as deposits, withdrawals, and other teller
transactions), but not for performing internal functions (such as
investigating account errors), then Saturday is not a business day for
that institution. In this case, Saturday does not count toward the
business-day standard set by the regulation for reporting lost or stolen
access devices, resolving errors, etc.
3. Short hours. A financial institution may determine, at its
election, whether an abbreviated day is a business day. For example, if
an institution engages in substantially all business functions until
noon on Saturdays instead of its usual 3:00 p.m. closing, it may
consider Saturday a business day.
4. Telephone line. If a financial institution makes a telephone line
available on Sundays for reporting the loss or theft of an access
device, but performs no other business functions, Sunday is not a
business day under the ``substantially all business functions''
standard.
2(h) Electronic Terminal
1. Point-of-sale (POS) payments initiated by telephone. Because the
term electronic terminal excludes a telephone operated by a consumer, a
financial institution need not provide a terminal receipt when:
i. A consumer uses a debit card at a public telephone to pay for the
call.
ii. A consumer initiates a transfer by a means analogous in function
to a telephone, such as by home banking equipment or a facsimile
machine.
2. POS terminals. A POS terminal that captures data electronically,
for debiting or crediting to a consumer's asset account, is an
electronic terminal for purposes of Regulation E even if no access
device is used to initiate the transaction. (See Sec. 205.9 for receipt
requirements.)
3. Teller-operated terminals. A terminal or other computer equipment
operated by an employee of a financial institution is not an electronic
terminal for purposes of the regulation. However, transfers initiated at
such terminals by means of a consumer's access device (using the
consumer's PIN, for example) are EFTs and are subject to other
requirements of the regulation. If an access device is used only for
identification purposes or for determining the account balance, the
transfers are not EFTs for purposes of the regulation.
[[Page 160]]
2(k) Preauthorized Electronic Fund Transfer
1. Advance authorization. A ``preauthorized electronic fund
transfer'' under Regulation E is one authorized by the consumer in
advance of a transfer that will take place on a recurring basis, at
substantially regular intervals, and will require no further action by
the consumer to initiate the transfer. In a bill-payment system, for
example, if the consumer authorizes a financial institution to make
monthly payments to a payee by means of EFTs, and the payments take
place without further action by the consumer, the payments are
preauthorized EFTs. In contrast, if the consumer must take action each
month to initiate a payment (such as by entering instructions on a
touch-tone telephone or home computer), the payments are not
preauthorized EFTs.
2(m) Unauthorized Electronic Fund Transfer
1. Transfer by institution's employee. A consumer has no liability
for erroneous or fraudulent transfers initiated by an employee of a
financial institution.
2. Authority. If a consumer furnishes an access device and grants
authority to make transfers to a person (such as a family member or co-
worker) who exceeds the authority given, the consumer is fully liable
for the transfers unless the consumer has notified the financial
institution that transfers by that person are no longer authorized.
3. Access device obtained through robbery or fraud. An unauthorized
EFT includes a transfer initiated by a person who obtained the access
device from the consumer through fraud or robbery.
4. Forced initiation. An EFT at an automated teller machine (ATM) is
an unauthorized transfer if the consumer has been induced by force to
initiate the transfer.
5. Reversal of direct deposits. The reversal of a direct deposit
made in error is not an unauthorized EFT when it involves:
i. A credit made to the wrong consumer's account;
ii. A duplicate credit made to a consumer's account; or
iii. A credit in the wrong amount (for example, when the amount
credited to the consumer's account differs from the amount in the
transmittal instructions).
Section 205.3--Coverage
3(a) General
1. Accounts covered. The requirements of the regulation apply only
to an account for which an agreement for EFT services to or from the
account has been entered into between:
i. The consumer and the financial institution (including an account
for which an access device has been issued to the consumer, for
example);
ii. The consumer and a third party (for preauthorized debits or
credits, for example), when the account-holding institution has received
notice of the agreement and the fund transfers have begun.
2. Automated clearing house (ACH) membership. The fact that
membership in an ACH requires a financial institution to accept EFTs to
accounts at the institution does not make every account of that
institution subject to the regulation.
3. Foreign applicability. Regulation E applies to all persons
(including branches and other offices of foreign banks located in the
United States) that offer EFT services to residents of any state,
including resident aliens. It covers any account located in the United
States through which EFTs are offered to a resident of a state. This is
the case whether or not a particular transfer takes place in the United
States and whether or not the financial institution is chartered in the
United States or a foreign country. The regulation does not apply to a
foreign branch of a U.S. bank unless the EFT services are offered in
connection with an account in a state as defined in Sec. 205.2(l).
3(b) Electronic Fund Transfer
Paragraph 3(b)(1)--Definition
1. Fund transfers covered. The term electronic fund transfer
includes:
i. A deposit made at an ATM or other electronic terminal (including
a deposit in cash or by check) provided a specific agreement exists
between the financial institution and the consumer for EFTs to or from
the account to which the deposit is made.
ii. A transfer sent via ACH. For example, social security benefits
under the U.S. Treasury's direct-deposit program are covered, even if
the listing of payees and payment amounts reaches the account-holding
institution by means of a computer printout from a correspondent bank.
iii. A preauthorized transfer credited or debited to an account in
accordance with instructions contained on magnetic tape, even if the
financial institution holding the account sends or receives a composite
check.
iv. A transfer from the consumer's account resulting from a debit-
card transaction at a merchant location, even if no electronic terminal
is involved at the time of the transaction, if the consumer's asset
account is subsequently debited for the amount of the transfer.
v. A transfer via ACH where a consumer has provided a check to
enable the merchant or other payee to capture the routing, account, and
serial numbers to initiate the transfer, whether the check is blank,
partially completed, or fully completed and signed; whether the check is
presented at POS or is mailed to a merchant or other payee or lockbox
and later converted to an
[[Page 161]]
EFT; or whether the check is retained by the consumer, the merchant or
other payee, or the payee's financial institution.
vi. A payment made by a bill payer under a bill-payment service
available to a consumer via computer or other electronic means, unless
the terms of the bill-payment service explicitly state that all
payments, or all payments to a particular payee or payees, will be
solely by check, draft, or similar paper instrument drawn on the
consumer's account, and the payee or payees that will be paid in this
manner are identified to the consumer.
2. Fund transfers not covered. The term electronic fund transfer
does not include:
i. A payment that does not debit or credit a consumer asset account,
such as a payroll allotment to a creditor to repay a credit extension
(which is deducted from salary).
ii. A payment made in currency by a consumer to another person at an
electronic terminal.
iii. A preauthorized check drawn by the financial institution on the
consumer's account (such as an interest or other recurring payment to
the consumer or another party), even if the check is computer-generated.
iv. Transactions arising from the electronic collection,
presentment, or return of checks through the check collection system,
such as through transmission of electronic check images.
Paragraph 3(b)(2)--Electronic Fund Transfer Using Information From a
Check
1. Notice at POS not furnished due to inadvertent error. If the copy
of the notice under section 205.3(b)(2)(ii) for ECK transactions is not
provided to the consumer at POS because of a bona fide unintentional
error, such as when a terminal printing mechanism jams, no violation
results if the payee maintains procedures reasonably adapted to avoid
such occurrences.
2. Authorization to process a transaction as an EFT or as a check.
In order to process a transaction as an EFT or alternatively as a check,
the payee must obtain the consumer's authorization to do so. A payee
may, at its option, specify the circumstances under which a check may
not be converted to an EFT. (See model clauses in Appendix A-6.)
3. Notice for each transfer. Generally, a notice to authorize an
electronic check conversion transaction must be provided for each
transaction. For example, a consumer must receive a notice that the
transaction will be processed as an EFT for each transaction at POS or
each time a consumer mails a check in an accounts receivable (ARC)
transaction to pay a bill, such as a utility bill, if the payee intends
to convert a check received as payment. Similarly, the consumer must
receive notice if the payee intends to collect a service fee for
insufficient or uncollected funds via an EFT for each transaction
whether at POS or if the consumer mails a check to pay a bill. The
notice about when funds may be debited from a consumer's account and the
non-return of consumer checks by the consumer's financial institution
must also be provided for each transaction. However, if in an ARC
transaction, a payee provides a coupon book to a consumer, for example,
for mortgage loan payments, and the payment dates and amounts are set
out in the coupon book, the payee may provide a single notice on the
coupon book stating all of the required disclosures under paragraph
(b)(2) of this section in order to obtain authorization for each
conversion of a check and any debits via EFT to the consumer's account
to collect any service fees imposed by the payee for insufficient or
uncollected funds in the consumer's account. The notice must be placed
on a conspicuous location of the coupon book that a consumer can
retain--for example, on the first page, or inside the front cover.
4. Multiple payments/multiple consumers. If a merchant or other
payee will use information from a consumer's check to initiate an EFT
from the consumer's account, notice to a consumer listed on the billing
account that a check provided as payment during a single billing cycle
or after receiving an invoice or statement will be processed as a one-
time EFT or as a check transaction constitutes notice for all checks
provided in payment for the billing cycle or the invoice for which
notice has been provided, whether the check(s) is submitted by the
consumer or someone else. The notice applies to all checks provided in
payment for the billing cycle or invoice until the provision of notice
on or with the next invoice or statement. Thus, if a merchant or other
payee receives a check as payment for the consumer listed on the billing
account after providing notice that the check will be processed as a
one-time EFT, the authorization from that consumer constitutes
authorization to convert any other checks provided for that invoice or
statement. Other notices required under this paragraph (b)(2) (for
example, to collect a service fee for insufficient or uncollected funds
via an EFT) provided to the consumer listed on the billing account also
constitutes notice to any other consumer who may provide a check for the
billing cycle or invoice.
5. Additional disclosures about ECK transactions at POS. When a
payee initiates an EFT at POS using information from the consumer's
check, and returns the check to the consumer at POS, the payee need not
provide a notice to the consumer that the check will not be returned by
the consumer's financial institution.
[[Page 162]]
Paragraph 3(b)(3)--Collection of Returned Item Fees via Electronic Fund
Transfer
1. Fees imposed by account-holding institution. The requirement to
obtain a consumer's authorization to collect a fee via EFT for the
return of an EFT or check unpaid applies only to the person that intends
to initiate an EFT to collect the returned item fee from the consumer's
account. The authorization requirement does not apply to any fees
assessed by the consumer's account-holding financial institution when it
returns the unpaid underlying EFT or check or pays the amount of an
overdraft.
2. Accounts receivable transactions. In an accounts receivable (ARC)
transaction where a consumer sends in a payment for amounts owed (or
makes an in-person payment at a biller's physical location, such as when
a consumer makes a loan payment at a bank branch or places a payment in
a dropbox), a person seeking to electronically collect a fee for items
returned unpaid must obtain the consumer's authorization to collect the
fee in this manner. A consumer authorizes a person to electronically
collect a returned item fee when the consumer receives notice, typically
on an invoice or statement, that the person may collect the fee through
an EFT to the consumer's account, and the consumer goes forward with the
underlying transaction by providing payment. The notice must also state
the dollar amount of the fee. However, an explanation of how that fee
will be determined may be provided in place of the dollar amount of the
fee if the fee may vary due to the amount of the transaction or due to
other factors, such as the number of days the underlying transaction is
left outstanding. For example, if a state law permits a maximum fee of
$30 or 10% of the underlying transaction, whichever is greater, the
person collecting the fee may explain how the fee is determined, rather
than state a specific dollar amount for the fee.
3. Disclosure of dollar amount of fee for POS transactions. The
notice provided to the consumer in connection with a POS transaction
under Sec. 205.3(b)(3)(ii) must state the amount of the fee for a
returned item if the dollar amount of the fee can be calculated at the
time the notice is provided or mailed. For example, if notice is
provided to the consumer at the time of the transaction, if the
applicable state law sets a maximum fee that may be collected for a
returned item based on the amount of the underlying transaction (such as
where the amount of the fee is expressed as a percentage of the
underlying transaction), the person collecting the fee must state the
actual dollar amount of the fee on the notice provided to the consumer.
Alternatively, if the amount of the fee to be collected cannot be
calculated at the time of the transaction (for example, where the amount
of the fee will depend on the number of days a debt continues to be
owed), the person collecting the fee may provide a description of how
the fee will be determined on both the posted notice as well as on the
notice provided at the time of the transaction. However, if the person
collecting the fee elects to send the consumer notice after the person
has initiated an EFT to collect the fee, that notice must state the
amount of the fee to be collected.
4. Third party providing notice. The person initiating an EFT to a
consumer's account to electronically collect a fee for an item returned
unpaid may obtain the authorization and provide the notices required
under Sec. 205.3(b)(3) through third parties, such as merchants.
3(c) Exclusions From Coverage
Paragraph 3(c)(1)--Checks
1. Re-presented checks. The electronic re-presentment of a returned
check is not covered by Regulation E because the transaction originated
by check. Regulation E does apply, however, to any fee debited via an
EFT from a consumer's account by the payee because the check was
returned for insufficient or uncollected funds. The person debiting the
fee electronically must obtain the consumer's authorization.
2. Check used to capture information for a one-time EFT. See comment
3(b)(1)-1.v.
Paragraph 3(c)(2)--Check Guarantee or Authorization
1. Memo posting. Under a check guarantee or check authorization
service, debiting of the consumer's account occurs when the check or
draft is presented for payment. These services are exempt from coverage,
even when a temporary hold on the account is memo-posted electronically
at the time of authorization.
Paragraph 3(c)(3)--Wire or Other Similar Transfers
1. Fedwire and ACH. If a financial institution makes a fund transfer
to a consumer's account after receiving funds through Fedwire or a
similar network, the transfer by ACH is covered by the regulation even
though the Fedwire or network transfer is exempt.
2. Article 4A. Financial institutions that offer telephone-initiated
Fedwire payments are subject to the requirements of UCC section 4A-202,
which encourages verification of Fedwire payment orders pursuant to a
security procedure established by agreement between the consumer and the
receiving bank. These transfers are not subject to Regulation E and the
agreement is not considered a telephone plan if the service is offered
separately from a telephone bill-payment or other prearranged plan
subject to Regulation
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E. The Board's Regulation J (12 CFR part 210) specifies the rules
applicable to funds handled by Federal Reserve Banks. To ensure that the
rules for all fund transfers through Fedwire are consistent, the Board
used its preemptive authority under UCC section 4A-107 to determine that
subpart B of Regulation J (12 CFR part 210), including the provisions of
Article 4A, applies to all fund transfers through Fedwire, even if a
portion of the fund transfer is governed by the EFTA. The portion of the
fund transfer that is governed by the EFTA is not governed by subpart B
of Regulation J (12 CFR part 210).
3. Similar fund transfer systems. Fund transfer systems that are
similar to Fedwire include the Clearing House Interbank Payments System
(CHIPS), Society for Worldwide Interbank Financial Telecommunication
(SWIFT), Telex, and transfers made on the books of correspondent banks.
Paragraph 3(c)(4)--Securities and Commodities Transfers
1. Coverage. The securities exemption applies to securities and
commodities that may be sold by a registered broker-dealer or futures
commission merchant, even when the security or commodity itself is not
regulated by the Securities and Exchange Commission or the Commodity
Futures Trading Commission.
2. Example of exempt transfer. The exemption applies to a transfer
involving a transfer initiated by a telephone order to a stockbroker to
buy or sell securities or to exercise a margin call.
3. Examples of nonexempt transfers. The exemption does not apply to
a transfer involving:
i. A debit card or other access device that accesses a securities or
commodities account such as a money market mutual fund and that the
consumer uses for purchasing goods or services or for obtaining cash.
ii. A payment of interest or dividends into the consumer's account
(for example, from a brokerage firm or from a Federal Reserve Bank for
government securities).
Paragraph 3(c)(5)--Automatic Transfers by Account-Holding Institution
1. Automatic transfers exempted. The exemption applies to:
i. Electronic debits or credits to consumer accounts for check
charges, stop-payment charges, NSF charges, overdraft charges,
provisional credits, error adjustments, and similar items that are
initiated automatically on the occurrence of certain events.
ii. Debits to consumer accounts for group insurance available only
through the financial institution and payable only by means of an
aggregate payment from the institution to the insurer.
iii. EFTs between a thrift institution and its paired commercial
bank in the state of Rhode Island, which are deemed under state law to
be intra-institutional.
iv. Automatic transfers between a consumer's accounts within the
same financial institution, even if the account holders on the two
accounts are not identical.
2. Automatic transfers not exempted. Transfers between accounts of
the consumer at affiliated institutions (such as between a bank and its
subsidiary or within a holding company) are not intra-institutional
transfers, and thus do not qualify for the exemption.
Paragraph 3(c)(6)--Telephone-Initiated Transfers
1. Written plan or agreement. A transfer that the consumer initiates
by telephone is covered by Regulation E if the transfer is made under a
written plan or agreement between the consumer and the financial
institution making the transfer. A written statement available to the
public or to account holders that describes a service allowing a
consumer to initiate transfers by telephone constitutes a plan--for
example, a brochure, or material included with periodic statements. The
following, however, do not by themselves constitute a written plan or
agreement:
i. A hold-harmless agreement on a signature card that protects the
institution if the consumer requests a transfer.
ii. A legend on a signature card, periodic statement, or passbook
that limits the number of telephone-initiated transfers the consumer can
make from a savings account because of reserve requirements under
Regulation D (12 CFR part 204).
iii. An agreement permitting the consumer to approve by telephone
the rollover of funds at the maturity of an instrument.
2. Examples of covered transfers. When a written plan or agreement
has been entered into, a transfer initiated by a telephone call from a
consumer is covered even though:
i. An employee of the financial institution completes the transfer
manually (for example, by means of a debit memo or deposit slip).
ii. The consumer is required to make a separate request for each
transfer.
iii. The consumer uses the plan infrequently.
iv. The consumer initiates the transfer via a facsimile machine.
v. The consumer initiates the transfer using a financial
institution's audio-response or voice-response telephone system.
Paragraph 3(c)(7)--Small Institutions
1. Coverage. This exemption is limited to preauthorized transfers;
institutions that offer other EFTs must comply with the applicable
sections of the regulation as to such services. The preauthorized
transfers remain
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subject to sections 913, 915, and 916 of the act and Sec. 205.10(e),
and are therefore exempt from UCC Article 4A.
Section 205.4--General Disclosure Requirements; Jointly Offered Services
4(a) Form of Disclosures
1. General. Although no particular rules govern type size, number of
pages, or the relative conspicuousness of various terms, the disclosures
must be in a clear and readily understandable written form that the
consumer may retain. Numbers or codes are considered readily
understandable if explained elsewhere on the disclosure form.
2. Foreign language disclosures. Disclosures may be made in
languages other than English, provided they are available in English
upon request.
Section 205.5--Issuance of Access Devices
1. Coverage. The provisions of this section limit the circumstances
under which a financial institution may issue an access device to a
consumer. Making an additional account accessible through an existing
access device is equivalent to issuing an access device and is subject
to the limitations of this section.
5(a) Solicited Issuance
Paragraph 5(a)(1)
1. Joint account. For a joint account, a financial institution may
issue an access device to each account holder if the requesting holder
specifically authorizes the issuance.
2. Permissible forms of request. The request for an access device
may be written or oral (for example, in response to a telephone
solicitation by a card issuer).
Paragraph 5(a)(2)
1. One-for-one rule. In issuing a renewal or substitute access
device, only one renewal or substitute device may replace a previously
issued device. For example, only one new card and PIN may replace a card
and PIN previously issued. A financial institution may provide
additional devices at the time it issues the renewal or substitute
access device, however, provided the institution complies with Sec.
205.5(b). (See comment 5(b)-5.) If the replacement device or the
additional device permits either fewer or additional types of electronic
fund transfer services, a change-in-terms notice or new disclosures are
required.
2. Renewal or substitution by a successor institution. A successor
institution is an entity that replaces the original financial
institution (for example, following a corporate merger or acquisition)
or that acquires accounts or assumes the operation of an EFT system.
5(b) Unsolicited Issuance
1. Compliance. A financial institution may issue an unsolicited
access device (such as the combination of a debit card and PIN) if the
institution's ATM system has been programmed not to accept the access
device until after the consumer requests and the institution validates
the device. Merely instructing a consumer not to use an unsolicited
debit card and PIN until after the institution verifies the consumer's
identity does not comply with the regulation.
2. PINS. A financial institution may impose no liability on a
consumer for unauthorized transfers involving an unsolicited access
device until the device becomes an ``accepted access device'' under the
regulation. A card and PIN combination may be treated as an accepted
access device once the consumer has used it to make a transfer.
3. Functions of PIN. If an institution issues a PIN at the
consumer's request, the issuance may constitute both a way of validating
the debit card and the means to identify the consumer (required as a
condition of imposing liability for unauthorized transfers).
4. Verification of identity. To verify the consumer's identity, a
financial institution may use any reasonable means, such as a
photograph, fingerprint, personal visit, signature comparison, or
personal information about the consumer. However, even if reasonable
means were used, if an institution fails to verify correctly the
consumer's identity and an imposter succeeds in having the device
validated, the consumer is not liable for any unauthorized transfers
from the account.
5. Additional access devices in a renewal or substitution. A
financial institution may issue more than one access device in
connection with the renewal or substitution of a previously issued
accepted access device, provided that any additional access device
(beyond the device replacing the accepted access device) is not
validated at the time it is issued, and the institution complies with
the other requirements of Sec. 205.5(b). The institution may, if it
chooses, set up the validation procedure such that both the device
replacing the previously issued device and the additional device are not
validated at the time they are issued, and validation will apply to both
devices. If the institution sets up the validation procedure in this
way, the institution should provide a clear and readily understandable
disclosure to the consumer that both devices are unvalidated and that
validation will apply to both devices.
Section 205.6--Liability of Consumer for Unauthorized Transfers
6(a) Conditions for Liability
1. Means of identification. A financial institution may use various
means for identifying
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the consumer to whom the access device is issued, including but not
limited to:
i. Electronic or mechanical confirmation (such as a PIN).
ii. Comparison of the consumer's signature, fingerprint, or
photograph.
2. Multiple users. When more than one access device is issued for an
account, the financial institution may, but need not, provide a separate
means to identify each user of the account.
6(b) Limitations on Amount of Liability
1. Application of liability provisions. There are three possible
tiers of consumer liability for unauthorized EFTs depending on the
situation. A consumer may be liable for (1) up to $50; (2) up to $500;
or (3) an unlimited amount depending on when the unauthorized EFT
occurs. More than one tier may apply to a given situation because each
corresponds to a different (sometimes overlapping) time period or set of
conditions.
2. Consumer negligence. Negligence by the consumer cannot be used as
the basis for imposing greater liability than is permissible under
Regulation E. Thus, consumer behavior that may constitute negligence
under state law, such as writing the PIN on a debit card or on a piece
of paper kept with the card, does not affect the consumer's liability
for unauthorized transfers. (However, refer to comment 2(m)-2 regarding
termination of the authority of given by the consumer to another
person.)
3. Limits on liability. The extent of the consumer's liability is
determined solely by the consumer's promptness in reporting the loss or
theft of an access device. Similarly, no agreement between the consumer
and an institution may impose greater liability on the consumer for an
unauthorized transfer than the limits provided in Regulation E.
Paragraph 6(b)(1)--Timely Notice Given
1. $50 limit applies. The basic liability limit is $50. For example,
the consumer's card is lost or stolen on Monday and the consumer learns
of the loss or theft on Wednesday. If the consumer notifies the
financial institution within two business days of learning of the loss
or theft (by midnight Friday), the consumer's liability is limited to
$50 or the amount of the unauthorized transfers that occurred before
notification, whichever is less.
2. Knowledge of loss or theft of access device. The fact that a
consumer has received a periodic statement that reflects unauthorized
transfers may be a factor in determining whether the consumer had
knowledge of the loss or theft, but cannot be deemed to represent
conclusive evidence that the consumer had such knowledge.
3. Two-business-day rule. The two-business-day period does not
include the day the consumer learns of the loss or theft or any day that
is not a business day. The rule is calculated based on two 24-hour
periods, without regard to the financial institution's business hours or
the time of day that the consumer learns of the loss or theft. For
example, a consumer learns of the loss or theft at 6 p.m. on Friday.
Assuming that Saturday is a business day and Sunday is not, the two-
business-day period begins on Saturday and expires at 11:59 p.m. on
Monday, not at the end of the financial institution's business day on
Monday.
Paragraph 6(b)(2)--Timely Notice Not Given
1. $500 limit applies. The second tier of liability is $500. For
example, the consumer's card is stolen on Monday and the consumer learns
of the theft that same day. The consumer reports the theft on Friday.
The $500 limit applies because the consumer failed to notify the
financial institution within two business days of learning of the theft
(which would have been by midnight Wednesday). How much the consumer is
actually liable for, however, depends on when the unauthorized transfers
take place. In this example, assume a $100 unauthorized transfer was
made on Tuesday and a $600 unauthorized transfer on Thursday. Because
the consumer is liable for the amount of the loss that occurs within the
first two business days (but no more than $50), plus the amount of the
unauthorized transfers that occurs after the first two business days and
before the consumer gives notice, the consumer's total liability is $500
($50 of the $100 transfer plus $450 of the $600 transfer, in this
example). But if $600 was taken on Tuesday and $100 on Thursday, the
consumer's maximum liability would be $150 ($50 of the $600 plus $100).
Paragraph 6(b)(3)--Periodic Statement; Timely Notice Not Given
1. Unlimited liability applies. The standard of unlimited liability
applies if unauthorized transfers appear on a periodic statement, and
may apply in conjunction with the first two tiers of liability. If a
periodic statement shows an unauthorized transfer made with a lost or
stolen debit card, the consumer must notify the financial institution
within 60 calendar days after the periodic statement was sent;
otherwise, the consumer faces unlimited liability for all unauthorized
transfers made after the 60-day period. The consumer's liability for
unauthorized transfers before the statement is sent, and up to 60 days
following, is determined based on the first two tiers of liability: up
to $50 if the consumer notifies the financial institution within two
business days of learning of the loss or theft of the card and up to
$500 if the consumer notifies the institution after two business days of
learning of the loss or theft.
[[Page 166]]
2. Transfers not involving access device. The first two tiers of
liability do not apply to unauthorized transfers from a consumer's
account made without an access device. If, however, the consumer fails
to report such unauthorized transfers within 60 calendar days of the
financial institution's transmittal of the periodic statement, the
consumer may be liable for any transfers occurring after the close of
the 60 days and before notice is given to the institution. For example,
a consumer's account is electronically debited for $200 without the
consumer's authorization and by means other than the consumer's access
device. If the consumer notifies the institution within 60 days of the
transmittal of the periodic statement that shows the unauthorized
transfer, the consumer has no liability. However, if in addition to the
$200, the consumer's account is debited for a $400 unauthorized transfer
on the 61st day and the consumer fails to notify the institution of the
first unauthorized transfer until the 62nd day, the consumer may be
liable for the full $400.
Paragraph 6(b)(4)--Extension of Time Limits
1. Extenuating circumstances. Examples of circumstances that require
extension of the notification periods under this section include the
consumer's extended travel or hospitalization.
Paragraph 6(b)(5)--Notice to Financial Institution
1. Receipt of notice. A financial institution is considered to have
received notice for purposes of limiting the consumer's liability if
notice is given in a reasonable manner, even if the consumer notifies
the institution but uses an address or telephone number other than the
one specified by the institution.
2. Notice by third party. Notice to a financial institution by a
person acting on the consumer's behalf is considered valid under this
section. For example, if a consumer is hospitalized and unable to report
the loss or theft of an access device, notice is considered given when
someone acting on the consumer's behalf notifies the bank of the loss or
theft. A financial institution may require appropriate documentation
from the person representing the consumer to establish that the person
is acting on the consumer's behalf.
3. Content of notice. Notice to a financial institution is
considered given when a consumer takes reasonable steps to provide the
institution with the pertinent account information. Even when the
consumer is unable to provide the account number or the card number in
reporting a lost or stolen access device or an unauthorized transfer,
the notice effectively limits the consumer's liability if the consumer
otherwise identifies sufficiently the account in question. For example,
the consumer may identify the account by the name on the account and the
type of account in question.
Section 205.7--Initial Disclosures
7(a) Timing of Disclosures
1. Early disclosures. Disclosures given by a financial institution
earlier than the regulation requires (for example, when the consumer
opens a checking account) need not be repeated when the consumer later
enters into an agreement with a third party to initiate preauthorized
transfers to or from the consumer's account, unless the terms and
conditions differ from those that the institution previously disclosed.
This interpretation also applies to any notice provided about one-time
EFTs from a consumer's account initiated using information from the
consumer's check. On the other hand, if an agreement for EFT services to
be provided by an account-holding institution is directly between the
consumer and the account-holding institution, disclosures must be given
in close proximity to the event requiring disclosure, for example, when
the consumer contracts for a new service.
2. Lack of advance notice of a transfer. Where a consumer authorizes
a third party to debit or credit the consumer's account, an account-
holding institution that has not received advance notice of the transfer
or transfers must provide the required disclosures as soon as reasonably
possible after the first debit or credit is made, unless the institution
has previously given the disclosures.
3. Addition of new accounts. If a consumer opens a new account
permitting EFTs at a financial institution, and the consumer already has
received Regulation E disclosures for another account at that
institution, the institution need only disclose terms and conditions
that differ from those previously given.
4. Addition of service in interchange systems. If a financial
institution joins an interchange or shared network system (which
provides access to terminals operated by other institutions),
disclosures are required for additional EFT services not previously
available to consumers if the terms and conditions differ from those
previously disclosed.
5. Disclosures covering all EFT services offered. An institution may
provide disclosures covering all EFT services that it offers, even if
some consumers have not arranged to use all services.
7(b) Content of Disclosures
Paragraph 7(b)(1)--Liability of Consumer
1. No liability imposed by financial institution. If a financial
institution chooses to impose zero liability for unauthorized EFTs, it
need not provide the liability disclosures. If
[[Page 167]]
the institution later decides to impose liability, however, it must
first provide the disclosures.
2. Preauthorized transfers. If the only EFTs from an account are
preauthorized transfers, liability could arise if the consumer fails to
report unauthorized transfers reflected on a periodic statement. To
impose such liability on the consumer, the institution must have
disclosed the potential liability and the telephone number and address
for reporting unauthorized transfers.
3. Additional information. At the institution's option, the summary
of the consumer's liability may include advice on promptly reporting
unauthorized transfers or the loss or theft of the access device.
Paragraph 7(b)(2)--Telephone Number and Address
1. Disclosure of telephone numbers. An institution may use the same
or different telephone numbers in the disclosures for the purpose of:
i. Reporting the loss or theft of an access device or possible
unauthorized transfers;
ii. Inquiring about the receipt of a preauthorized credit;
iii. Stopping payment of a preauthorized debit;
iv. Giving notice of an error.
2. Location of telephone number. The telephone number need not be
incorporated into the text of the disclosure; for example, the
institution may instead insert a reference to a telephone number that is
readily available to the consumer, such as ``Call your branch office.
The number is shown on your periodic statement.'' However, an
institution must provide a specific telephone number and address, on or
with the disclosure statement, for reporting a lost or stolen access
device or a possible unauthorized transfer.
Paragraph 7(b)(4)--Types of Transfers; Limitations
1. Security limitations. Information about limitations on the
frequency and dollar amount of transfers generally must be disclosed in
detail, even if related to security aspects of the system. If the
confidentiality of certain details is essential to the security of an
account or system, these details may be withheld (but the fact that
limitations exist must still be disclosed). For example, an institution
limits cash ATM withdrawals to $100 per day. The institution may
disclose that daily withdrawal limitations apply and need not disclose
that the limitations may not always be in force (such as during periods
when its ATMs are off-line).
2. Restrictions on certain deposit accounts. A limitation on account
activity that restricts the consumer's ability to make EFTs must be
disclosed even if the restriction also applies to transfers made by
nonelectronic means. For example, Regulation D (12 CFR Part 204)
restricts the number of payments to third parties that may be made from
a money market deposit account; an institution that does not execute
fund transfers in excess of those limits must disclose the restriction
as a limitation on the frequency of EFTs.
3. Preauthorized transfers. Financial institutions are not required
to list preauthorized transfers among the types of transfers that a
consumer can make.
4. One-time EFTs initiated using information from a check. Financial
institutions must disclose the fact that one-time EFTs initiated using
information from a consumer's check are among the types of transfers
that a consumer can make. (See Appendix A-2.)
Paragraph 7(b)(5)--Fees
1. Disclosure of EFT fees. An institution is required to disclose
all fees for EFTs or the right to make them. Others fees (for example,
minimum-balance fees, stop-payment fees, or account overdrafts) may, but
need not, be disclosed (but see Regulation DD, 12 CFR Part 230. An
institution is not required to disclose fees for inquiries made at an
ATM since no transfer of funds is involved.
2. Fees also applicable to non-EFT. A per-item fee for EFTs must be
disclosed even if the same fee is imposed on nonelectronic transfers. If
a per-item fee is imposed only under certain conditions, such as when
the transactions in the cycle exceed a certain number, those conditions
must be disclosed. Itemization of the various fees may be provided on
the disclosure statement or on an accompanying document that is
referenced in the statement.
3. Interchange system fees. Fees paid by the account-holding
institution to the operator of a shared or interchange ATM system need
not be disclosed, unless they are imposed on the consumer by the
account-holding institution. Fees for use of an ATM that are debited
directly from the consumer's account by an institution other than the
account-holding institution (for example, fees included in the transfer
amount) need not be disclosed. (See Sec. 205.7(b)(11) for the general
notice requirement regarding fees that may be imposed by ATM operators
and by a network used to complete the transfer.)
Paragraph 7(b)(9)--Confidentiality
1. Information provided to third parties. An institution must
describe the circumstances under which any information relating to an
account to or from which EFTs are permitted will be made available to
third parties, not just information concerning those EFTs. The term
``third parties'' includes affiliates such as other subsidiaries of the
same holding company.
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Paragraph 7(b)(10)--Error Resolution
1. Substantially similar. The error resolution notice must be
substantially similar to the model form in appendix A of part 205. An
institution may use different wording so long as the substance of the
notice remains the same, may delete inapplicable provisions (for
example, the requirement for written confirmation of an oral
notification), and may substitute substantive state law requirements
affording greater consumer protection than Regulation E.
2. Extended time-period for certain transactions. To take advantage
of the longer time periods for resolving errors under Sec. 205.11(c)(3)
(for new accounts as defined in Regulation CC (12 CFR part 229),
transfers initiated outside the United States, or transfers resulting
from POS debit-card transactions), a financial institution must have
disclosed these longer time periods. Similarly, an institution that
relies on the exception from provisional crediting in Sec. 205.11(c)(2)
for accounts subject to Regulation T (12 CFR part 220) must have
disclosed accordingly.
7(c) Addition of Electronic Fund Transfer Services
1. Addition of electronic check conversion services. One-time EFTs
initiated using information from a consumer's check are a new type of
transfer requiring new disclosures, as applicable. (See Appendix A-2.)
Section 205.8--Change-in-Terms Notice; Error Resolution Notice
8(a) Change-in-Terms Notice
1. Form of notice. No specific form or wording is required for a
change-in-terms notice. The notice may appear on a periodic statement,
or may be given by sending a copy of a revised disclosure statement,
provided attention is directed to the change (for example, in a cover
letter referencing the changed term).
2. Changes not requiring notice. The following changes do not
require disclosure:
i. Closing some of an institution's ATMs;
ii. Cancellation of an access device.
3. Limitations on transfers. When the initial disclosures omit
details about limitations because secrecy is essential to the security
of the account or system, a subsequent increase in those limitations
need not be disclosed if secrecy is still essential. If, however, an
institution had no limits in place when the initial disclosures were
given and now wishes to impose limits for the first time, it must
disclose at least the fact that limits have been adopted. (See also
Sec. 205.7(b)(4) and the related commentary.)
4. Change in telephone number or address. When a financial
institution changes the telephone number or address used for reporting
possible unauthorized transfers, a change-in-terms notice is required
only if the institution will impose liability on the consumer for
unauthorized transfers under Sec. 205.6. (See also Sec. 205.6(a) and
the related commentary.)
8(b) Error Resolution Notice
1. Change between annual and periodic notice. If an institution
switches from an annual to a periodic notice, or vice versa, the first
notice under the new method must be sent no later than 12 months after
the last notice sent under the old method.
2. Exception for new accounts. For new accounts, disclosure of the
longer error resolution time periods under Sec. 205.11(c)(3) is not
required in the annual error resolution notice or in the notice that may
be provided with each periodic statement as an alternative to the annual
notice.
Section 205.9--Receipts at Electronic Terminals; Periodic Statements
9(a) Receipts at Electronic Terminals
1. Receipts furnished only on request. The regulation requires that
a receipt be ``made available.'' A financial institution may program its
electronic terminals to provide a receipt only to consumers who elect to
receive one.
2. Third party providing receipt. An account-holding institution may
make terminal receipts available through third parties such as merchants
or other financial institutions.
3. Inclusion of promotional material. A financial institution may
include promotional material on receipts if the required information is
set forth clearly (for example, by separating it from the promotional
material). In addition, a consumer may not be required to surrender the
receipt or that portion containing the required disclosures in order to
take advantage of a promotion.
4. Transfer not completed. The receipt requirement does not apply to
a transfer that is initiated but not completed (for example, if the ATM
is out of currency or the consumer decides not to complete the
transfer).
5. Receipts not furnished due to inadvertent error. If a receipt is
not provided to the consumer because of a bona fide unintentional error,
such as when a terminal runs out of paper or the mechanism jams, no
violation results if the financial institution maintains procedures
reasonably adapted to avoid such occurrences.
6. Multiple transfers. If the consumer makes multiple transfers at
the same time, the financial institution may document them on a single
or on separate receipts.
Paragraph 9(a)(1)--Amount
1. Disclosure of transaction fee. The required display of a fee
amount on or at the terminal
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may be accomplished by displaying the fee on a sign at the terminal or
on the terminal screen for a reasonable duration. Displaying the fee on
a screen provides adequate notice, as long as a consumer is given the
option to cancel the transaction after receiving notice of a fee. (See
Sec. 205.16 for the notice requirements applicable to ATM operators
that impose a fee for providing EFT services.)
2. Relationship between Sec. 205.9(a)(1) and Sec. 205.16. The
requirements of Sec. Sec. 205.9(a)(1) and 205.16 are similar but not
identical.
i. Section 205.9(a)(1) requires that if the amount of the transfer
as shown on the receipt will include the fee, then the fee must be
disclosed either on a sign on or at the terminal, or on the terminal
screen. Section 205.16 requires disclosure both on a sign on or at the
terminal (in a prominent and conspicuous location) and on the terminal
screen. Section 205.16 permits disclosure on a paper notice as an
alternative to the on-screen disclosure.
ii. The disclosure of the fee on the receipt under Sec. 205.9(a)(1)
cannot be used to comply with the alternative paper disclosure procedure
under Sec. 205.16, if the receipt is provided at the completion of the
transaction because, pursuant to the statute, the paper notice must be
provided before the consumer is committed to paying the fee.
iii. Section 205.9(a)(1) applies to any type of electronic terminal
as defined in Regulation E (for example, to POS terminals as well as to
ATMs), while Sec. 205.16 applies only to ATMs.
Paragraph 9(a)(2)--Date
1. Calendar date. The receipt must disclose the calendar date on
which the consumer uses the electronic terminal. An accounting or
business date may be disclosed in addition if the dates are clearly
distinguished.
Paragraph 9(a)(3)--Type
1. Identifying transfer and account. Examples identifying the type
of transfer and the type of the consumer's account include ``withdrawal
from checking,'' ``transfer from savings to checking,'' or ``payment
from savings.''
2. Exception. Identification of an account is not required when the
consumer can access only one asset account at a particular time or
terminal, even if the access device can normally be used to access more
than one account. For example, the consumer may be able to access only
one particular account at terminals not operated by the account-holding
institution, or may be able to access only one particular account when
the terminal is off-line. The exception is available even if, in
addition to accessing one asset account, the consumer also can access a
credit line.
3. Access to multiple accounts. If the consumer can use an access
device to make transfers to or from different accounts of the same type,
the terminal receipt must specify which account was accessed, such as
``withdrawal from checking I'' or ``withdrawal from checking II.'' If
only one account besides the primary checking account can be debited,
the receipt can identify the account as ``withdrawal from other
account.''
4. Generic descriptions. Generic descriptions may be used for
accounts that are similar in function, such as share draft or NOW
accounts and checking accounts. In a shared system, for example, when a
credit union member initiates transfers to or from a share draft account
at a terminal owned or operated by a bank, the receipt may identify a
withdrawal from the account as a ``withdrawal from checking.''
5. Point-of-sale transactions. There is no prescribed terminology
for identifying a transfer at a merchant's POS terminal. A transfer may
be identified, for example, as a purchase, a sale of goods or services,
or a payment to a third party. When a consumer obtains cash from a POS
terminal in addition to purchasing goods, or obtains cash only, the
documentation need not differentiate the transaction from one involving
the purchase of goods.
Paragraph 9(a)(5)--Terminal Location
1. Options for identifying terminal. The institution may provide
either:
i. The city, state or foreign country, and the information in
Sec. Sec. 205.9(a)(5) (i), (ii), or (iii), or
ii. A number or a code identifying the terminal. If the institution
chooses the second option, the code or terminal number identifying the
terminal where the transfer is initiated may be given as part of a
transaction code.
2. Omission of city name. The city may be omitted if the generally
accepted name (such as a branch name) contains the city name.
3. Omission of a state. A state may be omitted from the location
information on the receipt if:
i. All the terminals owned or operated by the financial institution
providing the statement (or by the system in which it participates) are
located in that state, or
ii. All transfers occur at terminals located within 50 miles of the
financial institutions's main office.
4. Omission of a city and state. A city and state may be omitted if
all the terminals owned or operated by the financial institution
providing the statement (or by the system in which it participates) are
located in the same city.
Paragraph 9(a)(5)(i)
1. Street address. The address should include number and street (or
intersection); the
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number (or intersecting street) may be omitted if the street alone
uniquely identifies the terminal location.
Paragraph 9(a)(5)(ii)
1. Generally accepted name. Examples of a generally accepted name
for a specific location include a branch of the financial institution, a
shopping center, or an airport.
Paragraph 9(a)(5)(iii)
1. Name of owner or operator of terminal. Examples of an owner or
operator of a terminal are a financial institution or a retail merchant.
Paragraph 9(a)(6)--Third Party Transfer
1. Omission of third-party name. The receipt need not disclose the
third-party name if the name is provided by the consumer in a form that
is not machine readable (for example, if the consumer indicates the
payee by depositing a payment stub into the ATM). If, on the other hand,
the consumer keys in the identity of the payee, the receipt must
identify the payee by name or by using a code that is explained
elsewhere on the receipt.
2. Receipt as proof of payment. Documentation required under the
regulation constitutes prima facie proof of a payment to another person,
except in the case of a terminal receipt documenting a deposit.
9(b) Periodic Statements
1. Periodic cycles. Periodic statements may be sent on a cycle that
is shorter than monthly. The statements must correspond to periodic
cycles that are reasonably equal, that is, do not vary by more than four
days from the regular cycle. The requirement of reasonably equal cycles
does not apply when an institution changes cycles for operational or
other reasons, such as to establish a new statement day or date.
2. Interim statements. Generally, a financial institution must
provide periodic statements for each monthly cycle in which an EFT
occurs, and at least quarterly if a transfer has not occurred. Where
EFTs occur between regularly-scheduled cycles, interim statements must
be provided. For example, if an institution issues quarterly statements
at the end of March, June, September and December, and the consumer
initiates an EFT in February, an interim statement for February must be
provided. If an interim statement contains interest or rate information,
the institution must comply with Regulation DD, 12 CFR 230.6.
3. Inactive accounts. A financial institution need not send
statements to consumers whose accounts are inactive as defined by the
institution.
4. Statement pickup. A financial institution may permit, but may not
require, consumers to pick up their periodic statements at the financial
institution.
5. Periodic statements limited to EFT activity. A financial
institution that uses a passbook as the primary means for displaying
account activity, but also allows the account to be debited
electronically, may provide a periodic statement requirement that
reflects only the EFTs and other required disclosures (such as charges,
account balances, and address and telephone number for inquiries). (See
Sec. 205.9(c)(1)(i) for the exception applicable to preauthorized
transfers for passbook accounts.)
6. Codes and accompanying documents. To meet the documentation
requirements for periodic statements, a financial institution may:
i. Include copies of terminal receipts to reflect transfers
initiated by the consumer at electronic terminals;
ii. Enclose posting memos, deposit slips, and other documents that,
together with the statement, disclose all the required information;
iii. Use codes for names of third parties or terminal locations and
explain the information to which the codes relate on an accompanying
document.
Paragraph 9(b)(1)--Transaction Information
1. Information obtained from others. While financial institutions
must maintain reasonable procedures to ensure the integrity of data
obtained from another institution, a merchant, or other third parties,
verification of each transfer that appears on the periodic statement is
not required.
Paragraph 9(b)(1)(i)
1. Incorrect deposit amount. If a financial institution determines
that the amount actually deposited at an ATM is different from the
amount entered by the consumer, the institution need not immediately
notify the consumer of the discrepancy. The periodic statement
reflecting the deposit may show either the correct amount of the deposit
or the amount entered by the consumer along with the institution's
adjustment.
Paragraph 9(b)(1)(iii)
1. Type of transfer. There is no prescribed terminology for
describing a type of transfer. Placement of the amount of the transfer
in the debit or the credit column is sufficient if other information on
the statement, such as a terminal location or third-party name, enables
the consumer to identify the type of transfer.
Paragraph 9(b)(1)(iv)
1. Nonproprietary terminal in network. An institution need not
reflect on the periodic statement the street addresses, identification
codes, or terminal numbers for transfers
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initiated in a shared or interchange system at a terminal operated by an
institution other than the account-holding institution. The statement
must, however, specify the entity that owns or operates the terminal,
plus the city and state.
Paragraph 9(b)(1)(v)
1. Recurring payments by government agency. The third-party name for
recurring payments from federal, state, or local governments need not
list the particular agency. For example, ``U.S. gov't'' or ``N.Y. sal''
will suffice.
2. Consumer as third-party payee. If a consumer makes an electronic
fund transfer to another consumer, the financial institution must
identify the recipient by name (not just by an account number, for
example).
3. Terminal location/third party. A single entry may be used to
identify both the terminal location and the name of the third party to
or from whom funds are transferred. For example, if a consumer purchases
goods from a merchant, the name of the party to whom funds are
transferred (the merchant) and the location of the terminal where the
transfer is initiated will be satisfied by a disclosure such as ``XYZ
Store, Anytown, Ohio.''
4. Account-holding institution as third party. Transfers to the
account-holding institution (by ATM, for example) must show the
institution as the recipient, unless other information on the statement
(such as, ``loan payment from checking'') clearly indicates that the
payment was to the account-holding institution.
5. Consistency in third-party identity. The periodic statement must
disclose a third-party name as it appeared on the receipt, whether it
was, for example, the ``dba'' (doing business as) name of the third
party or the parent corporation's name.
6. Third-party identity on deposits at electronic terminal. A
financial institution need not identify third parties whose names appear
on checks, drafts, or similar paper instruments deposited to the
consumer's account at an electronic terminal.
Paragraph 9(b)(3)--Fees
1. Disclosure of fees. The fees disclosed may include fees for EFTs
and for other nonelectronic services, and both fixed fees and per-item
fees; they may be given as a total or may be itemized in part or in
full.
2. Fees in interchange system. An account-holding institution must
disclose any fees it imposes on the consumer for EFTs, including fees
for ATM transactions in an interchange or shared ATM system. Fees for
use of an ATM imposed on the consumer by an institution other than the
account-holding institution and included in the amount of the transfer
by the terminal-operating institution need not be separately disclosed
on the periodic statement.
3. Finance charges. The requirement to disclose any fees assessed
against the account does not include a finance charge imposed on the
account during the statement period.
Paragraph 9(b)(4)--Account Balances
1. Opening and closing balances. The opening and closing balances
must reflect both EFTs and other account activity.
Paragraph 9(b)(5)--Address and Telephone Number for Inquiries
1. Telephone number. A single telephone number, preceded by the
``direct inquiries to'' language, will satisfy the requirements of Sec.
205.9(b)(5) and (6).
Paragraph 9(b)(6)--Telephone Number for Preauthorized Transfers
1. Telephone number. See comment 9(b)(5)-1.
9(c) Exceptions to the Periodic Statement Requirements for Certain
Accounts
1. Transfers between accounts. The regulation provides an exception
from the periodic statement requirement for certain intra-institutional
transfers between a consumer's accounts. The financial institution must
still comply with the applicable periodic statement requirements for any
other EFTs to or from the account. For example, a Regulation E statement
must be provided quarterly for an account that also receives payroll
deposits electronically, or for any month in which an account is also
accessed by a withdrawal at an ATM.
Paragraph 9(c)(1)--Preauthorized Transfers to Accounts
1. Accounts that may be accessed only by preauthorized transfers to
the account. The exception for ``accounts that may be accessed only by
preauthorized transfers to the account'' includes accounts that can be
accessed by means other than EFTs, such as checks. If, however, an
account may be accessed by any EFT other than preauthorized credits to
the account, such as preauthorized debits or ATM transactions, the
account does not qualify for the exception.
2. Reversal of direct deposits. For direct-deposit-only accounts, a
financial institution must send a periodic statement at least quarterly.
A reversal of a direct deposit to correct an error does not trigger the
monthly statement requirement when the error represented a credit to the
wrong consumer's account, a duplicate credit, or a credit in the wrong
amount. (See also comment 2(m)-5.)
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9(d) Documentation for Foreign-Initiated Transfers
1. Foreign-initiated transfers. An institution must make a good
faith effort to provide all required information for foreign-initiated
transfers. For example, even if the institution is not able to provide a
specific terminal location, it should identify the country and city in
which the transfer was initiated.
Section 205.10--Preauthorized Transfers
10(a) Preauthorized Transfers to Consumer's Account
Paragraph 10(a)(1)--Notice by Financial Institution
1. Content. No specific language is required for notice regarding
receipt of a preauthorized transfer. Identifying the deposit is
sufficient; however, simply providing the current account balance is
not.
2. Notice of credit. A financial institution may use different
methods of notice for various types or series of preauthorized
transfers, and the institution need not offer consumers a choice of
notice methods.
3. Positive notice. A periodic statement sent within two business
days of the scheduled transfer, showing the transfer, can serve as
notice of receipt.
4. Negative notice. The absence of a deposit entry (on a periodic
statement sent within two business days of the scheduled transfer date)
will serve as negative notice.
5. Telephone notice. If a financial institution uses the telephone
notice option, it should be able in most instances to verify during a
consumer's initial call whether a transfer was received. The institution
must respond within two business days to any inquiry not answered
immediately.
6. Phone number for passbook accounts. The financial institution may
use any reasonable means necessary to provide the telephone number to
consumers with passbook accounts that can only be accessed by
preauthorized credits and that do not receive periodic statements. For
example, it may print the telephone number in the passbook, or include
the number with the annual error resolution notice.
7. Telephone line availability. To satisfy the readily-available
standard, the financial institution must provide enough telephone lines
so that consumers get a reasonably prompt response. The institution need
only provide telephone service during normal business hours. Within its
primary service area, an institution must provide a local or toll-free
telephone number. It need not provide a toll-free number or accept
collect long-distance calls from outside the area where it normally
conducts business.
10(b) Written Authorization for Preauthorized Transfers From Consumer's
Account
1. Preexisting authorizations. The financial institution need not
require a new authorization before changing from paper-based to
electronic debiting when the existing authorization does not specify
that debiting is to occur electronically or specifies that the debiting
will occur by paper means. A new authorization also is not required when
a successor institution begins collecting payments.
2. Authorization obtained by third party. The account-holding
financial institution does not violate the regulation when a third-party
payee fails to obtain the authorization in writing or fails to give a
copy to the consumer; rather, it is the third-party payee that is in
violation of the regulation.
3. Written authorization for preauthorized transfers. The
requirement that preauthorized EFTs be authorized by the consumer ``only
by a writing'' cannot be met by a payee's signing a written
authorization on the consumer's behalf with only an oral authorization
from the consumer.
4. Use of a confirmation form. A financial institution or designated
payee may comply with the requirements of this section in various ways.
For example, a payee may provide the consumer with two copies of a
preauthorization form, and ask the consumer to sign and return one and
to retain the second copy.
5. Similarly authenticated. The similarly authenticated standard
permits signed, written authorizations to be provided electronically.
The writing and signature requirements of this section are satisfied by
complying with the Electronic Signatures in Global and National Commerce
Act, 15 U.S.C. 7001 et seq., which defines electronic records and
electronic signatures. Examples of electronic signatures include, but
are not limited to, digital signatures and security codes. A security
code need not originate with the account-holding institution. The
authorization process should evidence the consumer's identity and assent
to the authorization. The person that obtains the authorization must
provide a copy of the terms of the authorization to the consumer either
electronically or in paper form. Only the consumer may authorize the
transfer and not, for example, a third-party merchant on behalf of the
consumer.
6. Requirements of an authorization. An authorization is valid if it
is readily identifiable as such and the terms of the preauthorized
transfer are clear and readily understandable.
7. Bona fide error. Consumers sometimes authorize third-party
payees, by telephone or on-line, to submit recurring charges against a
credit card account. If the consumer indicates use of a credit card
account
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when in fact a debit card is being used, the payee does not violate the
requirement to obtain a written authorization if the failure to obtain
written authorization was not intentional and resulted from a bona fide
error, and if the payee maintains procedures reasonably adapted to avoid
any such error. Procedures reasonably adapted to avoid error will depend
upon the circumstances. Generally, requesting the consumer to specify
whether the card to be used for the authorization is a debit (or check)
card or a credit card is a reasonable procedure. Where the consumer has
indicated that the card is a credit card (or that the card is not a
debit or check card), the payee may rely on the consumer's statement
without seeking further information about the type of card. If the payee
believes, at the time of the authorization, that a credit card is
involved, and later finds that the card used is a debit card (for
example, because the consumer later brings the matter to the payee's
attention), the payee must obtain a written and signed or (where
appropriate) a similarly authenticated authorization as soon as
reasonably possible, or cease debiting the consumer's account.
10(c) Consumer's Right To Stop Payment
1. Stop-payment order. The financial institution must honor an oral
stop-payment order made at least three business days before a scheduled
debit. If the debit item is resubmitted, the institution must continue
to honor the stop-payment order (for example, by suspending all
subsequent payments to the payee-originator until the consumer notifies
the institution that payments should resume).
2. Revocation of authorization. Once a financial institution has
been notified that the consumer's authorization is no longer valid, it
must block all future payments for the particular debit transmitted by
the designated payee-originator. (However, see comment 10(c)-3.) The
institution may not wait for the payee-originator to terminate the
automatic debits. The institution may confirm that the consumer has
informed the payee-originator of the revocation (for example, by
requiring a copy of the consumer's revocation as written confirmation to
be provided within 14 days of an oral notification). If the institution
does not receive the required written confirmation within the 14-day
period, it may honor subsequent debits to the account.
3. Alternative procedure for processing a stop-payment request. If
an institution does not have the capability to block a preauthorized
debit from being posted to the consumer's account--as in the case of a
preauthorized debit made through a debit card network or other system,
for example--the institution may instead comply with the stop-payment
requirements by using a third party to block the transfer(s), as long as
the consumer's account is not debited for the payment.
10(d) Notice of Transfers Varying in Amount
Paragraph 10(d)(1)--Notice
1. Preexisting authorizations. A financial institution holding the
consumer's account does not violate the regulation if the designated
payee fails to provide notice of varying amounts.
Paragraph 10(d)(2)--Range
1. Range. A financial institution or designated payee that elects to
offer the consumer a specified range of amounts for debiting (in lieu of
providing the notice of transfers varying in amount) must provide an
acceptable range that could be anticipated by the consumer. For example,
if the transfer is for payment of a gas bill, an appropriate range might
be based on the highest bill in winter and the lowest bill in summer.
2. Transfers to an account of the consumer held at another
institution. A financial institution need not provide a consumer the
option of receiving notice with each varying transfer, and may instead
provide notice only when a debit to an account of the consumer falls
outside a specified range or differs by more than a specified amount
from the most recent transfer, if the funds are transferred and credited
to an account of the consumer held at another financial institution. The
specified range or amount, however, must be one that reasonably could be
anticipated by the consumer, and the institution must notify the
consumer of the range or amount at the time the consumer provides
authorization for the preauthorized transfers. For example, if the
transfer is for payment of interest for a fixed-rate certificate of
deposit account, an appropriate range might be based on a month
containing 28 days and a month containing 31 days.
10(e) Compulsory Use
Paragraph 10(e)(1)--Credit
1. Loan payments. Creditors may not require repayment of loans by
electronic means on a preauthorized, recurring basis. A creditor may
offer a program with a reduced annual percentage rate or other cost-
related incentive for an automatic repayment feature, provided the
program with the automatic payment feature is not the only loan program
offered by the creditor for the type of credit involved. Examples
include:
i. Mortgages with graduated payments in which a pledged savings
account is automatically debited during an initial period to supplement
the monthly payments made by the borrower.
ii. Mortgage plans calling for preauthorized biweekly payments that
are
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debited electronically to the consumer's account and produce a lower
total finance charge.
2. Overdraft. A financial institution may require the automatic
repayment of an overdraft credit plan even if the overdraft extension is
charged to an open-end account that may be accessed by the consumer in
ways other than by overdrafts.
Paragraph 10(e)(2)--Employment or Government Benefit
1. Payroll. An employer (including a financial institution) may not
require its employees to receive their salary by direct deposit to any
particular institution. An employer may require direct deposit of salary
by electronic means if employees are allowed to choose the institution
that will receive the direct deposit. Alternatively, an employer may
give employees the choice of having their salary deposited at a
particular institution (designated by the employer) or receiving their
salary by another means, such as by check or cash.
Section 205.11--Procedures for Resolving Errors
11(a) Definition of Error
1. Terminal location. With regard to deposits at an ATM, a
consumer's request for the terminal location or other information
triggers the error resolution procedures, but the financial institution
need only provide the ATM location if it has captured that information.
2. Verifying an account debit or credit. If the consumer contacts
the financial institution to ascertain whether a payment (for example,
in a home-banking or bill-payment program) or any other type of EFT was
debited to the account, or whether a deposit made via ATM, preauthorized
transfer, or any other type of EFT was credited to the account, without
asserting an error, the error resolution procedures do not apply.
3. Loss or theft of access device. A financial institution is
required to comply with the error resolution procedures when a consumer
reports the loss or theft of an access device if the consumer also
alleges possible unauthorized use as a consequence of the loss or theft.
4. Error asserted after account closed. The financial institution
must comply with the error resolution procedures when a consumer
properly asserts an error, even if the account has been closed.
5. Request for documentation or information. A request for
documentation or other information must be treated as an error unless it
is clear that the consumer is requesting a duplicate copy for tax or
other record-keeping purposes.
6. Terminal receipts for transfers of $15 or less. The fact that an
institution does not make a terminal receipt available for a transfer of
$15 or less in accordance with Sec. 205.9(e) is not an error for
purposes of Sec. Sec. 205.11(a)(1)(vi) or (vii).
11(b) Notice of Error From Consumer
Paragraph 11(b)(1)--Timing; Contents
1. Content of error notice. The notice of error is effective even if
it does not contain the consumer's account number, so long as the
financial institution is able to identify the account in question. For
example, the consumer could provide a Social Security number or other
unique means of identification.
2. Investigation pending receipt of information. While a financial
institution may request a written, signed statement from the consumer
relating to a notice of error, it may not delay initiating or completing
an investigation pending receipt of the statement.
3. Statement held for consumer. When a consumer has arranged for
periodic statements to be held until picked up, the statement for a
particular cycle is deemed to have been transmitted on the date the
financial institution first makes the statement available to the
consumer.
4. Failure to provide statement. When a financial institution fails
to provide the consumer with a periodic statement, a request for a copy
is governed by this section if the consumer gives notice within 60 days
from the date on which the statement should have been transmitted.
5. Discovery of error by institution. The error resolution
procedures of this section apply when a notice of error is received from
the consumer, and not when the financial institution itself discovers
and corrects an error.
6. Notice at particular phone number or address. A financial
institution may require the consumer to give notice only at the
telephone number or address disclosed by the institution, provided the
institution maintains reasonable procedures to refer the consumer to the
specified telephone number or address if the consumer attempts to give
notice to the institution in a different manner.
7. Effect of late notice. An institution is not required to comply
with the requirements of this section for any notice of error from the
consumer that is received by the institution later than 60 days from the
date on which the periodic statement first reflecting the error is sent.
Where the consumer's assertion of error involves an unauthorized EFT,
however, the institution must comply with Sec. 205.6 before it may
impose any liability on the consumer.
Paragraph 11(b)(2)--Written Confirmation
1. Written confirmation-of-error notice. If the consumer sends a
written confirmation of
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error to the wrong address, the financial institution must process the
confirmation through normal procedures. But the institution need not
provisionally credit the consumer's account if the written confirmation
is delayed beyond 10 business days in getting to the right place because
it was sent to the wrong address.
11(c) Time Limits and Extent of Investigation
1. Notice to consumer. Unless otherwise indicated in this section,
the financial institution may provide the required notices to the
consumer either orally or in writing.
2. Written confirmation of oral notice. A financial institution must
begin its investigation promptly upon receipt of an oral notice. It may
not delay until it has received a written confirmation.
3. Charges for error resolution. If a billing error occurred,
whether as alleged or in a different amount or manner, the financial
institution may not impose a charge related to any aspect of the error-
resolution process (including charges for documentation or
investigation). Since the act grants the consumer error-resolution
rights, the institution should avoid any chilling effect on the good-
faith assertion of errors that might result if charges are assessed when
no billing error has occurred.
4. Correction without investigation. A financial institution may
make, without investigation, a final correction to a consumer's account
in the amount or manner alleged by the consumer to be in error, but must
comply with all other applicable requirements of Sec. 205.11.
5. Correction notice. A financial institution may include the notice
of correction on a periodic statement that is mailed or delivered within
the 10-business-day or 45-calendar-day time limits and that clearly
identifies the correction to the consumer's account. The institution
must determine whether such a mailing will be prompt enough to satisfy
the requirements of this section, taking into account the specific facts
involved.
6. Correction of an error. If the financial institution determines
an error occurred, within either the 10-day or 45-day period, it must
correct the error (subject to the liability provisions of Sec. Sec.
205.6 (a) and (b)) including, where applicable, the crediting of
interest and the refunding of any fees imposed by the institution. In a
combined credit/EFT transaction, for example, the institution must
refund any finance charges incurred as a result of the error. The
institution need not refund fees that would have been imposed whether or
not the error occurred.
7. Extent of required investigation. A financial institution
complies with its duty to investigate, correct, and report its
determination regarding an error described in Sec. 205.11(a)(1)(vii) by
transmitting the requested information, clarification, or documentation
within the time limits set forth in Sec. 205.11(c). If the institution
has provisionally credited the consumer's account in accordance with
Sec. 205.11(c)(2), it may debit the amount upon transmitting the
requested information, clarification, or documentation.
Paragraph 11(c)(2)(i)
1. Compliance with all requirements. Financial institutions exempted
from provisionally crediting a consumer's account under Sec.
205.11(c)(2)(i) (A) and (B) must still comply with all other
requirements of Sec. 205.11.
Paragraph 11(c)(3)--Extension of Time Periods
1. POS debit card transactions. The extended deadlines for
investigating errors resulting from POS debit card transactions apply to
all debit card transactions, including those for cash only, at
merchants' POS terminals, and also including mail and telephone orders.
The deadlines do not apply to transactions at an ATM, however, even
though the ATM may be in a merchant location.
Paragraph 11(c)(4)--Investigation
1. Third parties. When information or documentation requested by the
consumer is in the possession of a third party with whom the financial
institution does not have an agreement, the institution satisfies the
error resolution requirement by so advising the consumer within the
specified time period.
2. Scope of investigation. When an alleged error involves a payment
to a third party under the financial institution's telephone bill-
payment plan, a review of the institution's own records is sufficient,
assuming no agreement exists between the institution and the third party
concerning the bill-payment service.
3. POS transfers. When a consumer alleges an error involving a
transfer to a merchant via a POS terminal, the institution must verify
the information previously transmitted when executing the transfer. For
example, the financial institution may request a copy of the sales
receipt to verify that the amount of the transfer correctly corresponds
to the amount of the consumer's purchase.
4. Agreement. An agreement that a third party will honor an access
device is an agreement for purposes of this paragraph. A financial
institution does not have an agreement for purposes of Sec.
205.11(c)(4)(ii) solely because it participates in transactions that
occur under the federal recurring payments programs, or that are cleared
through an ACH or similar arrangement for the clearing and settlement of
fund transfers generally, or because it agrees to be bound by the rules
of such an arrangement.
5. No EFT agreement. When there is no agreement between the
institution and the
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third party for the type of EFT involved, the financial institution must
review any relevant information within the institution's own records for
the particular account to resolve the consumer's claim. The extent of
the investigation required may vary depending on the facts and
circumstances. However, a financial institution may not limit its
investigation solely to the payment instructions where additional
information within its own records pertaining to the particular account
in question could help to resolve a consumer's claim.
Information that may be reviewed as part of an investigation might
include:
i. The ACH transaction records for the transfer;
ii. The transaction history of the particular account for a
reasonable period of time immediately preceding the allegation of error;
iii. Whether the check number of the transaction in question is
notably out-of-sequence;
iv. The location of either the transaction or the payee in question
relative to the consumer's place of residence and habitual transaction
area;
v. Information relative to the account in question within the
control of the institution's third-party service providers if the
financial institution reasonably believes that it may have records or
other information that could be dispositive; or
vi. Any other information appropriate to resolve the claim.
11(d) Procedures if Financial Institution Determines No Error or
Different Error Occurred
1. Error different from that alleged. When a financial institution
determines that an error occurred in a manner or amount different from
that described by the consumer, it must comply with the requirements of
both Sec. 205.11 (c) and (d), as relevant. The institution may give the
notice of correction and the explanation separately or in a combined
form.
Paragraph 11(d)(1)--Written Explanation
1. Request for documentation. When a consumer requests copies of
documents, the financial institution must provide the copies in an
understandable form. If an institution relied on magnetic tape it must
convert the applicable data into readable form, for example, by printing
it and explaining any codes.
Paragraph 11(d)(2)--Debiting Provisional Credit
1. Alternative procedure for debiting of credited funds. The
financial institution may comply with the requirements of this section
by notifying the consumer that the consumer's account will be debited
five business days from the transmittal of the notification, specifying
the calendar date on which the debiting will occur.
2. Fees for overdrafts. The financial institution may not impose
fees for items it is required to honor under Sec. 205.11. It may,
however, impose any normal transaction or item fee that is unrelated to
an overdraft resulting from the debiting. If the account is still
overdrawn after five business days, the institution may impose the fees
or finance charges to which it is entitled, if any, under an overdraft
credit plan.
11(e) Reassertion of Error
1. Withdrawal of error; right to reassert. The financial institution
has no further error resolution responsibilities if the consumer
voluntarily withdraws the notice alleging an error. A consumer who has
withdrawn an allegation of error has the right to reassert the
allegation unless the financial institution had already complied with
all of the error resolution requirements before the allegation was
withdrawn. The consumer must do so, however, within the original 60-day
period.
Section 205.12--Relation to Other Laws
12(a) Relation to Truth in Lending
1. Determining applicable regulation. i. For transactions involving
access devices that also function as credit cards, whether Regulation E
or Regulation Z (12 CFR part 226) applies depends on the nature of the
transaction. For example, if the transaction solely involves an
extension of credit, and does not include a debit to a checking account
(or other consumer asset account), the liability limitations and error
resolution requirements of Regulation Z apply. If the transaction debits
a checking account only (with no credit extended), the provisions of
Regulation E apply. If the transaction debits a checking account but
also draws on an overdraft line of credit attached to the account,
Regulation E's liability limitations apply, in addition to Sec. Sec.
226.13 (d) and (g) of Regulation Z (which apply because of the extension
of credit associated with the overdraft feature on the checking
account). If a consumer's access device is also a credit card and the
device is used to make unauthorized withdrawals from a checking account,
but also is used to obtain unauthorized cash advances directly from a
line of credit that is separate from the checking account, both
Regulation E and Regulation Z apply.
ii. The following examples illustrate these principles:
A. A consumer has a card that can be used either as a credit card or
a debit card. When used as a debit card, the card draws on the
consumer's checking account. When used as a credit card, the card draws
only on a separate line of credit. If the card is stolen and used as a
credit card to make purchases or to
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get cash advances at an ATM from the line of credit, the liability
limits and error resolution provisions of Regulation Z apply; Regulation
E does not apply.
B. In the same situation, if the card is stolen and is used as a
debit card to make purchases or to get cash withdrawals at an ATM from
the checking account, the liability limits and error resolution
provisions of Regulation E apply; Regulation Z does not apply.
C. In the same situation, assume the card is stolen and used both as
a debit card and as a credit card; for example, the thief makes some
purchases using the card as a debit card, and other purchases using the
card as a credit card. Here, the liability limits and error resolution
provisions of Regulation E apply to the unauthorized transactions in
which the card was used as a debit card, and the corresponding
provisions of Regulation Z apply to the unauthorized transactions in
which the card was used as a credit card.
D. Assume a somewhat different type of card, one that draws on the
consumer's checking account and can also draw on an overdraft line of
credit attached to the checking account. There is no separate line of
credit, only the overdraft line, associated with the card. In this
situation, if the card is stolen and used, the liability limits and the
error resolution provisions of Regulation E apply. In addition, if the
use of the card has resulted in accessing the overdraft line of credit,
the error resolution provisions of Sec. 226.13(d) and (g) of Regulation
Z also apply, but not the other error resolution provisions of
Regulation Z.
2. Issuance rules. For access devices that also constitute credit
cards, the issuance rules of Regulation E apply if the only credit
feature is a preexisting credit line attached to the asset account to
cover overdrafts (or to maintain a specified minimum balance) or an
overdraft service, as defined in Sec. 205.17(a). Regulation Z (12 CFR
part 226) rules apply if there is another type of credit feature; for
example, one permitting direct extensions of credit that do not involve
the asset account.
3. Overdraft service. The addition of an overdraft service, as that
term is defined in Sec. 205.17(a), to an accepted access device does
not constitute the addition of a credit feature subject to Regulation Z.
Instead, the provisions of Regulation E apply, including the liability
limitations (Sec. 205.6) and the requirement to obtain consumer consent
to the service before any fees or charges for paying an overdraft may be
assessed on the account (Sec. 205.17).
12(b) Preemption of Inconsistent State Laws
1. Specific determinations. The regulation prescribes standards for
determining whether state laws that govern EFTs, and state laws
regarding gift certificates, store gift cards, or general-use prepaid
cards that govern dormancy, inactivity, or service fees, or expiration
dates, are preempted by the act and the regulation. A state law that is
inconsistent may be preempted even if the Board has not issued a
determination. However, nothing in Sec. 205.12(b) provides a financial
institution with immunity for violations of state law if the institution
chooses not to make state disclosures and the Board later determines
that the state law is not preempted.
2. Preemption determination. The Board determined that certain
provisions in the state law of Michigan are preempted by the federal
law, effective March 30, 1981:
i. Definition of unauthorized use. Section 5(4) is preempted to the
extent that it relates to the section of state law governing consumer
liability for unauthorized use of an access device.
ii. Consumer liability for unauthorized use of an account. Section
14 is inconsistent with Sec. 205.6 and is less protective of the
consumer than the federal law. The state law places liability on the
consumer for the unauthorized use of an account in cases involving the
consumer's negligence. Under the federal law, a consumer's liability for
unauthorized use is not related to the consumer's negligence and depends
instead on the consumer's promptness in reporting the loss or theft of
the access device.
iii. Error resolution. Section 15 is preempted because it is
inconsistent with Sec. 205.11 and is less protective of the consumer
than the federal law. The state law allows financial institutions up to
70 days to resolve errors, whereas the federal law generally requires
errors to be resolved within 45 days.
iv. Receipts and periodic statements. Sections 17 and 18 are
preempted because they are inconsistent with Sec. 205.9. The state
provisions require a different disclosure of information than does the
federal law. The receipt provision is also preempted because it allows
the consumer to be charged for receiving a receipt if a machine cannot
furnish one at the time of a transfer.
Section 205.13--Administrative Enforcement; Record Retention
13(b) Record Retention
1. Requirements. A financial institution need not retain records
that it has given disclosures and documentation to each consumer; it
need only retain evidence demonstrating that its procedures reasonably
ensure the consumers' receipt of required disclosures and documentation.
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Section 205.14--Electronic Fund Transfer Service Provider Not Holding
Consumer's Account
14(a) Electronic Fund Transfer Service Providers Subject to Regulation
1. Applicability. This section applies only when a service provider
issues an access device to a consumer for initiating transfers to or
from the consumer's account at a financial institution and the two
entities have no agreement regarding this EFT service. If the service
provider does not issue an access device to the consumer for accessing
an account held by another institution, it does not qualify for the
treatment accorded by Sec. 205.14. For example, this section does not
apply to an institution that initiates preauthorized payroll deposits to
consumer accounts on behalf of an employer. By contrast, Sec. 205.14
can apply to an institution that issues a code for initiating telephone
transfers to be carried out through the ACH from a consumer's account at
another institution. This is the case even if the consumer has accounts
at both institutions.
2. ACH agreements. The ACH rules generally do not constitute an
agreement for purposes of this section. However, an ACH agreement under
which members specifically agree to honor each other's debit cards is an
``agreement,'' and thus this section does not apply.
14(b) Compliance by Electronic Fund Transfer Service Provider
1. Liability. The service provider is liable for unauthorized EFTs
that exceed limits on the consumer's liability under Sec. 205.6.
Paragraph 14(b)(1)--Disclosures and Documentation
1. Periodic statements from electronic fund transfer service
provider. A service provider that meets the conditions set forth in this
paragraph does not have to issue periodic statements. A service provider
that does not meet the conditions need only include on periodic
statements information about transfers initiated with the access device
it has issued.
Paragraph 14(b)(2)--Error Resolution
1. Error resolution. When a consumer notifies the service provider
of an error, the EFT service provider must investigate and resolve the
error in compliance with Sec. 205.11 as modified by Sec. 205.14(b)(2).
If an error occurred, any fees or charges imposed as a result of the
error, either by the service provider or by the account-holding
institution (for example, overdraft or dishonor fees) must be reimbursed
to the consumer by the service provider.
14(c) Compliance by Account-Holding Institution
Paragraph 14(c)(1)
1. Periodic statements from account-holding institution. The
periodic statement provided by the account-holding institution need only
contain the information required by Sec. 205.9(b)(1).
Section 205.16--Disclosures at Automated Teller Machines
16(b) General
Paragraph 16(b)(1)
1. Specific notices. An ATM operator that imposes a fee for a
specific type of transaction--such as for a cash withdrawal, but not for
a balance inquiry, or for some cash withdrawals, but not for others
(such as where the card was issued by a foreign bank or by a card issuer
that has entered into a special contractual relationship with the ATM
operator regarding surcharges)--may provide a notice on or at the ATM
that a fee will be imposed or a notice that a fee may be imposed for
providing EFT services or may specify the type of EFT for which a fee is
imposed. If, however, a fee will be imposed in all instances, the notice
must state that a fee will be imposed.
Section 205.17--Requirements for Overdraft Services
17(a) Definition
1. Exempt securities- and commodities-related lines of credit. The
definition of ``overdraft service'' does not include the payment of
transactions in a securities or commodities account pursuant to which
credit is extended by a broker-dealer registered with the Securities and
Exchange Commission or the Commodity Futures Trading Commission.
17(b) Opt-In Requirement
1. Scope.
i. Account-holding institutions. Section 205.17(b) applies to ATM
and one-time debit card transactions made with a debit card issued by or
on behalf of the account-holding institution. Section 205.17(b) does not
apply to ATM and one-time debit card transactions made with a debit card
issued by or through a third party unless the debit card is issued on
behalf of the account-holding institution.
ii. Coding of transactions. A financial institution complies with
the rule if it adapts its systems to identify debit card transactions as
either one-time or recurring. If it does so, the financial institution
may rely on the transaction's coding by merchants, other institutions,
and other third parties as a one-time or a preauthorized or recurring
debit card transaction.
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iii. One-time debit card transactions. The opt-in applies to any
one-time debit card transaction, whether the card is used, for example,
at a point-of-sale, in an on-line transaction, or in a telephone
transaction.
iv. Application of fee prohibition. The prohibition on assessing
overdraft fees under Sec. 205.17(b)(1) applies to all institutions. For
example, the prohibition applies to an institution that has a policy and
practice of declining to authorize and pay any ATM or one-time debit
card transactions when the institution has a reasonable belief at the
time of the authorization request that the consumer does not have
sufficient funds available to cover the transaction. However, the
institution is not required to comply with Sec. Sec. 205.17(b)(1)(i)-
(iv), including the notice and opt-in requirements, if it does not
assess overdraft fees for paying ATM or one-time debit card transactions
that overdraw the consumer's account. Assume an institution does not
provide an opt-in notice, but authorizes an ATM or one-time debit card
transaction on the reasonable belief that the consumer has sufficient
funds in the account to cover the transaction. If, at settlement, the
consumer has insufficient funds in the account (for example, due to
intervening transactions that post to the consumer's account), the
institution is not permitted to assess an overdraft fee or charge for
paying that transaction.
2. No affirmative consent. A financial institution may pay
overdrafts for ATM and one-time debit card transactions even if a
consumer has not affirmatively consented or opted in to the
institution's overdraft service. If the institution pays such an
overdraft without the consumer's affirmative consent, however, it may
not impose a fee or charge for doing so. These provisions do not limit
the institution's ability to debit the consumer's account for the amount
overdrawn if the institution is permitted to do so under applicable law.
3. Overdraft transactions not required to be authorized or paid.
Section 205.17 does not require a financial institution to authorize or
pay an overdraft on an ATM or one-time debit card transaction even if
the consumer has affirmatively consented to an institution's overdraft
service for such transactions.
4. Reasonable opportunity to provide affirmative consent. A
financial institution provides a consumer with a reasonable opportunity
to provide affirmative consent when, among other things, it provides
reasonable methods by which the consumer may affirmatively consent. A
financial institution provides such reasonable methods, if--
i. By mail. The institution provides a form for the consumer to fill
out and mail to affirmatively consent to the service.
ii. By telephone. The institution provides a readily-available
telephone line that consumers may call to provide affirmative consent.
iii. By electronic means. The institution provides an electronic
means for the consumer to affirmatively consent. For example, the
institution could provide a form that can be accessed and processed at
its Web site, where the consumer may click on a check box to provide
consent and confirm that choice by clicking on a button that affirms the
consumer's consent.
iv. In person. The institution provides a form for the consumer to
complete and present at a branch or office to affirmatively consent to
the service.
5. Implementing opt-in at account-opening. A financial institution
may provide notice regarding the institution's overdraft service prior
to or at account-opening. A financial institution may require a
consumer, as a necessary step to opening an account, to choose whether
or not to opt into the payment of ATM or one-time debit card
transactions pursuant to the institution's overdraft service. For
example, the institution could require the consumer, at account opening,
to sign a signature line or check a box on a form (consistent with
comment 17(b)-6) indicating whether or not the consumer affirmatively
consents at account opening. If the consumer does not check any box or
provide a signature, the institution must assume that the consumer does
not opt in. Or, the institution could require the consumer to choose
between an account that does not permit the payment of ATM or one-time
debit card transactions pursuant to the institution's overdraft service
and an account that permits the payment of such overdrafts, provided
that the accounts comply with Sec. 205.17(b)(2) and Sec. 205.17(b)(3).
6. Affirmative consent required. A consumer's affirmative consent,
or opt-in, to a financial institution's overdraft service must be
obtained separately from other consents or acknowledgements obtained by
the institution, including a consent to receive disclosures
electronically. An institution may obtain a consumer's affirmative
consent by providing a blank signature line or check box that the
consumer could sign or select to affirmatively consent, provided that
the signature line or check box is used solely for purposes of
evidencing the consumer's choice whether or not to opt into the
overdraft service and not for other purposes. An institution does not
obtain a consumer's affirmative consent by including preprinted language
about the overdraft service in an account disclosure provided with a
signature card or contract that the consumer must sign to open the
account and that acknowledges the consumer's acceptance of the account
terms. Nor does an institution obtain a consumer's affirmative consent
by providing a signature card that contains a pre-selected check box
indicating that the consumer is requesting the service.
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7. Confirmation. A financial institution may comply with the
requirement in Sec. 205.17(b)(1)(iv) to provide confirmation of the
consumer's affirmative consent by mailing or delivering to the consumer
a copy of the consumer's completed opt-in notice, or by mailing or
delivering a letter or notice to the consumer acknowledging that the
consumer has elected to opt into the institution's service. The
confirmation, which must be provided in writing, or electronically if
the consumer agrees, must include a statement informing the consumer of
the right to revoke the opt-in at any time. See Sec. 205.17(d)(6),
which permits institutions to include the revocation statement on the
initial opt-in notice. An institution complies with the confirmation
requirement if it has adopted reasonable procedures designed to ensure
that overdraft fees are assessed only in connection with transactions
paid after the confirmation has been mailed or delivered to the
consumer.
8. Outstanding Negative Balance. If a fee or charge is based on the
amount of the outstanding negative balance, an institution is prohibited
from assessing any such fee if the negative balance is solely
attributable to an ATM or one-time debit card transaction, unless the
consumer has opted into the institution's overdraft service for ATM or
one-time debit card transactions. However, the rule does not prohibit an
institution from assessing such a fee if the negative balance is
attributable in whole or in part to a check, ACH, or other type of
transaction not subject to the prohibition on assessing overdraft fees
in Sec. 205.17(b)(1).
9. Daily or Sustained Overdraft, Negative Balance, or Similar Fee or
Charge
i. Daily or sustained overdraft, negative balance, or similar fees
or charges. If a consumer has not opted into the institution's overdraft
service for ATM or one-time debit card transactions, the fee prohibition
in Sec. 205.17(b)(1) applies to all overdraft fees or charges for
paying those transactions, including but not limited to daily or
sustained overdraft, negative balance, or similar fees or charges. Thus,
where a consumer's negative balance is solely attributable to an ATM or
one-time debit card transaction, the rule prohibits the assessment of
such fees unless the consumer has opted in. However, the rule does not
prohibit an institution from assessing daily or sustained overdraft,
negative balance, or similar fees or charges if a negative balance is
attributable in whole or in part to a check, ACH, or other type of
transaction not subject to the fee prohibition. When the negative
balance is attributable in part to an ATM or one-time debit card
transaction, and in part to a check, ACH, or other type of transaction
not subject to the fee prohibition, the date on which such a fee may be
assessed is based on the date on which the check, ACH, or other type of
transaction is paid into overdraft.
ii. Examples. The following examples illustrate how an institution
complies with the fee prohibition. For each example, assume the
following: (a) The consumer has not opted into the payment of ATM or
one-time debit card overdrafts; (b) these transactions are paid into
overdraft because the amount of the transaction at settlement exceeded
the amount authorized or the amount was not submitted for authorization;
(c) under the account agreement, the institution may charge a per-item
fee of $20 for each overdraft, and a one-time sustained overdraft fee of
$20 on the fifth consecutive day the consumer's account remains
overdrawn; (d) the institution posts ATM and debit card transactions
before other transactions; and (e) the institution allocates deposits to
account debits in the same order in which it posts debits.
a. Assume that a consumer has a $50 account balance on March 1. That
day, the institution posts a one-time debit card transaction of $60 and
a check transaction of $40. The institution charges an overdraft fee of
$20 for the check overdraft but cannot assess an overdraft fee for the
debit card transaction. At the end of the day, the consumer has an
account balance of negative $70. The consumer does not make any deposits
to the account, and no other transactions occur between March 2 and
March 6. Because the consumer's negative balance is attributable in part
to the $40 check (and associated overdraft fee), the institution may
charge a sustained overdraft fee on March 6 in connection with the
check.
b. Same facts as in a., except that on March 3, the consumer
deposits $40 in the account. The institution allocates the $40 to the
debit card transaction first, consistent with its posting order policy.
At the end of the day on March 3, the consumer has an account balance of
negative $30, which is attributable to the check transaction (and
associated overdraft fee). The consumer does not make any further
deposits to the account, and no other transactions occur between March 4
and March 6. Because the remaining negative balance is attributable to
the March 1 check transaction, the institution may charge a sustained
overdraft fee on March 6 in connection with the check.
c. Assume that a consumer has a $50 account balance on March 1. That
day, the institution posts a one-time debit card transaction of $60. At
the end of that day, the consumer has an account balance of negative
$10. The institution may not assess an overdraft fee for the debit card
transaction. On March 3, the institution pays a check transaction of
$100 and charges an overdraft fee of $20. At the end of that day, the
consumer has
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an account balance of negative $130. The consumer does not make any
deposits to the account, and no other transactions occur between March 4
and March 8. Because the consumer's negative balance is attributable in
part to the check, the institution may assess a $20 sustained overdraft
fee. However, because the check was paid on March 3, the institution
must use March 3 as the start date for determining the date on which the
sustained overdraft fee may be assessed. Thus, the institution may
charge a $20 sustained overdraft fee on March 8.
iii. Alternative approach. For a consumer who does not opt into the
institution's overdraft service for ATM and one-time debit card
transactions, an institution may also comply with the fee prohibition in
Sec. 205.17(b)(1) by not assessing daily or sustained overdraft,
negative balance, or similar fees or charges unless a consumer's
negative balance is attributable solely to check, ACH or other types of
transactions not subject to the fee prohibition while that negative
balance remains outstanding. In such case, the institution would not
have to determine how to allocate subsequent deposits that reduce but do
not eliminate the negative balance. For example, if a consumer has a
negative balance of $30, of which $10 is attributable to a one-time
debit card transaction, an institution complies with the fee prohibition
if it does not assess a sustained overdraft fee while that negative
balance remains outstanding.
Paragraph 17(b)(2)--Conditioning Payment of Other Overdrafts on
Consumer's Affirmative Consent
1. Application of the same criteria. The prohibitions on
conditioning in Sec. 205.17(b)(2) generally require an institution to
apply the same criteria for deciding when to pay overdrafts for checks,
ACH transactions, and other types of transactions, whether or not the
consumer has affirmatively consented to the institution's overdraft
service with respect to ATM and one-time debit card overdrafts. For
example, if an institution's internal criteria would lead the
institution to pay a check overdraft if the consumer had affirmatively
consented to the institution's overdraft service for ATM and one-time
debit card transactions, it must also apply the same criteria in a
consistent manner in determining whether to pay the check overdraft if
the consumer has not opted in.
2. No requirement to pay overdrafts on checks, ACH transactions, or
other types of transactions. The prohibition on conditioning in Sec.
205.17(b)(2) does not require an institution to pay overdrafts on
checks, ACH transactions, or other types of transactions in all
circumstances. Rather, the rule simply prohibits institutions from
considering the consumer's decision not to opt in when deciding whether
to pay overdrafts for checks, ACH transactions, or other types of
transactions.
Paragraph 17(b)(3)--Same Account Terms, Conditions, and Features
1. Variations in terms, conditions, or features. A financial
institution may not vary the terms, conditions, or features of an
account provided to a consumer who does not affirmatively consent to the
payment of ATM or one-time debit card transactions pursuant to the
institution's overdraft service. This includes, but is not limited to:
i. Interest rates paid and fees assessed;
ii. The type of ATM or debit card provided to the consumer. For
instance, an institution may not provide consumers who do not opt in a
PIN-only card while providing a debit card with both PIN and signature-
debit functionality to consumers who opt in;
iii. Minimum balance requirements; or
iv. Account features such as on-line bill payment services.
2. Limited-feature bank accounts. Section 205.17(b)(3) does not
prohibit institutions from offering deposit account products with
limited features, provided that a consumer is not required to open such
an account because the consumer did not opt in. For example, Sec.
205.17(b)(3) does not prohibit an institution from offering a checking
account designed to comply with state basic banking laws, or designed
for consumers who are not eligible for a checking account because of
their credit or checking account history, which may include features
limiting the payment of overdrafts. However, a consumer who applies, and
is otherwise eligible, for a full-service or other particular deposit
account product may not be provided instead with the account with more
limited features because the consumer has declined to opt in.
Paragraph 17(b)(4)--Exception to the Notice and Opt-In Requirement
17(c) Timing
1. Early compliance. A financial institution may provide the notice
required by Sec. 205(b)(1)(i) and obtain the consumer's affirmative
consent to the financial institution's overdraft service for ATM and
one-time debit card transactions prior to July 1, 2010, provided that
the financial institution complies with all of the requirements of this
section.
2. Permitted fees or charges. Fees or charges for ATM and one-time
debit card overdrafts may be assessed only for overdrafts paid on or
after the date the financial institution receives the consumer's
affirmative consent to the institution's overdraft service. See also
comment 17(b)-7.
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17(d) Content and Format
1. Overdraft service. The description of the institution's overdraft
service should indicate that the consumer has the right to affirmatively
consent, or opt into payment of overdrafts for ATM and one-time debit
card transactions. The description should also disclose the
institution's policies regarding the payment of overdrafts for other
transactions, including checks, ACH transactions, and automatic bill
payments, provided that this content is not more prominent than the
description of the consumer's right to opt into payment of overdrafts
for ATM and one-time debit card transactions. As applicable, the
institution also should indicate that it pays overdrafts at its
discretion, and should briefly explain that if the institution does not
authorize and pay an overdraft, it may decline the transaction.
2. Maximum fee. If the amount of a fee may vary from transaction to
transaction, the financial institution may indicate that the consumer
may be assessed a fee ``up to'' the maximum fee. The financial
institution must disclose all applicable overdraft fees, including but
not limited to:
i. Per item or per transaction fees;
ii. Daily overdraft fees;
iii. Sustained overdraft fees, where fees are assessed when the
consumer has not repaid the amount of the overdraft after some period of
time (for example, if an account remains overdrawn for five or more
business days); or
iv. Negative balance fees.
3. Opt-in methods. The opt-in notice must include the methods by
which the consumer may consent to the overdraft service for ATM and one-
time debit card transactions. Institutions may tailor Model Form A-9 to
the methods offered to consumers for affirmatively consenting to the
service. For example, an institution need not provide the tear-off
portion of Model Form A-9 if it is only permitting consumers to opt-in
telephonically or electronically. Institutions may, but are not
required, to provide a signature line or check box where the consumer
can indicate that he or she declines to opt in.
4. Identification of consumer's account. An institution may use any
reasonable method to identify the account for which the consumer submits
the opt-in notice. For example, the institution may include a line for a
printed name and an account number, as shown in Model Form A-9. Or, the
institution may print a bar code or use other tracking information. See
also comment 17(b)-6, which describes how an institution obtains a
consumer's affirmative consent.
5. Alternative plans for covering overdrafts. If the institution
offers both a line of credit subject to the Board's Regulation Z (12 CFR
part 226) and a service that transfers funds from another account of the
consumer held at the institution to cover overdrafts, the institution
must state in its opt-in notice that both alternative plans are offered.
For example, the notice might state ``We also offer overdraft protection
plans, such as a link to a savings account or to an overdraft line of
credit, which may be less expensive than our standard overdraft
practices.'' If the institution offers one, but not the other, it must
state in its opt-in notice the alternative plan that it offers. If the
institution does not offer either plan, it should omit the reference to
the alternative plans.
17(f) Continuing Right To Opt-In or To Revoke the Opt-In
1. Fees or charges for overdrafts incurred prior to revocation.
Section 205.17(f)(1) provides that a consumer may revoke his or her
prior consent at any time. If a consumer does so, this provision does
not require the financial institution to waive or reverse any overdraft
fees assessed on the consumer's account prior to the institution's
implementation of the consumer's revocation request.
17(g) Duration of Opt-In.
1. Termination of overdraft service. A financial institution may,
for example, terminate the overdraft service when the consumer makes
excessive use of the service.
Sec. 205.18 Requirements for Financial Institutions Offering Payroll
Card Accounts.
18(a) Coverage
1. Issuance of access device. Consistent with Sec. 205.5(a), a
financial institution may issue an access device only in response to an
oral or written request for the device, or as a renewal or substitute
for an accepted access device. A consumer is deemed to request an access
device for a payroll card account when the consumer chooses to receive
salary or other compensation through a payroll card account.
2. Application to employers and service providers. Typically,
employers and third-party service providers do not meet the definition
of a ``financial institution'' subject to the regulation because they
neither hold payroll card accounts nor issue payroll cards and agree
with consumers to provide EFT services in connection with payroll card
accounts. However, to the extent an employer or a service provider
undertakes either of these functions, it would be deemed a financial
institution under the regulation.
18(b) Alternative to Periodic Statements
1. Posted transactions. A history of transactions provided under
Sec. Sec. 205.18(b)(1)(ii) and (iii) shall reflect transfers once they
have been posted to the account. Thus, an institution does not need to
include transactions
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that have been authorized, but that have not yet posted to the account.
2. Electronic history. The electronic history required under Sec.
205.18(b)(1)(ii) must be provided in a form that the consumer may keep,
as required under Sec. 205.4(a)(1). Financial institutions may satisfy
this requirement if they make the electronic history available in a
format that is capable of being retained. For example, an institution
satisfies the requirement if it provides a history at an Internet Web
site in a format that is capable of being printed or stored
electronically using an Internet web browser.
18(c) Modified Requirements
1. Error resolution safe harbor provision. Institutions that choose
to investigate notices of error provided up to 120 days from the date a
transaction has posted to a consumer's account may still disclose the
error resolution time period required by the regulation (as set forth in
the Model Form in Appendix A-7). Specifically, an institution may
disclose to payroll card account holders that the institution will
investigate any notice of error provided within 60 days of the consumer
electronically accessing an account or receiving a written history upon
request that reflects the error, even if, for some or all transactions,
the institution investigates any notice of error provided up to 120 days
from the date that the transaction alleged to be in error has posted to
the consumer's account. Similarly, an institution's summary of the
consumer's liability (as required under Sec. 205.7(b)(1)) may disclose
that liability is based on the consumer providing notice of error within
60 days of the consumer electronically accessing an account or receiving
a written history reflecting the error, even if, for some or all
transactions, the institution allows a consumer to assert a notice of
error up to 120 days from the date of posting of the alleged error.
2. Electronic access. A consumer is deemed to have accessed a
payroll card account electronically when the consumer enters a user
identification code or password or otherwise complies with a security
procedure used by an institution to verify the consumer's identity. An
institution is not required to determine whether a consumer has in fact
accessed information about specific transactions to trigger the
beginning of the 60-day periods for liability limits and error
resolution under Sec. Sec. 205.6 and 205.11.
3. Untimely notice of error. An institution that provides a
transaction history under Sec. 205.18(b)(1) is not required to comply
with the requirements of Sec. 205.11 for any notice of error from the
consumer pertaining to a transfer that occurred more than 60 days prior
to the earlier of the date the consumer electronically accesses the
account or the date the financial institution sends a written history
upon the consumer's request. (Alternatively, as provided in Sec.
205.18(c)(4)(ii), an institution need not comply with the requirements
of Sec. 205.11 with respect to any notice of error received from the
consumer more than 120 days after the date of posting of the transfer
allegedly in error.) Where the consumer's assertion of error involves an
unauthorized EFT, however, the institution must comply with Sec. 205.6
before it may impose any liability on the consumer.
Section 205.20--Requirements for Gift Cards and Gift Certificates
20(a) Definitions
1. Form of card, code, or device. Section 205.20 applies to any
card, code, or other device that meets one of the definitions in Sec.
205.20(a)(1) through (a)(3) (and is not otherwise excluded by Sec.
205.20(b)), even if it is not issued in card form. Section 205.20
applies, for example, to an account number or bar code that can be used
to access underlying funds. Similarly, Sec. 205.20 applies to a device
with a chip or other embedded mechanism that links the device to stored
funds, such as a mobile phone or sticker containing a contactless chip
that enables the consumer to access the stored funds. A card, code, or
other device that meets the definition in Sec. 205.20(a)(1) through
(a)(3) includes an electronic promise (see comment 20(a)-2) as well as a
promise that is not electronic. See, however, Sec. 205.20(b)(5). In
addition, Sec. 205.20 applies if a merchant issues a code that entitles
a consumer to redeem the code for goods or services, regardless of the
medium in which the code is issued (see, however, Sec. 205.20(b)(5)),
and whether or not it may be redeemed electronically or in the
merchant's store. Thus, for example, if a merchant e-mails a code that a
consumer may redeem in a specified amount either on-line or in the
merchant's store, that code is covered under Sec. 205.20, unless one of
the exclusions in Sec. 205.20(b) apply.
2. Electronic promise. The term ``electronic promise'' as used in
EFTA Sections 915(a)(2)(B), (a)(2)(C), and (a)(2)(D) means a person's
commitment or obligation communicated or stored in electronic form made
to a consumer to provide payment for goods or services for transactions
initiated by the consumer. The electronic promise is itself represented
by a card, code or other device that is issued or honored by the person,
reflecting the person's commitment or obligation to pay. For example, if
a merchant issues a code that can be given as a gift and that entitles
the recipient to redeem the code in an on-line transaction for goods or
services, that code represents an electronic promise by the merchant and
is a card, code, or other device covered by Sec. 205.20.
3. Cards, codes, or other devices redeemable for specific goods or
services. Certain cards, codes, or other devices may be redeemable
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upon presentation for a specific good or service, or ``experience,''
such as a spa treatment, hotel stay, or airline flight. In other cases,
a card, code, or other device may entitle the consumer to a certain
percentage off the purchase of a good or service, such as 20% off of any
purchase in a store. Such cards, codes, or other devices generally are
not subject to the requirements of this section because they are not
issued to a consumer ``in a specified amount'' as required under the
definitions of ``gift certificate,'' ``store gift card,'' or ``general-
use prepaid card.'' However, if the card, code, or other device is
issued in a specified or denominated amount that can be applied toward
the purchase of a specific good or service, such as a certificate or
card redeemable for a spa treatment up to $50, the card, code, or other
device is subject to this section, unless one of the exceptions in Sec.
205.20(b) apply. See, e.g., Sec. 205.20(b)(3). Similarly, if the card,
code, or other device states a specific monetary value, such as ``a $50
value,'' the card, code, or other device is subject to this section,
unless an exclusion in Sec. 205.20(b) applies.
4. Issued primarily for personal, family, or household purposes.
Section 205.20 only applies to cards, codes, or other devices that are
sold or issued to a consumer primarily for personal, family, or
household purposes. A card, code, or other device initially purchased by
a business is subject to this section if the card, code, or other device
is purchased for redistribution or resale to consumers primarily for
personal, family, or household purposes. Moreover, the fact that a card,
code, or other device may be primarily funded by a business, for
example, in the case of certain rewards or incentive cards, does not
mean the card, code, or other device is outside the scope of Sec.
205.20, if the card, code, or other device will be provided to a
consumer primarily for personal, family, or household purposes. But see
Sec. 205.20(b)(3). Whether a card, code, or other device is issued to a
consumer primarily for personal, family, or household purposes will
depend on the facts and circumstances. For example, if a program manager
purchases store gift cards directly from an issuing merchant and sells
those cards through the program manager's retail outlets, such gift
cards are subject to the requirements of Sec. 205.20 because the store
gift cards are sold to consumers primarily for personal, family, or
household purposes. In contrast, a card, code, or other device generally
would not be issued to consumers primarily for personal, family, or
household purposes, and therefore would fall outside the scope of Sec.
205.20, if the purchaser of the card, code, or device is contractually
prohibited from reselling or redistributing the card, code, or device to
consumers primarily for personal, family, or household purposes, and
reasonable policies and procedures are maintained to avoid such sale or
distribution for such purposes. However, if an entity that has purchased
cards, codes, or other devices for business purposes sells or
distributes such cards, codes, or other devices to consumers primarily
for personal, family, or household purposes, that entity does not comply
with Sec. 205.20 if it has not otherwise met the substantive and
disclosure requirements of the rule or unless an exclusion in Sec.
205.20(b) applies.
5. Examples of cards, codes, or other devices issued for business
purposes. Examples of cards, codes, or other devices that are issued and
used for business purposes and therefore excluded from the definitions
of ``gift certificate,'' ``store gift card,'' or ``general-use prepaid
card'' include:
i. Cards, codes, or other devices to reimburse employees for travel
or moving expenses.
ii. Cards, codes, or other devices for employees to use to purchase
office supplies and other business-related items.
Paragraph 20(a)(2)--Store Gift Card
1. Relationship between ``gift certificate'' and ``store gift
card''. The term ``store gift card'' in Sec. 205.20(a)(2) includes
``gift certificate'' as defined in Sec. 205.20(a)(1). For example, a
numeric or alphanumeric code representing a specified dollar amount or
value that is electronically sent to a consumer as a gift which can be
redeemed or exchanged by the recipient to obtain goods or services may
be both a ``gift certificate'' and a ``store gift card'' if the
specified amount or value cannot be increased.
2. Affiliated group of merchants. The term ``affiliated group of
merchants'' means two or more affiliated merchants or other persons that
are related by common ownership or common corporate control (see, e.g.,
12 CFR 227.3(b) and 12 CFR 223.2) and that share the same name, mark, or
logo. For example, the term includes franchisees that are subject to a
common set of corporate policies or practices under the terms of their
franchise licenses. The term also applies to two or more merchants or
other persons that agree among themselves, by contract or otherwise, to
redeem cards, codes, or other devices bearing the same name, mark, or
logo (other than the mark, logo, or brand of a payment network), for the
purchase of goods or services solely at such merchants or persons. For
example, assume a movie theatre chain and a restaurant chain jointly
agree to issue cards that share the same ``Flix and Food'' logo that can
be redeemed solely towards the purchase of movie tickets or concessions
at any of the participating movie theatres, or towards the purchase of
food or beverages at any of the participating restaurants. For purposes
of Sec. 205.20, the movie theatre chain and the restaurant chain would
be considered to be an affiliated group of merchants, and the cards are
considered to be ``store gift
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cards.'' However, merchants or other persons are not considered to be
affiliated merely because they agree to accept a card that bears the
mark, logo, or brand of a payment network.
3. Mall gift cards. See comment 20(a)(3)-2.
Paragraph 20(a)(3)--General-Use Prepaid Card
1. Redeemable upon presentation at multiple, unaffiliated merchants.
A card, code, or other device is redeemable upon presentation at
multiple, unaffiliated merchants if, for example, such merchants agree
to honor the card, code, or device if it bears the mark, logo, or brand
of a payment network, pursuant to the rules of the payment network.
2. Mall gift cards. Mall gift cards that are intended to be used or
redeemed for goods or services at participating retailers within a
shopping mall may be considered store gift cards or general-use prepaid
cards depending on the merchants with which the cards may be redeemed.
For example, if a mall card may only be redeemed at merchants within the
mall itself, the card is more likely to be redeemable at an affiliated
group of merchants and considered a store gift card. However, certain
mall cards also carry the brand of a payment network and can be used at
any retailer that accepts that card brand, including retailers located
outside of the mall. Such cards are considered general-use prepaid
cards.
Paragraph 20(a)(4)--Loyalty, Award, or Promotional Gift Card
1. Examples of loyalty, award, or promotional programs. Examples of
loyalty, award or promotional programs under Sec. 205.20(a)(4) include,
but are not limited to:
i. Consumer retention programs operated or administered by a
merchant or other person that provide to consumers cards or coupons
redeemable for or towards goods or services or other monetary value as a
reward for purchases made or for visits to the participating merchant;
ii. Sales promotions operated or administered by a merchant or
product manufacturer that provide coupons or discounts redeemable for or
towards goods or services or other monetary value.
iii. Rebate programs operated or administered by a merchant or
product manufacturer that provide cards redeemable for or towards goods
or services or other monetary value to consumers in connection with the
consumer's purchase of a product or service and the consumer's
completion of the rebate submission process.
iv. Sweepstakes or contests that distribute cards redeemable for or
towards goods or services or other monetary value to consumers as an
invitation to enter into the promotion for a chance to win a prize.
v. Referral programs that provide cards redeemable for or towards
goods or services or other monetary value to consumers in exchange for
referring other potential consumers to a merchant.
vi. Incentive programs through which an employer provides cards
redeemable for or towards goods or services or other monetary value to
employees, for example, to recognize job performance, such as increased
sales, or to encourage employee wellness and safety.
vii. Charitable or community relations programs through which a
company provides cards redeemable for or towards goods or services or
other monetary value to a charity or community group for their
fundraising purposes, for example, as a reward for a donation or as a
prize in a charitable event.
2. Issued for loyalty, award, or promotional purposes. To indicate
that a card, code, or other device is issued for loyalty, award, or
promotional purposes as required by Sec. 205.20(a)(4)(iii), it is
sufficient for the card, code, or other device to state on the front,
for example, ``Reward'' or ``Promotional.''
3. Reference to toll-free number and Web site. If a card, code, or
other device issued in connection with a loyalty, award, or promotional
program does not have any fees, the disclosure under Sec.
205.20(a)(4)(iii)(D) is not required on the card, code, or other device.
Paragraph 20(a)(6)--Service Fee
1. Service fees. Under Sec. 205.20(a)(6), a service fee includes a
periodic fee for holding or use of a gift certificate, store gift card,
or general-use prepaid card. A periodic fee includes any fee that may be
imposed on a gift certificate, store gift card, or general-use prepaid
card from time to time for holding or using the certificate or card,
such as a monthly maintenance fee, a transaction fee, an ATM fee, a
reload fee, a foreign currency transaction fee, or a balance inquiry
fee, whether or not the fee is waived for a certain period of time or is
only imposed after a certain period of time. A service fee does not
include a one-time fee or a fee that is unlikely to be imposed more than
once while the underlying funds are still valid, such as an initial
issuance fee, a cash-out fee, a supplemental card fee, or a lost or
stolen certificate or card replacement fee.
Paragraph 20(a)(7)--Activity
1. Activity. Under Sec. 205.20(a)(7), any action that results in an
increase or decrease of the funds underlying a gift certificate, store
gift card, or general-use prepaid card, other than the imposition of a
fee, or an adjustment due to an error or a reversal of a prior
transaction, constitutes activity for purposes of Sec. 205.20. For
example, the purchase and activation of a certificate or card, the use
of the
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certificate or card to purchase a good or service, or the reloading of
funds onto a store gift card or general-use prepaid card constitutes
activity. However, the imposition of a fee, the replacement of an
expired, lost, or stolen certificate or card, and a balance inquiry do
not constitute activity. In addition, if a consumer attempts to engage
in a transaction with a gift certificate, store gift card, or general-
use prepaid card, but the transaction cannot be completed due to
technical or other reasons, such attempt does not constitute activity.
Furthermore, if the funds underlying a gift certificate, store gift
card, or general-use prepaid card are adjusted because there was an
error or the consumer has returned a previously purchased good, the
adjustment also does not constitute activity with respect to the
certificate or card.
20(b) Exclusions
1. Application of exclusion. A card, code, or other device is
excluded from the definition of ``gift certificate,'' ``store gift
card,'' or ``general-use prepaid card'' if it meets any of the
exclusions in Sec. 205.20(b). An excluded card, code, or other device
generally is not subject to any of the requirements of this section.
(See, however, Sec. 205.20(a)(4)(iii), requiring certain disclosures
for loyalty, award, or promotional gift cards.)
2. Eligibility for multiple exclusions. A card, code, or other
device may qualify for one or more exclusions. For example, a
corporation may give its employees a gift card that is marketed solely
to businesses for incentive-related purposes, such as to reward job
performance or promote employee safety. In this case, the card may
qualify for the exclusion for loyalty, award, or promotional gift cards
under Sec. 205.20(b)(3), or for the exclusion for cards, codes, or
other devices not marketed to the general public under Sec.
205.20(b)(4). In addition, as long as any one of the exclusions applies,
a card, code, or other device is not covered by Sec. 205.20, even if
other exclusions do not apply. In the above example, the corporation may
give its employees a type of gift card that can also be purchased by a
consumer directly from a merchant. Under these circumstances, while the
card does not qualify for the exclusion for cards, codes, or other
devices not marketed to the general public under Sec. 205.20(b)(4)
because the card can also be obtained through retail channels, it is
nevertheless exempt from the substantive requirements of Sec. 205.20
because it is a loyalty, award, or promotional gift card. (See, however,
Sec. 205.20(a)(4)(iii), requiring certain disclosures for loyalty,
award, or promotional gift cards.) Similarly, a person may market a
reloadable card to teenagers for occasional expenses that enables
parents to monitor spending. Although the card does not qualify for the
exclusion for cards, codes, or other devices not marketed to the general
public under Sec. 205.20(b)(4), it may nevertheless be exempt from the
requirements of Sec. 205.20 under Sec. 205.20(b)(2) if it is
reloadable and not marketed or labeled as a gift card or gift
certificate.
Paragraph 20(b)(1)--Usable Solely for Telephone Services
1. Examples of excluded products. The exclusion for products usable
solely for telephone services applies to prepaid cards for long-distance
telephone service, prepaid cards for wireless telephone service and
prepaid cards for other services that function similar to telephone
services, such as prepaid cards for voice over internet protocol (VoIP)
access time.
Paragraph 20(b)(2)--Reloadable and Not Marketed or Labeled as a Gift
Card or Gift Certificate
1. Reloadable. A card, code, or other device is ``reloadable'' if
the terms and conditions of the agreement permit funds to be added to
the card, code, or other device after the initial purchase or issuance.
A card, code, or other device is not ``reloadable'' merely because the
issuer or processor is technically able to add functionality that would
otherwise enable the card, code, or other device to be reloaded.
2. Marketed or labeled as a gift card or gift certificate. The term
``marketed or labeled as a gift card or gift certificate'' means
directly or indirectly offering, advertising or otherwise suggesting the
potential use of a card, code or other device, as a gift for another
person. Whether the exclusion applies generally does not depend on the
type of entity that makes the promotional message. For example, a card
may be marketed or labeled as a gift card or gift certificate if anyone
(other than the purchaser of the card), including the issuer, the
retailer, the program manager that may distribute the card, or the
payment network on which a card is used, promotes the use of the card as
a gift card or gift certificate. A card, code, or other device,
including a general-purpose reloadable card, is marketed or labeled as a
gift card or gift certificate even if it is only occasionally marketed
as a gift card or gift certificate. For example, a network-branded
general purpose reloadable card would be marketed or labeled as a gift
card or gift certificate if the issuer principally advertises the card
as a less costly alternative to a bank account but promotes the card in
a television, radio, newspaper, or Internet advertisement, or on signage
as ``the perfect gift'' during the holiday season. However, the mere
mention of the availability of gift cards or gift certificates in an
advertisement or on a sign that
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also indicates the availability of other excluded prepaid cards does not
by itself cause the excluded prepaid cards to be marketed as a gift card
or a gift certificate. For example, the posting of a sign in a store
that refers to the availability of gift cards does not by itself
constitute the marketing of otherwise excluded prepaid cards that may
also be sold in the store as gift cards or gift certificates, provided
that a consumer acting reasonably under the circumstances would not be
led to believe that the sign applies to all prepaid cards sold in the
store. (See, however, comment 20(b)(2)-4.ii.)
3. Examples of marketed or labeled as a gift card or gift
certificate.
i. Examples of marketed or labeled as a gift card or gift
certificate include:
A. Using the word ``gift'' or ``present'' on a card, certificate, or
accompanying material, including documentation, packaging and
promotional displays;
B. Representing or suggesting that a certificate or card can be
given to another person, for example, as a ``token of appreciation'' or
a ``stocking stuffer,'' or displaying a congratulatory message on the
card, certificate or accompanying material;
C. Incorporating gift-giving or celebratory imagery or motifs, such
as a bow, ribbon, wrapped present, candle, or congratulatory message, on
a card, certificate, accompanying documentation, or promotional
material;
ii. The term does not include:
A. Representing that a card or certificate can be used as a
substitute for a checking, savings, or deposit account;
B. Representing that a card or certificate can be used to pay for a
consumer's health-related expenses--for example, a card tied to a health
savings account;
C. Representing that a card or certificate can be used as a
substitute for travelers checks or cash;
D. Representing that a card or certificate can be used as a
budgetary tool, for example, by teenagers, or to cover emergency
expenses.
4. Reasonable policies and procedures to avoid marketing as a gift
card. The exclusion for a card, code, or other device that is reloadable
and not marketed or labeled as a gift card or gift certificate in Sec.
205.20(b)(2) applies if a reloadable card, code, or other device is not
marketed or labeled as a gift card or gift certificate and if persons
subject to the rule, including issuers, program managers, and retailers,
maintain policies and procedures reasonably designed to avoid such
marketing. Such policies and procedures may include contractual
provisions prohibiting a reloadable card, code, or other device from
being marketed or labeled as a gift card or gift certificate,
merchandising guidelines or plans regarding how the product must be
displayed in a retail outlet, and controls to regularly monitor or
otherwise verify that the card, code or other device is not being
marketed as a gift card. Whether a reloadable card, code, or other
device has been marketed as a gift card or gift certificate will depend
on the facts and circumstances, including whether a reasonable consumer
would be led to believe that the card, code, or other device is a gift
card or gift certificate. The following examples illustrate the
application of Sec. 205.20(b)(2):
i. An issuer or program manager of prepaid cards agrees to sell
general-purpose reloadable cards through a retailer. The contract
between the issuer or program manager and the retailer establishes the
terms and conditions under which the cards may be sold and marketed at
the retailer. The terms and conditions prohibit the general-purpose
reloadable cards from being marketed as a gift card or gift certificate,
and require policies and procedures to regularly monitor or otherwise
verify that the cards are not being marketed as such. The issuer or
program manager sets up one promotional display at the retailer for gift
cards and another physically separated display for excluded products
under Sec. 205.20(b), including general-purpose reloadable cards and
wireless telephone cards, such that a reasonable consumer would not
believe that the excluded cards are gift cards. The exclusion in Sec.
205.20(b)(2) applies because policies and procedures reasonably designed
to avoid the marketing of the general-purpose reloadable cards as gift
cards or gift certificates are maintained, even if a retail clerk
inadvertently stocks or a consumer inadvertently places a general-
purpose reloadable card on the gift card display.
ii. Same facts as in i., except that the issuer or program manager
sets up a single promotional display at the retailer on which a variety
of prepaid cards are sold, including store gift cards and general-
purpose reloadable cards. A sign stating ``Gift Cards'' appears
prominently at the top of the display. The exclusion in Sec.
205.20(b)(2) does not apply with respect to the general-purpose
reloadable cards because policies and procedures reasonably designed to
avoid the marketing of excluded cards as gift cards or gift certificates
are not maintained.
iii. Same facts as in i., except that the issuer or program manager
sets up a single promotional multi-sided display at the retailer on
which a variety of prepaid card products, including store gift cards and
general-purpose reloadable cards are sold. Gift cards are segregated
from excluded cards, with gift cards on one side of the display and
excluded cards on a different side of a display. Signs of equal
prominence at the top of each side of the display clearly differentiate
between gift cards and the other types of prepaid cards that are
available for sale. The retailer does not use any more conspicuous
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signage suggesting the general availability of gift cards, such as a
large sign stating ``Gift Cards'' at the top of the display or located
near the display. The exclusion in Sec. 205.20(b)(2) applies because
policies and procedures reasonably designed to avoid the marketing of
the general-purpose reloadable cards as gift cards or gift certificates
are maintained, even if a retail clerk inadvertently stocks or a
consumer inadvertently places a general-purpose reloadable card on the
gift card display.
iv. Same facts as in i., except that the retailer sells a variety of
prepaid card products, including store gift cards and general-purpose
reloadable cards, arranged side-by-side in the same checkout lane. The
retailer does not affirmatively indicate or represent that gift cards
are available, such as by displaying any signage or other indicia at the
checkout lane suggesting the general availability of gift cards. The
exclusion in Sec. 205.20(b)(2) applies because policies and procedures
reasonably designed to avoid marketing the general-purpose reloadable
cards as gift cards or gift certificates are maintained.
5. On-line sales of prepaid cards. Some Web sites may prominently
advertise or promote the availability of gift cards or gift certificates
in a manner that suggests to a consumer that the Web site exclusively
sells gift cards or gift certificates. For example, a Web site may
display a banner advertisement or a graphic on the home page that
prominently states ``Gift Cards,'' ``Gift Giving,'' or similar language
without mention of other available products, or use a Web address that
includes only a reference to gift cards or gift certificates in the
address. In such a case, a consumer acting reasonably under the
circumstances could be led to believe that all prepaid products sold on
the Web site are gift cards or gift certificates. Under these facts, the
Web site has marketed all such products, including general-purpose
reloadable cards, as gift cards or gift certificates, and the exclusion
in Sec. 205.20(b)(2) does not apply.
6. Temporary non-reloadable cards issued in connection with a
general-purpose reloadable card. Certain general-purpose reloadable
cards that are typically marketed as an account substitute initially may
be sold or issued in the form of a temporary non-reloadable card. After
the card is purchased, the cardholder is typically required to call the
issuer to register the card and to provide identifying information in
order to obtain a reloadable replacement card. In most cases, the
temporary non-reloadable card can be used for purchases until the
replacement reloadable card arrives and is activated by the cardholder.
Because the temporary non-reloadable card may only be obtained in
connection with the general-purpose reloadable card, the exclusion in
Sec. 205.20(b)(2) applies so long as the card is not marketed as a gift
card or gift certificate.
Paragraph 20(b)(4)--Not Marketed to the General Public
1. Marketed to the general public. A card, code, or other device is
marketed to the general public if the potential use of the card, code,
or other device is directly or indirectly offered, advertised, or
otherwise promoted to the general public. A card, code, or other device
may be marketed to the general public through any advertising medium,
including television, radio, newspaper, the Internet, or signage.
However, the posting of a company policy that funds may be disbursed by
prepaid card (such as a sign posted at a cash register or customer
service center stating that store credit will be issued by prepaid card)
does not constitute the marketing of a card, code, or other device to
the general public. In addition, the method of distribution by itself is
not dispositive in determining whether a card, code, or other device is
marketed to the general public. Factors that may be considered in
determining whether the exclusion applies to a particular card, code, or
other device include the means or channel through which the card, code,
or device may be obtained by a consumer, the subset of consumers that
are eligible to obtain the card, code, or device, and whether the
availability of the card, code, or device is advertised or otherwise
promoted in the marketplace.
2. Examples. The following examples illustrate the application of
the exclusion in Sec. 205.20(b)(4):
i. A merchant sells its gift cards at a discount to a business which
may give them to employees or loyal consumers as incentives or rewards.
In determining whether the gift card falls within the exclusion in Sec.
205.20(b)(4), the merchant must consider whether the card is of a type
that is advertised or made available to consumers generally or can be
obtained elsewhere. If the card can also be purchased through retail
channels, the exclusion in Sec. 205.20(b)(4) does not apply, even if
the consumer obtained the card from the business as an incentive or
reward. See, however, Sec. 205.20(b)(3).
ii. A national retail chain decides to market its gift cards only to
members of its frequent buyer program. Similarly, a bank may decide to
sell gift cards only to its customers. If a member of the general public
may become a member of the program or a customer of the bank, the card
does not fall within the exclusion in Sec. 205.20(b)(4) because the
general public has the ability to obtain the cards. See, however, Sec.
205.20(b)(3).
iii. A card issuer advertises a reloadable card to teenagers and
their parents promoting the card for use by teenagers for occasional
expenses, schoolbooks and emergencies and by parents to monitor
spending.
[[Page 189]]
Because the card is marketed to and may be sold to any member of the
general public, the exclusion in Sec. 205.20(b)(4) does not apply. See,
however, Sec. 205.20(b)(2).
iv. An insurance company settles a policyholder's claim and
distributes the insurance proceeds to the consumer by means of a prepaid
card. Because the prepaid card is simply the means for providing the
insurance proceeds to the consumer and the availability of the card is
not advertised to the general public, the exclusion in Sec.
205.20(b)(4) applies.
v. A merchant provides store credit to a consumer following a
merchandise return by issuing a prepaid card that clearly indicates that
the card contains funds for store credit. Because the prepaid card is
issued for the stated purpose of providing store credit to the consumer
and the ability to receive refunds by a prepaid card is not advertised
to the general public, the exclusion in Sec. 205.20(b)(4) applies.
vi. A tax preparation company elects to distribute tax refunds to
its clients by issuing prepaid cards, but does not advertise or
otherwise promote the ability to receive proceeds in this manner.
Because the prepaid card is simply the mechanism for providing the tax
refund to the consumer, and the tax preparer does not advertise the
ability to obtain tax refunds by a prepaid card, the exclusion in Sec.
205.20(b)(4) applies. However, if the tax preparer promotes the ability
to receive tax refund proceeds through a prepaid card as a way to obtain
``faster'' access to the proceeds, the exclusion in Sec. 205.20(b)(4)
does not apply.
Paragraph 20(b)(5)--Issued in Paper Form Only
1. Exclusion explained. To qualify for the exclusion in Sec.
205.20(b)(5), the sole means of issuing the card, code, or other device
must be in a paper form. Thus, the exclusion generally applies to
certificates issued in paper form where solely the paper itself may be
used to purchase goods or services. A card, code or other device is not
issued solely in paper form simply because it may be reproduced or
printed on paper. For example, a bar code, card or certificate number,
or certificate or coupon electronically provided to a consumer and
redeemable for goods and services is not issued in paper form, even if
it may be reproduced or otherwise printed on paper by the consumer. In
this circumstance, although the consumer might hold a paper facsimile of
the card, code, or other device, the exclusion does not apply because
the information necessary to redeem the value was initially issued in
electronic form. A paper certificate is within the exclusion regardless
of whether it may be redeemed electronically. For example, a paper
certificate or receipt that bears a bar code, code, or account number
falls within the exclusion in Sec. 205.20(b)(5) if the bar code, code,
or account number is not issued in any form other than on the paper. In
addition, the exclusion in Sec. 205.20(b)(5) continues to apply in
circumstances where an issuer replaces a gift certificate that was
initially issued in paper form with a card or electronic code (for
example, to replace a lost paper certificate).
2. Examples. The following examples illustrate the application of
the exclusion in Sec. 205.20(b)(5):
i. A merchant issues a paper gift certificate that entitles the
bearer to a specified dollar amount that can be applied towards a future
meal. The merchant fills in the certificate with the name of the
certificate holder and the amount of the certificate. The certificate
falls within the exclusion in Sec. 205.20(b)(5) because it is issued in
paper form only.
ii. A merchant allows a consumer to prepay for a good or service,
such as a car wash or time at a parking meter, and issues a paper
receipt bearing a numerical or bar code that the consumer may redeem to
obtain the good or service. The exclusion in Sec. 205.20(b)(5) applies
because the code is issued in paper form only.
iii. A merchant issues a paper certificate or receipt bearing a bar
code or certificate number that can later be scanned or entered into the
merchant's system and redeemed by the certificate or receipt holder
towards the purchase of goods or services. The bar code or certificate
number is not issued by the merchant in any form other than paper. The
exclusion in Sec. 205.20(b)(5) applies because the bar code or
certificate number is issued in paper form only.
iv. An on-line merchant electronically provides a bar code, card or
certificate number, or certificate or coupon to a consumer that the
consumer may print on a home printer and later redeem towards the
purchase of goods or services. The exclusion in Sec. 205.20(b)(5) does
not apply because the bar code or card or certificate number was issued
to the consumer in electronic form, even though it can be reproduced or
otherwise printed on paper by the consumer.
Paragraph 20(b)(6)--Redeemable Solely for Admission to Events or Venues
1. Exclusion explained. The exclusion for cards, codes, or other
devices that are redeemable solely for admission to events or venues at
a particular location or group of affiliated locations generally applies
to cards, codes, or other devices that are not redeemed for a specified
monetary value, but rather solely for admission or entry to an event or
venue. The exclusion also covers a card, code, or other device that is
usable to purchase goods or services in addition to entry into the event
or the venue, either at the event or venue or at an affiliated location
or location in geographic proximity to the event or venue.
[[Page 190]]
2. Examples. The following examples illustrate the application of
the exclusion in Sec. 205.20(b)(6):
i. A consumer purchases a prepaid card that entitles the holder to a
ticket for entry to an amusement park. The prepaid card may only be used
for entry to the park. The card qualifies for the exclusion in Sec.
205.20(b)(6) because it is redeemable for admission or entry and for
goods or services in conjunction with that admission. In addition, if
the prepaid card does not have a monetary value, and therefore is not
``issued in a specified amount,'' the card does not meet the definitions
of ``gift certificate,'' ``store gift card,'' or ``general-use prepaid
card'' in Sec. 205.20(a). See comment 20(a)-3.
ii. Same facts as in i., except that the gift card also entitles the
holder of the gift card to a dollar amount that can be applied towards
the purchase of food and beverages or goods or services at the park or
at nearby affiliated locations. The card qualifies for the exclusion in
Sec. 205.20(b)(6) because it is redeemable for admission or entry and
for goods or services in conjunction with that admission.
iii. A consumer purchases a $25 gift card that the holder of the
gift card can use to make purchases at a merchant, or, alternatively,
can apply towards the cost of admission to the merchant's affiliated
amusement park. The card is not eligible for the exclusion in Sec.
205.20(b)(6) because it is not redeemable solely for the admission or
ticket itself (or for goods and services purchased in conjunction with
such admission). The card meets the definition of ``store gift card''
and is therefore subject to Sec. 205.20, unless a different exclusion
applies.
20(c) Form of Disclosures
Paragraph 20(c)(1)--Clear and Conspicuous
1. Clear and conspicuous standard. All disclosures required by this
section must be clear and conspicuous. Disclosures are clear and
conspicuous for purposes of this section if they are readily
understandable and, in the case of written and electronic disclosures,
the location and type size are readily noticeable to consumers.
Disclosures need not be located on the front of the certificate or card,
except where otherwise required, to be considered clear and conspicuous.
Disclosures are clear and conspicuous for the purposes of this section
if they are in a print that contrasts with and is otherwise not
obstructed by the background on which they are printed. For example,
disclosures on a card or computer screen are not likely to be
conspicuous if obscured by a logo printed in the background. Similarly,
disclosures on the back of a card that are printed on top of
indentations from embossed type on the front of the card are not likely
to be conspicuous if the indentations obstruct the readability of the
disclosures. To the extent permitted, oral disclosures meet the standard
when they are given at a volume and speed sufficient for a consumer to
hear and comprehend them.
2. Abbreviations and symbols. Disclosures may contain commonly
accepted or readily understandable abbreviations or symbols, such as
``mo.'' for month or a ``/'' to indicate ``per.'' Under the clear and
conspicuous standard, it is sufficient to state, for example, that a
particular fee is charged ``$2.50/mo. after 12 mos.''
Paragraph 20(c)(2)--Format
1. Electronic disclosures. Disclosures provided electronically
pursuant to this section are not 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 USC 7001 et seq.).
Electronic disclosures must be in a retainable form. For example, a
person may satisfy the requirement if it provides an online disclosure
in a format that is capable of being printed. Electronic disclosures may
not be provided through a hyperlink or in another manner by which the
purchaser can bypass the disclosure. A person is not required to confirm
that the consumer has read the electronic disclosures.
Paragraph 20(c)(3)--Disclosure Prior to Purchase
1. Method of purchase. The disclosures required by this paragraph
must be provided before a certificate or card is purchased regardless of
whether the certificate or card is purchased in person, online, by
telephone, or by other means.
2. Electronic disclosures. Section 205.20(c)(3) provides that the
disclosures required by this section must be provided to the consumer
prior to purchase. For certificates or cards purchased electronically,
disclosures made to the consumer after a consumer has initiated an
online purchase of a certificate or card, but prior to completing the
purchase of the certificate or card, would satisfy the prior-to-purchase
requirement. However, electronic disclosures made available on a
person's Web site that may or may not be accessed by the consumer are
not provided to the consumer and therefore would not satisfy the prior-
to-purchase requirement.
3. Non-physical certificates and cards. If no physical certificate
or card is issued, the disclosures must be provided to the consumer
before the certificate or card is purchased. For example, where a gift
certificate or card is a code that is provided by telephone, the
required disclosures may be provided orally prior to purchase. See also
Sec. 205.20(c)(2).
[[Page 191]]
Paragraph 20(c)(4)--Disclosures on the Certificate or Card
1. Non-physical certificates and cards. If no physical certificate
or card is issued, the disclosures required by this paragraph must be
disclosed on the code, confirmation, or other written or electronic
document provided to the consumer. For example, where a gift certificate
or card is a code or confirmation that is provided to a consumer on-line
or sent to a consumer's e-mail address, the required disclosures may be
provided electronically on the same document as the code or
confirmation.
2. No disclosures on a certificate or card. Disclosures required by
Sec. 205.20(c)(4) need not be made on a certificate or card if it is
accompanied by a certificate or card that complies with this section.
For example, a person may issue or sell a supplemental gift card that is
smaller than a standard size and that does not bear the applicable
disclosures if it is accompanied by a fully compliant certificate or
card. See also comment 20(c)(2)-2.
20(d) Prohibition on Imposition of Fees or Charges
1. One-year period. Section 205.20(d) provides that a person may
impose a dormancy, inactivity, or service fee only if there has been no
activity with respect to a certificate or card for one year. The
following examples illustrate this rule:
i. A certificate or card is purchased on January 15 of year one. If
there has been no activity on the certificate or card since the
certificate or card was purchased, a dormancy, inactivity, or service
fee may be imposed on the certificate or card on January 15 of year two.
ii. Same facts as i., and a fee was imposed on January 15 of year
two. Because no more than one dormancy, inactivity, or service fee may
be imposed in any given calendar month, the earliest date that another
dormancy, inactivity, or service fee may be imposed, assuming there
continues to be no activity on the certificate or card, is February 1 of
year two. A dormancy, inactivity, or service fee is permitted to be
imposed on February 1 of year two because there has been no activity on
the certificate or card for the preceding year (February 1 of year one
through January 31 of year two), and February is a new calendar month.
The imposition of a fee on January 15 of year two is not activity for
purposes of Sec. 205.20(d). See comment 20(a)(7)-1.
iii. Same facts as i., and a fee was imposed on January 15 of year
two. On January 31 of year two, the consumer uses the card to make a
purchase. Another dormancy, inactivity, or service fee could not be
imposed until January 31 of year three, assuming there has been no
activity on the certificate or card since January 31 of year two.
2. Relationship between Sec. Sec. 205.20(d)(2) and (c)(3). Sections
205.20(d)(2) and (c)(3) contain similar, but not identical, disclosure
requirements. Section 205.20(d)(2) requires the disclosure of dormancy,
inactivity, and service fees on a certificate or card. Section
205.20(c)(3) requires that vendor person that issues or sells such
certificate or card disclose to a consumer any dormancy, inactivity, and
service fees associated with the certificate or card before such
certificate or card may be purchased. Depending on the context, a single
disclosure that meets the clear and conspicuous requirements of both
Sec. Sec. 205.20(d)(2) and (c)(3) may be used to disclose a dormancy,
inactivity, or service fee. For example, if the disclosures on a
certificate or card, required by Sec. 205.20(d)(2), are visible to the
consumer without having to remove packaging or other materials sold with
the certificate or card, for a purchase made in person, the disclosures
also meet the requirements of Sec. 205.20(c)(3). Otherwise, a dormancy,
inactivity, or service fee may need to be disclosed multiple times to
satisfy the requirements of Sec. Sec. 205.20(d)(2) and (c)(3). For
example, if the disclosures on a certificate or card, required by Sec.
205.20(d)(2), are obstructed by packaging sold with the certificate or
card, for a purchase made in person, they also must be disclosed on the
packaging sold with the certificate or card to meet the requirements of
Sec. 205.20(c)(3).
3. Relationship between Sec. Sec. 205.20(d)(2), (e)(3), and (f)(2).
In addition to any disclosures required under Sec. 205.20(d)(2), any
applicable disclosures under Sec. Sec. 205.20(e)(3) and (f)(2) of this
section must also be provided on the certificate or card.
4. One fee per month. Under Sec. 205.20(d)(3), no more than one
dormancy, inactivity, or service fee may be imposed in any given
calendar month. For example, if a dormancy fee is imposed on January 1,
following a year of inactivity, and a consumer makes a balance inquiry
on January 15, a balance inquiry fee may not be imposed at that time
because a dormancy fee was already imposed earlier that month and a
balance inquiry fee is a type of service fee. If, however, the dormancy
fee could be imposed on January 1, following a year of inactivity, and
the consumer makes a balance inquiry on the same date, the person
assessing the fees may choose whether to impose the dormancy fee or the
balance inquiry fee on January 1. The restriction in Sec. 205.20(d)(3)
does not apply to any fee that is not a dormancy, inactivity, or service
fee. For example, assume a service fee is imposed on a general-use
prepaid card on January 1, following a year of inactivity. If a consumer
cashes out the remaining funds by check on January 15, a cash-out fee,
to the extent such cash-out fee is permitted under Sec. 205.20(e)(4),
may be imposed at that time because a cash-out fee is not a dormancy,
inactivity, or service fee.
[[Page 192]]
5. Accumulation of fees. Section 205.20(d) prohibits the
accumulation of dormancy, inactivity, or service fees for previous
periods into a single fee because such a practice would circumvent the
limitation in Sec. 205.20(d)(3) that only one fee may be charged per
month. For example, if a consumer purchases and activates a store gift
card on January 1 but never uses the card, a monthly maintenance fee of
$2.00 a month may not be accumulated such that a fee of $24 is imposed
on January 1 the following year.
20(e) Prohibition on Sale of Gift Certificates or Cards With Expiration
Dates
1. Reasonable opportunity. Under Sec. 205.20(e)(1), no person may
sell or issue a gift certificate, store gift card, or general-use
prepaid card with an expiration date, unless there are policies and
procedures in place to provide consumers with a reasonable opportunity
to purchase a certificate or card with at least five years remaining
until the certificate or card expiration date. Consumers are deemed to
have a reasonable opportunity to purchase a certificate or card with at
least five years remaining until the certificate or card expiration date
if:
i. There are policies and procedures established to prevent the sale
of a certificate or card unless the certificate or card expiration date
is at least five years after the date the certificate or card was sold
or initially issued to a consumer; or
ii. A certificate or card is available to consumers to purchase five
years and six months before the certificate or card expiration date.
2. Applicability to replacement certificates or cards. Section
205.20(e)(1) applies solely to the purchase of a certificate or card.
Therefore, Sec. 205.20(e)(1) does not apply to the replacement of such
certificates or cards. Certificates or cards issued as a replacement may
bear a certificate or card expiration date of less than five years from
the date of issuance of the replacement certificate or card. If the
certificate or card expiration date for a replacement certificate or
card is later than the date set forth in Sec. 205.20(e)(2)(i), then
pursuant to Sec. 205.20(e)(2), the expiration date for the underlying
funds at the time the replacement certificate or card is issued must be
no earlier than the expiration date for the replacement certificate or
card. For purposes of Sec. 205.20(e)(2), funds are not considered to be
loaded to a store gift card or general-use prepaid card solely because a
replacement card has been issued or activated for use.
3. Disclosure of funds expiration--date not required. Section
205.20(e)(3)(i) does not require disclosure of the precise date the
funds will expire. It is sufficient to disclose, for example, ``Funds
expire 5 years from the date funds last loaded to the card.''; ``Funds
can be used 5 years from the date money was last added to the card.'';
or ``Funds do not expire.''
4. Disclosure not required if no expiration date. If the certificate
or card and underlying funds do not expire, the disclosure required by
Sec. 205.20(e)(3)(i) need not be stated on the certificate or card. If
the certificate or card and underlying funds expire at the same time,
only one expiration date need be disclosed on the certificate or card.
5. Reference to toll-free telephone number and Web site. If a
certificate or card does not expire, or if the underlying funds are not
available after the certificate or card expires, the disclosure required
by Sec. 205.20(e)(3)(ii) need not be stated on the certificate or card.
See, however, Sec. 205.20(f)(2).
6. Relationship to Sec. 226.20(f)(2). The same toll-free telephone
number and Web site may be used to comply with Sec. Sec.
226.20(e)(3)(ii) and (f)(2). Neither a toll-free number nor a Web site
must be maintained or disclosed if no fees are imposed in connection
with a certificate or card, and the certificate or card and the
underlying funds do not expire.
7. Distinguishing between certificate or card expiration and funds
expiration. If applicable, a disclosure must be made on the certificate
or card that notifies a consumer that the certificate or card expires,
but the funds either do not expire or expire later than the certificate
or card, and that the consumer may contact the issuer for a replacement
card. The disclosure must be made with equal prominence and in close
proximity to the certificate or card expiration date. The close
proximity requirement does not apply to oral disclosures. In the case of
a certificate or card, close proximity means that the disclosure must be
on the same side as the certificate or card expiration date. For
example, if the disclosure is the same type size and is located
immediately next to or directly above or below the certificate or card
expiration date, without any intervening text or graphical displays, the
disclosures would be deemed to be equally prominent and in close
proximity. The disclosure need not be embossed on the certificate or
card to be deemed equally prominent, even if the expiration date is
embossed on the certificate or card. The disclosure may state on the
front of the card, for example, ``Funds expire after card. Call for
replacement card.'' or ``Funds do not expire. Call for new card after
09/2016.'' Disclosures made pursuant to Sec. 205.20(e)(3)(iii)(A) may
also fulfill the requirements of Sec. 205.20(e)(3)(i). For example,
making a disclosure that ``Funds do not expire'' to comply with Sec.
205.20(e)(3)(iii)(A) also fulfills the requirements of Sec.
205.20(e)(3)(i).
8. Expiration date safe harbor. A non-reloadable certificate or card
that bears an expiration date that is at least seven years from the date
of manufacture need not state the disclosure required by Sec.
205.20(e)(3)(iii).
[[Page 193]]
However, Sec. 205.20(e)(1) still prohibits the sale or issuance of such
certificate or card unless there are policies and procedures in place to
provide a consumer with a reasonable opportunity to purchase the
certificate or card with at least five years remaining until the
certificate or card expiration date. In addition, under Sec.
205.20(e)(2), the funds may not expire before the certificate or card
expiration date, even if the expiration date of the certificate or card
bears an expiration date that is more than five years at the date of
purchase. For purposes of this safe harbor, the date of manufacture is
the date on which the certificate or card expiration date is printed on
the certificate or card.
9. Relationship between Sec. Sec. 205.20(d)(2), (e)(3), and (f)(2).
In addition to any disclosures required to be made under Sec.
205.20(e)(3), any applicable disclosures under Sec. Sec. 205.20(d)(2)
and (f)(2) must also be provided on the certificate or card.
10. Replacement or remaining balance of an expired certificate or
card. When a certificate or card expires, but the underlying funds have
not expired, an issuer, at its option in accordance with applicable
state law, may provide either a replacement certificate or card or
otherwise provide the certificate or card holder, for example, by check,
with the remaining balance on the certificate or card. In either case,
the issuer may not charge a fee for the service.
11. Replacement of a lost or stolen certificate or card not
required. Section 205.20(e)(4) does not require the replacement of a
certificate or card that has been lost or stolen.
12. Date of issuance or loading. For purposes of Sec.
205.20(e)(2)(i), a certificate or card is not issued or loaded with
funds until the certificate or card is activated for use.
13. Application of expiration date provisions after redemption of
certificate or card. The requirement that funds underlying a certificate
or card must not expire for at least five years from the date of
issuance or date of last load ceases to apply once the certificate or
card has been fully redeemed, even if the underlying funds are not used
to contemporaneously purchase a specific good or service. For example,
some certificates or cards can be used to purchase music, media, or
virtual goods. Once redeemed by a consumer, the entire balance on the
certificate or card is debited from the certificate or card and credited
or transferred to another ``account'' established by the merchant of
such goods or services. The consumer can then make purchases of songs,
media, or virtual goods from the merchant using that ``account'' either
at the time the value is transferred from the certificate or card or at
a later time. Under these circumstances, once the card has been fully
redeemed and the ``account'' credited with the amount of the underlying
funds, the five-year minimum expiration term no longer applies to the
underlying funds. However, if the consumer only partially redeems the
value of the certificate or card, the five-year minimum expiration term
requirement continues to apply to the funds remaining on the certificate
or card.
20(f) Additional Disclosure Requirements for Gift Certificates or Cards
1. Reference to toll-free telephone number and Web site. If a
certificate or card does not have any fees, the disclosure under Sec.
205.20(f)(2) is not required on the certificate or card. See, however,
Sec. 205.20(e)(3)(ii).
2. Relationship to Sec. 226.20(e)(3)(ii). The same toll-free
telephone number and Web site may be used to comply with Sec. Sec.
226.20(e)(3)(ii) and (f)(2). Neither a toll-free number nor a Web site
must be maintained or disclosed if no fees are imposed in connection
with a certificate or card, and both the certificate or card and
underlying funds do not expire.
3. Relationship between Sec. Sec. 205.20(d)(2), (e)(3), and (f)(2).
In addition to any disclosures required pursuant to Sec. 205.20(f)(2),
any applicable disclosures under Sec. Sec. 205.20(d)(2) and (e)(3) must
also be provided on the certificate or card.
20(g) Compliance Dates
1. Period of eligibility for loyalty, award, or promotional
programs. For purposes of Sec. 205.20(g)(2), the period of eligibility
is the time period during which a consumer must engage in a certain
action or actions to meet the terms of eligibility for a loyalty, award,
or promotional program and obtain the card, code, or other device. Under
Sec. 205.20(g)(2), a gift card issued pursuant to a loyalty, award, or
promotional program that began prior to August 22, 2010 need not state
the disclosures in Sec. 205.20(a)(4)(iii) regardless of whether the
consumer became eligible to receive the gift card prior to August 22,
2010, or after that date. For example, a product manufacturer may
provide a $20 rebate card to a consumer if the consumer purchases a
particular product and submits a fully completed entry between January
1, 2010 and December 31, 2010. Similarly, a merchant may provide a $20
gift card to a consumer if the consumer makes $200 worth of qualifying
purchases between June 1, 2010 and October 30, 2010. Under both
examples, gift cards provided pursuant to these loyalty, award, or
promotional programs need not state the disclosures in Sec.
205.20(a)(4)(iii) to qualify for the exclusion in Sec. 205.20(b)(3) for
loyalty, award, or promotional gift cards because the period of
eligibility for each program began prior to August 22, 2010.
20(h) Temporary Exemption
20(h)(1)--Delayed Effective Date
1. Application to certificates or cards produced prior to April 1,
2010. Certificates or
[[Page 194]]
cards produced prior to April 1, 2010 may be sold to a consumer on or
after August 22, 2010 without satisfying the requirements of Sec.
205.20(c)(3), (d)(2), (e)(1), (e)(3), and (f) through January 30, 2011,
provided that issuers of such certificates or cards comply with the
additional substantive and disclosure requirements of Sec. Sec.
205.20(h)(1)(i) through (iv). Issuers of certificates or cards produced
prior to April 1, 2010 need not satisfy these additional requirements if
the certificates or cards fully comply with the rule (Sec. Sec.
205.20(a) through (f)). For example, the in-store signage and other
disclosures required by Sec. 205.20(h)(2) do not apply to gift cards
produced prior to April 1, 2010 that do not have fees and do not expire,
and which otherwise comply with the rule.
2. Expiration of temporary exemption. Certificates or cards produced
prior to April 1, 2010 that do not fully comply with Sec. Sec.
205.20(a) through (f) may not be issued or sold to consumers on or after
January 31, 2011.
20(h)(2)--Additional Disclosures
1. Disclosures through third parties. Issuers may make the
disclosures required by Sec. 205.20(h)(2) through a third party, such
as a retailer or merchant. For example, an issuer may have a merchant
install in-store signage with the disclosures required by Sec.
205.20(h)(2) on the issuer's behalf.
2. General advertising disclosures. Section 205.20(h)(2) does not
impose an obligation on the issuer to advertise gift certificates, store
gift cards, or general-use prepaid cards.
Appendix A--Model Disclosure Clauses and Forms
1. Review of forms. The Board will not review or approve disclosure
forms or statements for financial institutions. However, the Board has
issued model clauses for institutions to use in designing their
disclosures. If an institution uses these clauses accurately to reflect
its service, the institution is protected from liability for failure to
make disclosures in proper form.
2. Use of forms. The appendix contains model disclosure clauses for
optional use by financial institutions to facilitate compliance with the
disclosure requirements of sections 205.5(b)(2) and (b)(3), 205.6(a),
205.7, 205.8(b), 205.14(b)(1)(ii), 205.15(d)(1) and (d)(2), and
205.18(c)(1) and (c)(2). The use of appropriate clauses in making
disclosures will protect a financial institution from liability under
sections 915 and 916 of the act provided the clauses accurately reflect
the institution's EFT services.
3. Altering the clauses. Financial institutions may use clauses of
their own design in conjunction with the Board's model clauses. The
inapplicable words or portions of phrases in parentheses should be
deleted. The catchlines are not part of the clauses and need not be
used. Financial institutions may make alterations, substitutions, or
additions in the clauses to reflect the services offered, such as
technical changes (including the substitution of a trade name for the
word ``card,'' deletion of inapplicable services, or substitution of
lesser liability limits). Several of the model clauses include
references to a telephone number and address. Where two or more of these
clauses are used in a disclosure, the telephone number and address may
be referenced and need not be repeated.
[Reg. E, 61 FR 19686, May 2, 1996, as amended at 66 FR 13412, Mar. 6,
2001; 66 FR 15192, Mar. 16, 2001; 66 FR 17794, Apr. 4, 2001; 71 FR 1661,
Jan. 10, 2006; 71 FR 69437, Dec. 1, 2006; 71 FR 1482, Jan. 10, 2006, 71
FR 51450, Aug. 30, 2006; 72 FR 36593, July 5, 2007; 72 FR 63456, Nov. 9,
2007; 74 FR 59055, Nov. 17, 2009; 75 FR 31671, June 4, 2010; 75 FR
16615, Apr. 1, 2010; 75 FR 50688, Aug. 17, 2010; 75 FR 66649, Oct. 29,
2010]
PART 206_LIMITATIONS ON INTERBANK LIABILITIES (REGULATION F)--Table of
Contents
Sec.
206.1 Authority, purpose, and scope.
206.2 Definitions.
206.3 Prudential standards.
206.4 Credit exposure.
206.5 Capital levels of correspondents.
206.6 Waiver.
Authority: 12 U.S.C. 371b-2
Source: Reg. F, 57 FR 60106, Dec. 18, 1992, unless otherwise noted.
Sec. 206.1 Authority, purpose, and scope.
(a) Authority and purpose. This part (Regulation F, 12 CFR part 206)
is issued by the Board of Governors of the Federal Reserve System
(Board) under authority of section 23 of the Federal Reserve Act (12
U.S.C. 371b-2). The purpose of this part is to limit the risks that the
failure of a depository institution would pose to insured depository
institutions.
(b) Scope. This part applies to all depository institutions insured
by the Federal Deposit Insurance Corporation.
[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283,
Sept. 10, 2003]
Sec. 206.2 Definitions.
As used in this part, unless the context requires otherwise:
(a) Bank means an insured depository institution, as defined in
section 3 of the Federal Deposit Insurance Act (12
[[Page 195]]
U.S.C. 1813), and includes an insured national bank, state bank,
District bank, or savings association, and an insured branch of a
foreign bank.
(b) Commonly-controlled correspondent means a correspondent that is
commonly controlled with the bank and for which the bank is subject to
liability under section 5(e) of the Federal Deposit Insurance Act. A
correspondent is considered to be commonly controlled with the bank if:
(1) 25 percent or more of any class of voting securities of the bank
and the correspondent are owned, directly or indirectly, by the same
depository institution or company; or
(2) Either the bank or the correspondent owns 25 percent or more of
any class of voting securities of the other.
(c) Correspondent means a U.S. depository institution or a foreign
bank, as defined in this part, to which a bank has exposure, but does
not include a commonly controlled correspondent.
(d) Exposure means the potential that an obligation will not be paid
in a timely manner or in full. ``Exposure'' includes credit and
liquidity risks, including operational risks, related to intraday and
interday transactions.
(e) Foreign bank means an institution that: (1) Is organized under
the laws of a country other than the United States;
(2) Engages in the business of banking;
(3) Is recognized as a bank by the bank supervisory or monetary
authorities of the country of the bank's organization;
(4) Receives deposits to a substantial extent in the regular course
of business; and
(5) Has the power to accept demand deposits.
(f) Primary federal supervisor has the same meaning as the term
``appropriate Federal banking agency'' in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
(g) Total capital means the total of a bank's Tier 1 and Tier 2
capital under the risk-based capital guidelines provided by the bank's
primary federal supervisor. For an insured branch of a foreign bank
organized under the laws of a country that subscribes to the principles
of the Basel Capital Accord, ``total capital'' means total Tier 1 and
Tier 2 capital as calculated under the standards of that country. For an
insured branch of a foreign bank organized under the laws of a country
that does not subscribe to the principles of the Basel Capital Accord,
``total capital'' means total Tier 1 and Tier 2 capital as calculated
under the provisions of the Accord.
(h) U.S. depository institution means a bank, as defined in Sec.
206.2(a) of this part, other than an insured branch of a foreign bank.
[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283,
Sept. 10, 2003]
Sec. 206.3 Prudential standards.
(a) General. A bank shall establish and maintain written policies
and procedures to prevent excessive exposure to any individual
correspondent in relation to the condition of the correspondent.
(b) Standards for selecting correspondents. (1) A bank shall
establish policies and procedures that take into account credit and
liquidity risks, including operational risks, in selecting
correspondents and terminating those relationships.
(2) Where exposure to a correspondent is significant, the policies
and procedures shall require periodic reviews of the financial condition
of the correspondent and shall take into account any deterioration in
the correspondent's financial condition. Factors bearing on the
financial condition of the correspondent include the capital level of
the correspondent, level of nonaccrual and past due loans and leases,
level of earnings, and other factors affecting the financial condition
of the correspondent. Where public information on the financial
condition of the correspondent is available, a bank may base its review
of the financial condition of a correspondent on such information, and
is not required to obtain non-public information for its review.
However, for those foreign banks for which there is no public source of
financial information, a bank will be required to obtain information for
its review.
(3) A bank may rely on another party, such as a bank rating agency
or
[[Page 196]]
the bank's holding company, to assess the financial condition of or
select a correspondent, provided that the bank's board of directors has
reviewed and approved the general assessment or selection criteria used
by that party.
(c) Internal limits on exposure. (1) Where the financial condition
of the correspondent and the form or maturity of the exposure create a
significant risk that payments will not be made in full or in a timely
manner, a bank's policies and procedures shall limit the bank's exposure
to the correspondent, either by the establishment of internal limits or
by other means. Limits shall be consistent with the risk undertaken,
considering the financial condition and the form and maturity of
exposure to the correspondent. Limits may be fixed as to amount or
flexible, based on such factors as the monitoring of exposure and the
financial condition of the correspondent. Different limits may be set
for different forms of exposure, different products, and different
maturities.
(2) A bank shall structure transactions with a correspondent or
monitor exposure to a correspondent, directly or through another party,
to ensure that its exposure ordinarily does not exceed the bank's
internal limits, including limits established for credit exposure,
except for occasional excesses resulting from unusual market
disturbances, market movements favorable to the bank, increases in
activity, operational problems, or other unusual circumstances.
Generally, monitoring may be done on a retrospective basis. The level of
monitoring required depends on:
(i) The extent to which exposure approaches the bank's internal
limits;
(ii) The volatility of the exposure; and
(iii) The financial condition of the correspondent.
(3) A bank shall establish appropriate procedures to address
excesses over its internal limits.
(d) Review by board of directors. The policies and procedures
established under this section shall be reviewed and approved by the
bank's board of directors at least annually.
[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283,
Sept. 10, 2003]
Sec. 206.4 Credit exposure.
(a) Limits on credit exposure. (1) The policies and procedures on
exposure established by a bank under Sec. 206.3(c) of this part shall
limit a bank's interday credit exposure to an individual correspondent
to not more than 25 percent of the bank's total capital, unless the bank
can demonstrate that its correspondent is at least adequately
capitalized, as defined in Sec. 206.5(a) of this part.
(2) Where a bank is no longer able to demonstrate that a
correspondent is at least adequately capitalized for the purposes of
Sec. 206.4(a) of this part, including where the bank cannot obtain
adequate information concerning the capital ratios of the correspondent,
the bank shall reduce its credit exposure to comply with the
requirements of Sec. 206.4(a)(1) of this part within 120 days after the
date when the current Report of Condition and Income or other relevant
report normally would be available.
(b) Calculation of credit exposure. Except as provided in Sec. Sec.
206.4 (c) and (d) of this part, the credit exposure of a bank to a
correspondent shall consist of the bank's assets and off-balance sheet
items that are subject to capital requirements under the capital
adequacy guidelines of the bank's primary federal supervisor, and that
involve claims on the correspondent or capital instruments issued by the
correspondent. For this purpose, off-balance sheet items shall be valued
on the basis of current exposure. The term ``credit exposure'' does not
include exposure related to the settlement of transactions, intraday
exposure, transactions in an agency or similar capacity where losses
will be passed back to the principal or other party, or other sources of
exposure that are not covered by the capital adequacy guidelines.
(c) Netting. Transactions covered by netting agreements that are
valid and enforceable under all applicable laws may be netted in
calculating credit exposure.
[[Page 197]]
(d) Exclusions. A bank may exclude the following from the
calculation of credit exposure to a correspondent:
(1) Transactions, including reverse repurchase agreements, to the
extent that the transactions are secured by government securities or
readily marketable collateral, as defined in paragraph (f) of this
section, based on the current market value of the collateral;
(2) The proceeds of checks and other cash items deposited in an
account at a correspondent that are not yet available for withdrawal;
(3) Quality assets, as defined in paragraph (f) of this section, on
which the correspondent is secondarily liable, or obligations of the
correspondent on which a creditworthy obligor in addition to the
correspondent is available, including but not limited to:
(i) Loans to third parties secured by stock or debt obligations of
the correspondent;
(ii) Loans to third parties purchased from the correspondent with
recourse;
(iii) Loans or obligations of third parties backed by stand-by
letters of credit issued by the correspondent; or
(iv) Obligations of the correspondent backed by stand-by letters of
credit issued by a creditworthy third party;
(4) exposure that results from the merger with or acquisition of
another bank for one year after that merger or acquisition is
consummated; and
(5) The portion of the bank's exposure to the correspondent that is
covered by federal deposit insurance.
(e) Credit exposure of subsidiaries. In calculating credit exposure
to a correspondent under this part, a bank shall include credit exposure
to the correspondent of any entity that the bank is required to
consolidate on its Report of Condition and Income or Thrift Financial
Report.
(f) Definitions. As used in this section:
(1) Government securities means obligations of, or obligations fully
guaranteed as to principal and interest by, the United States government
or any department, agency, bureau, board, commission, or establishment
of the United States, or any corporation wholly owned, directly or
indirectly, by the United States.
(2) Readily marketable collateral means financial instruments or
bullion that may be sold in ordinary circumstances with reasonable
promptness at a fair market value determined by quotations based on
actual transactions on an auction or a similarly available daily bid-
ask-price market.
(3)(i) Quality asset means an asset:
(A) That is not in a nonaccrual status;
(B) On which principal or interest is not more than thirty days past
due; and
(C) Whose terms have not been renegotiated or compromised due to the
deteriorating financial conditions of the additional obligor.
(ii) An asset is not considered a ``quality asset'' if any other
loans to the primary obligor on the asset have been classified as
``substandard,'' ``doubtful,'' or ``loss,'' or treated as ``other loans
specially mentioned'' in the most recent report of examination or
inspection of the bank or an affiliate prepared by either a federal or a
state supervisory agency.
[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283,
Sept. 10, 2003]
Sec. 206.5 Capital levels of correspondents.
(a) Adequately capitalized correspondents.\1\ For the purpose of
this part, a correspondent is considered adequately capitalized if the
correspondent has:
---------------------------------------------------------------------------
\1\ As used in this part, the term ``adequately capitalized'' is
similar but not identical to the definition of that term as used for the
purposes of the prompt corrective action standards. See, e.g. 12 CFR
part 208, subpart D.
---------------------------------------------------------------------------
(1) A total risk-based capital ratio, as defined in paragraph (e)(1)
of this section, of 8.0 percent or greater;
(2) A Tier 1 risk-based capital ratio, as defined in paragraph
(e)(2) of this section, of 4.0 percent or greater; and
(3) A leverage ratio, as defined in paragraph (e)(3) of this
section, of 4.0 percent or greater.
(b) Frequency of monitoring capital levels. A bank shall obtain
information to demonstrate that a correspondent is at least adequately
capitalized on a quarterly basis, either from the most recently
available Report of Condition and Income, Thrift Financial Report,
[[Page 198]]
financial statement, or bank rating report for the correspondent. For a
foreign bank correspondent for which quarterly financial statements or
reports are not available, a bank shall obtain such information on as
frequent a basis as such information is available. Information obtained
directly from a correspondent for the purpose of this section should be
based on the most recently available Report of Condition and Income,
Thrift Financial Report, or financial statement of the correspondent.
(c) Foreign banks. A correspondent that is a foreign bank may be
considered adequately capitalized under this section without regard to
the minimum leverage ratio required under paragraph (a)(3) of this
section.
(d) Reliance on information. A bank may rely on information as to
the capital levels of a correspondent obtained from the correspondent, a
bank rating agency, or other party that it reasonably believes to be
accurate.
(e) Definitions. For the purposes of this section:
(1) Total risk-based capital ratio means the ratio of qualifying
total capital to weighted risk assets.
(2) Tier 1 risk-based capital ratio means the ratio of Tier 1
capital to weighted risk assets.
(3) Leverage ratio means the ratio of Tier 1 capital to average
total consolidated assets, as calculated in accordance with the capital
adequacy guidelines of the correspondent's primary federal supervisor.
(f) Calculation of capital ratios. (1) For a correspondent that is a
U.S. depository institution, the ratios shall be calculated in
accordance with the capital adequacy guidelines of the correspondent's
primary federal supervisor.
(2) For a correspondent that is a foreign bank organized in a
country that has adopted the risk-based framework of the Basel Capital
Accord, the ratios shall be calculated in accordance with the capital
adequacy guidelines of the appropriate supervisory authority of the
country in which the correspondent is chartered.
(3) For a correspondent that is a foreign bank organized in a
country that has not adopted the risk-based framework of the Basel
Capital Accord, the ratios shall be calculated in accordance with the
provisions of the Basel Capital Accord.
[Reg. F, 57 FR 60106, Dec. 18, 1992, as amended by Reg. F, 68 FR 53283,
Sept. 10, 2003]
Sec. 206.6 Waiver.
The Board may waive the application of Sec. 206.4(a) of this part
to a bank if the primary Federal supervisor of the bank advises the
Board that the bank is not reasonably able to obtain necessary services,
including payment-related services and placement of funds, without
incurring exposure to a correspondent in excess of the otherwise
applicable limit.
PART 207_DISCLOSURE AND REPORTING OF CRA-RELATED AGREEMENTS (REGULATION G)--
Table of Contents
Sec.
207.1 Purpose and scope of this part.
207.2 Definition of covered agreement.
207.3 CRA communications.
207.4 Fulfillment of the CRA.
207.5 Related agreements considered a single agreement.
207.6 Disclosure of covered agreements.
207.7 Annual reports.
207.8 Release of information under FOIA.
207.9 Compliance provisions.
207.10 Transition provisions.
207.11 Other definitions and rules of construction used in this part.
Authority: 12 U.S.C. 1831y.
Source: Reg. G, 66 FR 2092, Jan. 10, 2001, unless otherwise noted.
Sec. 207.1 Purpose and scope of this part.
(a) General. This part implements section 711 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1831y). That section requires any nongovernmental
entity or person, insured depository institution, or affiliate of an
insured depository institution that enters into a covered agreement to--
(1) Make the covered agreement available to the public and the
appropriate Federal banking agency; and
(2) File an annual report with the appropriate Federal banking
agency concerning the covered agreement.
(b) Scope of this part. The provisions of this part apply to--
(1) State member banks and their subsidiaries;
[[Page 199]]
(2) Bank holding companies;
(3) Savings and loan holding companies;
(4) Affiliates of bank holding companies and savings and loan
holding companies, other than banks, savings associations and
subsidiaries of banks and savings associations; and
(5) Nongovernmental entities or persons that enter into covered
agreements with any company listed in paragraph (b)(1) through (4) of
this section.
(c) Relation to Community Reinvestment Act. This part does not
affect in any way the Community Reinvestment Act of 1977 (12 U.S.C. 2901
et seq.), the Board's Regulation BB (12 CFR part 228), or the Board's
interpretations or administration of that Act or regulation.
(d) Examples--(1) The examples in this part are not exclusive.
Compliance with an example, to the extent applicable, constitutes
compliance with this part.
(2) Examples in a paragraph illustrate only the issue described in
the paragraph and do not illustrate any other issues that may arise in
this part.
[Reg. G, 66 FR 2092, Jan. 10, 2001, as amended at 76 FR 56530, Sept. 13,
2011]
Sec. 207.2 Definition of covered agreement.
(a) General definition of covered agreement. A covered agreement is
any contract, arrangement, or understanding that meets all of the
following criteria--
(1) The agreement is in writing.
(2) The parties to the agreement include--
(i) One or more insured depository institutions or affiliates of an
insured depository institution; and
(ii) One or more nongovernmental entities or persons (referred to
hereafter as NGEPs).
(3) The agreement provides for the insured depository institution or
any affiliate to--
(i) Provide to one or more individuals or entities (whether or not
parties to the agreement) cash payments, grants, or other consideration
(except loans) that have an aggregate value of more than $10,000 in any
calendar year; or
(ii) Make to one or more individuals or entities (whether or not
parties to the agreement) loans that have an aggregate principal amount
of more than $50,000 in any calendar year.
(4) The agreement is made pursuant to, or in connection with, the
fulfillment of the Community Reinvestment Act of 1977 (12 U.S.C. 2901 et
seq.) (CRA), as defined in Sec. 207.4.
(5) The agreement is with a NGEP that has had a CRA communication as
described in Sec. 207.3 prior to entering into the agreement.
(b) Examples concerning written arrangements or understandings--(1)
Example 1. A NGEP meets with an insured depository institution and
states that the institution needs to make more community development
investments in the NGEP's community. The NGEP and insured depository
institution do not reach an agreement concerning the community
development investments the institution should make in the community,
and the parties do not reach any mutual arrangement or understanding.
Two weeks later, the institution unilaterally issues a press release
announcing that it has established a general goal of making $100 million
of community development grants in low- and moderate-income
neighborhoods served by the insured depository institution over the next
5 years. The NGEP is not identified in the press release. The press
release is not a written arrangement or understanding.
(2) Example 2. A NGEP meets with an insured depository institution
and states that the institution needs to offer new loan programs in the
NGEP's community. The NGEP and the insured depository institution reach
a mutual arrangement or understanding that the institution will provide
additional loans in the NGEP's community. The institution tells the NGEP
that it will issue a press release announcing the program. Later, the
insured depository institution issues a press release announcing the
loan program. The press release incorporates the key terms of the
understanding reached between the
[[Page 200]]
NGEP and the insured depository institution. The written press release
reflects the mutual arrangement or understanding of the NGEP and the
insured depository institution and is, therefore, a written arrangement
or understanding.
(3) Example 3. An NGEP sends a letter to an insured depository
institution requesting that the institution provide a $15,000 grant to
the NGEP. The insured depository institution responds in writing and
agrees to provide the grant in connection with its annual grant program.
The exchange of letters constitutes a written arrangement or
understanding.
(c) Loan agreements that are not covered agreements. A covered
agreement does not include--
(1) Any individual loan that is secured by real estate; or
(2) Any specific contract or commitment for a loan or extension of
credit to an individual, business, farm, or other entity, or group of
such individuals or entities, if--
(i) The funds are loaned at rates that are not substantially below
market rates; and
(ii) The loan application or other loan documentation does not
indicate that the borrower intends or is authorized to use the borrowed
funds to make a loan or extension of credit to one or more third
parties.
(d) Examples concerning loan agreements--(1) Example 1. An insured
depository institution provides an organization with a $1 million loan
that is documented in writing and is secured by real estate owned or to-
be-acquired by the organization. The agreement is an individual mortgage
loan and is exempt from coverage under paragraph (c)(1) of this section,
regardless of the interest rate on the loan or whether the organization
intends or is authorized to re-loan the funds to a third party.
(2) Example 2. An insured depository institution commits to provide
a $500,000 line of credit to a small business that is documented by a
written agreement. The loan is made at rates that are within the range
of rates offered by the institution to similarly situated small
businesses in the market and the loan documentation does not indicate
that the small business intends or is authorized to re-lend the borrowed
funds. The agreement is exempt from coverage under paragraph (c)(2) of
this section.
(3) Example 3. An insured depository institution offers small
business loans that are guaranteed by the Small Business Administration
(SBA). A small business obtains a $75,000 loan, documented in writing,
from the institution under the institution's SBA loan program. The loan
documentation does not indicate that the borrower intends or is
authorized to re-lend the funds. Although the rate charged on the loan
is well below that charged by the institution on commercial loans, the
rate is within the range of rates that the institution would charge a
similarly situated small business for a similar loan under the SBA loan
program. Accordingly, the loan is not made at substantially below market
rates and is exempt from coverage under paragraph (c)(2) of this
section.
(4) Example 4. A bank holding company enters into a written
agreement with a community development organization that provides that
insured depository institutions owned by the bank holding company will
make $250 million in small business loans in the community over the next
5 years. The written agreement is not a specific contract or commitment
for a loan or an extension of credit and, thus, is not exempt from
coverage under paragraph (c)(2) of this section. Each small business
loan made by the insured depository institution pursuant to this general
commitment would, however, be exempt from coverage if the loan is made
at rates that are not substantially below market rates and the loan
documentation does not indicate that the borrower intended or was
authorized to re-lend the funds.
(e) Agreements that include exempt loan agreements. If an agreement
includes a loan, extension of credit or loan commitment that, if
documented separately, would be exempt under paragraph (c) of this
section, the exempt loan, extension of credit or loan commitment may be
excluded for purposes of determining whether the agreement is a covered
agreement.
[[Page 201]]
(f) Determining annual value of agreements that lack schedule of
disbursements. For purposes of paragraph (a)(3) of this section, a
multi-year agreement that does not include a schedule for the
disbursement of payments, grants, loans or other consideration by the
insured depository institution or affiliate, is considered to have a
value in the first year of the agreement equal to all payments, grants,
loans and other consideration to be provided at any time under the
agreement.
Sec. 207.3 CRA communications.
(a) Definition of CRA communication. A CRA communication is any of
the following--
(1) Any written or oral comment or testimony provided to a Federal
banking agency concerning the adequacy of the performance under the CRA
of the insured depository institution, any affiliated insured depository
institution, or any CRA affiliate.
(2) Any written comment submitted to the insured depository
institution that discusses the adequacy of the performance under the CRA
of the institution and must be included in the institution's CRA public
file.
(3) Any discussion or other contact with the insured depository
institution or any affiliate about--
(i) Providing (or refraining from providing) written or oral
comments or testimony to any Federal banking agency concerning the
adequacy of the performance under the CRA of the insured depository
institution, any affiliated insured depository institution, or any CRA
affiliate;
(ii) Providing (or refraining from providing) written comments to
the insured depository institution that concern the adequacy of the
institution's performance under the CRA and must be included in the
institution's CRA public file; or
(iii) The adequacy of the performance under the CRA of the insured
depository institution, any affiliated insured depository institution,
or any CRA affiliate.
(b) Discussions or contacts that are not CRA communications--(1)
Timing of contacts with a Federal banking agency. An oral or written
communication with a Federal banking agency is not a CRA communication
if it occurred more than 3 years before the parties entered into the
agreement.
(2) Timing of contacts with insured depository institutions and
affiliates. A communication with an insured depository institution or
affiliate is not a CRA communication if the communication occurred--
(i) More than 3 years before the parties entered into the agreement,
in the case of any written communication;
(ii) More than 3 years before the parties entered into the
agreement, in the case of any oral communication in which the NGEP
discusses providing (or refraining from providing) comments or testimony
to a Federal banking agency or written comments that must be included in
the institution's CRA public file in connection with a request to, or
agreement by, the institution or affiliate to take (or refrain from
taking) any action that is in fulfillment of the CRA; or
(iii) More than 1 year before the parties entered into the
agreement, in the case of any other oral communication not described in
paragraph (b)(2)(ii) of this section.
(3) Knowledge of communication by insured depository institution or
affiliate. (i) A communication is only a CRA communication under
paragraph (a) of this section if the insured depository institution or
its affiliate has knowledge of the communication under this paragraph
(b)(3)(ii) or (b)(3)(iii) of this section.
(ii) Communication with insured depository institution or affiliate.
An insured depository institution or affiliate has knowledge of a
communication by the NGEP to the institution or its affiliate under this
paragraph only if one of the following representatives of the insured
depository institution or any affiliate has knowledge of the
communication.
(A) An employee who approves, directs, authorizes, or negotiates the
agreement with the NGEP; or
(B) An employee designated with responsibility for compliance with
the CRA or executive officer if the employee or executive officer knows
that the institution or affiliate is negotiating, intends to negotiate,
or has been informed by the NGEP that it expects
[[Page 202]]
to request that the institution or affiliate negotiate an agreement with
the NGEP.
(iii) Other communications. An insured depository institution or
affiliate is deemed to have knowledge of--
(A) Any testimony provided to a Federal banking agency at a public
meeting or hearing;
(B) Any comment submitted to a Federal banking agency that is
conveyed in writing by the agency to the insured depository institution
or affiliate; and
(C) Any written comment submitted to the insured depository
institution that must be and is included in the institution's CRA public
file.
(4) Communication where NGEP has knowledge. A NGEP has a CRA
communication with an insured depository institution or affiliate only
if any of the following individuals has knowledge of the communication--
(i) A director, employee, or member of the NGEP who approves,
directs, authorizes, or negotiates the agreement with the insured
depository institution or affiliate;
(ii) A person who functions as an executive officer of the NGEP and
who knows that the NGEP is negotiating or intends to negotiate an
agreement with the insured depository institution or affiliate; or
(iii) Where the NGEP is an individual, the NGEP.
(c) Examples of CRA communications--(1) Examples of actions that are
CRA communications. The following are examples of CRA communications.
These examples are not exclusive and assume that the communication
occurs within the relevant time period as described in paragraph (b)(1)
or (b)(2) of this section and the appropriate representatives have
knowledge of the communication as specified in paragraphs (b)(3) and
(b)(4) of this section.
(i) Example 1. A NGEP files a written comment with a Federal banking
agency that states than an insured depository institution successfully
addresses the credit needs of its community. The written comment is in
response to a general request from the agency for comments on an
application of the insured depository institution to open a new branch
and a copy of the comment is provided to the institution.
(ii) Example 2. A NGEP meets with an executive officer of an insured
depository institution and states that the institution must improve its
CRA performance.
(iii) Example 3. A NGEP meets with an executive officer of an
insured depository institution and states that the institution needs to
make more mortgage loans in low- and moderate-income neighborhoods in
its community.
(iv) Example 4. A bank holding company files an application with a
Federal banking agency to acquire an insured depository institution. Two
weeks later, the NGEP meets with an executive officer of the bank
holding company to discuss the adequacy of the performance under the CRA
of the target insured depository institution. The insured depository
institution was an affiliate of the bank holding company at the time the
NGEP met with the target institution. (See Sec. 207.11(a).)
Accordingly, the NGEP had a CRA communication with an affiliate of the
bank holding company.
(2) Examples of actions that are not CRA communications. The
following are examples of actions that are not by themselves CRA
communications. These examples are not exclusive.
(i) Example 1. A NGEP provides to a Federal banking agency comments
or testimony concerning an insured depository institution or affiliate
in response to a direct request by the agency for comments or testimony
from that NGEP. Direct requests for comments or testimony do not include
a general invitation by a Federal banking agency for comments or
testimony from the public in connection with a CRA performance
evaluation of, or application for a deposit facility (as defined in
section 803 of the CRA (12 U.S.C. 2902(3)) by, an insured depository
institution or an application by a company to acquire an insured
depository institution.
(ii) Example 2. A NGEP makes a statement concerning an insured
depository institution or affiliate at a widely attended conference or
seminar regarding a general topic. A public or private meeting, public
hearing, or other meeting regarding one or more
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specific institutions, affiliates or transactions involving an
application for a deposit facility is not considered a widely attended
conference or seminar.
(iii) Example 3. A NGEP, such as a civil rights group, community
group providing housing and other services in low- and moderate-income
neighborhoods, veterans organization, community theater group, or youth
organization, sends a fundraising letter to insured depository
institutions and to other businesses in its community. The letter
encourages all businesses in the community to meet their obligation to
assist in making the local community a better place to live and work by
supporting the fundraising efforts of the NGEP.
(iv) Example 4. A NGEP discusses with an insured depository
institution or affiliate whether particular loans, services,
investments, community development activities, or other activities are
generally eligible for consideration by a Federal banking agency under
the CRA. The NGEP and insured depository institution or affiliate do not
discuss the adequacy of the CRA performance of the insured depository
institution or affiliate.
(v) Example 5. A NGEP engaged in the sale or purchase of loans in
the secondary market sends a general offering circular to financial
institutions offering to sell or purchase a portfolio of loans. An
insured depository institution that receives the offering circular
discusses with the NGEP the types of loans included in the loan pool,
whether such loans are generally eligible for consideration under the
CRA, and which loans are made to borrowers in the institution's local
community. The NGEP and insured depository institution do not discuss
the adequacy of the institution's CRA performance.
(d) Multiparty covered agreements. (1) A NGEP that is a party to a
covered agreement that involves multiple NGEPs is not required to comply
with the requirements of this part if--
(i) The NGEP has not had a CRA communication; and
(ii) No representative of the NGEP identified in paragraph (b)(4) of
this section has knowledge at the time of the agreement that another
NGEP that is a party to the agreement has had a CRA communication.
(2) An insured depository institution or affiliate that is a party
to a covered agreement that involves multiple insured depository
institutions or affiliates is not required to comply with the disclosure
and annual reporting requirements in Sec. Sec. 207.6 and 207.7 if--
(i) No NGEP that is a party to the agreement has had a CRA
communication concerning the insured depository institution or any
affiliate; and
(ii) No representative of the insured depository institution or any
affiliate identified in paragraph (b)(3) of this section has knowledge
at the time of the agreement that an NGEP that is a party to the
agreement has had a CRA communication concerning any other insured
depository institution or affiliate that is a party to the agreement.
Sec. 207.4 Fulfillment of the CRA.
(a) List of factors that are in fulfillment of the CRA. Fulfillment
of the CRA, for purposes of this part, means the following list of
factors--
(1) Comments to a Federal banking agency or included in CRA public
file. Providing or refraining from providing written or oral comments or
testimony to any Federal banking agency concerning the performance under
the CRA of an insured depository institution or CRA affiliate that is a
party to the agreement or an affiliate of a party to the agreement or
written comments that are required to be included in the CRA public file
of any such insured depository institution; or
(2) Activities given favorable CRA consideration. Performing any of
the following activities if the activity is of the type that is likely
to receive favorable consideration by a Federal banking agency in
evaluating the performance under the CRA of the insured depository
institution that is a party to the agreement or an affiliate of a party
to the agreement--
(i) Home-purchase, home-improvement, small business, small farm,
community development, and consumer lending, as described in Sec.
228.22 of Regulation BB (12 CFR 228.22), including loan purchases, loan
commitments, and letters of credit;
[[Page 204]]
(ii) Making investments, deposits, or grants, or acquiring
membership shares, that have as their primary purpose community
development, as described in Sec. 228.23 of Regulation BB (12 CFR
228.23);
(iii) Delivering retail banking services, as described in Sec.
228.24(d) of Regulation BB (12 CFR 228.24(d));
(iv) Providing community development services, as described in Sec.
228.24(e) of Regulation BB (12 CFR 228.24(e));
(v) In the case of a wholesale or limited-purpose insured depository
institution, community development lending, including originating and
purchasing loans and making loan commitments and letters of credit,
making qualified investments, or providing community development
services, as described in Sec. 228.25(c) of Regulation BB (12 CFR
228.25(c));
(vi) In the case of a small insured depository institution, any
lending or other activity described in Sec. 228.26(a) of Regulation BB
(12 CFR 228.26(a)); or
(vii) In the case of an insured depository institution that is
evaluated on the basis of a strategic plan, any element of the strategic
plan, as described in Sec. 228.27(f) of Regulation BB (12 CFR
228.27(f)).
(b) Agreements relating to activities of CRA affiliates. An insured
depository institution or affiliate that is a party to a covered
agreement that concerns any activity described in paragraph (a) of this
section of a CRA affiliate must, prior to the time the agreement is
entered into, notify each NGEP that is a party to the agreement that the
agreement concerns a CRA affiliate.
Sec. 207.5 Related agreements considered a single agreement.
The following rules must be applied in determining whether an
agreement is a covered agreement under Sec. 207.2.
(a) Agreements entered into by same parties. All written agreements
to which an insured depository institution or an affiliate of the
insured depository institution is a party shall be considered to be a
single agreement if the agreements--
(1) Are entered into with the same NGEP;
(2) Were entered into within the same 12-month period; and
(3) Are each in fulfillment of the CRA.
(b) Substantively related contracts. All written contracts to which
an insured depository institution or an affiliate of the insured
depository institution is a party shall be considered to be a single
agreement, without regard to whether the other parties to the contracts
are the same or whether each such contract is in fulfillment of the CRA,
if the contracts were negotiated in a coordinated fashion and a NGEP is
a party to each contract.
Sec. 207.6 Disclosure of covered agreements.
(a) Applicability date. This section applies only to covered
agreements entered into after November 12, 1999.
(b) Disclosure of covered agreements to the public--(1) Disclosure
required. Each NGEP and each insured depository institution or affiliate
that enters into a covered agreement must promptly make a copy of the
covered agreement available to any individual or entity upon request.
(2) Nondisclosure of confidential and proprietary information
permitted. In responding to a request for a covered agreement from any
individual or entity under paragraph (b)(1) of this section, a NGEP,
insured depository institution, or affiliate may withhold from public
disclosure confidential or proprietary information that the party
believes the relevant supervisory agency could withhold from disclosure
under the Freedom of Information Act (5 U.S.C. 552 et seq.) (FOIA).
(3) Information that must be disclosed. Notwithstanding paragraph
(b)(2) of this section, a party must disclose any of the following
information that is contained in a covered agreement--
(i) The names and addresses of the parties to the agreement;
(ii) The amount of any payments, fees, loans, or other consideration
to be made or provided by any party to the agreement;
(iii) Any description of how the funds or other resources provided
under the agreement are to be used;
(iv) The term of the agreement (if the agreement establishes a
term); and
[[Page 205]]
(v) Any other information that the relevant supervisory agency
determines is not properly exempt from public disclosure.
(4) Request for review of withheld information. Any individual or
entity may request that the relevant supervisory agency review whether
any information in a covered agreement withheld by a party must be
disclosed. Any requests for agency review of withheld information must
be filed, and will be processed in accordance with, the relevant
supervisory agency's rules concerning the availability of information
(see Sec. 261.12 of the Board's Rules Regarding the Availability of
Information (12 CFR 261.12)).
(5) Duration of obligation. The obligation to disclose a covered
agreement to the public terminates 12 months after the end of the term
of the agreement.
(6) Reasonable copy and mailing fees. Each NGEP and each insured
depository institution or affiliate may charge an individual or entity
that requests a copy of a covered agreement a reasonable fee not to
exceed the cost of copying and mailing the agreement.
(7) Use of CRA public file by insured depository institution or
affiliate. An insured depository institution and any affiliate of an
insured depository institution may fulfill its obligation under this
paragraph (b) by placing a copy of the covered agreement in the insured
depository institution's CRA public file if the institution makes the
agreement available in accordance with the procedures set forth in Sec.
228.43 of Regulation BB (12 CFR 228.43).
(c) Disclosure by NGEPs of covered agreements to the relevant
supervisory agency. (1) Each NGEP that is a party to a covered agreement
must provide the following within 30 days of receiving a request from
the relevant supervisory agency--
(i) A complete copy of the agreement; and
(ii) In the event the NGEP proposes the withholding of any
information contained in the agreement in accordance with paragraph
(b)(2) of this section, a public version of the agreement that excludes
such information and an explanation justifying the exclusions. Any
public version must include the information described in paragraph
(b)(3) of this section.
(2) The obligation of a NGEP to provide a covered agreement to the
relevant supervisory agency terminates 12 months after the end of the
term of the covered agreement.
(d) Disclosure by insured depository institution or affiliate of
covered agreements to the relevant supervisory agency--(1) In general.
Within 60 days of the end of each calendar quarter, each insured
depository institution and affiliate must provide each relevant
supervisory agency with--
(i)(A) A complete copy of each covered agreement entered into by the
insured depository institution or affiliate during the calendar quarter;
and
(B) In the event the institution or affiliate proposes the
withholding of any information contained in the agreement in accordance
with paragraph (b)(2) of this section, a public version of the agreement
that excludes such information (other than any information described in
paragraph (b)(3) of this section) and an explanation justifying the
exclusions; or
(ii) A list of all covered agreements entered into by the insured
depository institution or affiliate during the calendar quarter that
contains--
(A) The name and address of each insured depository institution or
affiliate that is a party to the agreement;
(B) The name and address of each NGEP that is a party to the
agreement;
(C) The date the agreement was entered into;
(D) The estimated total value of all payments, fees, loans and other
consideration to be provided by the institution or any affiliate of the
institution under the agreement; and
(E) The date the agreement terminates.
(2) Prompt filing of covered agreements contained in list required.
(i) If an insured depository institution or affiliate files a list of
the covered agreements entered into by the institution or affiliate
pursuant to paragraph (d)(1)(ii) of this section, the institution or
affiliate must provide any relevant supervisory agency a complete copy
and public version of any covered agreement referenced in the list
within 7 calendar
[[Page 206]]
days of receiving a request from the agency for a copy of the agreement.
(ii) The obligation of an insured depository institution or
affiliate to provide a covered agreement to the relevant supervisory
agency under this paragraph (d)(2) terminates 36 months after the end of
the term of the agreement.
(3) Joint filings. In the event that 2 or more insured depository
institutions or affiliates are parties to a covered agreement, the
insured depository institution(s) and affiliate(s) may jointly file the
documents required by this paragraph (d). Any joint filing must identify
the insured depository institution(s) and affiliate(s) for whom the
filings are being made.
Sec. 207.7 Annual reports.
(a) Applicability date. This section applies only to covered
agreements entered into on or after May 12, 2000.
(b) Annual report required. Each NGEP and each insured depository
institution or affiliate that is a party to a covered agreement must
file an annual report with each relevant supervisory agency concerning
the disbursement, receipt, and uses of funds or other resources under
the covered agreement.
(c) Duration of reporting requirement--(1) NGEPs. A NGEP must file
an annual report for a covered agreement for any fiscal year in which
the NGEP receives or uses funds or other resources under the agreement.
(2) Insured depository institutions and affiliates. An insured
depository institution or affiliate must file an annual report for a
covered agreement for any fiscal year in which the institution or
affiliate--
(i) provides or receives any payments, fees, or loans under the
covered agreement that must be reported under paragraphs (e)(1)(iii) and
(iv) of this section; or
(ii) has data to report on loans, investments, and services provided
by a party to the covered agreement under the covered agreement under
paragraph (e)(1)(vi) of this section.
(d) Annual reports filed by NGEP--(1) Contents of report. The annual
report filed by a NGEP under this section must include the following--
(i) The name and mailing address of the NGEP filing the report;
(ii) Information sufficient to identify the covered agreement for
which the annual report is being filed, such as by providing the names
of the parties to the agreement and the date the agreement was entered
into or by providing a copy of the agreement;
(iii) The amount of funds or resources received under the covered
agreement during the fiscal year; and
(iv) A detailed, itemized list of how any funds or resources
received by the NGEP under the covered agreement were used during the
fiscal year, including the total amount used for--
(A) Compensation of officers, directors, and employees;
(B) Administrative expenses;
(C) Travel expenses;
(D) Entertainment expenses;
(E) Payment of consulting and professional fees; and
(F) Other expenses and uses (specify expense or use).
(2) More detailed reporting of uses of funds or resources
permitted--(i) In general. If a NGEP allocated and used funds received
under a covered agreement for a specific purpose, the NGEP may fulfill
the requirements of paragraph (d)(1)(iv) of this section with respect to
such funds by providing--
(A) A brief description of each specific purpose for which the funds
or other resources were used; and
(B) The amount of funds or resources used during the fiscal year for
each specific purpose.
(ii) Specific purpose defined. A NGEP allocates and uses funds for a
specific purpose if the NGEP receives and uses the funds for a purpose
that is more specific and limited than the categories listed in
paragraph (d)(1)(iv) of this section.
(3) Use of other reports. The annual report filed by a NGEP may
consist of or incorporate a report prepared for any other purpose, such
as the Internal Revenue Service Return of Organization Exempt From
Income Tax on Form 990, or any other Internal Revenue Service form,
state tax form, report to members or shareholders, audited or unaudited
financial statements, audit report, or other report, so long as the
annual report filed by the
[[Page 207]]
NGEP contains all of the information required by this paragraph (d).
(4) Consolidated reports permitted. A NGEP that is a party to 2 or
more covered agreements may file with each relevant supervisory agency a
single consolidated annual report covering all the covered agreements.
Any consolidated report must contain all the information required by
this paragraph (d). The information reported under paragraphs (d)(1)(iv)
and (d)(2) of this section may be reported on an aggregate basis for all
covered agreements.
(5) Examples of annual report requirements for NGEPs--(i) Example 1.
A NGEP receives an unrestricted grant of $15,000 under a covered
agreement, includes the funds in its general operating budget and uses
the funds during its fiscal year. The NGEP's annual report for the
fiscal year must provide the name and mailing address of the NGEP,
information sufficient to identify the covered agreement, and state that
the NGEP received $15,000 during the fiscal year. The report must also
indicate the total expenditures made by the NGEP during the fiscal year
for compensation, administrative expenses, travel expenses,
entertainment expenses, consulting and professional fees, and other
expenses and uses. The NGEP's annual report may provide this information
by submitting an Internal Revenue Service Form 990 that includes the
required information. If the Internal Revenue Service Form does not
include information for all of the required categories listed in this
part, the NGEP must report the total expenditures in the remaining
categories either by providing that information directly or by providing
another form or report that includes the required information.
(ii) Example 2. An organization receives $15,000 from an insured
depository institution under a covered agreement and allocates and uses
the $15,000 during the fiscal year to purchase computer equipment to
support its functions. The organization's annual report must include the
name and address of the organization, information sufficient to identify
the agreement, and a statement that the organization received $15,000
during the year. In addition, since the organization allocated and used
the funds for a specific purpose that is more narrow and limited than
the categories of expenses included in the detailed, itemized list of
expenses, the organization would have the option of providing either the
total amount it used during the year for each category of expenses
included in paragraph (d)(1)(iv) of this section, or a statement that it
used the $15,000 to purchase computer equipment and a brief description
of the equipment purchased.
(iii) Example 3. A community group receives $50,000 from an insured
depository institution under a covered agreement. During its fiscal
year, the community group specifically allocates and uses $5,000 of the
funds to pay for a particular business trip and uses the remaining
$45,000 for general operating expenses. The group's annual report for
the fiscal year must include the name and address of the group,
information sufficient to identify the agreement, and a statement that
the group received $50,000. Because the group did not allocate and use
all of the funds for a specific purpose, the group's annual report must
provide the total amount of funds it used during the year for each
category of expenses included in paragraph (d)(1)(iv) of this section.
The group's annual report also could state that it used $5,000 for a
particular business trip and include a brief description of the trip.
(iv) Example 4. A community development organization is a party to
two separate covered agreements with two unaffiliated insured depository
institutions. Under each agreement, the organization receives $15,000
during its fiscal year and uses the funds to support its activities
during that year. If the organization elects to file a consolidated
annual report, the consolidated report must identify the organization
and the two covered agreements, state that the organization received
$15,000 during the fiscal year under each agreement, and provide the
total amount that the organization used during the year for each
category of expenses included in paragraph (d)(1)(iv) of this section.
[[Page 208]]
(e) Annual report filed by insured depository institution or
affiliate--(1) General. The annual report filed by an insured depository
institution or affiliate must include the following--
(i) The name and principal place of business of the insured
depository institution or affiliate filing the report;
(ii) Information sufficient to identify the covered agreement for
which the annual report is being filed, such as by providing the names
of the parties to the agreement and the date the agreement was entered
into or by providing a copy of the agreement;
(iii) The aggregate amount of payments, aggregate amount of fees,
and aggregate amount of loans provided by the insured depository
institution or affiliate under the covered agreement to any other party
to the agreement during the fiscal year;
(iv) The aggregate amount of payments, aggregate amount of fees, and
aggregate amount of loans received by the insured depository institution
or affiliate under the covered agreement from any other party to the
agreement during the fiscal year;
(v) A general description of the terms and conditions of any
payments, fees, or loans reported under paragraphs (e)(1)(iii) and (iv)
of this section, or, in the event such terms and conditions are set
forth--
(A) In the covered agreement, a statement identifying the covered
agreement and the date the agreement (or a list identifying the
agreement) was filed with the relevant supervisory agency; or
(B) In a previous annual report filed by the insured depository
institution or affiliate, a statement identifying the date the report
was filed with the relevant supervisory agency; and
(vi) The aggregate amount and number of loans, aggregate amount and
number of investments, and aggregate amount of services provided under
the covered agreement to any individual or entity not a party to the
agreement--
(A) By the insured depository institution or affiliate during its
fiscal year; and
(B) By any other party to the agreement, unless such information is
not known to the insured depository institution or affiliate filing the
report or such information is or will be contained in the annual report
filed by another party under this section.
(2) Consolidated reports permitted--(i) Party to multiple
agreements. An insured depository institution or affiliate that is a
party to 2 or more covered agreements may file a single consolidated
annual report with each relevant supervisory agency concerning all the
covered agreements.
(ii) Affiliated entities party to the same agreement. An insured
depository institution and its affiliates that are parties to the same
covered agreement may file a single consolidated annual report relating
to the agreement with each relevant supervisory agency for the covered
agreement.
(iii) Content of report. Any consolidated annual report must contain
all the information required by this paragraph (e). The amounts and data
required to be reported under paragraphs (e)(1)(iv) and (vi) of this
section may be reported on an aggregate basis for all covered
agreements.
(f) Time and place of filing--(1) General. Each party must file its
annual report with each relevant supervisory agency for the covered
agreement no later than six months following the end of the fiscal year
covered by the report.
(2) Alternative method of fulfilling annual reporting requirement
for a NGEP--(i) A NGEP may fulfill the filing requirements of this
section by providing the following materials to an insured depository
institution or affiliate that is a party to the agreement no later than
six months following the end of the NGEP's fiscal year--
(A) A copy of the NGEP's annual report required under paragraph (d)
of this section for the fiscal year; and
(B) Written instructions that the insured depository institution or
affiliate promptly forward the annual report to the relevant supervisory
agency or agencies on behalf of the NGEP.
(ii) An insured depository institution or affiliate that receives an
annual report from a NGEP pursuant to paragraph (f)(2)(i) of this
section must file the report with the relevant supervisory agency or
agencies on behalf of the NGEP within 30 days.
[[Page 209]]
Sec. 207.8 Release of information under FOIA.
The Board will make covered agreements and annual reports available
to the public in accordance with the Freedom of Information Act (5
U.S.C. 552 et seq.) and the Board's Rules Regarding the Availability of
Information (12 CFR part 261). A party to a covered agreement may
request confidential treatment of proprietary and confidential
information in a covered agreement or an annual report under those
procedures.
Sec. 207.9 Compliance provisions.
(a) Willful failure to comply with disclosure and reporting
obligations--(1) If the Board determines that a NGEP has willfully
failed to comply in a material way with Sec. Sec. 207.6 or 207.7, the
Board will notify the NGEP in writing of that determination and provide
the NGEP a period of 90 days (or such longer period as the Board finds
to be reasonable under the circumstances) to comply.
(2) If the NGEP does not comply within the time period established
by the Board, the agreement shall thereafter be unenforceable by that
NGEP by operation of section 48 of the Federal Deposit Insurance Act (12
U.S.C. 1831y).
(3) The Board may assist any insured depository institution or
affiliate that is a party to a covered agreement that is unenforceable
by a NGEP by operation of section 48 of the Federal Deposit Insurance
Act (12 U.S.C. 1831y) in identifying a successor to assume the NGEP's
responsibilities under the agreement.
(b) Diversion of funds. If a court or other body of competent
jurisdiction determines that funds or resources received under a covered
agreement have been diverted contrary to the purposes of the covered
agreement for an individual's personal financial gain, the Board may
take either or both of the following actions--
(1) Order the individual to disgorge the diverted funds or resources
received under the agreement;
(2) Prohibit the individual from being a party to any covered
agreement for a period not to exceed 10 years.
(c) Notice and opportunity to respond. Before making a determination
under paragraph (a)(1) of this section, or taking any action under
paragraph (b) of this section, the Board will provide written notice and
an opportunity to present information to the Board concerning any
relevant facts or circumstances relating to the matter.
(d) Inadvertent or de minimis errors. Inadvertent or de minimis
errors in annual reports or other documents filed with the Board under
Sec. 207.6 or Sec. 207.7 will not subject the reporting party to any
penalty.
(e) Enforcement of provisions in covered agreements. No provision of
this part shall be construed as authorizing the Board to enforce the
provisions of any covered agreement.
Sec. 207.10 Transition provisions.
(a) Disclosure of covered agreements entered into before the
effective date of this part. The following disclosure requirements apply
to covered agreements that were entered into after November 12, 1999,
and that terminated before April 1, 2001.
(1) Disclosure to the public. Each NGEP and each insured depository
institution or affiliate that was a party to the agreement must make the
agreement available to the public under Sec. 207.6 until at least April
1, 2002.
(2) Disclosure to the relevant supervisory agency--(i) Each NGEP
that was a party to the agreement must make the agreement available to
the relevant supervisory agency under Sec. 207.6 until at least April
1, 2002.
(ii) Each insured depository institution or affiliate that was a
party to the agreement must, by June 30, 2001, provide each relevant
supervisory agency either--
(A) A copy of the agreement under Sec. 207.6(d)(1)(i); or
(B) The information described in Sec. 207.6(d)(1)(ii) for each
agreement.
(b) Filing of annual reports that relate to fiscal years ending on
or before December 31, 2000. In the event that a NGEP, insured
depository institution or affiliate has any information to report under
Sec. 207.7 for a fiscal year that ends on or before December 31, 2000,
and that concerns a covered agreement entered into between May 12, 2000,
and December 31, 2000, the annual report
[[Page 210]]
for that fiscal year must be provided no later than June 30, 2001, to--
(1) Each relevant supervisory agency; or
(2) In the case of a NGEP, to an insured depository institution or
affiliate that is a party to the agreement in accordance with Sec.
207.7(f)(2).
Sec. 207.11 Other definitions and rules of construction used in this part.
(a) Affiliate. ``Affiliate'' means--
(1) Any company that controls, is controlled by, or is under common
control with another company; and
(2) For the purpose of determining whether an agreement is a covered
agreement under Sec. 207.2, an ``affiliate'' includes any company that
would be under common control or merged with another company on
consummation of any transaction pending before a Federal banking agency
at the time--
(i) The parties enter into the agreement; and
(ii) The NGEP that is a party to the agreement makes a CRA
communication, as described in Sec. 207.3.
(b) Control. ``Control'' is defined in section 2(a) of the Bank
Holding Company Act (12 U.S.C. 1841(a)).
(c) CRA affiliate. A ``CRA affiliate'' of an insured depository
institution is any company that is an affiliate of an insured depository
institution to the extent, and only to the extent, that the activities
of the affiliate were considered by the appropriate Federal banking
agency when evaluating the CRA performance of the institution at its
most recent CRA examination prior to the agreement. An insured
depository institution or affiliate also may designate any company as a
CRA affiliate at any time prior to the time a covered agreement is
entered into by informing the NGEP that is a party to the agreement of
such designation.
(d) CRA public file. ``CRA public file'' means the public file
maintained by an insured depository institution and described in Sec.
228.43 of Regulation BB (12 CFR 228.43).
(e) Executive officer. The term ``executive officer'' has the same
meaning as in Sec. 215.2(e)(1) of the Board's Regulation O (12 CFR
215.2(e)(1)).
(f) Federal banking agency; appropriate Federal banking agency. The
terms ``Federal banking agency'' and ``appropriate Federal banking
agency'' have the same meanings as in section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813).
(g) Fiscal year. (1) The fiscal year for a NGEP that does not have a
fiscal year shall be the calendar year.
(2) Any NGEP, insured depository institution, or affiliate that has
a fiscal year may elect to have the calendar year be its fiscal year for
purposes of this part.
(h) Insured depository institution. ``Insured depository
institution'' has the same meaning as in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
(i) NGEP. ``NGEP'' means a nongovernmental entity or person.
(j) Nongovernmental entity or person--(1) General. A
``nongovernmental entity or person'' is any partnership, association,
trust, joint venture, joint stock company, corporation, limited
liability corporation, company, firm, society, other organization, or
individual.
(2) Exclusions. A nongovernmental entity or person does not
include--
(i) The United States government, a state government, a unit of
local government (including a county, city, town, township, parish,
village, or other general-purpose subdivision of a state) or an Indian
tribe or tribal organization established under Federal, state or Indian
tribal law (including the Department of Hawaiian Home Lands), or a
department, agency, or instrumentality of any such entity;
(ii) A federally-chartered public corporation that receives Federal
funds appropriated specifically for that corporation;
(iii) An insured depository institution or affiliate of an insured
depository institution; or
(iv) An officer, director, employee, or representative (acting in
his or her capacity as an officer, director, employee, or
representative) of an entity listed in paragraphs (i)(2)(i) through
(iii) of this section.
(k) Party. The term ``party'' with respect to a covered agreement
means each NGEP and each insured depository institution or affiliate
that entered into the agreement.
[[Page 211]]
(l) Relevant supervisory agency. The ``relevant supervisory agency''
for a covered agreement means the appropriate Federal banking agency
for--
(1) Each insured depository institution (or subsidiary thereof) that
is a party to the covered agreement;
(2) Each insured depository institution (or subsidiary thereof) or
CRA affiliate that makes payments or loans or provides services that are
subject to the covered agreement; and
(3) Any company (other than an insured depository institution or
subsidiary thereof) that is a party to the covered agreement.
(m) Term of agreement. An agreement that does not have a fixed
termination date is considered to terminate on the last date on which
any party to the agreement makes any payment or provides any loan or
other resources under the agreement, unless the relevant supervisory
agency for the agreement otherwise notifies each party in writing.
PART 208_MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE
SYSTEM (REGULATION H)--Table of Contents
Sec.
208.1 Authority, purpose, and scope.
208.2 Definitions.
208.3 Application and conditions for membership in the Federal Reserve
System.
208.4 Capital adequacy.
208.5 Dividends and other distributions.
208.6 Establishment and maintenance of branches.
208.7 Prohibition against use of interstate branches primarily for
deposit production.
Subpart B_Investments and Loans
208.20 Authority, purpose, and scope.
208.21 Investments in premises and securities.
208.22 Community development and public welfare investments.
208.23 Agricultural loan loss amortization.
208.24 Letters of credit and acceptances.
208.25 Loans in areas having special flood hazards.
Subpart C_Bank Securities and Securities-Related Activities
208.30 Authority, purpose, and scope.
208.31 State member banks as transfer agents.
208.32 Notice of disciplinary sanctions imposed by registered clearing
agency.
208.33 Application for stay or review of disciplinary sanctions imposed
by registered clearing agency.
208.34 Recordkeeping and confirmation of certain securities transactions
effected by State member banks.
208.35 Qualification requirements for transactions in certain
securities. [Reserved]
208.36 Reporting requirements for State member banks subject to the
Securities Exchange Act of 1934.
208.37 Government securities sales practices.
Subpart D_Prompt Corrective Action
208.40 Authority, purpose, scope, other supervisory authority, and
disclosure of capital categories.
208.41 Definitions for purposes of this subpart.
208.42 Notice of capital category.
208.43 Capital measures and capital category definitions.
208.44 Capital restoration plans.
208.45 Mandatory and discretionary supervisory actions under section 38.
Subpart E_Real Estate Lending and Appraisal Standards
208.50 Authority, purpose, and scope.
208.51 Real estate lending standards.
Subpart F_Miscellaneous Requirements
208.60 Authority, purpose, and scope.
208.61 Bank security procedures.
208.62 Suspicious activity reports.
208.63 Procedures for monitoring Bank Secrecy Act compliance.
208.64 Frequency of examination.
Subpart G_Financial Subsidiaries of State Member Banks
208.71 What are the requirements to invest in or control a financial
subsidiary?
208.72 What activities may a financial subsidiary conduct?
208.73 What additional provisions are applicable to state member banks
with financial subsidiaries?
208.74 What happens if the state member bank or a depository institution
affiliate fails to continue to meet certain requirements?
208.75 What happens if the state member bank or any of its insured
depository institution affiliates receives less than a
``satisfactory'' CRA rating?
208.76 What Federal Reserve approvals are necessary for financial
subsidiaries?
208.77 Definitions.
[[Page 212]]
Subpart H_Consumer Protection in Sales of Insurance
208.81 Purpose and scope.
208.82 Definitions for purposes of this subpart.
208.83 Prohibited practices.
208.84 What you must disclose.
208.85 Where insurance activities may take place.
208.86 Qualification and licensing requirements for insurance sales
personnel.
Appendix A to Subpart H--Consumer Grievance Process
Subpart I_Registration of Residential Mortgage Loan Originators
208.101 Authority, purpose, and scope.
208.102 Definitions.
208.103 Registration of mortgage loan originators.
208.104 Policies and procedures.
208.105 Use of unique identifier.
Appendix A to Subpart I of Part 208--Examples of Mortgage Loan
Originator Activities
Subpart J_Interpretations
208.110 Sale of bank's money orders off premises as establishment of
branch office.
208.111 Obligations concerning institutional customers.
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
Appendix B to Part 208--Capital Adequacy Guidelines for State Member
Banks: Tier 1 Leverage Measure
Appendix C to Part 208--Interagency Guidelines for Real Estate Lending
Policies
Appendix D-1 to Part 208--Interagency Guidelines Establishing Standards
for Safety and Soundness
Appendix D-2 to Part 208--Interagency Guidelines Establishing
Information Security Standards
Appendix E to Part 208--Capital Adequacy Guidelines for State Member
Banks; Market Risk Measure
Appendix F to Part 208--Capital Adequacy Guidelines for Banks: Internal-
Ratings-Based and Advanced Measurement Approaches
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1820(d)(9), 1823(j), 1828(o),
1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x, 1835a, 1882, 2901-2907,
3105, 3106a(1), 3108(a), 3310, 3331-3351, and 3906-3909, 5101 et seq.,
15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78q, 78q-1, 78w,
1681s, 1681w, 6801 and 6805; 31 U.S.C. 5318, 42 U.S.C. 4012a, 4104a,
4104b, 4106, and 4128.
Source: Reg. H, 17 FR 8006, Sept. 4, 1952, unless otherwise noted.
Subpart A_General Membership and Branching Requirements
Source: 63 FR 37637, July 13, 1998, unless otherwise noted.
Sec. 208.1 Authority, purpose, and scope.
(a) Authority. Subpart A of Regulation H (12 CFR part 208, Subpart
A) is issued by the Board of Governors of the Federal Reserve System
(Board) under 12 U.S.C. 24, 36; sections 9, 11, 21, 25 and 25A of the
Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), 481-486, 601
and 611); sections 1814, 1816, 1818, 1831o, 1831p-1, 1831r-1 and 1835a
of the Federal Deposit Insurance Act (FDI Act) (12 U.S.C. 1814, 1816,
1818, 1831o, 1831p-1, 1831r-1, and 1835); and 12 U.S.C. 3906-3909.
(b) Purpose and scope of Part 208. The requirements of this part 208
govern State member banks and state banks applying for admission to
membership in the Federal Reserve System (System) under section 9 of the
Federal Reserve Act (Act), except for Sec. 208.7, which also applies to
certain foreign banks licensed by a State. This part 208 does not govern
banks eligible for membership under section 2 or 19 of the Act. \1\ Any
bank desiring to be admitted to the System under the provisions of
section 2 or 19 should communicate with the Federal Reserve Bank with
which it would like to become a member.
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\1\ Under section 2 of the Federal Reserve Act, every national bank
in any state shall, upon commencing business, or within 90 days after
admission into the Union of the State in which it is located, become a
member of the System. Under section 19 of the Federal Reserve Act,
national banks and banks organized under local laws, located in a
dependency or insular possession or any part of the United States
outside of the States of the United States and the District of Columbia,
are not required to become members of the System but may, with the
consent of the board, become members of the System.
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(c) Purpose and scope of Subpart A. This Subpart A describes the
eligibility requirements for membership of state-chartered banking
institutions in the System, the general conditions imposed upon members,
including capital
[[Page 213]]
and dividend requirements, as well as the requirements for establishing
and maintaining branches.
Sec. 208.2 Definitions.
For the purposes of this part:
(a) Board of Directors means the governing board of any institution
performing the usual functions of a board of directors.
(b) Board means the Board of Governors of the Federal Reserve
System.
(c) Branch. (1) Branch means any branch bank, branch office, branch
agency, additional office, or any branch place of business that receives
deposits, pays checks, or lends money. A branch may include a temporary,
seasonal, or mobile facility that meets these criteria.
(2) Branch does not include:
(i) A loan origination facility where the proceeds of loans are not
disbursed;
(ii) An office of an affiliated or unaffiliated institution that
provides services to customers of the member bank on behalf of the
member bank so long as the institution is not established or operated by
the bank;
(iii) An automated teller machine;
(iv) A remote service unit;
(v) A facility to which the bank does not permit members of the
public to have physical access for purposes of making deposits, paying
checks, or borrowing money (such as an office established by the bank
that receives deposits only through the mail); or
(vi) A facility that is located at the site of, or is an extension
of, an approved main office or branch. The Board determines whether a
facility is an extension of an existing main or branch office on a case-
by-case basis.
(d) Capital stock and surplus means, unless otherwise provided in
this part, or by statute, Tier 1 and Tier 2 capital included in a member
bank's risk-based capital (under the guidelines in appendix A of this
part) and the balance of a member bank's allowance for loan and lease
losses not included in its Tier 2 capital for calculation of risk-based
capital, based on the bank's most recent consolidated Report of
Condition and Income filed under 12 U.S.C. 324.
(e) Eligible bank means a member bank that:
(1) Is well capitalized as defined in subpart D of this part;
(2) Has a composite Uniform Financial Institutions Rating System
(CAMELS) rating of 1 or 2;
(3) Has a Community Reinvestment Act (CRA) (12 U.S.C. 2906) rating
of ``Outstanding'' or ``Satisfactory;''
(4) Has a compliance rating of 1 or 2; and
(5) Has no major unresolved supervisory issues outstanding (as
determined by the Board or appropriate Federal Reserve Bank in its
discretion).
(f) State bank means any bank incorporated by special law of any
State, or organized under the general laws of any State, or of the
United States, including a Morris Plan bank, or other incorporated
banking institution engaged in a similar business.
(g) State member bank or member bank means a state bank that is a
member of the Federal Reserve System.
Sec. 208.3 Application and conditions for membership in the Federal Reserve
System.
(a) Applications for membership and stock. (1) State banks applying
for membership in the Federal Reserve System shall file with the
appropriate Federal Reserve Bank an application for membership in the
Federal Reserve System and for stock in the Reserve Bank, \2\ in
accordance with this part and Sec. 262.3 of the Rules of Procedure,
located at 12 CFR 262.3.
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\2\ A mutual savings bank not authorized to purchase Federal Reserve
Bank stock may apply for membership evidenced initially by a deposit,
but if the laws under which the bank is organized are not amended at the
first session of the legislature after its admission to authorize the
purchase, or if the bank fails to purchase the stock within six months
of the amendment, its membership shall be terminated.
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(2) Board approval. If an applying bank conforms to all the
requirements of the Federal Reserve Act and this section, and is
otherwise qualified for membership, the Board may approve its
application subject to such conditions as the Board may prescribe.
(3) Effective date of membership. A State bank becomes a member of
the Federal Reserve System on the date its Federal Reserve Bank stock is
credited
[[Page 214]]
to its account (or its deposit is accepted, if it is a mutual savings
bank not authorized to purchase Reserve Bank stock) in accordance with
the Board's Regulation I (12 CFR part 209).
(b) Factors considered in approving applications for membership.
Factors given special consideration by the Board in passing upon an
application are:
(1) Financial condition and management. The financial history and
condition of the applying bank and the general character of its
management.
(2) Capital. The adequacy of the bank's capital in accordance with
Sec. 208.4, and its future earnings prospects.
(3) Convenience and needs. The convenience and needs of the
community.
(4) Corporate powers. Whether the bank's corporate powers are
consistent with the purposes of the Federal Reserve Act.
(c) Expedited approval for eligible banks and bank holding
companies--(1) Availability of expedited treatment. The expedited
membership procedures described in paragraph (c)(2) of this section are
available to:
(i) An eligible bank; and
(ii) A bank that cannot be determined to be an eligible bank because
it has not received CAMELS compliance or CRA ratings from a bank
regulatory authority, if it is controlled by a bank holding company that
meets the criteria for expedited processing under Sec. 225.14(c) of
Regulation Y (12 CFR 225.14(c)).
(2) Expedited procedures. A completed membership application filed
with the appropriate Reserve Bank will be deemed approved on the
fifteenth day after receipt of the complete application by the Board or
appropriate Reserve Bank, unless the Board or the appropriate Reserve
Bank notifies the bank that the application is approved prior to that
date or the Board or the appropriate Federal Reserve Bank notifies the
bank that the application is not eligible for expedited review for any
reason, including, without limitation, that:
(i) The bank will offer banking services that are materially
different from those currently offered by the bank, or by the affiliates
of the proposed bank;
(ii) The bank or bank holding company does not meet the criteria
under Sec. 208.3(c)(1);
(iii) The application contains a material error or is otherwise
deficient; or
(iv) The application raises significant supervisory, compliance,
policy or legal issues that have not been resolved, or a timely
substantive adverse comment is submitted. A comment will be considered
substantive unless it involves individual complaints, or raises
frivolous, previously considered, or wholly unsubstantiated claims or
irrelevant issues.
(d) Conditions of membership--(1) Safety and soundness. Each member
bank shall at all times conduct its business and exercise its powers
with due regard to safety and soundness. Each member bank shall comply
with the Interagency Guidelines Establishing Standards for Safety and
Soundness prescribed pursuant to section 39 of the FDI Act (12 U.S.C.
1831p-1), set forth in appendix D-1 to this part, and the Interagency
Guidelines Establishing Information Security Standards prescribed
pursuant to sections 501 and 505 of the Gramm-Leach-Bliley Act (15
U.S.C. 6801 and 6805) and section 216 of the Fair and Accurate Credit
Transactions Act of 2003 (15 U.S.C. 1681w), set forth in appendix D-2 to
this part.
(2) General character of bank's business. A member bank may not,
without the permission of the Board, cause or permit any change in the
general character of its business or in the scope of the corporate
powers it exercises at the time of admission to membership.
(3) Compliance with conditions of membership. Each member bank shall
comply at all times with this Regulation H (12 CFR part 208) and any
other conditions of membership prescribed by the Board.
(e) Waivers--(1) Conditions of membership. A member bank may
petition the Board to waive a condition of membership. The Board may
grant a waiver of a condition of membership upon a showing of good cause
and, in its discretion, may limit, among other items, the scope,
duration, and timing of the waiver.
(2) Reports of affiliates. Pursuant to section 21 of the Federal
Reserve Act
[[Page 215]]
(12 U.S.C. 486), the Board waives the requirement for the submission of
reports of affiliates of member banks, unless such reports are
specifically requested by the Board.
(f) Voluntary withdrawal from membership. Voluntary withdrawal from
membership becomes effective upon cancellation of the Federal Reserve
Bank stock held by the member bank, and after the bank has made due
provision to pay any indebtedness due or to become due to the Federal
Reserve Bank in accordance with the Board's Regulation I (12 CFR part
209).
[Reg. H, 63 FR 37637, July 13, 1998, as amended at 63 FR 58620, Nov. 2,
1998; 66 FR 8634, Feb. 1, 2001; 69 FR 77617, Dec. 28, 2004]
Sec. 208.4 Capital adequacy.
(a) Adequacy. A member bank's capital, as defined in appendix A to
this part, shall be at all times adequate in relation to the character
and condition of its assets and to its existing and prospective
liabilities and other corporate responsibilities. If at any time, in
light of all the circumstances, the bank's capital appears inadequate in
relation to its assets, liabilities, and responsibilities, the bank
shall increase the amount of its capital, within such period as the
Board deems reasonable, to an amount which, in the judgment of the
Board, shall be adequate.
(b) Standards for evaluating capital adequacy. Standards and
guidelines by which the Board evaluates the capital adequacy of member
banks include those in appendices A and E to this part for risk-based
capital purposes and appendix B to this part for leverage measurement
purposes.
Sec. 208.5 Dividends and other distributions.
(a) Definitions. For the purposes of this section:
(1) Capital surplus means the total of surplus as reportable in the
bank's Reports of Condition and Income and surplus on perpetual
preferred stock.
(2) Permanent capital means the total of the bank's perpetual
preferred stock and related surplus, common stock and surplus, and
minority interest in consolidated subsidiaries, as reportable in the
Reports of Condition and Income.
(b) Limitations. The limitations in this section on the payment of
dividends and withdrawal of capital apply to all cash and property
dividends or distributions on common or preferred stock. The limitations
do not apply to dividends paid in the form of common stock.
(c) Earnings limitations on payment of dividends. (1) A member bank
may not declare or pay a dividend if the total of all dividends declared
during the calendar year, including the proposed dividend, exceeds the
sum of the bank's net income (as reportable in its Reports of Condition
and Income) during the current calendar year and the retained net income
of the prior two calendar years, unless the dividend has been approved
by the Board.
(2) ``Retained net income'' in a calendar year is equal to the
bank's net income (as reported in its Report of Condition and Income for
such year), less any dividends declared during such year. \3\ The bank's
net income during the current year and its retained net income from the
prior two calendar years is reduced by any net losses incurred in the
current or prior two years and any required transfers to surplus or to a
fund for the retirement of preferred stock. \4\
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\3\ In the case of dividends in excess of net income for the year, a
bank generally is not required to carry forward negative amounts
resulting from such excess. Instead, the bank may attribute the excess
to the prior two years, attributing the excess first to the earlier year
and then to the immediately preceding year. If the excess is greater
than the bank's previously undistributed net income for the preceding
two years, prior Board approval of the dividend is required and a
negative amount would be carried forward in future dividend
calculations. However, in determining any such request for approval, the
Board could consider any request for different treatment of such
negative amount, including advance waivers for future periods. This
applies only to earnings deficits that result from dividends declared in
excess of net income for the year and does not apply to other types of
current earnings deficits.
\4\ State member banks are required to comply with state law
provisions concerning the maintenance of surplus funds in addition to
common capital. Where the surplus of a State member bank is less than
what applicable state law requires the bank to maintain relative to its
capital stock account, the bank may be required to transfer amounts from
its undivided profits account to surplus.
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[[Page 216]]
(d) Limitation on withdrawal of capital by dividend or otherwise.
(1) A member bank may not declare or pay a dividend if the dividend
would exceed the bank's undivided profits as reportable on its Reports
of Condition and Income, unless the bank has received the prior approval
of the Board and of at least two-thirds of the shareholders of each
class of stock outstanding.
(2) A member bank may not permit any portion of its permanent
capital to be withdrawn unless the withdrawal has been approved by the
Board and by at least two-thirds of the shareholders of each class of
stock outstanding.
(3) If a member bank has capital surplus in excess of that required
by law, the excess amount may be transferred to the bank's undivided
profits account and be available for the payment of dividends if:
(i) The amount transferred came from the earnings of prior periods,
excluding earnings transferred as a result of stock dividends;
(ii) The bank's board of directors approves the transfer of funds;
and
(iii) The transfer has been approved by the Board.
(e) Payment of capital distributions. All member banks also are
subject to the restrictions on payment of capital distributions
contained in Sec. 208.45 of subpart D of this part implementing section
38 of the FDI Act (12 U.S.C. 1831o).
(f) Compliance. A member bank shall use the date a dividend is
declared to determine compliance with this section.
Sec. 208.6 Establishment and maintenance of branches.
(a) Branching. (1) To the extent authorized by state law, a member
bank may establish and maintain branches (including interstate branches)
subject to the same limitations and restrictions that apply to the
establishment and maintenance of national bank branches (12 U.S.C. 36
and 1831u), except that approval of such branches shall be obtained from
the Board rather than from the Comptroller of the Currency.
(2) Branch applications. A State member bank wishing to establish a
branch in the United States or its territories must file an application
in accordance with the Board's Rules of Procedure, located at 12 CFR
262.3, and must comply with the public notice and comment rules
contained in paragraphs (a)(3) and (a)(4) of this section. Branches of
member banks located in foreign nations, in the overseas territories,
dependencies, and insular possessions of those nations and of the United
States, and in the Commonwealth of Puerto Rico, are subject to the
Board's Regulation K (12 CFR part 211).
(3) Public notice of branch applications. (i) Location of
publication. A State member bank wishing to establish a branch in the
United States or its territories must publish notice in a newspaper of
general circulation in the form and at the locations specified in Sec.
262.3 of the Rules of Procedure (12 CFR 262.3).
(ii) Contents of notice. The newspaper notice referred to in
paragraph (a)(3) of this section shall provide an opportunity for
interested persons to comment on the application for a period of at
least 15 days.
(iii) Timing of publication. Each newspaper notice shall be
published no more than 7 calendar days before and no later than the
calendar day on which an application is filed with the appropriate
Reserve Bank.
(4) Public comment. (i) Timely comments. Interested persons may
submit information and comments regarding a branch application under
Sec. 208.6. A comment shall be considered timely for purposes of this
subpart if the comment, together with all supplemental information, is
submitted in writing in accordance with the Board's Rules of Procedure
(12 CFR 262.3) and received by the Board or the appropriate Reserve Bank
prior to the expiration of the public comment period provided in
paragraph (a)(3)(ii) of this section.
(ii) Extension of comment period. The Board may, in its discretion,
extend the public comment period regarding any application under Sec.
208.6. In the
[[Page 217]]
event that an interested person requests a copy of an application
submitted under Sec. 208.6, the Board may, in its discretion and based
on the facts and circumstances, grant such person an extension of the
comment period for up to 15 calendar days.
(b) Factors considered in approving domestic branch applications.
Factors given special consideration by the Board in passing upon a
branch application are:
(1) Financial condition and management. The financial history and
condition of the applying bank and the general character of its
management;
(2) Capital. The adequacy of the bank's capital in accordance with
Sec. 208.4, and its future earnings prospects;
(3) Convenience and needs. The convenience and needs of the
community to be served by the branch;
(4) CRA performance. In the case of branches with deposit-taking
capability, the bank's performance under the Community Reinvestment Act
(12 U.S.C. 2901 et seq.) and Regulation BB (12 CFR part 228); and
(5) Investment in bank premises. Whether the bank's investment in
bank premises in establishing the branch is consistent with Sec.
208.21.
(c) Expedited approval for eligible banks and bank holding
companies--(1) Availability of expedited treatment. The expedited branch
application procedures described in paragraph (c)(2) of this section are
available to:
(i) An eligible bank; and
(ii) A bank that cannot be determined to be an eligible bank because
it has not received CAMELS compliance or CRA ratings from a bank
regulatory authority, if it is controlled by a bank holding company that
meets the criteria for expedited processing under Sec. 225.14(c) of
Regulation Y (12 CFR 225.14(c)).
(2) Expedited procedures. A completed domestic branch application
filed with the appropriate Reserve Bank will be deemed approved on the
fifth day after the close of the comment period, unless the Board or the
appropriate Reserve Bank notifies the bank that the application is
approved prior to that date (but in no case will an application be
approved before the third day after the close of the public comment
period) or the Board or the appropriate Federal Reserve Bank notifies
the bank that the application is not eligible for expedited review for
any reason, including, without limitation, that:
(i) The bank or bank holding company does not meet the criteria
under Sec. 208.6(c)(1);
(ii) The application contains a material error or is otherwise
deficient; or
(iii) The application or the notice required under paragraph (a)(3)
of this section, raises significant supervisory, Community Reinvestment
Act, compliance, policy or legal issues that have not been resolved, or
a timely substantive adverse comment is submitted. A comment will be
considered substantive unless it involves individual complaints, or
raises frivolous, previously considered, or wholly unsubstantiated
claims or irrelevant issues.
(d) Consolidated Applications--(1) Proposed branches; notice of
branch opening. A member bank may seek approval in a single application
or notice for any branches that it proposes to establish within one year
after the approval date. The bank shall, unless notification is waived,
notify the appropriate Reserve Bank not later than 30 days after opening
any branch approved under a consolidated application. A bank is not
required to open a branch approved under either a consolidated or single
branch application.
(2) Duration of branch approval. Branch approvals remain valid for
one year unless the Board or the appropriate Reserve Bank notifies the
bank that in its judgment, based on reports of condition, examinations,
or other information, there has been a change in the bank's condition,
financial or otherwise, that warrants reconsideration of the approval.
(e) Branch closings. A member bank shall comply with section 42 of
the FDI Act (FDI Act), 12 U.S.C. 1831r-1, with regard to branch
closings.
(f) Branch relocations. A relocation of an existing branch does not
require filing a branch application. A relocation of an existing branch,
for purposes of determining whether to file a branch application, is a
movement that does not substantially affect the nature of
[[Page 218]]
the branch's business or customers served.
[63 FR 37639, July 13, 1998, as amended at 63 FR 58621, Nov. 2, 1998]
Sec. 208.7 Prohibition against use of interstate branches primarily for
deposit production.
(a) Purpose and scope--(1) Purpose. The purpose of this section is
to implement section 109 (12 U.S.C. 1835a) of the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 (Interstate Act).
(2) Scope. (i) This section applies to any State member bank that
has operated a covered interstate branch for a period of at least one
year, and any foreign bank that has operated a covered interstate branch
licensed by a State for a period of at least one year.
(ii) This section describes the requirements imposed under 12 U.S.C.
1835a, which requires the appropriate Federal banking agencies (the
Board, the Office of the Comptroller of the Currency, and the Federal
Deposit Insurance Corporation) to prescribe uniform rules that prohibit
a bank from using any authority to engage in interstate branching
pursuant to the Interstate Act, or any amendment made by the Interstate
Act to any other provision of law, primarily for the purpose of deposit
production.
(b) Definitions. For purposes of this section, the following
definitions apply:
(1) Bank means, unless the context indicates otherwise:
(i) A State member bank as that term is defined in 12 U.S.C.
1813(d)(2); and
(ii) A foreign bank as that term is defined in 12 U.S.C. 3101(7) and
12 CFR 211.21.
(2) Covered interstate branch means:
(i) Any branch of a State member bank, and any uninsured branch of a
foreign bank licensed by a State, that:
(A) Is established or acquired outside the bank's home State
pursuant to the interstate branching authority granted by the Interstate
Act or by any amendment made by the Interstate Act to any other
provision of law; or
(B) Could not have been established or acquired outside of the
bank's home State but for the establishment or acquisition of a branch
described in paragraph (b)(2)(i) of this section; and
(ii) Any bank or branch of a bank controlled by an out-of-State bank
holding company.
(3) Home State means:
(i) With respect to a State bank, the State that chartered the bank;
(ii) With respect to a national bank, the State in which the main
office of the bank is located;
(iii) With respect to a bank holding company, the State in which the
total deposits of all banking subsidiaries of such company are the
largest on the later of:
(A) July 1, 1966; or
(B) The date on which the company becomes a bank holding company
under the Bank Holding Company Act.
(iv) With respect to a foreign bank:
(A) For purposes of determining whether a U.S. branch of a foreign
bank is a covered interstate branch, the home State of the foreign bank
as determined in accordance with 12 U.S.C. 3103(c) and 12 CFR 211.22;
and
(B) For purposes of determining whether a branch of a U.S. bank
controlled by a foreign bank is a covered interstate branch, the State
in which the total deposits of all banking subsidiaries of such foreign
bank are the largest on the later of:
(1) July 1, 1966; or
(2) The date on which the foreign bank becomes a bank holding
company under the Bank Holding Company Act.
(4) Host State means a State in which a covered interstate branch is
established or acquired.
(5) Host state loan-to-deposit ratio generally means, with respect
to a particular host state, the ratio of total loans in the host state
relative to total deposits from the host state for all banks (including
institutions covered under the definition of ``bank'' in 12 U.S.C.
1813(a)(1)) that have that state as their home state, as determined and
updated periodically by the appropriate Federal banking agencies and
made available to the public.
(6) Out-of-State bank holding company means, with respect to any
State, a bank holding company whose home State is another State.
(7) State means state as that term is defined in 12 U.S.C.
1813(a)(3).
[[Page 219]]
(8) Statewide loan-to-deposit ratio means, with respect to a bank,
the ratio of the bank's loans to its deposits in a state in which the
bank has one or more covered interstate branches, as determined by the
Board.
(c)(1) Application of screen. Beginning no earlier than one year
after a covered interstate branch is acquired or established, the Board
will consider whether the bank's statewide loan-to-deposit ratio is less
than 50 percent of the relevant host State loan-to-deposit ratio.
(2) Results of screen. (i) If the Board determines that the bank's
statewide loan-to-deposit ratio is 50 percent or more of the host state
loan-to-deposit ratio, no further consideration under this section is
required.
(ii) If the Board determines that the bank's statewide loan-to-
deposit ratio is less than 50 percent of the host state loan-to-deposit
ratio, or if reasonably available data are insufficient to calculate the
bank's statewide loan-to-deposit ratio, the Board will make a credit
needs determination for the bank as provided in paragraph (d) of this
section.
(d) Credit needs determination--(1) In general. The Board will
review the loan portfolio of the bank and determine whether the bank is
reasonably helping to meet the credit needs of the communities in the
host state that are served by the bank.
(2) Guidelines. The Board will use the following considerations as
guidelines when making the determination pursuant to paragraph (d)(1) of
this section:
(i) Whether covered interstate branches were formerly part of a
failed or failing depository institution;
(ii) Whether covered interstate branches were acquired under
circumstances where there was a low loan-to-deposit ratio because of the
nature of the acquired institution's business or loan portfolio;
(iii) Whether covered interstate branches have a high concentration
of commercial or credit card lending, trust services, or other
specialized activities, including the extent to which the covered
interstate branches accept deposits in the host state;
(iv) The Community Reinvestment Act ratings received by the bank, if
any, under 12 U.S.C. 2901 et seq.;
(v) Economic conditions, including the level of loan demand, within
the communities served by the covered interstate branches;
(vi) The safe and sound operation and condition of the bank; and
(vii) The Board's Regulation BB--Community Reinvestment (12 CFR part
228) and interpretations of that regulation.
(e) Sanctions--(1) In general. If the Board determines that a bank
is not reasonably helping to meet the credit needs of the communities
served by the bank in the host state, and that the bank's statewide
loan-to-deposit ratio is less than 50 percent of the host state loan-to-
deposit ratio, the Board:
(i) May order that a bank's covered interstate branch or branches be
closed unless the bank provides reasonable assurances to the
satisfaction of the Board, after an opportunity for public comment, that
the bank has an acceptable plan under which the bank will reasonably
help to meet the credit needs of the communities served by the bank in
the host state; and
(ii) Will not permit the bank to open a new branch in the host state
that would be considered to be a covered interstate branch unless the
bank provides reasonable assurances to the satisfaction of the Board,
after an opportunity for public comment, that the bank will reasonably
help to meet the credit needs of the community that the new branch will
serve.
(2) Notice prior to closure of a covered interstate branch. Before
exercising the Board's authority to order the bank to close a covered
interstate branch, the Board will issue to the bank a notice of the
Board's intent to order the closure and will schedule a hearing within
60 days of issuing the notice.
(3) Hearing. The Board will conduct a hearing scheduled under
paragraph (e)(2) of this section in accordance with the provisions of 12
U.S.C. 1818(h) and 12 CFR part 263.
[63 FR 37637, July 13, 1998, as amended at 67 FR 38848, June 6, 2002]
Subpart B_Investments and Loans
Source: 63 FR 37641, July 13, 1998, unless otherwise noted.
[[Page 220]]
Sec. 208.20 Authority, purpose, and scope.
(a) Authority. Subpart B of Regulation H (12 CFR part 208, subpart
B) is issued by the Board of Governors of the Federal Reserve System
under 12 U.S.C. 24; sections 9, 11 and 21 of the Federal Reserve Act (12
U.S.C. 321-338a, 248(a), 248(c), and 481-486); sections 1814, 1816,
1818, 1823(j), 1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C.
1814, 1816, 1818, 1823(j), 1831o, 1831p-1 and 1831r-1); and the National
Flood Insurance Act of 1968 and the Flood Disaster Protection Act of
1973, as amended (42 U.S.C. 4001-4129).
(b) Purpose and scope. This subpart B describes certain investment
limitations on member banks, statutory requirements for amortizing
losses on agricultural loans and extending credit in areas having
special flood hazards, as well as the requirements for issuing letters
of credit and acceptances.
Sec. 208.21 Investments in premises and securities.
(a) Investment in bank premises. No state member bank shall invest
in bank premises, or in the stock, bonds, debentures, or other such
obligations of any corporation holding the premises of such bank, or
make loans to or upon the security of any such corporation unless:
(1) The bank notifies the appropriate Reserve Bank at least fifteen
days prior to such investment and has not received notice that the
investment is subject to further review by the end of the fifteen day
notice period;
(2) The aggregate of all such investments and loans, together with
the amount of any indebtedness incurred by any such corporation that is
an affiliate of the bank (as defined in section 2 of the Banking Act of
1933, as amended, 12 U.S.C. 221a), is less than or equal to the bank's
perpetual preferred stock and related surplus plus common stock plus
surplus, as those terms are defined in the FFIEC Consolidated Reports of
Condition and Income; or
(3)(i) The aggregate of all such investments and loans, together
with the amount of any indebtedness incurred by any such corporation
that is an affiliate of the bank, is less than or equal to 150 percent
of the bank's perpetual preferred stock and related surplus plus common
stock plus surplus, as those terms are defined in the FFIEC Consolidated
Reports of Condition and Income; and
(ii) The bank:
(A) Has a CAMELS composite rating of 1 or 2 under the Uniform
Interagency Bank Rating System \5\ (or an equivalent rating under a
comparable rating system) as of the most recent examination of the bank;
and
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\5\ See FRRS 3-1575 for an explanation of the Uniform Interagency
Bank Rating System. (For availability, see 12 CFR 261.10(f).)
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(B) Is well capitalized and will continue to be well capitalized, in
accordance with subpart D of this part, after the investment or loan.
(b) Investments in securities. Member banks are subject to the same
limitations and conditions with respect to purchasing, selling,
underwriting, and holding investment securities and stocks as are
national banks under 12 U.S.C. 24, ] 7th. To determine whether an
obligation qualifies as an investment security for the purposes of 12
U.S.C. 24, ] 7th, and to calculate the limits with respect to the
purchase of such obligations, a state member bank may look to part 1 of
the rules of the Comptroller of the Currency (12 CFR part 1) and
interpretations thereunder. A state member bank may consult the Board
for a determination with respect to the application of 12 U.S.C. 24, ]
7th, with respect to issues not addressed in 12 CFR part 1. The
provisions of 12 CFR part 1 do not provide authority for a state member
bank to purchase securities of a type or amount that the bank is not
authorized to purchase under applicable state law.
Sec. 208.22 Community development and public welfare investments.
(a) Definitions. For purposes of this section:
(1) Low- or moderate-income area means:
(i) One or more census tracts in a Metropolitan Statistical Area
where the median family income adjusted for family size in each census
tract is less than 80 percent of the median family income adjusted for
family size of the Metropolitan Statistical Area; or
[[Page 221]]
(ii) If not in a Metropolitan Statistical Area, one or more census
tracts or block-numbered areas where the median family income adjusted
for family size in each census tract or block-numbered area is less than
80 percent of the median family income adjusted for family size of the
State.
(2) Low- and moderate-income persons has the same meaning as low-
and moderate-income persons as defined in 42 U.S.C. 5302(a)(20)(A).
(3) Small business means a business that meets the size-eligibility
standards of 13 CFR 121.802(a)(2).
(b) Investments not requiring prior Board approval. Notwithstanding
the provisions of section 5136 of the Revised Statutes (12 U.S.C. 24, ]
7th) made applicable to member banks by paragraph 20 of section 9 of the
Federal Reserve Act (12 U.S.C. 335), a member bank may make an
investment, without prior Board approval, if the following conditions
are met:
(1) The investment is in a corporation, limited partnership, or
other entity, and:
(i) The Board has determined that an investment in that entity or
class of entities is a public welfare investment under paragraph 23 of
section 9 of the Federal Reserve Act (12 U.S.C. 338a), or a community
development investment under Regulation Y (12 CFR 225.25(b)(6)); or
(ii) The Comptroller of the Currency has determined, by order or
regulation, that an investment in that entity by a national bank is a
public welfare investment under section 5136 of the Revised Statutes (12
U.S.C. 24 (Eleventh)); or
(iii) The entity is a community development financial institution as
defined in section 103(5) of the Community Development Banking and
Financial Institutions Act of 1994 (12 U.S.C. 4702(5)); or
(iv) The entity, directly or indirectly, engages solely in or makes
loans solely for the purposes of one or more of the following community
development activities:
(A) Investing in, developing, rehabilitating, managing, selling, or
renting residential property if a majority of the units will be occupied
by low- and moderate-income persons, or if the property is a ``qualified
low-income building'' as defined in section 42(c)(2) of the Internal
Revenue Code (26 U.S.C. 42(c)(2));
(B) Investing in, developing, rehabilitating, managing, selling, or
renting nonresidential real property or other assets located in a low-
or moderate-income area and targeted towards low- and moderate-income
persons;
(C) Investing in one or more small businesses located in a low- or
moderate-income area to stimulate economic development;
(D) Investing in, developing, or otherwise assisting job training or
placement facilities or programs that will be targeted towards low- and
moderate-income persons;
(E) Investing in an entity located in a low- or moderate-income area
if the entity creates long-term employment opportunities, a majority of
which (based on full-time equivalent positions) will be held by low- and
moderate-income persons; and
(F) Providing technical assistance, credit counseling, research, and
program development assistance to low- and moderate-income persons,
small businesses, or nonprofit corporations to help achieve community
development;
(2) The investment is permitted by state law;
(3) The investment will not expose the member bank to liability
beyond the amount of the investment;
(4) The aggregate of all such investments of the member bank does
not exceed the sum of five percent of its capital stock and surplus;
(5) The member bank is well capitalized or adequately capitalized
under Sec. Sec. 208.43(b) (1) and (2);
(6) The member bank received a composite CAMELS rating of ``1'' or
``2'' under the Uniform Financial Institutions Rating System as of its
most recent examination and an overall rating of ``1'' or ``2'' as of
its most recent consumer compliance examination; and
(7) The member bank is not subject to any written agreement, cease-
and-desist order, capital directive, prompt-corrective-action directive,
or memorandum of understanding issued by the Board or a Federal Reserve
Bank.
[[Page 222]]
(c) Notice to Federal Reserve Bank. Not more than 30 days after
making an investment under paragraph (b) of this section, the member
bank shall advise its Federal Reserve Bank of the investment, including
the amount of the investment and the identity of the entity in which the
investment is made.
(d) Investments requiring Board approval. (1) With prior Board
approval, a member bank may make public welfare investments under
paragraph 23 of section 9 of the Federal Reserve Act (12 U.S.C. 338a),
other than those specified in paragraph (b) of this section.
(2) Requests for Board approval under this paragraph (d) shall
include, at a minimum:
(i) The amount of the proposed investment;
(ii) A description of the entity in which the investment is to be
made;
(iii) An explanation of why the investment is a public welfare
investment under paragraph 23 of section 9 of the Federal Reserve Act
(12 U.S.C. 338a);
(iv) A description of the member bank's potential liability under
the proposed investment;
(v) The amount of the member bank's aggregate outstanding public
welfare investments under paragraph 23 of section 9 of the Federal
Reserve Act;
(vi) The amount of the member bank's capital stock and surplus; and
(vii) If the bank investment is not eligible under paragraph (b) of
this section, explain the reason or reasons why it is ineligible.
(3) The Board shall act on a request under this paragraph (d) within
60 calendar days of receipt of a request that meets the requirements of
paragraph (d)(2) of this section, unless the Board notifies the
requesting member bank that a longer time period will be required.
(e) Divestiture of investments. A member bank shall divest itself of
an investment made under paragraph (b) or (d) of this section to the
extent that the investment exceeds the scope of, or ceases to meet, the
requirements of paragraphs (b)(1) through (b)(4) or paragraph (d) of
this section. The divestiture shall be made in the manner specified in
12 CFR 225.140, Regulation Y, for interests acquired by a lending
subsidiary of a bank holding company or the bank holding company itself
in satisfaction of a debt previously contracted.
Sec. 208.23 Agricultural loan loss amortization.
(a) Definitions. For purposes of this section:
(1) Accepting official means:
(i) The Reserve Bank in whose district the bank is located; or
(ii) The Director of the Division of Banking Supervision and
Regulation in cases in which the Reserve Bank cannot determine that the
bank qualifies.
(2) Agriculturally related other property means any property, real
or personal, that the bank owned on January 1, 1983, and any additional
property that it acquired prior to January 1, 1992, in connection with a
qualified agricultural loan. For the purposes of paragraph (d) of this
section, the value of such property shall include the amount previously
charged off as a loss.
(3) Participating bank means an agricultural bank (as defined in 12
U.S.C. 1823(j)(4)(A)) that, as of January 1, 1992, had a proposal for a
capital restoration plan accepted by an accepting official and received
permission from the accepting official, subject to paragraphs (d) and
(e) of this section, to amortize losses in accordance with paragraphs
(b) and (c) of this section.
(4) Qualified agricultural loan means:
(i) Loans that finance agricultural production or are secured by
farm land for purposes of Schedule RC-C of the FFIEC Consolidated Report
of Condition or such other comparable schedule;
(ii) Loans secured by farm machinery;
(iii) Other loans that a bank proves to be sufficiently related to
agriculture for classification as an agricultural loan by the Board; and
(iv) The remaining unpaid balance of any loans described in
paragraphs (a)(4) (i), (ii) and (iii) of this section that have been
charged off since January 1, 1984, and that qualify for deferral under
this section.
(b)(1) Provided there is no evidence that the loss resulted from
fraud or criminal abuse on the part of the bank, the officers,
directors, or principal
[[Page 223]]
shareholders, a participating bank may amortize in its Reports of
Condition and Income:
(i) Any loss on a qualified agricultural loan that the bank would be
required to reflect in its financial statements for any period between
and including 1984 and 1991; or
(ii) Any loss that the bank would be required to reflect in its
financial statements for any period between and including 1983 and 1991
resulting from a reappraisal or sale of agriculturally-related other
property.
(2) Amortization under this section shall be computed over a period
not to exceed seven years on a quarterly straight-line basis commencing
in the first quarter after the loan was or is charged off so as to be
fully amortized not later than December 31, 1998.
(c) Accounting for amortization. Any bank that is permitted to
amortize losses in accordance with paragraph (b) of this section may
restate its capital and other relevant accounts and account for future
authorized deferrals and authorizations in accordance with the
instructions to the FFIEC Consolidated Reports of Condition and Income.
Any resulting increase in the capital account shall be included in
qualifying capital pursuant to appendix A of this part.
(d) Conditions of participation. In order for a bank to maintain its
status as a participating bank, it shall:
(1) Adhere to the approved capital plan and obtain the prior
approval of the accepting official before making any modifications to
the plan;
(2) Maintain accounting records for each asset subject to loss
deferral under the program that document the amount and timing of the
deferrals, repayments, and authorizations;
(3) Maintain the financial condition of the bank so that it does not
deteriorate to the point where it is no longer a viable, fundamentally
sound institution;
(4) Make a reasonable effort, consistent with safe and sound banking
practices, to maintain in its loan portfolio a percentage of
agricultural loans, including agriculturally-related other property, not
less than the percentage of such loans in its loan portfolio on January
1, 1986; and
(5) Provide the accepting official, upon request, with any
information the accepting official deems necessary to monitor the bank's
amortization, its compliance with the conditions of participation, and
its continued eligibility.
(e) Revocation of eligibility for loss amortization. The failure to
comply with any condition in an acceptance, with the capital restoration
plan, or with the conditions stated in paragraph (d) of this section, is
grounds for revocation of acceptance for loss amortization and for an
administrative action against the bank under 12 U.S.C. 1818(b). In
addition, acceptance of a bank for loss amortization shall not foreclose
any administrative action against the bank that the Board may deem
appropriate.
(f) Expiration date. The terms of this section will no longer be in
effect as of January 1, 1999.
Sec. 208.24 Letters of credit and acceptances.
(a) Standby letters of credit. For the purpose of this section,
standby letters of credit include every letter of credit (or similar
arrangement however named or designated) that represents an obligation
to the beneficiary on the part of the issuer:
(1) To repay money borrowed by or advanced to or for the account of
the account party; or
(2) To make payment on account of any evidence of indebtedness
undertaken by the account party; or
(3) To make payment on account of any default by the party procuring
the issuance of the letter of credit in the performance of an
obligation. \6\
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\6\ A standby letter of credit does not include: (1) Commercial
letters of credit and similar instruments, where the issuing bank
expects the beneficiary to draw upon the issuer, and which do not
guaranty payment of a money obligation; or (2) a guaranty or similar
obligation issued by a foreign branch in accordance with and subject to
the limitations of 12 CFR part 211 (Regulation K).
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(b) Ineligible acceptance. An ineligible acceptance is a time draft
accepted by a bank, which does not meet the requirements for discount
with a Federal Reserve Bank.
[[Page 224]]
(c) Bank's lending limits. Standby letters of credit and ineligible
acceptances count toward member banks' lending limits imposed by state
law.
(d) Exceptions. A standby letter of credit or ineligible acceptance
is not subject to the restrictions set forth in paragraph (c) of this
section if prior to or at the time of issuance of the credit:
(1) The issuing bank is paid an amount equal to the bank's maximum
liability under the standby letter of credit; or
(2) The party procuring the issuance of a letter of credit or
ineligible acceptance has set aside sufficient funds in a segregated,
clearly earmarked deposit account to cover the bank's maximum liability
under the standby letter of credit or ineligible acceptance.
Sec. 208.25 Loans in areas having special flood hazards.
(a) Purpose and scope--(1) Purpose. The purpose of this section is
to implement the requirements of the National Flood Insurance Act of
1968 and the Flood Disaster Protection Act of 1973, as amended (42
U.S.C. 4001-4129).
(2) Scope. This section, except for paragraphs (f) and (h) of this
section, applies to loans secured by buildings or mobile homes located
or to be located in areas determined by the Director of the Federal
Emergency Management Agency to have special flood hazards. Paragraphs
(f) and (h) of this section apply to loans secured by buildings or
mobile homes, regardless of location.
(b) Definitions. For purposes of this section:
(1) Act means the National Flood Insurance Act of 1968, as amended
(42 U.S.C. 4001-4129).
(2) Building means a walled and roofed structure, other than a gas
or liquid storage tank, that is principally above ground and affixed to
a permanent site, and a walled and roofed structure while in the course
of construction, alteration, or repair.
(3) Community means a State or a political subdivision of a State
that has zoning and building code jurisdiction over a particular area
having special flood hazards.
(4) Designated loan means a loan secured by a building or mobile
home that is located or to be located in a special flood hazard area in
which flood insurance is available under the Act.
(5) Director of FEMA means the Director of the Federal Emergency
Management Agency.
(6) Mobile home means a structure, transportable in one or more
sections, that is built on a permanent chassis and designed for use with
or without a permanent foundation when attached to the required
utilities. The term mobile home does not include a recreational vehicle.
For purposes of this section, the term mobile home means a mobile home
on a permanent foundation. The term mobile home includes a manufactured
home as that term is used in the National Flood Insurance Program.
(7) NFIP means the National Flood Insurance Program authorized under
the Act.
(8) Residential improved real estate means real estate upon which a
home or other residential building is located or to be located.
(9) Servicer means the person responsible for:
(i) Receiving any scheduled, periodic payments from a borrower under
the terms of a loan, including amounts for taxes, insurance premiums,
and other charges with respect to the property securing the loan; and
(ii) Making payments of principal and interest and any other
payments from the amounts received from the borrower as may be required
under the terms of the loan.
(10) Special flood hazard area means the land in the flood plain
within a community having at least a one percent chance of flooding in
any given year, as designated by the Director of FEMA.
(11) Table funding means a settlement at which a loan is funded by a
contemporaneous advance of loan funds and an assignment of the loan to
the person advancing the funds.
(c) Requirement to purchase flood insurance where available--(1) In
general. A member bank shall not make, increase, extend, or renew any
designated loan unless the building or mobile home and any personal
property securing the loan is covered by flood insurance for the term of
the loan. The amount of insurance must be at least
[[Page 225]]
equal to the lesser of the outstanding principal balance of the
designated loan or the maximum limit of coverage available for the
particular type of property under the Act. Flood insurance coverage
under the Act is limited to the overall value of the property securing
the designated loan minus the value of the land on which the property is
located.
(2) Table funded loans. A member bank that acquires a loan from a
mortgage broker or other entity through table funding shall be
considered to be making a loan for the purposes of this section.
(d) Exemptions. The flood insurance requirement prescribed by
paragraph (c) of this section does not apply with respect to:
(1) Any State-owned property covered under a policy of self-
insurance satisfactory to the Director of FEMA, who publishes and
periodically revises the list of States falling within this exemption;
or
(2) Property securing any loan with an original principal balance of
$5,000 or less and a repayment term of one year or less.
(e) Escrow requirement. If a member bank requires the escrow of
taxes, insurance premiums, fees, or any other charges for a loan secured
by residential improved real estate or a mobile home that is made,
increased, extended, or renewed after October 1, 1996, the member bank
shall also require the escrow of all premiums and fees for any flood
insurance required under paragraph (c) of this section. The member bank,
or a servicer acting on its behalf, shall deposit the flood insurance
premiums on behalf of the borrower in an escrow account. This escrow
account will be subject to escrow requirements adopted pursuant to
section 10 of the Real Estate Settlement Procedures Act of 1974 (12
U.S.C. 2609) (RESPA), which generally limits the amount that may be
maintained in escrow accounts for certain types of loans and requires
escrow account statements for those accounts, only if the loan is
otherwise subject to RESPA. Following receipt of a notice from the
Director of FEMA or other provider of flood insurance that premiums are
due, the member bank, or a servicer acting on its behalf, shall pay the
amount owed to the insurance provider from the escrow account by the
date when such premiums are due.
(f) Required use of standard flood hazard determination form--(1)
Use of form. A member bank shall use the standard flood hazard
determination form developed by the Director of FEMA when determining
whether the building or mobile home offered as collateral security for a
loan is or will be located in a special flood hazard area in which flood
insurance is available under the Act. The standard flood hazard
determination form may be used in a printed, computerized, or electronic
manner. A member bank may obtain the standard flood hazard determination
form by written request to FEMA, P.O. Box 2012, Jessup, MD 20794-2012.
(2) Retention of form. A member bank shall retain a copy of the
completed standard flood hazard determination form, in either hard copy
or electronic form, for the period of time the bank owns the loan.
(g) Forced placement of flood insurance. If a member bank, or a
servicer acting on behalf of the bank, determines at any time during the
term of a designated loan that the building or mobile home and any
personal property securing the designated loan is not covered by flood
insurance or is covered by flood insurance in an amount less than the
amount required under paragraph (c) of this section, then the bank or
its servicer shall notify the borrower that the borrower should obtain
flood insurance, at the borrower's expense, in an amount at least equal
to the amount required under paragraph (c) of this section, for the
remaining term of the loan. If the borrower fails to obtain flood
insurance within 45 days after notification, then the member bank or its
servicer shall purchase insurance on the borrower's behalf. The member
bank or its servicer may charge the borrower for the cost of premiums
and fees incurred in purchasing the insurance.
(h) Determination fees--(1) General. Notwithstanding any Federal or
State law other than the Flood Disaster Protection Act of 1973, as
amended (42 U.S.C. 4001-4129), any member bank, or a servicer acting on
behalf of the bank,
[[Page 226]]
may charge a reasonable fee for determining whether the building or
mobile home securing the loan is located or will be located in a special
flood hazard area. A determination fee may also include, but is not
limited to, a fee for life-of-loan monitoring.
(2) Borrower fee. The determination fee authorized by paragraph
(h)(1) of this section may be charged to the borrower if the
determination:
(i) Is made in connection with a making, increasing, extending, or
renewing of the loan that is initiated by the borrower;
(ii) Reflects the Director of FEMA's revision or updating of flood
plain areas or flood-risk zones;
(iii) Reflects the Director of FEMA's publication of a notice or
compendium that:
(A) Affects the area in which the building or mobile home securing
the loan is located; or
(B) By determination of the Director of FEMA, may reasonably require
a determination whether the building or mobile home securing the loan is
located in a special flood hazard area;
(iv) Results in the purchase of flood insurance coverage by the
lender or its servicer on behalf of the borrower under paragraph (g) of
this section.
(3) Purchaser or transferee fee. The determination fee authorized by
paragraph (h)(1) of this section may be charged to the purchaser or
transferee of a loan in the case of the sale or transfer of the loan.
(i) Notice of special flood hazards and availability of Federal
disaster relief assistance. When a member bank makes, increases,
extends, or renews a loan secured by a building or a mobile home located
or to be located in a special flood hazard area, the bank shall mail or
deliver a written notice to the borrower and to the servicer in all
cases whether or not flood insurance is available under the Act for the
collateral securing the loan.
(1) Contents of notice. The written notice must include the
following information:
(i) A warning, in a form approved by the Director of FEMA, that the
building or the mobile home is or will be located in a special flood
hazard area;
(ii) A description of the flood insurance purchase requirements set
forth in section 102(b) of the Flood Disaster Protection Act of 1973, as
amended (42 U.S.C. 4012a(b));
(iii) A statement, where applicable, that flood insurance coverage
is available under the NFIP and may also be available from private
insurers; and
(iv) A statement whether Federal disaster relief assistance may be
available in the event of damage to the building or mobile home caused
by flooding in a Federally declared disaster.
(2) Timing of notice. The member bank shall provide the notice
required by paragraph (i)(1) of this section to the borrower within a
reasonable time before the completion of the transaction, and to the
servicer as promptly as practicable after the bank provides notice to
the borrower and in any event no later than the time the bank provides
other similar notices to the servicer concerning hazard insurance and
taxes. Notice to the servicer may be made electronically or may take the
form of a copy of the notice to the borrower.
(3) Record of receipt. The member bank shall retain a record of the
receipt of the notices by the borrower and the servicer for the period
of time the bank owns the loan.
(4) Alternate method of notice. Instead of providing the notice to
the borrower required by paragraph (i)(1) of this section, a member bank
may obtain satisfactory written assurance from a seller or lessor that,
within a reasonable time before the completion of the sale or lease
transaction, the seller or lessor has provided such notice to the
purchaser or lessee. The member bank shall retain a record of the
written assurance from the seller or lessor for the period of time the
bank owns the loan.
(5) Use of prescribed form of notice. A member bank will be
considered to be in compliance with the requirement for notice to the
borrower of this paragraph (i) by providing written notice to the
borrower containing the language presented in appendix A of this section
within a reasonable time before the completion of the transaction. The
notice presented in appendix A of this section satisfies the borrower
notice requirements of the Act.
[[Page 227]]
(j) Notice of servicer's identity--(1) Notice requirement. When a
member bank makes, increases, extends, renews, sells, or transfers a
loan secured by a building or mobile home located or to be located in a
special flood hazard area, the bank shall notify the Director of FEMA
(or the Director's designee) in writing of the identity of the servicer
of the loan. The Director of FEMA has designated the insurance provider
to receive the member bank's notice of the servicer's identity. This
notice may be provided electronically if electronic transmission is
satisfactory to the Director of FEMA's designee.
(2) Transfer of servicing rights. The member bank shall notify the
Director of FEMA (or the Director's designee) of any change in the
servicer of a loan described in paragraph (j)(1) of this section within
60 days after the effective date of the change. This notice may be
provided electronically if electronic transmission is satisfactory to
the Director of FEMA's designee. Upon any change in the servicing of a
loan described in paragraph (j)(1) of this section, the duty to provide
notice under this paragraph (j)(2) shall transfer to the transferee
servicer.
Appendix A to Sec. 208.25 Sample Form of Notice
Notice of Special Flood Hazards and Availability of Federal Disaster
Relief Assistance
We are giving you this notice to inform you that:
The building or mobile home securing the loan for which you have
applied is or will be located in an area with special flood hazards.
The area has been identified by the Director of the Federal
Emergency Management Agency (FEMA) as a special flood hazard area using
FEMA's Flood Insurance Rate Map or the Flood Hazard Boundary Map for the
following community: --------------------. This area has a one percent
(1%) chance of a flood equal to or exceeding the base flood elevation (a
100-year flood) in any given year. During the life of a 30-year mortgage
loan, the risk of a 100-year flood in a special flood hazard area is 26
percent (26%).
Federal law allows a lender and borrower jointly to request the
Director of FEMA to review the determination of whether the property
securing the loan is located in a special flood hazard area. If you
would like to make such a request, please contact us for further
information.
------ The community in which the property securing the loan is
located participates in the National Flood Insurance Program (NFIP).
Federal law will not allow us to make you the loan that you have applied
for if you do not purchase flood insurance. The flood insurance must be
maintained for the life of the loan. If you fail to purchase or renew
flood insurance on the property, Federal law authorizes and requires us
to purchase the flood insurance for you at your expense.
Flood insurance coverage under the NFIP may be
purchased through an insurance agent who will obtain the policy either
directly through the NFIP or through an insurance company that
participates in the NFIP. Flood insurance also may be available from
private insurers that do not participate in the NFIP.
At a minimum, flood insurance purchased must
cover the lesser of:
(1) the outstanding principal balance of the loan; or
(2) the maximum amount of coverage allowed for the type of property
under the NFIP.
Flood insurance coverage under the NFIP is limited to the overall
value of the property securing the loan minus the value of the land on
which the property is located.
Federal disaster relief assistance (usually in
the form of a low-interest loan) may be available for damages incurred
in excess of your flood insurance if your community's participation in
the NFIP is in accordance with NFIP requirements.
------Flood insurance coverage under the NFIP is not available for
the property securing the loan because the community in which the
property is located does not participate in the NFIP. In addition, if
the non-participating community has been identified for at least one
year as containing a special flood hazard area, properties located in
the community will not be eligible for Federal disaster relief
assistance in the event of a Federally declared flood disaster.
[Reg. H, 63 FR 37641, July 13, 1998, as amended at 64 FR 71274, Dec. 21,
1999]
Subpart C_Bank Securities and Securities-Related Activities
Source: 63 FR 37646, July 13, 1998, unless otherwise noted.
Sec. 208.30 Authority, purpose, and scope.
(a) Authority. Subpart C of Regulation H (12 CFR part 208, subpart
C) is issued by the Board of Governors of the Federal Reserve System
under 12 U.S.C. 24, 92a, 93a; sections 1818 and 1831p-1(a)(2) of the FDI
Act (12 U.S.C.
[[Page 228]]
1818, 1831p-1(a)(2)); and sections 78b, 78l(b), 78l(g), 78l(i), 78o-
4(c)(5), 78o-5, 78q, 78q-1, and 78w of the Securities Exchange Act of
1934 (15 U.S.C. 78b, 78l(b), 78l(g), 78l(i), 78o-4(c)(5), 78o-5, 78q,
78q-1, 78w).
(b) Purpose and scope. This subpart C describes the requirements
imposed upon member banks acting as transfer agents, registered clearing
agencies, or sellers of securities under the Securities Exchange Act of
1934. This subpart C also describes the reporting requirements imposed
on member banks whose securities are subject to registration under the
Securities Exchange Act of 1934.
Sec. 208.31 State member banks as transfer agents.
(a) The rules adopted by the Securities and Exchange Commission
(SEC) pursuant to section 17A of the Securities Exchange Act of 1934 (15
U.S.C. 78q-l) prescribing procedures for registration of transfer agents
for which the SEC is the appropriate regulatory agency (17 CFR
240.17Ac2-1) apply to member bank transfer agents. References to the
``Commission'' are deemed to refer to the Board.
(b) The rules adopted by the SEC pursuant to section 17A prescribing
operational and reporting requirements for transfer agents (17 CFR
240.17Ac2-2 and 240.17Ad-1 through 240.17Ad-16) apply to member bank
transfer agents.
Sec. 208.32 Notice of disciplinary sanctions imposed by registered clearing
agency.
(a) Notice requirement. Any member bank or any of its subsidiaries
that is a registered clearing agency pursuant to section 17A(b) of the
Securities Exchange Act of 1934 (the Act), and that:
(1) Imposes any final disciplinary sanction on any participant
therein;
(2) Denies participation to any applicant; or
(3) Prohibits or limits any person in respect to access to services
offered by the clearing agency, shall file with the Board (and the
appropriate regulatory agency, if other than the Board, for a
participant or applicant) notice thereof in the manner prescribed in
this section.
(b) Notice of final disciplinary actions. (1) Any registered
clearing agency for which the Board is the appropriate regulatory agency
that takes any final disciplinary action with respect to any participant
shall promptly file a notice thereof with the Board in accordance with
paragraph (c) of this section. For the purposes of this paragraph (b),
final disciplinary action means the imposition of any disciplinary
sanction pursuant to section 17A(b)(3)(G) of the Act, or other action of
a registered clearing agency which, after notice and opportunity for
hearing, results in final disposition of charges of:
(i) One or more violations of the rules of the registered clearing
agency; or
(ii) Acts or practices constituting a statutory disqualification of
a type defined in paragraph (iv) or (v) (except prior convictions) of
section 3(a)(39) of the Act.
(2) However, if a registered clearing agency fee schedule specifies
certain charges for errors made by its participants in giving
instructions to the registered clearing agency which are de minimis on a
per error basis, and whose purpose is, in part, to provide revenues to
the clearing agency to compensate it for effort expended in beginning to
process an erroneous instruction, such error charges shall not be
considered a final disciplinary action for purposes of this paragraph
(b).
(c) Contents of final disciplinary action notice. Any notice filed
pursuant to paragraph (b) of this section shall consist of the
following, as appropriate:
(1) The name of the respondent and the respondent's last known
address, as reflected on the records of the clearing agency, and the
name of the person, committee, or other organizational unit that brought
the charges. However, identifying information as to any respondent found
not to have violated a provision covered by a charge may be deleted
insofar as the notice reports the disposition of that charge and, prior
to the filing of the notice, the respondent does not request that
identifying information be included in the notice;
(2) A statement describing the investigative or other origin of the
action;
(3) As charged in the proceeding, the specific provision or
provisions of the
[[Page 229]]
rules of the clearing agency violated by the respondent, or the
statutory disqualification referred to in paragraph (b)(2) of this
section, and a statement describing the answer of the respondent to the
charges;
(4) A statement setting forth findings of fact with respect to any
act or practice in which the respondent was charged with having engaged
in or omitted; the conclusion of the clearing agency as to whether the
respondent violated any rule or was subject to a statutory
disqualification as charged; and a statement of the clearing agency in
support of its resolution of the principal issues raised in the
proceedings;
(5) A statement describing any sanction imposed, the reasons
therefor, and the date upon which the sanction became or will become
effective; and
(6) Such other matters as the clearing agency may deem relevant.
(d) Notice of final denial, prohibition, termination or limitation
based on qualification or administrative rules. (1) Any registered
clearing agency, for which the Board is the appropriate regulatory
agency, that takes any final action that denies or conditions the
participation of any person, or prohibits or limits access, to services
offered by the clearing agency, shall promptly file notice thereof with
the Board (and the appropriate regulatory agency, if other than the
Board, for the affected person) in accordance with paragraph (e) of this
section; but such action shall not be considered a final disciplinary
action for purposes of paragraph (b) of this section where the action is
based on an alleged failure of such person to:
(i) Comply with the qualification standards prescribed by the rules
of the registered clearing agency pursuant to section 17A(b)(4)(B) of
the Act; or
(ii) Comply with any administrative requirements of the registered
clearing agency (including failure to pay entry or other dues or fees,
or to file prescribed forms or reports) not involving charges of
violations that may lead to a disciplinary sanction.
(2) However, no such action shall be considered final pursuant to
this paragraph (d) that results merely from a notice of such failure to
comply to the person affected, if such person has not sought an
adjudication of the matter, including a hearing, or otherwise exhausted
the administrative remedies within the registered clearing agency with
respect to such a matter.
(e) Contents of notice required by paragraph (d) of this section.
Any notice filed pursuant to paragraph (d) of this section shall consist
of the following, as appropriate:
(1) The name of each person concerned and each person's last known
address, as reflected in the records of the clearing agency;
(2) The specific grounds upon which the action of the clearing
agency was based, and a statement describing the answer of the person
concerned;
(3) A statement setting forth findings of fact and conclusions as to
each alleged failure of the person to comply with qualification
standards or administrative obligations, and a statement of the clearing
agency in support of its resolution of the principal issues raised in
the proceeding;
(4) The date upon which such action became or will become effective;
and
(5) Such other matters as the clearing agency deems relevant.
(f) Notice of final action based on prior adjudicated statutory
disqualifications. Any registered clearing agency for which the Board is
the appropriate regulatory agency that takes any final action shall
promptly file notice thereof with the Board (and the appropriate
regulatory agency, if other than the Board, for the affected person) in
accordance with paragraph (g) of this section, where the final action:
(1) Denies or conditions participation to any person, or prohibits
or limits access to services offered by the clearing agency; and
(2) Is based upon a statutory disqualification of a type defined in
paragraph (A), (B) or (C) of section 3(a)(39) of the Act, consisting of
a prior conviction, as described in subparagraph (E) of section 3(a)(39)
of the Act. However, no such action shall be considered final pursuant
to this paragraph (f) that results merely from a notice of such
disqualification to the person affected, if such person has not sought
an adjudication of the matter, including a
[[Page 230]]
hearing, or otherwise exhausted the administrative remedies within the
clearing agency with respect to such a matter.
(g) Contents of notice required by paragraph (f) of this section.
Any notice filed pursuant to paragraph (f) of this section shall consist
of the following, as appropriate:
(1) The name of each person concerned and each person's last known
address, as reflected in the records of the clearing agency;
(2) A statement setting forth the principal issues raised, the
answer of any person concerned, and a statement of the clearing agency
in support of its resolution of the principal issues raised in the
proceeding;
(3) Any description furnished by or on behalf of the person
concerned of the activities engaged in by the person since the
adjudication upon which the disqualification is based;
(4) A copy of the order or decision of the court, appropriate
regulatory agency, or self-regulatory organization that adjudicated the
matter giving rise to the statutory disqualification;
(5) The nature of the action taken and the date upon which such
action is to be made effective; and
(6) Such other matters as the clearing agency deems relevant.
(h) Notice of summary suspension of participation. Any registered
clearing agency for which the Board is the appropriate regulatory agency
that summarily suspends or closes the accounts of a participant pursuant
to the provisions of section 17A(b)(5)(C) of the Act shall, within one
business day after such action becomes effective, file notice thereof
with the Board and the appropriate regulatory agency for the
participant, if other than the Board, of such action in accordance with
paragraph (i) of this section.
(i) Contents of notice of summary suspension. Any notice pursuant to
paragraph (h) of this section shall contain at least the following
information, as appropriate:
(1) The name of the participant concerned and the participant's last
known address, as reflected in the records of the clearing agency;
(2) The date upon which the summary action became or will become
effective;
(3) If the summary action is based upon the provisions of section
17A(b)(5)(C)(i) of the Act, a copy of the relevant order or decision of
the self-regulatory organization, if available to the clearing agency;
(4) If the summary action is based upon the provisions of section
17A(b)(5)(C)(ii) of the Act, a statement describing the default of any
delivery of funds or securities to the clearing agency;
(5) If the summary action is based upon the provisions of section
17A(b)(5)(C)(iii) of the Act, a statement describing the financial or
operating difficulty of the participant based upon which the clearing
agency determined that the suspension and closing of accounts was
necessary for the protection of the clearing agency, its participants,
creditors, or investors;
(6) The nature and effective date of the suspension; and
(7) Such other matters as the clearing agency deems relevant.
Sec. 208.33 Application for stay or review of disciplinary sanctions imposed
by registered clearing agency.
(a) Stays. The rules adopted by the Securities and Exchange
Commission (SEC) pursuant to section 19 of the Securities Exchange Act
of 1934 (15 U.S.C. 78s) regarding applications by persons for whom the
SEC is the appropriate regulatory agency for stays of disciplinary
sanctions or summary suspensions imposed by registered clearing agencies
(17 CFR 240.19d-2) apply to applications by member banks. References to
the ``Commission'' are deemed to refer to the Board.
(b) Reviews. The regulations adopted by the Securities and Exchange
Commission pursuant to section 19 of the Securities and Exchange Act of
1934 (15 U.S.C. 78s) regarding applications by persons for whom the SEC
is the appropriate regulatory agency for reviews of final disciplinary
sanctions, denials of participation, or prohibitions or limitations of
access to services imposed by registered clearing agencies (17 CFR
240.19d-3(a)-(f)) apply to applications by member banks. References to
the ``Commission'' are deemed to refer to the Board. The Board's Uniform
Rules of Practice and Procedure (12 CFR part
[[Page 231]]
263) apply to review proceedings under this Sec. 208.33 to the extent
not inconsistent with this Sec. 208.33.
Sec. 208.34 Recordkeeping and confirmation of certain securities transactions
effected by State member banks.
(a) Exceptions and safe and sound operations. (1) A State member
bank may be excepted from one or more of the requirements of this
section if it meets one of the following conditions of paragraphs
(a)(1)(i) through (a)(1)(iv) of this section:
(i) De minimis transactions. The requirements of paragraphs (c)(2)
through (c)(4) and paragraphs (e)(1) through (e)(3) of this section
shall not apply to banks having an average of less than 200 securities
transactions per year for customers over the prior three calendar year
period, exclusive of transactions in government securities;
(ii) Government securities. The recordkeeping requirements of
paragraph (c) of this section shall not apply to banks effecting fewer
than 500 government securities brokerage transactions per year; provided
that this exception shall not apply to government securities
transactions by a State member bank that has filed a written notice, or
is required to file notice, with the Federal Reserve Board that it acts
as a government securities broker or a government securities dealer;
(iii) Municipal securities. The municipal securities activities of a
State member bank that are subject to regulations promulgated by the
Municipal Securities Rulemaking Board shall not be subject to the
requirements of this section; and
(iv) Foreign branches. The requirements of this section shall not
apply to the activities of foreign branches of a State member bank.
(2) Every State member bank qualifying for an exemption under
paragraph (a)(1) of this section that conducts securities transactions
for customers shall, to ensure safe and sound operations, maintain
effective systems of records and controls regarding its customer
securities transactions that clearly and accurately reflect appropriate
information and provide an adequate basis for an audit of the
information.
(b) Definitions. For purposes of this section:
(1) Asset-backed security shall mean a security that is serviced
primarily by the cash flows of a discrete pool of receivables or other
financial assets, either fixed or revolving, that by their terms convert
into cash within a finite time period plus any rights or other assets
designed to assure the servicing or timely distribution of proceeds to
the security holders.
(2) Collective investment fund shall mean funds held by a State
member bank as fiduciary and, consistent with local law, invested
collectively as follows:
(i) In a common trust fund maintained by such bank exclusively for
the collective investment and reinvestment of monies contributed thereto
by the bank in its capacity as trustee, executor, administrator,
guardian, or custodian under the Uniform Gifts to Minors Act; or
(ii) In a fund consisting solely of assets of retirement, pension,
profit sharing, stock bonus or similar trusts which are exempt from
Federal income taxation under the Internal Revenue Code (26 U.S.C.).
(3) Completion of the transaction effected by or through a state
member bank shall mean:
(i) For purchase transactions, the time when the customer pays the
bank any part of the purchase price (or the time when the bank makes the
book-entry for any part of the purchase price if applicable); however,
if the customer pays for the security prior to the time payment is
requested or becomes due, then the transaction shall be completed when
the bank transfers the security into the account of the customer; and
(ii) For sale transactions, the time when the bank transfers the
security out of the account of the customer or, if the security is not
in the bank's custody, then the time when the security is delivered to
the bank; however, if the customer delivers the security to the bank
prior to the time delivery is requested or becomes due then the
transaction shall be completed when
[[Page 232]]
the banks makes payment into the account of the customer.
(4) Crossing of buy and sell orders shall mean a security
transaction in which the same bank acts as agent for both the buyer and
the seller.
(5) Customer shall mean any person or account, including any agency,
trust, estate, guardianship, or other fiduciary account, for which a
State member bank effects or participates in effecting the purchase or
sale of securities, but shall not include a broker, dealer, bank acting
as a broker or dealer, municipal securities broker or dealer, or issuer
of the securities which are the subject of the transactions.
(6) Debt security as used in paragraph (c) of this section shall
mean any security, such as a bond, debenture, note or any other similar
instrument which evidences a liability of the issuer (including any
security of this type that is convertible into stock or similar
security) and fractional or participation interests in one or more of
any of the foregoing; provided, however, that securities issued by an
investment company registered under the Investment Company Act of 1940,
15 U.S.C. 80a-1 et seq., shall not be included in this definition.
(7) Government security shall mean:
(i) A security that is a direct obligation of, or obligation
guaranteed as to principal and interest by, the United States;
(ii) A security that is issued or guaranteed by a corporation in
which the United States has a direct or indirect interest and which is
designated by the Secretary of the Treasury for exemption as necessary
or appropriate in the public interest or for the protection of
investors;
(iii) A security issued or guaranteed as to principal and interest
by any corporation whose securities are designated, by statute
specifically naming the corporation, to constitute exempt securities
within the meaning of the laws administered by the Securities and
Exchange Commission; or
(iv) Any put, call, straddle, option, or privilege on a security as
described in paragraphs (b)(7) (i), (ii), or (iii) of this section other
than a put, call, straddle, option, or privilege that is traded on one
or more national securities exchanges, or for which quotations are
disseminated though an automated quotation system operated by a
registered securities association.
(8) Investment discretion with respect to an account shall mean if
the State member bank, directly or indirectly, is authorized to
determine what securities or other property shall be purchased or sold
by or for the account, or makes decisions as to what securities or other
property shall be purchased or sold by or for the account even though
some other person may have responsibility for such investment decisions.
(9) Municipal security shall mean a security which is a direct
obligation of, or obligation guaranteed as to principal or interest by,
a State or any political subdivision thereof, or any agency or
instrumentality of a State or any political subdivision thereof, or any
municipal corporate instrumentality of one or more States, or any
security which is an industrial development bond (as defined in 26
U.S.C. 103(c)(2) the interest on which is excludable from gross income
under 26 U.S.C. 103(a)(1), by reason of the application of paragraph (4)
or (6) of 26 U.S.C. 103(c) (determined as if paragraphs (4)(A), (5) and
(7) were not included in 26 U.S.C. 103(c)), paragraph (1) of 26 U.S.C.
103(c) does not apply to such security.
(10) Periodic plan shall mean:
(i) A written authorization for a State member bank to act as agent
to purchase or sell for a customer a specific security or securities, in
a specific amount (calculated in security units or dollars) or to the
extent of dividends and funds available, at specific time intervals, and
setting forth the commission or charges to be paid by the customer or
the manner of calculating them (including dividend reinvestment plans,
automatic investment plans, and employee stock purchase plans); or
(ii) Any prearranged, automatic transfer or sweep of funds from a
deposit account to purchase a security, or any prearranged, automatic
redemption or sale of a security with the funds being transferred into a
deposit account (including cash management sweep services).
(11) Security shall mean:
(i) Any note, stock, treasury stock, bond, debenture, certificate of
interest
[[Page 233]]
or participation in any profit-sharing agreement or in any oil, gas, or
other mineral royalty or lease, any collateral-trust certificate,
preorganization certificate or subscription, transferable share,
investment contract, voting-trust certificate, for a security, any put,
call, straddle, option, or privilege on any security, or group or index
of securities (including any interest therein or based on the value
thereof), any instrument commonly known as a ``security''; or any
certificate of interest or participation in, temporary or interim
certificate for, receipt for, or warrant or right to subscribe to or
purchase, any of the foregoing.
(ii) But does not include a deposit or share account in a federally
or state insured depository institution, a loan participation, a letter
of credit or other form of bank indebtedness incurred in the ordinary
course of business, currency, any note, draft, bill of exchange, or
bankers acceptance which has a maturity at the time of issuance of not
exceeding nine months, exclusive of days of grace, or any renewal
thereof the maturity of which is likewise limited, units of a collective
investment fund, interests in a variable amount (master) note of a
borrower of prime credit, or U.S. Savings Bonds.
(c) Recordkeeping. Except as provided in paragraph (a) of this
section, every State member bank effecting securities transactions for
customers, including transactions in government securities, and
municipal securities transactions by banks not subject to registration
as municipal securities dealers, shall maintain the following records
with respect to such transactions for at least three years. Nothing
contained in this section shall require a bank to maintain the records
required by this paragraph in any given manner, provided that the
information required to be shown is clearly and accurately reflected and
provides an adequate basis for the audit of such information. Records
may be maintained in hard copy, automated, or electronic form provided
the records are easily retrievable, readily available for inspection,
and capable of being reproduced in a hard copy. A bank may contract with
third party service providers, including broker/dealers, to maintain
records required under this part.
(1) Chronological records of original entry containing an itemized
daily record of all purchases and sales of securities. The records of
original entry shall show the account or customer for which each such
transaction was effected, the description of the securities, the unit
and aggregate purchase or sale price (if any), the trade date and the
name or other designation of the broker/dealer or other person from whom
purchased or to whom sold;
(2) Account records for each customer which shall reflect all
purchases and sales of securities, all receipts and deliveries of
securities, and all receipts and disbursements of cash with respect to
transactions in securities for such account and all other debits and
credits pertaining to transactions in securities;
(3) A separate memorandum (order ticket) of each order to purchase
or sell securities (whether executed or canceled), which shall include:
(i) The account(s) for which the transaction was effected;
(ii) Whether the transaction was a market order, limit order, or
subject to special instructions;
(iii) The time the order was received by the trader or other bank
employee responsible for effecting the transaction;
(iv) The time the order was placed with the broker/dealer, or if
there was no broker/dealer, the time the order was executed or canceled;
(v) The price at which the order was executed; and
(vi) The broker/dealer utilized;
(4) A record of all broker/dealers selected by the bank to effect
securities transactions and the amount of commissions paid or allocated
to each such broker during the calendar year; and
(5) A copy of the written notification required by paragraphs (d)
and (e) of this section.
(d) Content and time of notification. Every State member bank
effecting a securities transaction for a customer shall give or send to
such customer either of the following types of notifications at or
before completion of the transaction or; if the bank uses a broker/
dealer's confirmation, within
[[Page 234]]
one business day from the bank's receipt of the broker/dealer's
confirmation:
(1) A copy of the confirmation of a broker/dealer relating to the
securities transaction; and if the bank is to receive remuneration from
the customer or any other source in connection with the transaction, and
the remuneration is not determined pursuant to a prior written agreement
between the bank and the customer, a statement of the source and the
amount of any remuneration to be received; or
(2) A written notification disclosing:
(i) The name of the bank;
(ii) The name of the customer;
(iii) Whether the bank is acting as agent for such customer, as
agent for both such customer and some other person, as principal for its
own account, or in any other capacity;
(iv) The date of execution and a statement that the time of
execution will be furnished within a reasonable time upon written
request of such customer specifying the identity, price and number of
shares or units (or principal amount in the case of debt securities) of
such security purchased or sold by such customer;
(v) The amount of any remuneration received or to be received,
directly or indirectly, by any broker/dealer from such customer in
connection with the transaction;
(vi) The amount of any remuneration received or to be received by
the bank from the customer and the source and amount of any other
remuneration to be received by the bank in connection with the
transaction, unless remuneration is determined pursuant to a written
agreement between the bank and the customer, provided, however, in the
case of Government securities and municipal securities, this paragraph
(d)(2)(vi) shall apply only with respect to remuneration received by the
bank in an agency transaction. If the bank elects not to disclose the
source and amount of remuneration it has or will receive from a party
other than the customer pursuant to this paragraph (d)(2)(vi), the
written notification must disclose whether the bank has received or will
receive remuneration from a party other than the customer, and that the
bank will furnish within a reasonable time the source and amount of this
remuneration upon written request of the customer. This election is not
available, however, if, with respect to a purchase, the bank was
participating in a distribution of that security; or with respect to a
sale, the bank was participating in a tender offer for that security;
(vii) The name of the broker/dealer utilized; or, where there is no
broker/dealer, the name of the person from whom the security was
purchased or to whom it was sold, or the fact that such information will
be furnished within a reasonable time upon written request;
(viii) In the case of a transaction in a debt security subject to
redemption before maturity, a statement to the effect that the debt
security may be redeemed in whole or in part before maturity, that the
redemption could affect the yield represented and that additional
information is available on request;
(ix) In the case of a transaction in a debt security effected
exclusively on the basis of a dollar price:
(A) The dollar price at which the transaction was effected;
(B) The yield to maturity calculated from the dollar price;
provided, however, that this paragraph (c)(2)(ix)(B) shall not apply to
a transaction in a debt security that either has a maturity date that
may be extended by the issuer with a variable interest payable thereon,
or is an asset-backed security that represents an interest in or is
secured by a pool of receivables or other financial assets that are
subject to continuous prepayment;
(x) In the case of a transaction in a debt security effected on the
basis of yield:
(A) The yield at which the transaction was effected, including the
percentage amount and its characterization (e.g., current yield, yield
to maturity, or yield to call) and if effected at yield to call, the
type of call, the call date, and the call price; and
(B) The dollar price calculated from the yield at which the
transaction was effected; and
(C) If effected on a basis other than yield to maturity and the
yield to maturity is lower than the represented yield, the yield to
maturity as well as
[[Page 235]]
the represented yield; provided, however, that this paragraph
(c)(2)(x)(C) shall not apply to a transaction in a debt security that
either has a maturity date that may be extended by the issuer with a
variable interest rate payable thereon, or is an asset-backed security
that represents an interest in or is secured by a pool of receivables or
other financial assets that are subject to continuous prepayment;
(xi) In the case of a transaction in a debt security that is an
asset-backed security which represents an interest in or is secured by a
pool of receivables or other financial assets that are subject
continuously to prepayment, a statement indicating that the actual yield
of such asset-backed security may vary according to the rate at which
the underlying receivables or other financial assets are prepaid and a
statement of the fact that information concerning the factors that
affect yield (including at a minimum, the estimated yield, weighted
average life, and the prepayment assumptions underlying yield) will be
furnished upon written request of such customer; and
(xii) In the case of a transaction in a debt security, other than a
government security, that the security is unrated by a nationally
recognized statistical rating organization, if that is the case.
(e) Notification by agreement; alternative forms and times of
notification. A State member bank may elect to use the following
alternative procedures if a transaction is effected for:
(1) Accounts (except periodic plans) where the bank does not
exercise investment discretion and the bank and the customer agree in
writing to a different arrangement as to the time and content of the
notification; provided, however, that such agreement makes clear the
customer's right to receive the written notification pursuant to
paragraph (c) of this section at no additional cost to the customer;
(2) Accounts (except collective investment funds) where the bank
exercises investment discretion in other than an agency capacity, in
which instance the bank shall, upon request of the person having the
power to terminate the account or, if there is no such person, upon the
request of any person holding a vested beneficial interest in such
account, give or send to such person the written notification within a
reasonable time. The bank may charge such person a reasonable fee for
providing this information;
(3) Accounts, where the bank exercises investment discretion in an
agency capacity, in which instance:
(i) The bank shall give or send to each customer not less frequently
than once every three months an itemized statement which shall specify
the funds and securities in the custody or possession of the bank at the
end of such period and all debits, credits and transactions in the
customer's accounts during such period; and
(ii) If requested by the customer, the bank shall give or send to
each customer within a reasonable time the written notification
described in paragraph (c) of this section. The bank may charge a
reasonable fee for providing the information described in paragraph (c)
of this section;
(4) A collective investment fund, in which instance the bank shall
at least annually furnish a copy of a financial report of the fund, or
provide notice that a copy of such report is available and will be
furnished upon request, to each person to whom a regular periodic
accounting would ordinarily be rendered with respect to each
participating account. This report shall be based upon an audit made by
independent public accountants or internal auditors responsible only to
the board of directors of the bank;
(5) A periodic plan, in which instance the bank:
(i) Shall (except for a cash management sweep service) give or send
to the customer a written statement not less than every three months if
there are no securities transactions in the account, showing the
customer's funds and securities in the custody or possession of the
bank; all service charges and commissions paid by the customer in
connection with the transaction; and all other debits and credits of the
customer's account involved in the transaction; or
(ii) Shall for a cash management sweep service or similar periodic
plan as defined in Sec. 208.34(b)(10)(ii) give or send its customer a
written statement
[[Page 236]]
in the same form as prescribed in paragraph (e)(3) above for each month
in which a purchase or sale of a security takes place in a deposit
account and not less than once every three months if there are no
securities transactions in the account subject to any other applicable
laws or regulations;
(6) Upon the written request of the customer the bank shall furnish
the information described in paragraph (d) of this section, except that
any such information relating to remuneration paid in connection with
the transaction need not be provided to the customer when paid by a
source other than the customer. The bank may charge a reasonable fee for
providing the information described in paragraph (d) of this section.
(f) Settlement of securities transactions. All contracts for the
purchase or sale of a security shall provide for completion of the
transaction within the number of business days in the standard
settlement cycle for the security followed by registered broker dealers
in the United States unless otherwise agreed to by the parties at the
time of the transaction.
(g) Securities trading policies and procedures. Every State member
bank effecting securities transactions for customers shall establish
written policies and procedures providing:
(1) Assignment of responsibility for supervision of all officers or
employees who:
(i) Transmit orders to or place orders with broker/dealers;
(ii) Execute transactions in securities for customers; or
(iii) Process orders for notification and/or settlement purposes, or
perform other back office functions with respect to securities
transactions effected for customers; provided that procedures
established under this paragraph (g)(1)(iii) should provide for
supervision and reporting lines that are separate from supervision of
personnel under paragraphs (g)(1)(i) and (g)(1)(ii) of this section;
(2) For the fair and equitable allocation of securities and prices
to accounts when orders for the same security are received at
approximately the same time and are placed for execution either
individually or in combination;
(3) Where applicable and where permissible under local law, for the
crossing of buy and sell orders on a fair and equitable basis to the
parties to the transaction; and
(4) That bank officers and employees who make investment
recommendations or decisions for the accounts of customers, who
participate in the determination of such recommendations or decisions,
or who, in connection with their duties, obtain information concerning
which securities are being purchased or sold or recommended for such
action, must report to the bank, within ten days after the end of the
calendar quarter, all transactions in securities made by them or on
their behalf, either at the bank or elsewhere in which they have a
beneficial interest. The report shall identify the securities purchased
or sold and indicate the dates of the transactions and whether the
transactions were purchases or sales. Excluded from this requirement are
transactions for the benefit of the officer or employee over which the
officer or employee has no direct or indirect influence or control,
transactions in mutual fund shares, and all transactions involving in
the aggregate $10,000 or less during the calendar quarter. For purposes
of this paragraph (g)(4), the term securities does not include
government securities.
Sec. 208.35 Qualification requirements for transactions in certain
securities. [Reserved]
Sec. 208.36 Reporting requirements for State member banks subject to the
Securities Exchange Act of 1934.
(a) Filing, disclosure and other requirements--(1) General. Except
as otherwise provided in this section, a member bank whose securities
are subject to registration pursuant to section 12(b) or section 12(g)
of the Securities Exchange Act of 1934 (the 1934 Act) (15 U.S.C. 78l(b)
and (g)) shall comply with the rules, regulations and forms adopted by
the Securities and Exchange Commission (Commission) pursuant to--
(i) Sections 10A(m), 12, 13, 14(a), 14(c), 14(d), 14(f) and 16 of
the 1934 Act (15 U.S.C. 78f(m), 78l, 78m, 78n(a), (c), (d) and (f), and
78p); and
[[Page 237]]
(ii) Sections 302, 303, 304, 306, 401(b), 404, 406 and 407 of the
Sarbanes-Oxley Act of 2002 (codified at 15 U.S.C. 7241, 7242, 7243,
7244, 7261, 7262, 7264 and 7265).
(2) References to the Commission. Any references to the ``Securities
and Exchange Commission'' or the ``Commission'' in the rules,
regulations and forms described in paragraph (a)(1) of this section
shall with respect to securities issued by member banks be deemed to
refer to the Board unless the context otherwise requires.
(b) Elections permitted for member banks with total assets of $150
million or less. (1) Notwithstanding paragraph (a) of this section or
the rules and regulations promulgated by the Commission pursuant to the
1934 Act a member bank that has total assets of $150 million or less as
of the end of its most recent fiscal year, and no foreign offices, may
elect to substitute for the financial statements required by the
Commission's Form 10-Q, the balance sheet and income statement from the
quarterly report of condition required to be filed by the bank with the
Board under section 9 of the Federal Reserve Act (12 U.S.C. 324)
(Federal Financial Institutions Examination Council Form 033 or 034).
(2) A member bank qualifying for and electing to file financial
statements from its quarterly report of condition pursuant to paragraph
(b)(1) of this section in its form 10-Q shall include earnings per share
or net loss per share data prepared in accordance with GAAP and disclose
any material contingencies, as required by Article 10 of the
Commission's Regulation S-X (17 CFR 210.10-01), in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
section of Form 10-Q.
(c) Required filings--(1) Place and timing of filing. All papers
required to be filed with the Board, pursuant to the 1934 Act or
regulations thereunder, shall be submitted to the Division of Banking
Supervision and Regulation, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.
Material may be filed by delivery to the Board, through the mails, or
otherwise. The date on which papers are actually received by the Board
shall be the date of filing thereof if all of the requirements with
respect to the filing have been complied with.
(2) Filing fees. No filing fees specified by the Commission's rules
shall be paid to the Board.
(3) Public inspection. Copies of the registration statement,
definitive proxy solicitation materials, reports, and annual reports to
shareholders required by this section (exclusive of exhibits) shall be
available for public inspection at the Board's offices in Washington,
DC, as well as at the Federal Reserve Banks of New York, Chicago, and
San Francisco and at the Reserve Bank in the district in which the
reporting bank is located.
(d) Confidentiality of filing. Any person filing any statement,
report, or document under the 1934 Act may make written objection to the
public disclosure of any information contained therein in accordance
with the following procedure:
(1) The person shall omit from the statement, report, or document,
when it is filed, the portion thereof that the person desires to keep
undisclosed (hereinafter called the confidential portion). The person
shall indicate at the appropriate place in the statement, report, or
document that the confidential portion has been omitted and filed
separately with the Board.
(2) The person shall file the following with the copies of the
statement, report, or document filed with the Board:
(i) As many copies of the confidential portion, each clearly marked
``CONFIDENTIAL TREATMENT,'' as there are copies of the statement,
report, or document filed with the Board. Each copy of the confidential
portion shall contain the complete text of the item and, notwithstanding
that the confidential portion does not constitute the whole of the
answer, the entire answer thereto; except that in case the confidential
portion is part of a financial statement or schedule, only the
particular financial statement or schedule need be included. All copies
of the confidential portion shall be in the same form as the remainder
of the statement, report, or document; and
(ii) An application making objection to the disclosure of the
confidential portion. The application shall be on a
[[Page 238]]
sheet or sheets separate from the confidential portion, and shall:
(A) Identify the portion of the statement, report, or document that
has been omitted;
(B) Include a statement of the grounds of objection; and
(C) Include the name of each exchange, if any, with which the
statement, report, or document is filed.
(3) The copies of the confidential portion and the application filed
in accordance with this paragraph shall be enclosed in a separate
envelope marked ``CONFIDENTIAL TREATMENT,'' and addressed to Secretary,
Board of Governors of the Federal Reserve System, Washington, DC 20551.
(4) Pending determination by the Board on the objection filed in
accordance with this paragraph, the confidential portion shall not be
disclosed by the Board.
(5) If the Board determines to sustain the objection, a notation to
that effect shall be made at the appropriate place in the statement,
report, or document.
(6) If the Board determines not to sustain the objection because
disclosure of the confidential portion is in the public interest, a
finding and determination to that effect shall be entered and notice of
the finding and determination sent by registered or certified mail to
the person.
(7) If the Board determines not to sustain the objection, pursuant
to paragraph (d)(6) of this section, the confidential portion shall be
made available to the public:
(i) 15 days after notice of the Board's determination not to sustain
the objection has been given, as required by paragraph (d)(6) of this
section, provided that the person filing the objection has not
previously filed with the Board a written statement that he intends, in
good faith, to seek judicial review of the finding and determination; or
(ii) 60 days after notice of the Board's determination not to
sustain the objection has been given as required by paragraph (d)(6) of
this section and the person filing the objection has filed with the
Board a written statement of intent to seek judicial review of the
finding and determination, but has failed to file a petition for
judicial review of the Board's determination; or
(iii) Upon final judicial determination, if adverse to the party
filing the objection.
(8) If the confidential portion is made available to the public, a
copy thereof shall be attached to each copy of the statement, report, or
document filed with the Board.
[63 FR 37646, July 13, 1998, as amended at 67 FR 57941, Sept. 13, 2002;
68 FR 4096, Jan. 28, 2003]
Sec. 208.37 Government securities sales practices.
(a) Scope. This subpart is applicable to state member banks that
have filed notice as, or are required to file notice as, government
securities brokers or dealers pursuant to section 15C of the Securities
Exchange Act (15 U.S.C. 78o-5) and Department of the Treasury rules
under section 15C (17 CFR 400.1(d) and part 401).
(b) Definitions. For purposes of this section:
(1) Bank that is a government securities broker or dealer means a
state member bank that has filed notice, or is required to file notice,
as a government securities broker or dealer pursuant to section 15C of
the Securities Exchange Act (15 U.S.C. 78o-5) and Department of the
Treasury rules under section 15C (17 CFR 400.1(d) and Part 401).
(2) Customer does not include a broker or dealer or a government
securities broker or dealer.
(3) Government security has the same meaning as this term has in
section 3(a)(42) of the Securities Exchange Act of 1934 (15 U.S.C.
78c(a)(42)).
(4) Non-institutional customer means any customer other than:
(i) A bank, savings association, insurance company, or registered
investment company;
(ii) An investment adviser registered under section 203 of the
Investment Advisers Act of 1940 (15 U.S.C. 80b-3); or
(iii) Any entity (whether a natural person, corporation,
partnership, trust, or otherwise) with total assets of at least $50
million.
(c) Business conduct. A bank that is a government securities broker
or dealer shall observe high standards of commercial honor and just and
equitable
[[Page 239]]
principles of trade in the conduct of its business as a government
securities broker or dealer.
(d) Recommendations to customers. In recommending to a customer the
purchase, sale or exchange of a government security, a bank that is a
government securities broker or dealer shall have reasonable grounds for
believing that the recommendation is suitable for the customer upon the
basis of the facts, if any, disclosed by the customer as to the
customer's other security holdings and as to the customer'ancial
situation and needs.
(e) Customer information. Prior to the execution of a transaction
recommended to a non-institutional customer, a bank that is a government
securities broker or dealer shall make reasonable efforts to obtain
information concerning:
(1) The customer's financial status;
(2) The customer's tax status;
(3) The customer's investment objectives; and
(4) Such other information used or considered to be reasonable by
the bank in making recommendations to the customer.
Subpart D_Prompt Corrective Action
Source: 63 FR 37652, July 13, 1998, unless otherwise noted.
Sec. 208.40 Authority, purpose, scope, other supervisory authority, and
disclosure of capital categories.
(a) Authority. Subpart D of Regulation H (12 CFR part 208, Subpart
D) is issued by the Board of Governors of the Federal Reserve System
(Board) under section 38 (section 38) of the FDI Act as added by section
131 of the Federal Deposit Insurance Corporation Improvement Act of 1991
(Pub. L. 102-242, 105 Stat. 2236 (1991)) (12 U.S.C. 1831o).
(b) Purpose and scope. This subpart D defines the capital measures
and capital levels that are used for determining the supervisory actions
authorized under section 38 of the FDI Act. (Section 38 of the FDI Act
establishes a framework of supervisory actions for insured depository
institutions that are not adequately capitalized.) This subpart also
establishes procedures for submission and review of capital restoration
plans and for issuance and review of directives and orders pursuant to
section 38. Certain of the provisions of this subpart apply to officers,
directors, and employees of state member banks. Other provisions apply
to any company that controls a member bank and to the affiliates of the
member bank.
(c) Other supervisory authority. Neither section 38 nor this subpart
in any way limits the authority of the Board under any other provision
of law to take supervisory actions to address unsafe or unsound
practices or conditions, deficient capital levels, violations of law, or
other practices. Action under section 38 of the FDI Act and this subpart
may be taken independently of, in conjunction with, or in addition to
any other enforcement action available to the Board, including issuance
of cease and desist orders, capital directives, approval or denial of
applications or notices, assessment of civil money penalties, or any
other actions authorized by law.
(d) Disclosure of capital categories. The assignment of a bank under
this subpart within a particular capital category is for purposes of
implementing and applying the provisions of section 38. Unless permitted
by the Board or otherwise required by law, no bank may state in any
advertisement or promotional material its capital category under this
subpart or that the Board or any other Federal banking agency has
assigned the bank to a particular capital category.
Sec. 208.41 Definitions for purposes of this subpart.
For purposes of this subpart, except as modified in this section or
unless the context otherwise requires, the terms used have the same
meanings as set forth in section 38 and section 3 of the FDI Act.
(a) Control--(1) Control has the same meaning assigned to it in
section 2 of the Bank Holding Company Act (12 U.S.C. 1841), and the term
controlled shall be construed consistently with the term control.
(2) Exclusion for fiduciary ownership. No insured depository
institution or
[[Page 240]]
company controls another insured depository institution or company by
virtue of its ownership or control of shares in a fiduciary capacity.
Shares shall not be deemed to have been acquired in a fiduciary capacity
if the acquiring insured depository institution or company has sole
discretionary authority to exercise voting rights with respect to the
shares.
(3) Exclusion for debts previously contracted. No insured depository
institution or company controls another insured depository institution
or company by virtue of its ownership or control of shares acquired in
securing or collecting a debt previously contracted in good faith, until
two years after the date of acquisition. The two-year period may be
extended at the discretion of the appropriate Federal banking agency for
up to three one-year periods.
(b) Controlling person means any person having control of an insured
depository institution and any company controlled by that person.
(c) Leverage ratio means the ratio of Tier 1 capital to average
total consolidated assets, as calculated in accordance with the Board's
Capital Adequacy Guidelines for State Member Banks: Tier 1 Leverage
Measure (Appendix B to this part).
(d) Management fee means any payment of money or provision of any
other thing of value to a company or individual for the provision of
management services or advice to the bank, or related overhead expenses,
including payments related to supervisory, executive, managerial, or
policy making functions, other than compensation to an individual in the
individual's capacity as an officer or employee of the bank.
(e) Risk-weighted assets means total weighted risk assets, as
calculated in accordance with the Board's Capital Adequacy Guidelines
for State Member Banks: Risk-Based Measure (Appendix A to this part).
(f) Tangible equity means the amount of core capital elements as
defined in the Board's Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure (Appendix A to this part), plus the amount of
outstanding cumulative perpetual preferred stock (including related
surplus), minus all intangible assets except mortgage servicing assets
to the extent that the Board determines that mortgage servicing assets
may be included in calculating the bank's Tier 1 capital.
(g) Tier 1 capital means the amount of Tier 1 capital as defined in
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
(h) Tier 1 risk-based capital ratio means the ratio of Tier 1
capital to weighted risk assets, as calculated in accordance with the
Board's Capital Adequacy Guidelines for State Member Banks: Risk-Based
Measure (Appendix A to this part).
(i) Total assets means quarterly average total assets as reported in
a bank's Report of Condition and Income (Call Report), minus intangible
assets as provided in the definition of tangible equity. At its
discretion the Federal Reserve may calculate total assets using a bank's
period-end assets rather than quarterly average assets.
(j) Total risk-based capital ratio means the ratio of qualifying
total capital to weighted risk assets, as calculated in accordance with
the Board's Capital Adequacy Guidelines for State Member Banks: Risk-
Based Measure (Appendix A to this part).
[63 FR 37652, July 13, 1998, as amended at 63 FR 42674, Aug. 10, 1998]
Sec. 208.42 Notice of capital category.
(a) Effective date of determination of capital category. A member
bank shall be deemed to be within a given capital category for purposes
of section 38 of the FDI Act and this subpart as of the date the bank is
notified of, or is deemed to have notice of, its capital category,
pursuant to paragraph (b) of this section.
(b) Notice of capital category. A member bank shall be deemed to
have been notified of its capital levels and its capital category as of
the most recent date:
(1) A Report of Condition and Income (Call Report) is required to be
filed with the Board;
(2) A final report of examination is delivered to the bank; or
[[Page 241]]
(3) Written notice is provided by the Board to the bank of its
capital category for purposes of section 38 of the FDI Act and this
subpart or that the bank's capital category has changed as provided in
paragraph (c) of this section or Sec. 208.43(c).
(c) Adjustments to reported capital levels and capital category--(1)
Notice of adjustment by bank. A member bank shall provide the Board with
written notice that an adjustment to the bank's capital category may
have occurred no later than 15 calendar days following the date that any
material event occurred that would cause the bank to be placed in a
lower capital category from the category assigned to the bank for
purposes of section 38 and this subpart on the basis of the bank's most
recent Call Report or report of examination.
(2) Determination by Board to change capital category. After
receiving notice pursuant to paragraph (c)(1) of this section, the Board
shall determine whether to change the capital category of the bank and
shall notify the bank of the Board's determination.
Sec. 208.43 Capital measures and capital category definitions.
(a) Capital measures. For purposes of section 38 and this subpart,
the relevant capital measures are:
(1) The total risk-based capital ratio;
(2) The Tier 1 risk-based capital ratio; and
(3) The leverage ratio.
(b) Capital categories. For purposes of section 38 and this subpart,
a member bank is deemed to be:
(1) ``Well capitalized'' if the bank:
(i) Has a total risk-based capital ratio of 10.0 percent or greater;
and
(ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or
greater; and
(iii) Has a leverage ratio of 5.0 percent or greater; and
(iv) Is not subject to any written agreement, order, capital
directive, or prompt corrective action directive issued by the Board
pursuant to section 8 of the FDI Act, the International Lending
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act,
or any regulation thereunder, to meet and maintain a specific capital
level for any capital measure.
(2) ``Adequately capitalized'' if the bank:
(i) Has a total risk-based capital ratio of 8.0 percent or greater;
and
(ii) Has a Tier 1 risk-based capital ratio of 4.0 percent or
greater; and
(iii) Has:
(A) A leverage ratio of 4.0 percent or greater; or
(B) A leverage ratio of 3.0 percent or greater if the bank is rated
composite 1 under the CAMELS rating system in the most recent
examination of the bank and is not experiencing or anticipating
significant growth; and
(iv) Does not meet the definition of a ``well capitalized'' bank.
(3) ``Undercapitalized'' if the bank has:
(i) A total risk-based capital ratio that is less than 8.0 percent;
or
(ii) A Tier 1 risk-based capital ratio that is less than 4.0
percent; or
(iii) Except as provided in paragraph (b)(2)(iii)(B) of this
section, has a leverage ratio that is less than 4.0 percent; or
(iv) A leverage ratio that is less than 3.0 percent, if the bank is
rated composite 1 under the CAMELS rating system in the most recent
examination of the bank and is not experiencing or anticipating
significant growth.
(4) ``Significantly undercapitalized'' if the bank has:
(i) A total risk-based capital ratio that is less than 6.0 percent;
or
(ii) A Tier 1 risk-based capital ratio that is less than 3.0
percent; or
(iii) A leverage ratio that is less than 3.0 percent.
(5) ``Critically undercapitalized'' if the bank has a ratio of
tangible equity to total assets that is equal to or less than 2.0
percent.
(c) Reclassification based on supervisory criteria other than
capital. The Board may reclassify a well capitalized member bank as
adequately capitalized and may require an adequately-capitalized or an
undercapitalized member bank to comply with certain mandatory or
discretionary supervisory actions as if the bank were in the next lower
capital category (except that the Board may not reclassify a
significantly undercapitalized bank as critically undercapitalized)
(each of these
[[Page 242]]
actions are hereinafter referred to generally as ``reclassifications'')
in the following circumstances:
(1) Unsafe or unsound condition. The Board has determined, after
notice and opportunity for hearing pursuant to 12 CFR 263.203, that the
bank is in unsafe or unsound condition; or
(2) Unsafe or unsound practice. The Board has determined, after
notice and opportunity for hearing pursuant to 12 CFR 263.203, that, in
the most recent examination of the bank, the bank received and has not
corrected, a less-than-satisfactory rating for any of the categories of
asset quality, management, earnings, liquidity, or sensitivity to market
risk.
Sec. 208.44 Capital restoration plans.
(a) Schedule for filing plan--(1) In general. A member bank shall
file a written capital restoration plan with the appropriate Reserve
Bank within 45 days of the date that the bank receives notice or is
deemed to have notice that the bank is undercapitalized, significantly
undercapitalized, or critically undercapitalized, unless the Board
notifies the bank in writing that the plan is to be filed within a
different period. An adequately capitalized bank that has been required,
pursuant to Sec. 208.43(c), to comply with supervisory actions as if
the bank were undercapitalized is not required to submit a capital
restoration plan solely by virtue of the reclassification.
(2) Additional capital restoration plans. Notwithstanding paragraph
(a)(1) of this section, a bank that has already submitted and is
operating under a capital restoration plan approved under section 38 and
this subpart is not required to submit an additional capital restoration
plan based on a revised calculation of its capital measures or a
reclassification of the institution under Sec. 208.43(c), unless the
Board notifies the bank that it must submit a new or revised capital
plan. A bank that is notified that it must submit a new or revised
capital restoration plan shall file the plan in writing with the
appropriate Reserve Bank within 45 days of receiving such notice, unless
the Board notifies the bank in writing that the plan is to be filed
within a different period.
(b) Contents of plan. All financial data submitted in connection
with a capital restoration plan shall be prepared in accordance with the
instructions provided on the Call Report, unless the Board instructs
otherwise. The capital restoration plan shall include all of the
information required to be filed under section 38(e)(2) of the FDI Act.
A bank that is required to submit a capital restoration plan as the
result of a reclassification of the bank pursuant to Sec. 208.43(c)
shall include a description of the steps the bank will take to correct
the unsafe or unsound condition or practice. No plan shall be accepted
unless it includes any performance guarantee described in section
38(e)(2)(C) of that Act by each company that controls the bank.
(c) Review of capital restoration plans. Within 60 days after
receiving a capital restoration plan under this subpart, the Board shall
provide written notice to the bank of whether the plan has been
approved. The Board may extend the time within which notice regarding
approval of a plan shall be provided.
(d) Disapproval of capital plan. If the Board does not approve a
capital restoration plan, the bank shall submit a revised capital
restoration plan within the time specified by the Board. Upon receiving
notice that its capital restoration plan has not been approved, any
undercapitalized member bank (as defined in Sec. 208.43(b)(3)) shall be
subject to all of the provisions of section 38 and this subpart
applicable to significantly undercapitalized institutions. These
provisions shall be applicable until such time as the Board approves a
new or revised capital restoration plan submitted by the bank.
(e) Failure to submit capital restoration plan. A member bank that
is undercapitalized (as defined in Sec. 208.43(b)(3)) and that fails to
submit a written capital restoration plan within the period provided in
this section shall, upon the expiration of that period, be subject to
all of the provisions of section 38 and this subpart applicable to
significantly undercapitalized institutions.
(f) Failure to implement capital restoration plan. Any
undercapitalized member bank that fails in any material respect to
implement a capital restoration plan shall be subject to all of the
[[Page 243]]
provisions of section 38 and this subpart applicable to significantly
undercapitalized institutions.
(g) Amendment of capital plan. A bank that has filed an approved
capital restoration plan may, after prior written notice to and approval
by the Board, amend the plan to reflect a change in circumstance. Until
such time as a proposed amendment has been approved, the bank shall
implement the capital restoration plan as approved prior to the proposed
amendment.
(h) Notice to FDIC. Within 45 days of the effective date of Board
approval of a capital restoration plan, or any amendment to a capital
restoration plan, the Board shall provide a copy of the plan or
amendment to the Federal Deposit Insurance Corporation.
(i) Performance guarantee by companies that control a bank--(1)
Limitation on Liability. (i) Amount limitation. The aggregate liability
under the guarantee provided under section 38 and this subpart for all
companies that control a specific member bank that is required to submit
a capital restoration plan under this subpart shall be limited to the
lesser of:
(A) An amount equal to 5.0 percent of the bank's total assets at the
time the bank was notified or deemed to have notice that the bank was
undercapitalized; or
(B) The amount necessary to restore the relevant capital measures of
the bank to the levels required for the bank to be classified as
adequately capitalized, as those capital measures and levels are defined
at the time that the bank initially fails to comply with a capital
restoration plan under this subpart.
(ii) Limit on duration. The guarantee and limit of liability under
section 38 and this subpart shall expire after the Board notifies the
bank that it has remained adequately capitalized for each of four
consecutive calendar quarters. The expiration or fulfillment by a
company of a guarantee of a capital restoration plan shall not limit the
liability of the company under any guarantee required or provided in
connection with any capital restoration plan filed by the same bank
after expiration of the first guarantee.
(iii) Collection on guarantee. Each company that controls a bank
shall be jointly and severally liable for the guarantee for such bank as
required under section 38 and this subpart, and the Board may require
and collect payment of the full amount of that guarantee from any or all
of the companies issuing the guarantee.
(2) Failure to provide guarantee. In the event that a bank that is
controlled by a company submits a capital restoration plan that does not
contain the guarantee required under section 38(e)(2) of the FDI Act,
the bank shall, upon submission of the plan, be subject to the
provisions of section 38 and this subpart that are applicable to banks
that have not submitted an acceptable capital restoration plan.
(3) Failure to perform guarantee. Failure by any company that
controls a bank to perform fully its guarantee of any capital plan shall
constitute a material failure to implement the plan for purposes of
section 38(f) of the FDI Act. Upon such failure, the bank shall be
subject to the provisions of section 38 and this subpart that are
applicable to banks that have failed in a material respect to implement
a capital restoration plan.
Sec. 208.45 Mandatory and discretionary supervisory actions under section 38.
(a) Mandatory supervisory actions--(1) Provisions applicable to all
banks. All member banks are subject to the restrictions contained in
section 38(d) of the FDI Act on payment of capital distributions and
management fees.
(2) Provisions applicable to undercapitalized, significantly
undercapitalized, and critically undercapitalized banks. Immediately
upon receiving notice or being deemed to have notice, as provided in
Sec. 208.42 or Sec. 208.44, that the bank is undercapitalized,
significantly undercapitalized, or critically undercapitalized, the bank
shall become subject to the provisions of section 38 of the FDI Act:
(i) Restricting payment of capital distributions and management fees
(section 38(d));
(ii) Requiring that the Board monitor the condition of the bank
(section 38(e)(1));
[[Page 244]]
(iii) Requiring submission of a capital restoration plan within the
schedule established in this subpart (section 38(e)(2));
(iv) Restricting the growth of the bank's assets (section 38(e)(3));
and
(v) Requiring prior approval of certain expansion proposals (section
3(e)(4)).
(3) Additional provisions applicable to significantly
undercapitalized, and critically undercapitalized banks. In addition to
the provisions of section 38 of the FDI Act described in paragraph
(a)(2) of this section, immediately upon receiving notice or being
deemed to have notice, as provided in Sec. 208.42 or Sec. 208.44, that
the bank is significantly undercapitalized, or critically
undercapitalized, or that the bank is subject to the provisions
applicable to institutions that are significantly undercapitalized
because the bank failed to submit or implement in any material respect
an acceptable capital restoration plan, the bank shall become subject to
the provisions of section 38 of the FDI Act that restrict compensation
paid to senior executive officers of the institution (section 38(f)(4)).
(4) Additional provisions applicable to critically undercapitalized
banks. In addition to the provisions of section 38 of the FDI Act
described in paragraphs (a)(2) and (a)(3) of this section, immediately
upon receiving notice or being deemed to have notice, as provided in
Sec. 208.32, that the bank is critically undercapitalized, the bank
shall become subject to the provisions of section 38 of the FDI Act:
(i) Restricting the activities of the bank (section 38(h)(1)); and
(ii) Restricting payments on subordinated debt of the bank (section
38(h)(2)).
(b) Discretionary supervisory actions. In taking any action under
section 38 that is within the Board's discretion to take in connection
with: A member bank that is deemed to be undercapitalized, significantly
undercapitalized, or critically undercapitalized, or has been
reclassified as undercapitalized, or significantly undercapitalized; an
officer or director of such bank; or a company that controls such bank,
the Board shall follow the procedures for issuing directives under 12
CFR 263.202 and 263.204, unless otherwise provided in section 38 or this
subpart.
Subpart E_Real Estate Lending and Appraisal Standards
Source: 63 FR 37655, July 13, 1998, unless otherwise noted.
Sec. 208.50 Authority, purpose, and scope.
(a) Authority. Subpart E of Regulation H (12 CFR part 208, subpart
E) is issued by the Board of Governors of the Federal Reserve System
under section 304 of the Federal Deposit Insurance Corporation
Improvement Act of 1991, 12 U.S.C. 1828(o) and Title 11 of the Financial
Institutions Reform, Recovery, and Enforcement Act (12 U.S.C. 3331-
3351).
(b) Purpose and scope. This subpart E prescribes standards for real
estate lending to be used by member banks in adopting internal real
estate lending policies. The standards applicable to appraisals rendered
in connection with federally related transactions entered into by member
banks are set forth in 12 CFR part 225, subpart G (Regulation Y).
Sec. 208.51 Real estate lending standards.
(a) Adoption of written policies. Each state bank that is a member
of the Federal Reserve System shall adopt and maintain written policies
that establish appropriate limits and standards for extensions of credit
that are secured by liens on or interests in real estate, or that are
made for the purpose of financing permanent improvements to real estate.
(b) Requirements of lending policies. (1) Real estate lending
policies adopted pursuant to this section shall be:
(i) Consistent with safe and sound banking practices;
(ii) Appropriate to the size of the institution and the nature and
scope of its operations; and
(iii) Reviewed and approved by the bank's board of directors at
least annually.
(2) The lending policies shall establish:
(i) Loan portfolio diversification standards;
[[Page 245]]
(ii) Prudent underwriting standards, including loan-to-value limits,
that are clear and measurable;
(iii) Loan administration procedures for the bank's real estate
portfolio; and
(iv) Documentation, approval, and reporting requirements to monitor
compliance with the bank's real estate lending policies.
(c) Monitoring conditions. Each member bank shall monitor conditions
in the real estate market in its lending area to ensure that its real
estate lending policies continue to be appropriate for current market
conditions.
(d) Interagency guidelines. The real estate lending policies adopted
pursuant to this section should reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (contained in appendix C of
this part) established by the Federal bank and thrift supervisory
agencies.
Subpart F_Miscellaneous Requirements
Source: 63 FR 37655, July 13, 1998, unless otherwise noted.
Sec. 208.60 Authority, purpose, and scope.
(a) Authority. Subpart F of Regulation H (12 CFR part 208, subpart
F) is issued by the Board of Governors of the Federal Reserve System
under sections 9, 11, 21, 25 and 25A of the Federal Reserve Act (12
U.S.C. 321-338a, 248(a), 248(c), 481-486, 601 and 611), section 7 of the
International Banking Act (12 U.S.C. 3105), section 3 of the Bank
Protection Act of 1968 (12 U.S.C. 1882), sections 1814, 1816, 1818,
1831o, 1831p-1 and 1831r-1 of the FDI Act (12 U.S.C. 1814, 1816, 1818,
1831o, 1831p-1 and 1831r-1), and the Bank Secrecy Act (31 U.S.C. 5318).
(b) Purpose and scope. This subpart F describes a member bank's
obligation to implement security procedures to discourage certain
crimes, to file suspicious activity reports, and to comply with the Bank
Secrecy Act's requirements for reporting and recordkeeping of currency
and foreign transactions. It also describes the examination schedule for
certain small insured member banks.
Sec. 208.61 Bank security procedures.
(a) Authority, purpose, and scope. Pursuant to section 3 of the Bank
Protection Act of 1968 (12 U.S.C. 1882), member banks are required to
adopt appropriate security procedures to discourage robberies,
burglaries, and larcenies, and to assist in the identification and
prosecution of persons who commit such acts. It is the responsibility of
the member bank's board of directors to comply with the provisions of
this section and ensure that a written security program for the bank's
main office and branches is developed and implemented.
(b) Designation of security officer. Upon becoming a member of the
Federal Reserve System, a member bank's board of directors shall
designate a security officer who shall have the authority, subject to
the approval of the board of directors, to develop, within a reasonable
time, but no later than 180 days, and to administer a written security
program for each banking office.
(c) Security program. (1) The security program shall:
(i) Establish procedures for opening and closing for business and
for the safekeeping of all currency, negotiable securities, and similar
valuables at all times;
(ii) Establish procedures that will assist in identifying persons
committing crimes against the institution and that will preserve
evidence that may aid in their identification and prosecution. Such
procedures may include, but are not limited to: maintaining a camera
that records activity in the banking office; using identification
devices, such as prerecorded serial-numbered bills, or chemical and
electronic devices; and retaining a record of any robbery, burglary, or
larceny committed against the bank;
(iii) Provide for initial and periodic training of officers and
employees in their responsibilities under the security program and in
proper employee conduct during and after a burglary, robbery, or
larceny; and
(iv) Provide for selecting, testing, operating, and maintaining
appropriate security devices, as specified in paragraph (c)(2) of this
section.
[[Page 246]]
(2) Security devices. Each member bank shall have, at a minimum, the
following security devices:
(i) A means of protecting cash and other liquid assets, such as a
vault, safe, or other secure space;
(ii) A lighting system for illuminating, during the hours of
darkness, the area around the vault, if the vault is visible from
outside the banking office;
(iii) Tamper-resistant locks on exterior doors and exterior windows
that may be opened;
(iv) An alarm system or other appropriate device for promptly
notifying the nearest responsible law enforcement officers of an
attempted or perpetrated robbery or burglary; and
(v) Such other devices as the security officer determines to be
appropriate, taking into consideration: the incidence of crimes against
financial institutions in the area; the amount of currency and other
valuables exposed to robbery, burglary, or larceny; the distance of the
banking office from the nearest responsible law enforcement officers;
the cost of the security devices; other security measures in effect at
the banking office; and the physical characteristics of the structure of
the banking office and its surroundings.
(d) Annual reports. The security officer for each member bank shall
report at least annually to the bank's board of directors on the
implementation, administration, and effectiveness of the security
program.
(e) Reserve Banks. Each Reserve Bank shall develop and maintain a
written security program for its main office and branches subject to
review and approval of the Board.
Sec. 208.62 Suspicious activity reports.
(a) Purpose. This section ensures that a member bank files a
Suspicious Activity Report when it detects a known or suspected
violation of Federal law, or a suspicious transaction related to a money
laundering activity or a violation of the Bank Secrecy Act. This section
applies to all member banks.
(b) Definitions. For the purposes of this section:
(1) FinCEN means the Financial Crimes Enforcement Network of the
Department of the Treasury.
(2) Institution-affiliated party means any institution-affiliated
party as that term is defined in 12 U.S.C. 1786(r), or 1813(u) and
1818(b) (3), (4) or (5).
(3) SAR means a Suspicious Activity Report on the form prescribed by
the Board.
(c) SARs required. A member bank shall file a SAR with the
appropriate Federal law enforcement agencies and the Department of the
Treasury in accordance with the form's instructions by sending a
completed SAR to FinCEN in the following circumstances:
(1) Insider abuse involving any amount. Whenever the member bank
detects any known or suspected Federal criminal violation, or pattern of
criminal violations, committed or attempted against the bank or
involving a transaction or transactions conducted through the bank,
where the bank believes that it was either an actual or potential victim
of a criminal violation, or series of criminal violations, or that the
bank was used to facilitate a criminal transaction, and the bank has a
substantial basis for identifying one of its directors, officers,
employees, agents or other institution-affiliated parties as having
committed or aided in the commission of a criminal act regardless of the
amount involved in the violation.
(2) Violations aggregating $5,000 or more where a suspect can be
identified. Whenever the member bank detects any known or suspected
Federal criminal violation, or pattern of criminal violations, committed
or attempted against the bank or involving a transaction or transactions
conducted through the bank and involving or aggregating $5,000 or more
in funds or other assets, where the bank believes that it was either an
actual or potential victim of a criminal violation, or series of
criminal violations, or that the bank was used to facilitate a criminal
transaction, and the bank has a substantial basis for identifying a
possible suspect or group of suspects. If it is determined prior to
filing this report that the identified suspect or group of suspects has
used an ``alias,'' then information regarding the true identity of the
suspect or group of suspects, as well as alias identifiers, such as
drivers' licenses or
[[Page 247]]
social security numbers, addresses and telephone numbers, must be
reported.
(3) Violations aggregating $25,000 or more regardless of a potential
suspect. Whenever the member bank detects any known or suspected Federal
criminal violation, or pattern of criminal violations, committed or
attempted against the bank or involving a transaction or transactions
conducted through the bank and involving or aggregating $25,000 or more
in funds or other assets, where the bank believes that it was either an
actual or potential victim of a criminal violation, or series of
criminal violations, or that the bank was used to facilitate a criminal
transaction, even though there is no substantial basis for identifying a
possible suspect or group of suspects.
(4) Transactions aggregating $5,000 or more that involve potential
money laundering or violations of the Bank Secrecy Act. Any transaction
(which for purposes of this paragraph (c)(4) means a deposit,
withdrawal, transfer between accounts, exchange of currency, loan,
extension of credit, purchase or sale of any stock, bond, certificate of
deposit, or other monetary instrument or investment security, or any
other payment, transfer, or delivery by, through, or to a financial
institution, by whatever means effected) conducted or attempted by, at
or through the member bank and involving or aggregating $5,000 or more
in funds or other assets, if the bank knows, suspects, or has reason to
suspect that:
(i) The transaction involves funds derived from illegal activities
or is intended or conducted in order to hide or disguise funds or assets
derived from illegal activities (including, without limitation, the
ownership, nature, source, location, or control of such funds or assets)
as part of a plan to violate or evade any law or regulation or to avoid
any transaction reporting requirement under federal law;
(ii) The transaction is designed to evade any regulations
promulgated under the Bank Secrecy Act; or
(iii) The transaction has no business or apparent lawful purpose or
is not the sort in which the particular customer would normally be
expected to engage, and the bank knows of no reasonable explanation for
the transaction after examining the available facts, including the
background and possible purpose of the transaction.
(d) Time for reporting. A member bank is required to file a SAR no
later than 30 calendar days after the date of initial detection of facts
that may constitute a basis for filing a SAR. If no suspect was
identified on the date of detection of the incident requiring the
filing, a member bank may delay filing a SAR for an additional 30
calendar days to identify a suspect. In no case shall reporting be
delayed more than 60 calendar days after the date of initial detection
of a reportable transaction. In situations involving violations
requiring immediate attention, such as when a reportable violation is
on-going, the financial institution shall immediately notify, by
telephone, an appropriate law enforcement authority and the Board in
addition to filing a timely SAR.
(e) Reports to state and local authorities. Member banks are
encouraged to file a copy of the SAR with state and local law
enforcement agencies where appropriate.
(f) Exceptions. (1) A member bank need not file a SAR for a robbery
or burglary committed or attempted that is reported to appropriate law
enforcement authorities.
(2) A member bank need not file a SAR for lost, missing,
counterfeit, or stolen securities if it files a report pursuant to the
reporting requirements of 17 CFR 240.17f-1.
(g) Retention of records. A member bank shall maintain a copy of any
SAR filed and the original or business record equivalent of any
supporting documentation for a period of five years from the date of the
filing of the SAR. Supporting documentation shall be identified and
maintained by the bank as such, and shall be deemed to have been filed
with the SAR. A member bank must make all supporting documentation
available to appropriate law enforcement agencies upon request.
(h) Notification to board of directors. The management of a member
bank shall promptly notify its board of directors, or a committee
thereof, of any report filed pursuant to this section.
[[Page 248]]
(i) Compliance. Failure to file a SAR in accordance with this
section and the instructions may subject the member bank, its directors,
officers, employees, agents, or other institution affiliated parties to
supervisory action.
(j) Confidentiality of SARs. SARs are confidential. Any member bank
subpoenaed or otherwise requested to disclose a SAR or the information
contained in a SAR shall decline to produce the SAR or to provide any
information that would disclose that a SAR has been prepared or filed
citing this section, applicable law (e.g., 31 U.S.C. 5318(g)), or both,
and notify the Board.
(k) Safe harbor. The safe harbor provisions of 31 U.S.C. 5318(g),
which exempts any member bank that makes a disclosure of any possible
violation of law or regulation from liability under any law or
regulation of the United States, or any constitution, law or regulation
of any state or political subdivision, covers all reports of suspected
or known criminal violations and suspicious activities to law
enforcement and financial institution supervisory authorities, including
supporting documentation, regardless of whether such reports are filed
pursuant to this section or are filed on a voluntary basis.
Sec. 208.63 Procedures for monitoring Bank Secrecy Act compliance.
(a) Purpose. This section is issued to assure that all state member
banks establish and maintain procedures reasonably designed to assure
and monitor their compliance with the provisions of the Bank Secrecy Act
(31 U.S.C. 5311, et seq.) and the implementing regulations promulgated
thereunder by the Department of Treasury at 31 CFR part 103, requiring
recordkeeping and reporting of currency transactions.
(b) Establishment of BSA compliance program--(1) Program
requirement. Each bank shall develop and provide for the continued
administration of a program reasonably designed to ensure and monitor
compliance with the recordkeeping and reporting requirements set forth
in subchapter II of chapter 53 of title 31, United States Code, the Bank
Secrecy Act, and the implementing regulations promulgated thereunder by
the Department of the Treasury at 31 CFR part 103. The compliance
program shall be reduced to writing, approved by the board of directors,
and noted in the minutes.
(2) Customer identification program. Each bank is subject to the
requirements of 31 U.S.C. 5318(l) and the implementing regulation
jointly promulgated by the Board and the Department of the Treasury at
31 CFR 103.121, which require a customer identification program to be
implemented as part of the BSA compliance program required under this
section.
(c) Contents of compliance program. The compliance program shall, at
a minimum:
(1) Provide for a system of internal controls to assure ongoing
compliance;
(2) Provide for independent testing for compliance to be conducted
by bank personnel or by an outside party;
(3) Designate an individual or individuals responsible for
coordinating and monitoring day-to-day compliance; and
(4) Provide training for appropriate personnel.
[63 FR 37655, July 13, 1998, as amended at 68 FR 25111, May 9, 2003]
Sec. 208.64 Frequency of examination.
(a) General. The Federal Reserve examines insured member banks
pursuant to authority conferred by 12 U.S.C. 325 and the requirements of
12 U.S.C. 1820(d). The Federal Reserve is required to conduct a full-
scope, on-site examination of every insured member bank at least once
during each 12-month period.
(b) 18-month rule for certain small institutions. The Federal
Reserve may conduct a full-scope, on-site examination of an insured
member bank at least once during each 18-month period, rather than each
12-month period as provided in paragraph (a) of this section, if the
following conditions are satisfied:
(1) The bank has total assets of less than $500 million;
(2) The bank is well capitalized as defined in subpart D of this
part (Sec. 208.43);
(3) At the most recent examination conducted by either the Federal
Reserve or applicable State banking agency, the Federal Reserve--
[[Page 249]]
(i) Assigned the bank a rating of 1 or 2 for management as part of
the bank's rating under the Uniform Financial Institutions Rating System
(commonly referred to as CAMELS); and
(ii) Assigned the bank a composite CAMELS rating of 1 or 2 under the
Uniform Financial Institutions Rating System;
(4) The bank currently is not subject to a formal enforcement
proceeding or order by the Federal Reserve or the FDIC; and
(5) No person acquired control of the bank during the preceding 12-
month period in which a full-scope examination would have been required
but for this paragraph (b).
(c) Authority to conduct more frequent examinations. This section
does not limit the authority of the Federal Reserve to examine any
member bank as frequently as the agency deems necessary.
[63 FR 37655, July 13, 1998, as amended at 72 FR 17802, Apr. 10, 2007]
Subpart G_Financial Subsidiaries of State Member Banks
Source: Reg. H, 66 FR 42933, Aug. 16, 2001, unless otherwise noted.
Sec. 208.71 What are the requirements to invest in or control a financial
subsidiary?
(a) In general. A state member bank may control, or hold an interest
in, a financial subsidiary only if:
(1) The state member bank and each depository institution affiliate
of the state member bank are well capitalized and well managed;
(2) The aggregate consolidated total assets of all financial
subsidiaries of the state member bank do not exceed the lesser of:
(i) 45 percent of the consolidated total assets of the parent bank;
or
(ii) $50 billion, which dollar amount shall be adjusted according to
an indexing mechanism jointly established by the Board and the Secretary
of the Treasury;
(3) The state member bank, if it is one of the largest 100 insured
banks (based on consolidated total assets as of the end of the previous
calendar year), meets the debt rating or alternative requirement of
paragraph (b) of this section, if applicable; and
(4) The Board or the appropriate Reserve Bank has approved the bank
to acquire the interest in or control the financial subsidiary under
Sec. 208.76.
(b) Debt rating or alternative requirement for 100 largest insured
banks--(1) General. A state member bank meets the debt rating or
alternative requirement of this paragraph (b) if:
(i) The bank has at least one issue of eligible debt outstanding
that is currently rated in one of the three highest investment grade
rating categories by a nationally recognized statistical rating
organization; or
(ii) If the bank is one of the second 50 largest insured banks
(based on consolidated total assets as of the end of the previous
calendar year), the bank has a current long-term issuer credit rating
from at least one nationally recognized statistical rating organization
that is within the three highest investment grade rating categories used
by the organization.
(2) Financial subsidiaries engaged in financial activities only as
agent. This paragraph (b) does not apply to a state member bank if the
financial subsidiaries of the bank engage in financial activities
described in Sec. 208.72(a)(1) and (2) only in an agency capacity and
not directly or indirectly as principal.
Sec. 208.72 What activities may a financial subsidiary conduct?
(a) Authorized activities. A financial subsidiary of a state member
bank may engage in only the following activities:
(1) Any financial activity listed in Sec. 225.86(a), (b), or (c) of
the Board's Regulation Y (12 CFR 225.86(a), (b), or (c));
(2) Any activity that the Secretary of the Treasury, in consultation
with the Board, has determined to be financial in nature or incidental
to a financial activity and permissible for financial subsidiaries
pursuant to Section 5136A(b) of the Revised Statutes of the United
States (12 U.S.C. 24a(b)); and
(3) Any activity that the state member bank is permitted to engage
in directly (subject to the same terms and conditions that govern the
conduct of the activity by the state member bank).
[[Page 250]]
(b) Impermissible activities. Notwithstanding paragraph (a) of this
section, a financial subsidiary may not engage as principal in the
following activities:
(1) Insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability or death (except to the extent permitted
under applicable state law and section 302 or 303(c) of the Gramm-Leach-
Bliley Act (15 U.S.C. 6712 or 6713(c));
(2) Providing or issuing annuities the income of which is subject to
tax treatment under section 72 of the Internal Revenue Code of 1986 (26
U.S.C. 72);
(3) Real estate development or real estate investment, unless
otherwise expressly authorized by applicable state and Federal law; and
(4) Any merchant banking or insurance company investment activity
permitted for financial holding companies by section 4(k)(4)(H) or (I)
of the Bank Holding Company Act (12 U.S.C. 1843(k)(4)(H) and (I)).
Sec. 208.73 What additional provisions are applicable to state member banks
with financial subsidiaries?
(a) Capital deduction required. A state member bank that controls or
holds an interest in a financial subsidiary must comply with the
following rules in determining its compliance with applicable regulatory
capital standards (including the well capitalized standard of Sec.
208.71(a)(1)):
(1) The bank must not consolidate the assets and liabilities of any
financial subsidiary with those of the bank.
(2) For purposes of determining the bank's risk-based capital ratios
under appendix A of this part, the bank must--
(i) Deduct 50 percent of the aggregate amount of its outstanding
equity investment (including retained earnings) in all financial
subsidiaries from both the bank's Tier 1 capital and Tier 2 capital; and
(ii) Deduct the entire amount of the bank's outstanding equity
investment (including retained earnings) in all financial subsidiaries
from the bank's risk-weighted assets.
(3) For purposes of determining the bank's leverage capital ratio
under appendix B of this part, the bank must--
(i) Deduct 50 percent of the aggregate amount of its outstanding
equity investment (including retained earnings) in all financial
subsidiaries from the bank's Tier 1 capital; and
(ii) Deduct the entire amount of the bank's outstanding equity
investment (including retained earnings) in all financial subsidiaries
from the bank's average total assets.
(4) For purposes of determining the bank's ratio of tangible equity
to total assets under Sec. 208.43(b)(5), the bank must deduct the
entire amount of the bank's outstanding equity investment (including
retained earnings) in all financial subsidiaries from the bank's
tangible equity and total assets.
(5) If the deduction from Tier 2 capital required by paragraph
(a)(2)(i) of this section exceeds the bank's Tier 2 capital, any excess
must be deducted from the bank's Tier 1 capital.
(b) Financial statement disclosure of capital deduction. Any
published financial statement of a state member bank that controls or
holds an interest in a financial subsidiary must, in addition to
providing information prepared in accordance with generally accepted
accounting principles, separately present financial information for the
bank reflecting the capital deduction and adjustments required by
paragraph (a) of this section.
(c) Safeguards for the bank. A state member bank that establishes,
controls or holds an interest in a financial subsidiary must:
(1) Establish and maintain procedures for identifying and managing
financial and operational risks within the state member bank and the
financial subsidiary that adequately protect the state member bank from
such risks; and
(2) Establish and maintain reasonable policies and procedures to
preserve the separate corporate identity and limited liability of the
state member bank and the financial subsidiary.
(d) Application of Sections 23A and 23B of the Federal Reserve Act.
For purposes of sections 23A and 23B of the Federal Reserve Act (12
U.S.C. 371c, 371c-1):
(1) A financial subsidiary of a state member bank shall be deemed an
affiliate, and not a subsidiary, of the bank;
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(2) The restrictions contained in section 23A(a)(1)(A) of the
Federal Reserve Act (12 U.S.C. 371c(a)(1)(A)) shall not apply with
respect to covered transactions between the bank and any individual
financial subsidiary of the bank;
(3) The bank's investment in a financial subsidiary shall not
include retained earnings of the financial subsidiary;
(4) Any purchase of, or investment in, the securities of a financial
subsidiary by an affiliate of the bank will be considered to be a
purchase of, or investment in, such securities by the bank; and
(5) Any extension of credit by an affiliate of the bank to a
financial subsidiary of the bank will be considered to be an extension
of credit by the bank to the financial subsidiary if the Board
determines that such treatment is necessary or appropriate to prevent
evasions of the Federal Reserve Act and the Gramm-Leach-Bliley Act.
(e) Application of anti-tying prohibitions. A financial subsidiary
of a state member bank shall be deemed a subsidiary of a bank holding
company and not a subsidiary of the bank for purposes of the anti-tying
prohibitions of section 106 of the Bank Holding Company Act Amendments
of 1970 (12 U.S.C. 1971 et seq.).
Sec. 208.74 What happens if the state member bank or a depository institution
affiliate fails to continue to meet certain requirements?
(a) Qualifications and safeguards. The following procedures apply to
a state member bank that controls or holds an interest in a financial
subsidiary.
(1) Notice by Board. If the Board finds that a state member bank or
any of its depository institution affiliates fails to continue to be
well capitalized and well managed, or the state member bank is not in
compliance with the asset limitation set forth in Sec. 208.71(a)(2) or
the safeguards set forth in Sec. 208.73(c), the Board will notify the
state member bank in writing and identify the areas of noncompliance.
The Board may provide this notice at any time before or after receiving
notice from the state member bank under paragraph (a)(2) of this
section.
(2) Notification by state member bank. A state member bank must
notify the appropriate Reserve Bank in writing within 15 calendar days
of becoming aware that any depository institution affiliate of the bank
has ceased to be well capitalized or well managed. The notification must
identify the depository institution affiliate and the area(s) of
noncompliance.
(3) Execution of agreement. Within 45 days after receiving a notice
from the Board under paragraph (a)(1) of this section, or such
additional period of time as the Board may permit, the:
(i) State member bank must execute an agreement acceptable to the
Board to comply with all applicable capital, management, asset and
safeguard requirements; and
(ii) Any relevant depository institution affiliate of the state
member bank must execute an agreement acceptable to its appropriate
Federal banking agency to comply with all applicable capital and
management requirements.
(4) Agreement requirements. Any agreement required by paragraph
(a)(3)(i) of this section must:
(i) Explain the specific actions that the state member bank will
take to correct all areas of noncompliance;
(ii) Provide a schedule within which each action will be taken; and
(iii) Provide any other information the Board may require.
(5) Imposition of limits. Until the Board determines that the
conditions described in the notice under paragraph (a)(1) of this
section are corrected:
(i) The Board may impose any limitations on the conduct or
activities of the state member bank or any subsidiary of the bank as the
Board determines to be appropriate under the circumstances and
consistent with the purposes of section 121 of the Gramm-Leach-Bliley
Act, including requiring the Board's prior approval for any financial
subsidiary of the bank to acquire any company or engage in any
additional activity; and
(ii) The appropriate Federal banking agency for any relevant
depository institution affiliate may impose any limitations on the
conduct or activities of
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the depository institution or any subsidiary of that institution as the
agency determines to be appropriate under the circumstances and
consistent with the purposes of section 121 of the Gramm-Leach-Bliley
Act.
(6) Divestiture. The Board may require a state member bank to divest
control of any financial subsidiary if the conditions described in a
notice under paragraph (a)(1) of this section are not corrected within
180 days of receipt of the notice or such additional period of time as
the Board may permit. Any divestiture must be completed in accordance
with any terms and conditions established by the Board.
(7) Consultation. The Board will consult with all relevant Federal
and state regulatory authorities in taking any action under this
paragraph (a).
(b) Debt rating or alternative requirement. If a state member bank
does not continue to meet any applicable debt rating or alternative
requirement of Sec. 208.71(b), the bank may not, directly or through a
subsidiary, purchase or acquire any additional equity capital of any
financial subsidiary until the bank restores its compliance with the
requirements of that section. For purposes of this paragraph (b), the
term ``equity capital'' includes, in addition to any equity instrument,
any debt instrument issued by the financial subsidiary if the debt
instrument qualifies as capital of the subsidiary under any Federal or
state law, regulation or interpretation applicable to the subsidiary.
Sec. 208.75 What happens if the state member bank or any of its insured
depository institution affiliates receives less than a ``satisfactory'' CRA
rating?
(a) Limits on establishment of financial subsidiaries and expansion
of existing financial subsidiaries. If a state member bank, or any
insured depository institution affiliate of the bank, has received less
than a ``satisfactory'' rating in meeting community credit needs in its
most recent examination under the Community Reinvestment Act of 1977 (12
U.S.C. 2901 et seq.):
(1) The state member bank may not, directly or indirectly, acquire
control of any financial subsidiary; and
(2) Any financial subsidiary controlled by the state member bank may
not commence any additional activity or acquire control, including all
or substantially all of the assets, of any company.
(b) Exception for certain activities. The prohibition in paragraph
(a)(2) of this section does not apply to any activity, or to the
acquisition of control of any company that is engaged only in
activities, that the state member bank is permitted to conduct directly
and that are conducted on the same terms and conditions that govern the
conduct of the activity by the state member bank.
(c) Duration of prohibitions. The prohibitions described in
paragraph (a) of this section shall continue in effect until such time
as the state member bank and each insured depository institution
affiliate of the state member bank has achieved at least a
``satisfactory'' rating in meeting community credit needs in its most
recent examination under the Community Reinvestment Act.
Sec. 208.76 What Federal Reserve approvals are necessary for financial
subsidiaries?
(a) Notice requirements. (1) A state member bank may not acquire
control of, or an interest in, a financial subsidiary unless it files a
notice (in letter form, with enclosures) with the appropriate Reserve
Bank.
(2) A state member bank may not engage in any additional activity
pursuant to Sec. 208.72(a)(1) or (2) through an existing financial
subsidiary unless the state member bank files a notice (in letter form,
with enclosures) with the appropriate Reserve Bank.
(b) Contents of Notice. Any notice required by paragraph (a) of this
section must:
(1) In the case of a notice filed under paragraph (a)(1) of this
section, describe the transaction(s) through which the bank proposes to
acquire control of, or an interest in, the financial subsidiary;
(2) Provide the name and head office address of the financial
subsidiary;
(3) Provide a description of the current and proposed activities of
the financial subsidiary and the specific authority permitting each
activity;
[[Page 253]]
(4) Provide the capital ratios as of the close of the previous
calendar quarter for all relevant capital measures, as defined in
section 38 of the Federal Deposit Insurance Act (12 U.S.C. 1831o), for
the bank and each of its depository institution affiliates;
(5) Certify that the bank and each of its depository institution
affiliates was well capitalized at the close of the previous calendar
quarter and is well capitalized as of the date the bank files its
notice;
(6) Certify that the bank and each of its depository institution
affiliates is well managed as of the date the bank files its notice;
(7) Certify that the bank meets the debt rating or alternative
requirement of Sec. 208.71(b), if applicable; and
(8) Certify that the bank and its financial subsidiaries are in
compliance with the asset limit set forth in Sec. 208.71(a)(2) both
before the proposal and on a pro forma basis.
(c) Insurance activities. (1) If a notice filed under paragraph (a)
of this section relates to the initial affiliation of the bank with a
company engaged in insurance activities, the notice must describe the
type of insurance activity that the company is engaged in or plans to
conduct and identify each state where the company holds an insurance
license and the state insurance regulatory authority that issued the
license.
(2) The appropriate Reserve Bank will send a copy of any notice
described in paragraph (c)(1) of this section to the appropriate state
insurance regulatory authorities and provide such authorities with an
opportunity to comment on the proposal.
(d) Approval procedures. A notice filed with the appropriate Reserve
Bank under paragraph (a) of this section will be deemed approved on the
fifteenth day after receipt of a complete notice by the appropriate
Reserve Bank, unless prior to that date the Board or the appropriate
Reserve Bank notifies the bank that the notice is approved, that the
notice will require additional review, or that the bank does not meet
the requirements of this subpart. Any notification of early approval of
a notice must be in writing.
Sec. 208.77 Definitions.
The following definitions shall apply for purposes of this subpart:
(a) Affiliate, Company, Control, and Subsidiary. The terms
``affiliate'', ``company'', ``control'', and ``subsidiary'' have the
meanings given those terms in section 2 of the Bank Holding Company Act
of 1956 (12 U.S.C. 1841).
(b) Appropriate Federal Banking Agency, Depository Institution,
Insured Bank and Insured Depository Institution. The terms ``appropriate
Federal banking agency'', ``depository institution'', ``insured bank''
and ``insured depository institution'' have the meanings given those
terms in section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813).
(c) Capital-related definitions. (1) The terms ``Tier 1 capital'',
``tangible equity'', ``risk-weighted assets'' and ``total assets'' have
the meanings given those terms in Sec. 208.41 of this part.
(2) The terms ``Tier 2 capital'' and ``average total assets'' have
the meanings given those terms in appendix A and appendix B of this
part, respectively.
(d) Eligible Debt. The term ``eligible debt'' means unsecured debt
with an initial maturity of more than 360 days that:
(1) Is not supported by any form of credit enhancement, including a
guarantee or standby letter of credit; and
(2) Is not held in whole or in any significant part by any
affiliate, officer, director, principal shareholder, or employee of the
bank or any other person acting on behalf of or with funds from the bank
or an affiliate of the bank.
(e) Financial Subsidiary--(1) In general. The term ``financial
subsidiary'' means any company that is controlled by one or more insured
depository institutions other than:
(i) A subsidiary that engages only in activities that the state
member bank is permitted to engage in directly and that are conducted on
the same terms and conditions that govern the conduct of the activities
by the state member bank; or
(ii) A subsidiary that the state member bank is specifically
authorized by the express terms of a Federal statute (other than section
9 of the Federal Reserve Act (12 U.S.C. 335)), and not by
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implication or interpretation, to control, such as by section 25 or 25A
of the Federal Reserve Act (12 U.S.C. 601-604a, 611-631) or the Bank
Service Company Act (12 U.S.C. 1861 et seq.).
(2) Subsidiaries of financial subsidiaries. A financial subsidiary
includes any company that is directly or indirectly controlled by the
financial subsidiary.
(f) Long-term Issuer Credit Rating. The term ``long-term issuer
credit rating'' means a written opinion issued by a nationally
recognized statistical rating organization of the bank's overall
capacity and willingness to pay on a timely basis its unsecured, dollar-
denominated financial obligations maturing in not less than one year.
(g) Well Capitalized--(1) Insured depository institutions. An
insured depository institution is ``well capitalized'' if it has and
maintains at least the capital levels required to be well capitalized
under the capital adequacy regulations or guidelines adopted by the
institution's appropriate Federal banking agency under section 38 of the
Federal Deposit Insurance Act (12 U.S.C. 1831o).
(2) Uninsured depository institutions. A depository institution the
deposits of which are not insured by the Federal Deposit Insurance
Corporation is ``well capitalized'' if the institution has and maintains
at least the capital levels required for an insured depository
institution to be well capitalized.
(h) Well Managed--(1) In general. The term ``well managed'' means:
(i) Unless otherwise determined in writing by the appropriate
Federal banking agency, the institution has received a composite rating
of 1 or 2 under the Uniform Financial Institutions Rating System (or an
equivalent rating under an equivalent rating system) and at least a
rating of 2 for management (if such rating is given) in connection with
its most recent examination or subsequent review by the institution's
appropriate Federal banking agency (or the appropriate state banking
agency in an examination described in section 10(d) of the Federal
Deposit Insurance Act (12 U.S.C. 1820(d)); or
(ii) In the case of any depository institution that has not been
examined by its appropriate Federal banking agency or been subject to an
examination by its appropriate state banking agency that meets the
requirements of section 10(d) of the Federal Deposit Insurance Act (18
U.S.C. 1820(d)), the existence and use of managerial resources that the
appropriate Federal banking agency determines are satisfactory.
(2) Merged depository institutions--(i) Merger involving well
managed institutions. A depository institution that results from the
merger of two or more depository institutions that are well managed will
be considered to be well managed unless the appropriate Federal banking
agency for the resulting depository institution determines otherwise.
(ii) Merger involving a poorly rated institution. A depository
institution that results from the merger of a well managed depository
institution with one or more depository institutions that are not well
managed or that have not been examined shall be considered to be well
managed if the appropriate Federal banking agency for the resulting
depository institution determines that the institution is well managed.
Subpart H_Consumer Protection in Sales of Insurance
Source: 65 FR 75841, Dec. 4, 2000, unless otherwise noted.
Sec. 208.81 Purpose and scope.
This subpart establishes consumer protections in connection with
retail sales practices, solicitations, advertising, or offers of any
insurance product or annuity to a consumer by:
(a) Any state member bank; or
(b) Any other person that is engaged in such activities at an office
of the bank or on behalf of the bank.
Sec. 208.82 Definitions for purposes of this subpart.
As used in this subpart:
(a) Affiliate means a company that controls, is controlled by, or is
under common control with another company.
(b) Bank means a state member bank.
(c) Company means any corporation, partnership, business trust,
association or similar organization, or any other trust (unless by its
terms the trust
[[Page 255]]
must terminate within twenty-five years or not later than twenty-one
years and ten months after the death of individuals living on the
effective date of the trust). It does not include any corporation the
majority of the shares of which are owned by the United States or by any
State, or a qualified family partnership, as defined in section 2(o)(10)
of the Bank Holding Company Act of 1956, as amended (12 U.S.C.
1841(o)(10)).
(d) Consumer means an individual who purchases, applies to purchase,
or is solicited to purchase from you insurance products or annuities
primarily for personal, family, or household purposes.
(e) Control of a company has the same meaning as in section 3(w)(5)
of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(5)).
(f) Domestic violence means the occurrence of one or more of the
following acts by a current or former family member, household member,
intimate partner, or caretaker:
(1) Attempting to cause or causing or threatening another person
physical harm, severe emotional distress, psychological trauma, rape, or
sexual assault;
(2) Engaging in a course of conduct or repeatedly committing acts
toward another person, including following the person without proper
authority, under circumstances that place the person in reasonable fear
of bodily injury or physical harm;
(3) Subjecting another person to false imprisonment; or
(4) Attempting to cause or causing damage to property so as to
intimidate or attempt to control the behavior of another person.
(g) Electronic media includes any means for transmitting messages
electronically between you and a consumer in a format that allows visual
text to be displayed on equipment, for example, a personal computer
monitor.
(h) Office means the premises of a bank where retail deposits are
accepted from the public.
(i) Subsidiary has the same meaning as in section 3(w)(4) of the
Federal Deposit Insurance Act (12 U.S.C. 1813(w)(4)).
(j)(1) You means:
(i) A bank; or
(ii) Any other person only when the person sells, solicits,
advertises, or offers an insurance product or annuity to a consumer at
an office of the bank or on behalf of a bank.
(2) For purposes of this definition, activities on behalf of a bank
include activities where a person, whether at an office of the bank or
at another location sells, solicits, advertises, or offers an insurance
product or annuity and at least one of the following applies:
(i) The person represents to a consumer that the sale, solicitation,
advertisement, or offer of any insurance product or annuity is by or on
behalf of the bank;
(ii) If the bank refers a consumer to a seller of insurance products
or annuities and the bank has a contractual arrangement to receive
commissions or fees derived from the sale of an insurance product or
annuity resulting from that referral; or
(iii) Documents evidencing the sale, solicitation, advertising, or
offer of an insurance product or annuity identify or refer to the bank.
Sec. 208.83 Prohibited practices.
(a) Anticoercion and antitying rules. You may not engage in any
practice that would lead a consumer to believe that an extension of
credit, in violation of section 106(b) of the Bank Holding Company Act
Amendments of 1970 (12 U.S.C. 1972), is conditional upon either:
(1) The purchase of an insurance product or annuity from the bank or
any of its affiliates; or
(2) An agreement by the consumer not to obtain, or a prohibition on
the consumer from obtaining, an insurance product or annuity from an
unaffiliated entity.
(b) Prohibition on misrepresentations generally. You may not engage
in any practice or use any advertisement at any office of, or on behalf
of, the bank or a subsidiary of the bank that could mislead any person
or otherwise cause a reasonable person to reach an erroneous belief with
respect to:
(1) The fact that an insurance product or annuity sold or offered
for sale by you or any subsidiary of the bank is not backed by the
Federal government
[[Page 256]]
or the bank or the fact that the insurance product or annuity is not
insured by the Federal Deposit Insurance Corporation;
(2) In the case of an insurance product or annuity that involves
investment risk, the fact that there is an investment risk, including
the potential that principal may be lost and that the product may
decline in value; or
(3) In the case of a bank or subsidiary of the bank at which
insurance products or annuities are sold or offered for sale, the fact
that:
(i) The approval of an extension of credit to a consumer by the bank
or subsidiary may not be conditioned on the purchase of an insurance
product or annuity by the consumer from the bank or a subsidiary of the
bank; and
(ii) The consumer is free to purchase the insurance product or
annuity from another source.
(c) Prohibition on domestic violence discrimination. You may not
sell or offer for sale, as principal, agent, or broker, any life or
health insurance product if the status of the applicant or insured as a
victim of domestic violence or as a provider of services to victims of
domestic violence is considered as a criterion in any decision with
regard to insurance underwriting, pricing, renewal, or scope of coverage
of such product, or with regard to the payment of insurance claims on
such product, except as required or expressly permitted under State law.
Sec. 208.84 What you must disclose.
(a) Insurance disclosures. In connection with the initial purchase
of an insurance product or annuity by a consumer from you, you must
disclose to the consumer, except to the extent the disclosure would not
be accurate, that:
(1) The insurance product or annuity is not a deposit or other
obligation of, or guaranteed by, the bank or an affiliate of the bank;
(2) The insurance product or annuity is not insured by the Federal
Deposit Insurance Corporation (FDIC) or any other agency of the United
States, the bank, or (if applicable) an affiliate of the bank; and
(3) In the case of an insurance product or annuity that involves an
investment risk, there is investment risk associated with the product,
including the possible loss of value.
(b) Credit disclosure. In the case of an application for credit in
connection with which an insurance product or annuity is solicited,
offered, or sold, you must disclose that the bank may not condition an
extension of credit on either:
(1) The consumer's purchase of an insurance product or annuity from
the bank or any of its affiliates; or
(2) The consumer's agreement not to obtain, or a prohibition on the
consumer from obtaining, an insurance product or annuity from an
unaffiliated entity.
(c) Timing and method of disclosures--(1) In general. The
disclosures required by paragraph (a) of this section must be provided
orally and in writing before the completion of the initial sale of an
insurance product or annuity to a consumer. The disclosure required by
paragraph (b) of this section must be made orally and in writing at the
time the consumer applies for an extension of credit in connection with
which insurance is solicited, offered, or sold.
(2) Exceptions for transactions by mail. If a sale of an insurance
product or annuity is conducted by mail, you are not required to make
the oral disclosures required by paragraph (a) of this section. If you
take an application for credit by mail, you are not required to make the
oral disclosure required by paragraph (b) of this section.
(3) Exception for transactions by telephone. If a sale of an
insurance product or annuity is conducted by telephone, you may provide
the written disclosures required by paragraph (a) of this section by
mail within 3 business days beginning on the first business day after
the sale, excluding Sundays and the legal public holidays specified in 5
U.S.C 6103(a). If you take an application for such credit by telephone,
you may provide the written disclosure required by paragraph (b) of this
section by mail, provided you mail it to the consumer within three days
beginning the first business day after the application is taken,
excluding Sundays and the legal public holidays specified in 5 U.S.C.
6103(a).
(4) Electronic form of disclosures. (i) Subject to the requirements
of section
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101(c) of the Electronic Signatures in Global and National Commerce Act
(12 U.S.C. 7001(c)), you may provide the written disclosures required by
paragraphs (a) and (b) of this section through electronic media instead
of on paper, if the consumer affirmatively consents to receiving the
disclosures electronically and if the disclosures are provided in a
format that the consumer may retain or obtain later, for example, by
printing or storing electronically (such as by downloading).
(ii) Any disclosures required by paragraphs (a) or (b) of this
section that are provided by electronic media are not required to be
provided orally.
(5) Disclosures must be readily understandable. The disclosures
provided shall be conspicuous, simple, direct, readily understandable,
and designed to call attention to the nature and significance of the
information provided. For instance, you may use the following
disclosures, in visual media, such as television broadcasting, ATM
screens, billboards, signs, posters and written advertisements and
promotional materials, as appropriate and consistent with paragraphs (a)
and (b) of this section:
NOT A DEPOSIT
NOT FDIC-INSURED
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
NOT GUARANTEED BY THE BANK
MAY GO DOWN IN VALUE
(6) Disclosures must be meaningful. (i) You must provide the
disclosures required by paragraphs (a) and (b) of this section in a
meaningful form. Examples of the types of methods that could call
attention to the nature and significance of the information provided
include:
(A) A plain-language heading to call attention to the disclosures;
(B) A typeface and type size that are easy to read;
(C) Wide margins and ample line spacing;
(D) Boldface or italics for key words; and
(E) Distinctive type size, style, and graphic devices, such as
shading or sidebars, when the disclosures are combined with other
information.
(ii) You have not provided the disclosures in a meaningful form if
you merely state to the consumer that the required disclosures are
available in printed material, but you do not provide the printed
material when required and do not orally disclose the information to the
consumer when required.
(iii) With respect to those disclosures made through electronic
media for which paper or oral disclosures are not required, the
disclosures are not meaningfully provided if the consumer may bypass the
visual text of the disclosures before purchasing an insurance product or
annuity.
(7) Consumer acknowledgment. You must obtain from the consumer, at
the time a consumer receives the disclosures required under paragraphs
(a) or (b) of this section, or at the time of the initial purchase by
the consumer of an insurance product or annuity, a written
acknowledgment by the consumer that the consumer received the
disclosures. You may permit a consumer to acknowledge receipt of the
disclosures electronically or in paper form. If the disclosures required
under paragraphs (a) or (b) of this section are provided in connection
with a transaction that is conducted by telephone, you must:
(i) Obtain an oral acknowledgment of receipt of the disclosures and
maintain sufficient documentation to show that the acknowledgment was
given; and
(ii) Make reasonable efforts to obtain a written acknowledgment from
the consumer.
(d) Advertisements and other promotional material for insurance
products or annuities. The disclosures described in paragraph (a) of
this section are required in advertisements and promotional material for
insurance products or annuities unless the advertisements and
promotional materials are of a general nature describing or listing the
services or products offered by the bank.
Sec. 208.85 Where insurance activities may take place.
(a) General rule. A bank must, to the extent practicable, keep the
area where the bank conducts transactions involving insurance products
or annuities physically segregated from areas where retail deposits are
routinely accepted from the general public, identify the
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areas where insurance product or annuity sales activities occur, and
clearly delineate and distinguish those areas from the areas where the
bank's retail deposit-taking activities occur.
(b) Referrals. Any person who accepts deposits from the public in an
area where such transactions are routinely conducted in the bank may
refer a consumer who seeks to purchase an insurance product or annuity
to a qualified person who sells that product only if the person making
the referral receives no more than a one-time, nominal fee of a fixed
dollar amount for each referral that does not depend on whether the
referral results in a transaction.
Sec. 208.86 Qualification and licensing requirements for insurance sales
personnel.
A bank may not permit any person to sell or offer for sale any
insurance product or annuity in any part of its office or on its behalf,
unless the person is at all times appropriately qualified and licensed
under applicable State insurance licensing standards with regard to the
specific products being sold or recommended.
Sec. Appendix A to Subpart H of Part 208--Consumer Grievance Process
Any consumer who believes that any bank or any other person selling,
soliciting, advertising, or offering insurance products or annuities to
the consumer at an office of the bank or on behalf of the bank has
violated the requirements of this subpart should contact the Consumer
Complaints Section, Division of Consumer and Community Affairs, Board of
Governors of the Federal Reserve System at the following address: 20th &
C Streets, NW, Washington, D.C. 20551.
Subpart I_Registration of Residential Mortgage Loan Originators
Source: 75 FR 44688, July 28, 2010, unless otherwise noted.
Sec. 208.101 Authority, purpose, and scope.
(a) Authority. This subpart is issued pursuant to the Secure and
Fair Enforcement for Mortgage Licensing Act of 2008, title V of the
Housing and Economic Recovery Act of 2008 (S.A.F.E. Act) (Pub. L. 110-
289, 122 Stat. 2654, 12 U.S.C. 5101 et seq.), 12 U.S.C. 248(a),
3106a(1), and 3108(a).
(b) Purpose. This subpart implements the S.A.F.E. Act's Federal
registration requirement for mortgage loan originators. The S.A.F.E. Act
provides that the objectives of this registration include aggregating
and improving the flow of information to and between regulators;
providing increased accountability and tracking of mortgage loan
originators; enhancing consumer protections; supporting anti-fraud
measures; and providing consumers with easily accessible information at
no charge regarding the employment history of, and publicly adjudicated
disciplinary and enforcement actions against, mortgage loan originators.
(c) Scope. (1) In general. This subpart applies to member banks of
the Federal Reserve System (other than national banks); their respective
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
(collectively referred to in this subpart as banks); and their employees
who act as mortgage loan originators.
(2) De minimis exception. (i) This subpart and the requirements of
12 U.S.C. 5103(a)(1)(A) and (2) of the S.A.F.E. Act do not apply to any
employee of a bank who has never been registered or licensed through the
Registry as a mortgage loan originator if during the past 12 months the
employee acted as a mortgage loan originator for 5 or fewer residential
mortgage loans.
(ii) Prior to engaging in mortgage loan origination activity that
exceeds the exception limit in paragraph (c)(2)(i) of this section, a
bank employee must register with the Registry pursuant to this subpart.
(iii) Evasion. Banks are prohibited from engaging in any act or
practice to evade the limits of the de minimis exception set forth in
paragraph (c)(2)(i) of this section.
[[Page 259]]
Sec. 208.102 Definitions.
For purposes of this subpart I, the following definitions apply:
(a) Annual renewal period means November 1 through December 31 of
each year.
(b)(1) Mortgage loan originator \7\ means an individual who:
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\7\ Appendix A of this subpart provides examples of activities that
would, and would not, cause an employee to fall within this definition
of mortgage loan originator.
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(i) Takes a residential mortgage loan application; and
(ii) Offers or negotiates terms of a residential mortgage loan for
compensation or gain.
(2) The term mortgage loan originator does not include:
(i) An individual who performs purely administrative or clerical
tasks on behalf of an individual who is described in paragraph (b)(1) of
this section;
(ii) An individual who only performs real estate brokerage
activities (as defined in 12 U.S.C. 5102(3)(D)) and is licensed or
registered as a real estate broker in accordance with applicable State
law, unless the individual is compensated by a lender, a mortgage
broker, or other mortgage loan originator or by any agent of such
lender, mortgage broker, or other mortgage loan originator, and meets
the definition of mortgage loan originator in paragraph (b)(1) of this
section; or
(iii) An individual or entity solely involved in extensions of
credit related to timeshare plans, as that term is defined in 11 U.S.C.
101(53D).
(3) Administrative or clerical tasks means the receipt, collection,
and distribution of information common for the processing or
underwriting of a loan in the residential mortgage industry and
communication with a consumer to obtain information necessary for the
processing or underwriting of a residential mortgage loan.
(c) Nationwide Mortgage Licensing System and Registry or Registry
means the system developed and maintained by the Conference of State
Bank Supervisors and the American Association of Residential Mortgage
Regulators for the State licensing and registration of State-licensed
mortgage loan originators and the registration of mortgage loan
originators pursuant to 12 U.S.C. 5107.
(d) Registered mortgage loan originator or registrant means any
individual who:
(1) Meets the definition of mortgage loan originator and is an
employee of a bank; and
(2) Is registered pursuant to this subpart with, and maintains a
unique identifier through, the Registry.
(e) Residential mortgage loan means any loan primarily for personal,
family, or household use that is secured by a mortgage, deed of trust,
or other equivalent consensual security interest on a dwelling (as
defined in section 103(v) of the Truth in Lending Act, 15 U.S.C.
1602(v)) or residential real estate upon which is constructed or
intended to be constructed a dwelling, and includes refinancings,
reverse mortgages, home equity lines of credit and other first and
additional lien loans that meet the qualifications listed in this
definition.
(f) Unique identifier means a number or other identifier that:
(1) Permanently identifies a registered mortgage loan originator;
(2) Is assigned by protocols established by the Nationwide Mortgage
Licensing System and Registry, the Federal banking agencies, and the
Farm Credit Administration to facilitate:
(i) Electronic tracking of mortgage loan originators; and
(ii) Uniform identification of, and public access to, the employment
history of and the publicly adjudicated disciplinary and enforcement
actions against mortgage loan originators; and
(3) Must not be used for purposes other than those set forth under
the S.A.F.E. Act.
Sec. 208.103 Registration of mortgage loan originators.
(a) Registration requirement--(1) Employee registration. Each
employee of a bank who acts as a mortgage loan originator must register
with the Registry, obtain a unique identifier, and maintain this
registration in accordance with the requirements of this subpart. Any
such employee who is not in compliance with the registration and unique
identifier requirements set forth in this subpart is in violation of the
S.A.F.E. Act and this subpart.
[[Page 260]]
(2) Bank requirement--(i) In general. A bank that employs one or
more individuals who act as a residential mortgage loan originator must
require each such employee to register with the Registry, maintain this
registration, and obtain a unique identifier in accordance with the
requirements of this subpart.
(ii) Prohibition. A bank must not permit an employee of the bank who
is subject to the registration requirements of this subpart to act as a
mortgage loan originator for the bank unless such employee is registered
with the Registry pursuant to this subpart.
(3) Implementation period for initial registration. An employee of a
bank who is a mortgage loan originator must complete an initial
registration with the Registry pursuant to this subpart within 180 days
from the date that the Board provides in a public notice that the
Registry is accepting registrations.
(4) Employees previously registered or licensed through the
Registry--(i) In general. If an employee of a bank was registered or
licensed through, and obtained a unique identifier from, the Registry
and has maintained this registration or license before the employee
becomes subject to this subpart at this bank, then the registration
requirements of the S.A.F.E. Act and this subpart are deemed to be met,
provided that:
(A) The employment information in paragraphs (d)(1)(i)(C) and
(d)(1)(ii) of this section is updated and the requirements of paragraph
(d)(2) of this section are met;
(B) New fingerprints of the employee are submitted to the Registry
for a background check, as required by paragraph (d)(1)(ix) of this
section, unless the employee has fingerprints on file with the Registry
that are less than 3 years old;
(C) The bank information required in paragraphs (e)(1)(i) (to the
extent the bank has not previously met these requirements) and (e)(2)(i)
of this section is submitted to the Registry; and
(D) The registration is maintained pursuant to paragraphs (b) and
(e)(1)(ii) of this section, as of the date that the employee becomes
subject to this subpart.
(ii) Rule for certain acquisitions, mergers, or reorganizations.
When registered or licensed mortgage loan originators become bank
employees as a result of an acquisition, merger, or reorganization, only
the requirements of paragraphs (a)(4)(i)(A), (C), and (D) of this
section must be met, and these requirements must be met within 60 days
from the effective date of the acquisition, merger, or reorganization.
(b) Maintaining registration. (1) A mortgage loan originator who is
registered with the Registry pursuant to paragraph (a) of this section
must:
(i) Except as provided in paragraph (b)(3) of this section, renew
the registration during the annual renewal period, confirming the
responses set forth in paragraphs (d)(1)(i) through (viii) of this
section remain accurate and complete, and updating this information, as
appropriate; and
(ii) Update the registration within 30 days of any of the following
events:
(A) A change in the name of the registrant;
(B) The registrant ceases to be an employee of the bank; or
(C) The information required under paragraphs (d)(1)(iii) through
(viii) of this section becomes inaccurate, incomplete, or out-of-date.
(2) A registered mortgage loan originator must maintain his or her
registration, unless the individual is no longer engaged in the activity
of a mortgage loan originator.
(3) The annual registration renewal requirement set forth in
paragraph (b)(1) of this section does not apply to a registered mortgage
loan originator who has completed his or her registration with the
Registry pursuant to paragraph (a)(1) of this section less than 6 months
prior to the end of the annual renewal period.
(c) Effective dates--(1) Registration. A registration pursuant to
paragraph (a)(1) of this section is effective on the date the Registry
transmits notification to the registrant that the registrant is
registered.
(2) Renewals or updates. A renewal or update pursuant to paragraph
(b) of this section is effective on the date the Registry transmits
notification to the registrant that the registration has been renewed or
updated.
[[Page 261]]
(d) Required employee information--(1) In general. For purposes of
the registration required by this section, a bank must require each
employee who is a mortgage loan originator to submit to the Registry, or
must submit on behalf of the employee, the following categories of
information, to the extent this information is collected by the
Registry:
(i) Identifying information, including the employee's:
(A) Name and any other names used;
(B) Home address and contact information;
(C) Principal business location address and business contact
information;
(D) Social security number;
(E) Gender; and
(F) Date and place of birth;
(ii) Financial services-related employment history for the 10 years
prior to the date of registration or renewal, including the date the
employee became an employee of the bank;
(iii) Convictions of any criminal offense involving dishonesty,
breach of trust, or money laundering against the employee or
organizations controlled by the employee, or agreements to enter into a
pretrial diversion or similar program in connection with the prosecution
for such offense(s);
(iv) Civil judicial actions against the employee in connection with
financial services-related activities, dismissals with settlements, or
judicial findings that the employee violated financial services-related
statutes or regulations, except for actions dismissed without a
settlement agreement;
(v) Actions or orders by a State or Federal regulatory agency or
foreign financial regulatory authority that:
(A) Found the employee to have made a false statement or omission or
been dishonest, unfair or unethical; to have been involved in a
violation of a financial services-related regulation or statute; or to
have been a cause of a financial services-related business having its
authorization to do business denied, suspended, revoked, or restricted;
(B) Are entered against the employee in connection with a financial
services-related activity;
(C) Denied, suspended, or revoked the employee's registration or
license to engage in a financial services-related activity; disciplined
the employee or otherwise by order prevented the employee from
associating with a financial services-related business or restricted the
employee's activities; or
(D) Barred the employee from association with an entity or its
officers regulated by the agency or authority or from engaging in a
financial services-related business;
(vi) Final orders issued by a State or Federal regulatory agency or
foreign financial regulatory authority based on violations of any law or
regulation that prohibits fraudulent, manipulative, or deceptive
conduct;
(vii) Revocation or suspension of the employee's authorization to
act as an attorney, accountant, or State or Federal contractor;
(viii) Customer-initiated financial services-related arbitration or
civil action against the employee that required action, including
settlements, or which resulted in a judgment; and
(ix) Fingerprints of the employee, in digital form if practicable,
and any appropriate identifying information for submission to the
Federal Bureau of Investigation and any governmental agency or entity
authorized to receive such information in connection with a State and
national criminal history background check; however, fingerprints
provided to the Registry that are less than 3 years old may be used to
satisfy this requirement.
(2) Employee authorizations and attestation. An employee registering
as a mortgage loan originator or renewing or updating his or her
registration under this subpart, and not the employing bank or other
employees of the bank, must:
(i) Authorize the Registry and the employing institution to obtain
information related to sanctions or findings in any administrative,
civil, or criminal action, to which the employee is a party, made by any
governmental jurisdiction;
(ii) Attest to the correctness of all information required by
paragraph (d) of this section, whether submitted by the employee or on
behalf of the employee by the employing bank; and
[[Page 262]]
(iii) Authorize the Registry to make available to the public
information required by paragraphs (d)(1)(i)(A) and (C), and (d)(1)(ii)
through (viii) of this section.
(3) Submission of information. A bank may identify one or more
employees of the bank who may submit the information required by
paragraph (d)(1) of this section to the Registry on behalf of the bank's
employees provided that this individual, and any employee delegated such
authority, does not act as a mortgage loan originator, consistent with
paragraph (e)(1)(i)(F) of this section. In addition, a bank may submit
to the Registry some or all of the information required by paragraphs
(d)(1) and (e)(2) of this section for multiple employees in bulk through
batch processing in a format to be specified by the Registry, to the
extent such batch processing is made available by the Registry.
(e) Required bank information. A bank must submit the following
categories of information to the Registry:
(1) Bank record. (i) In connection with the registration of one or
more mortgage loan originators:
(A) Name, main office address, and business contact information;
(B) Internal Revenue Service Employer Tax Identification Number
(EIN);
(C) Research Statistics Supervision and Discount (RSSD) number, as
issued by the Board of Governors of the Federal Reserve System;
(D) Identification of its primary Federal regulator;
(E) Name(s) and contact information of the individual(s) with
authority to act as the bank's primary point of contact for the
Registry;
(F) Name(s) and contact information of the individual(s) with
authority to enter the information required by paragraphs (d)(1) and (e)
of this section to the Registry and who may delegate this authority to
other individuals. For the purpose of providing information required by
paragraph (e) of this section, this individual and their delegates must
not act as mortgage loan originators unless the bank has 10 or fewer
full time or equivalent employees and is not a subsidiary; and
(G) If a subsidiary of a bank, indication that it is a subsidiary
and the RSSD number of the parent bank.
(ii) Attestation. The individual(s) identified in paragraphs
(e)(1)(i)(E) and (F) of this section must comply with Registry protocols
to verify their identity and must attest that they have the authority to
enter data on behalf of the bank, that the information provided to the
Registry pursuant to this paragraph (e) is correct, and that the bank
will keep the information required by this paragraph (e) current and
will file accurate supplementary information on a timely basis.
(iii) A bank must update the information required by this paragraph
(e) of this section within 30 days of the date that this information
becomes inaccurate.
(iv) A bank must renew the information required by paragraph (e) of
this section on an annual basis.
(2) Employee information. In connection with the registration of
each employee who acts as a mortgage loan originator:
(i) After the information required by paragraph (d) of this section
has been submitted to the Registry, confirmation that it employs the
registrant; and
(ii) Within 30 days of the date the registrant ceases to be an
employee of the bank, notification that it no longer employs the
registrant and the date the registrant ceased being an employee.
Sec. 208.104 Policies and procedures.
A bank that employs one or more mortgage loan originators must adopt
and follow written policies and procedures designed to assure compliance
with this subpart. These policies and procedures must be appropriate to
the nature, size, complexity, and scope of the mortgage lending
activities of the bank, and apply only to those employees acting within
the scope of their employment at the bank. At a minimum, these policies
and procedures must:
(a) Establish a process for identifying which employees of the bank
are required to be registered mortgage loan originators;
[[Page 263]]
(b) Require that all employees of the bank who are mortgage loan
originators be informed of the registration requirements of the S.A.F.E.
Act and this subpart and be instructed on how to comply with such
requirements and procedures;
(c) Establish procedures to comply with the unique identifier
requirements in Sec. 208.105;
(d) Establish reasonable procedures for confirming the adequacy and
accuracy of employee registrations, including updates and renewals, by
comparisons with its own records;
(e) Establish reasonable procedures and tracking systems for
monitoring compliance with registration and renewal requirements and
procedures;
(f) Provide for independent testing for compliance with this subpart
to be conducted at least annually by bank personnel or by an outside
party;
(g) Provide for appropriate action in the case of any employee who
fails to comply with the registration requirements of the S.A.F.E. Act,
this subpart, or the bank's related policies and procedures, including
prohibiting such employees from acting as mortgage loan originators or
other appropriate disciplinary actions;
(h) Establish a process for reviewing employee criminal history
background reports received pursuant to this subpart, taking appropriate
action consistent with applicable Federal law, including section 19 of
the Federal Deposit Insurance Act (12 U.S.C. 1829) and implementing
regulations with respect to these reports, and maintaining records of
these reports and actions taken with respect to applicable employees;
and
(i) Establish procedures designed to ensure that any third party
with which the bank has arrangements related to mortgage loan
origination has policies and procedures to comply with the S.A.F.E. Act,
including appropriate licensing and/or registration of individuals
acting as mortgage loan originators.
Sec. 208.105 Use of unique identifier.
(a) The bank shall make the unique identifier(s) of its registered
mortgage loan originator(s) available to consumers in a manner and
method practicable to the institution.
(b) A registered mortgage loan originator shall provide his or her
unique identifier to a consumer:
(1) Upon request;
(2) Before acting as a mortgage loan originator; and
(3) Through the originator's initial written communication with a
consumer, if any, whether on paper or electronically.
Sec. Appendix A to Subpart I of Part 208--Examples of Mortgage Loan
Originator Activities
This Appendix provides examples to aid in the understanding of
activities that would cause an employee of a bank to fall within or
outside the definition of mortgage loan originator. The examples in this
Appendix are not all inclusive. They illustrate only the issue described
and do not illustrate any other issues that may arise under this
subpart. For purposes of the examples below, the term ``loan'' refers to
a residential mortgage loan.
(a) Taking a loan application. The following examples illustrate
when an employee takes, or does not take, a loan application.
(1) Taking an application includes: receiving information provided
in connection with a request for a loan to be used to determine whether
the consumer qualifies for a loan, even if the employee:
(i) Has received the consumer's information indirectly in order to
make an offer or negotiate a loan;
(ii) Is not responsible for verifying information;
(iii) Is inputting information into an online application or other
automated system on behalf of the consumer; or
(iv) Is not engaged in approval of the loan, including determining
whether the consumer qualifies for the loan.
(2) Taking an application does not include any of the following
activities performed solely or in combination:
(i) Contacting a consumer to verify the information in the loan
application by obtaining documentation, such as tax returns or payroll
receipts;
(ii) Receiving a loan application through the mail and forwarding
it, without review, to loan approval personnel;
(iii) Assisting a consumer who is filling out an application by
clarifying what type of information is necessary for the application or
otherwise explaining the qualifications or criteria necessary to obtain
a loan product;
(iv) Describing the steps that a consumer would need to take to
provide information to be used to determine whether the consumer
[[Page 264]]
qualifies for a loan or otherwise explaining the loan application
process;
(v) In response to an inquiry regarding a prequalified offer that a
consumer has received from a bank, collecting only basic identifying
information about the consumer and forwarding the consumer to a mortgage
loan originator; or
(vi) Receiving information in connection with a modification to the
terms of an existing loan to a borrower as part of the bank's loss
mitigation efforts when the borrower is reasonably likely to default.
(b) Offering or negotiating terms of a loan. The following examples
are designed to illustrate when an employee offers or negotiates terms
of a loan, and conversely, what does not constitute offering or
negotiating terms of a loan.
(1) Offering or negotiating the terms of a loan includes:
(i) Presenting a loan offer to a consumer for acceptance, either
verbally or in writing, including, but not limited to, providing a
disclosure of the loan terms after application under the Truth in
Lending Act, even if:
(A) Further verification of information is necessary;
(B) The offer is conditional;
(C) Other individuals must complete the loan process; or
(D) Only the rate approved by the bank's loan approval mechanism
function for a specific loan product is communicated without authority
to negotiate the rate.
(ii) Responding to a consumer's request for a lower rate or lower
points on a pending loan application by presenting to the consumer a
revised loan offer, either verbally or in writing, that includes a lower
interest rate or lower points than the original offer.
(2) Offering or negotiating terms of a loan does not include solely
or in combination:
(i) Providing general explanations or descriptions in response to
consumer queries regarding qualification for a specific loan product,
such as explaining loan terminology (i.e., debt-to-income ratio);
lending policies (i.e., the loan-to-value ratio policy of the bank); or
product-related services;
(ii) In response to a consumer's request, informing a consumer of
the loan rates that are publicly available, such as on the bank's Web
site, for specific types of loan products without communicating to the
consumer whether qualifications are met for that loan product;
(iii) Collecting information about a consumer in order to provide
the consumer with information on loan products for which the consumer
generally may qualify, without presenting a specific loan offer to the
consumer for acceptance, either verbally or in writing;
(iv) Arranging the loan closing or other aspects of the loan
process, including communicating with a consumer about those
arrangements, provided that communication with the consumer only
verifies loan terms already offered or negotiated;
(v) Providing a consumer with information unrelated to loan terms,
such as the best days of the month for scheduling loan closings at the
bank;
(vi) Making an underwriting decision about whether the consumer
qualifies for a loan;
(vii) Explaining or describing the steps or process that a consumer
would need to take in order to obtain a loan offer, including
qualifications or criteria that would need to be met without providing
guidance specific to that consumer's circumstances; or
(viii) Communicating on behalf of a mortgage loan originator that a
written offer, including disclosures provided pursuant to the Truth in
Lending Act, has been sent to a consumer without providing any details
of that offer.
(c) Offering or negotiating a loan for compensation or gain. The
following examples illustrate when an employee does or does not offer or
negotiate terms of a loan ``for compensation or gain.''
(1) Offering or negotiating terms of a loan for compensation or gain
includes engaging in any of the activities in paragraph (b)(1) of this
Appendix in the course of carrying out employment duties, even if the
employee does not receive a referral fee or commission or other special
compensation for the loan.
(2) Offering or negotiating terms of a loan for compensation or gain
does not include engaging in a seller-financed transaction for the
employee's personal property that does not involve the bank.
Subpart J_Interpretations
Source: Reg. H, 63 FR 37658, July 13, 1998, unless otherwise noted.
Redesignated at 65 FR 14814, Mar. 20, 2000. Redesignated further at 65
FR 75841, Dec. 4, 2000. Redesignated further at 75 FR 44688, July 28,
2010.
Sec. 208.110 Sale of bank's money orders off premises as establishment of
branch office.
(a) The Board of Governors has been asked to consider whether the
appointment by a member bank of an agent to sell the bank's money
orders, at a location other than the premises of the bank, constitutes
the establishment of a branch office.
(b) Section 5155 of the Revised Statutes (12 U.S.C. 36), which is
also applicable to member banks, defines the term branch as including
``any branch bank, branch office, branch agency, additional office, or
any branch place of
[[Page 265]]
business * * * at which deposits are received, or checks paid, or money
lent.'' The basic question is whether the sale of a bank's money orders
by an agent amounts to the receipt of deposits at a branch place of
business within the meaning of this statute.
(c) Money orders are classified as deposits for certain purposes.
However, they bear a strong resemblance to traveler's checks that are
issued by banks and sold off premises. In both cases, the purchaser does
not intend to establish a deposit account in the bank, although a
liability on the bank's part is created. Even though they result in a
deposit liability, the Board is of the opinion that the issuance of a
bank's money orders by an authorized agent does not involve the receipt
of deposits at a ``branch place of business'' and accordingly does not
require the Board's permission to establish a branch.
Sec. 208.111 Obligations concerning institutional customers.
(a) As a result of broadened authority provided by the Government
Securities Act Amendments of 1993 (15 U.S.C. 78o-3 and 78o-5), the Board
is adopting sales practice rules for the government securities market, a
market with a particularly broad institutional component. Accordingly,
the Board believes it is appropriate to provide further guidance to
banks on their suitability obligations when making recommendations to
institutional customers.
(b) The Board's Suitability Rule, Sec. 208.37(d), is fundamental to
fair dealing and is intended to promote ethical sales practices and high
standards of professional conduct. Banks' responsibilities include
having a reasonable basis for recommending a particular security or
strategy, as well as having reasonable grounds for believing the
recommendation is suitable for the customer to whom it is made. Banks
are expected to meet the same high standards of competence,
professionalism, and good faith regardless of the financial
circumstances of the customer.
(c) In recommending to a customer the purchase, sale, or exchange of
any government security, the bank shall have reasonable grounds for
believing that the recommendation is suitable for the customer upon the
basis of the facts, if any, disclosed by the customer as to the
customer's other security holdings and financial situation and needs.
(d) The interpretation in this section concerns only the manner in
which a bank determines that a recommendation is suitable for a
particular institutional customer. The manner in which a bank fulfills
this suitability obligation will vary, depending on the nature of the
customer and the specific transaction. Accordingly, the interpretation
in this section deals only with guidance regarding how a bank may
fulfill customer-specific suitability obligations under Sec. 208.37(d).
\8\
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\8\ The interpretation in this section does not address the
obligation related to suitability that requires that a bank have''* * *
a `reasonable basis' to believe that the recommendation could be
suitable for at least some customers.'' In the Matter of the Application
of F.J. Kaufman and Company of Virginia and Frederick J. Kaufman, Jr.,
50 SEC 164 (1989).
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(e) While it is difficult to define in advance the scope of a bank's
suitability obligation with respect to a specific institutional customer
transaction recommended by a bank, the Board has identified certain
factors that may be relevant when considering compliance with Sec.
208.37(d). These factors are not intended to be requirements or the only
factors to be considered but are offered merely as guidance in
determining the scope of a bank's suitability obligations.
(f) The two most important considerations in determining the scope
of a bank's suitability obligations in making recommendations to an
institutional customer are the customer's capability to evaluate
investment risk independently and the extent to which the customer is
exercising independent judgement in evaluating a bank's recommendation.
A bank must determine, based on the information available to it, the
customer's capability to evaluate investment risk. In some cases, the
bank may conclude that the customer is not capable of making independent
investment decisions in general. In other cases, the institutional
customer may have general capability, but may
[[Page 266]]
not be able to understand a particular type of instrument or its risk.
This is more likely to arise with relatively new types of instruments,
or those with significantly different risk or volatility characteristics
than other investments generally made by the institution. If a customer
is either generally not capable of evaluating investment risk or lacks
sufficient capability to evaluate the particular product, the scope of a
bank's customer-specific obligations under Sec. 208.37(d) would not be
diminished by the fact that the bank was dealing with an institutional
customer. On the other hand, the fact that a customer initially needed
help understanding a potential investment need not necessarily imply
that the customer did not ultimately develop an understanding and make
an independent investment decision.
(g) A bank may conclude that a customer is exercising independent
judgement if the customer's investment decision will be based on its own
independent assessment of the opportunities and risks presented by a
potential investment, market factors and other investment
considerations. Where the bank has reasonable grounds for concluding
that the institutional customer is making independent investment
decisions and is capable of independently evaluating investment risk,
then a bank's obligations under Sec. 208.25(d) for a particular
customer are fulfilled. \9\ Where a customer has delegated decision-
making authority to an agent, such as an investment advisor or a bank
trust department, the interpretation in this section shall be applied to
the agent.
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\9\ See footnote 8 in paragraph (d) of this section.
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(h) A determination of capability to evaluate investment risk
independently will depend on an examination of the customer's capability
to make its own investment decisions, including the resources available
to the customer to make informed decisions. Relevant considerations
could include:
(1) The use of one or more consultants, investment advisers, or bank
trust departments;
(2) The general level of experience of the institutional customer in
financial markets and specific experience with the type of instruments
under consideration;
(3) The customer's ability to understand the economic features of
the security involved;
(4) The customer's ability to independently evaluate how market
developments would affect the security; and
(5) The complexity of the security or securities involved.
(i) A determination that a customer is making independent investment
decisions will depend on the nature of the relationship that exists
between the bank and the customer. Relevant considerations could
include:
(1) Any written or oral understanding that exists between the bank
and the customer regarding the nature of the relationship between the
bank and the customer and the services to be rendered by the bank;
(2) The presence or absence of a pattern of acceptance of the bank's
recommendations;
(3) The use by the customer of ideas, suggestions, market views and
information obtained from other government securities brokers or dealers
or market professionals, particularly those relating to the same type of
securities; and
(4) The extent to which the bank has received from the customer
current comprehensive portfolio information in connection with
discussing recommended transactions or has not been provided important
information regarding its portfolio or investment objectives.
(j) Banks are reminded that these factors are merely guidelines that
will be utilized to determine whether a bank has fulfilled its
suitability obligation with respect to a specific institutional customer
transaction and that the inclusion or absence of any of these factors is
not dispositive of the determination of suitability. Such a
determination can only be made on a case-by-case basis taking into
consideration all the facts and circumstances of a particular bank/
customer relationship, assessed in the context of a particular
transaction.
(k) For purposes of the interpretation in this section, an
institutional customer shall be any entity other than a
[[Page 267]]
natural person. In determining the applicability of the interpretation
in this section to an institutional customer, the Board will consider
the dollar value of the securities that the institutional customer has
in its portfolio and/or under management. While the interpretation in
this section is potentially applicable to any institutional customer,
the guidance contained in this section is more appropriately applied to
an institutional customer with at least $10 million invested in
securities in the aggregate in its portfolio and/or under management.
[Reg. H, 63 FR 37658, July 13, 1998. Redesignated at 65 FR 14814, Mar.
20, 2000. Redesignated further at 65 FR 75841, Dec. 4, 2000.
Redesignated further at 75 FR 44688, July 28, 2010; 75 FR 44692, July
28, 2010]
Sec. Appendix A to Part 208--Capital Adequacy Guidelines for State
Member Banks: Risk-Based Measure
I. Overview
The Board of Governors of the Federal Reserve System has adopted a
risk-based capital measure to assist in the assessment of the capital
adequacy of state member banks. \1\ The principal objectives of this
measure are to: (i) Make regulatory capital requirements more sensitive
to differences in risk profiles among banks; (ii) factor off-balance
sheet exposures into the assessment of capital adequacy; (iii) minimize
disincentives to holding liquid, low-risk assets; and (iv) achieve
greater consistency in the evaluation of the capital adequacy of major
banks throughout the world. \2\
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\1\ Supervisory ratios that relate capital to total assets for state
member banks are outlined in appendix B of this part and in appendix B
to part 225 of the Federal Reserve's Regulation Y, 12 CFR part 225.
\2\ The risk-based capital measure is based upon a framework
developed jointly by supervisory authorities from the countries
represented on the Basle Committee on Banking Regulations and
Supervisory Practices (Basle Supervisors' Committee) and endorsed by the
Group of Ten Central Bank Governors. The framework is described in a
paper prepared by the BSC entitled ``International Convergence of
Capital Measurement,'' July 1988.
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The risk-based capital guidelines include both a definition of
capital and a framework for calculating weighted risk assets by
assigning assets and off-balance sheet items to broad risk categories. A
bank's risk-based capital ratio is calculated by dividing its qualifying
capital (the numerator of the ratio) by its weighted risk assets (the
denominator). \3\ The definition of qualifying capital is outlined below
in section II, and the procedures for calculating weighted risk assets
are discussed in Section III. Attachment I illustrates a sample
calculation of weighted risk assets and the risk-based capital ratio.
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\3\ Banks will initially be expected to utilize period-end amounts
in calculating their risk-based capital ratios. When necessary and
appropriate, ratios based on average balances may also be calculated on
a case-by-case basis. Moreover, to the extent banks have data on average
balances that can be used to calculate risk-based ratios, the Federal
Reserve will take such data into account.
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In addition, when certain banks that engage in trading activities
calculate their risk-based capital ratio under this appendix A, they
must also refer to appendix E of this part, which incorporates capital
charges for certain market risks into the risk-based capital ratio. When
calculating their risk-based capital ratio under this appendix A, such
banks are required to refer to appendix E of this part for supplemental
rules to determine qualifying and excess capital, calculate risk-
weighted assets, calculate market risk equivalent assets, and calculate
risk-based capital ratios adjusted for market risk.
The risk-based capital guidelines also establish a schedule for
achieving a minimum supervisory standard for the ratio of qualifying
capital to weighted risk assets and provide for transitional
arrangements during a phase-in period to facilitate adoption and
implementation of the measure at the end of 1992. These interim
standards and transitional arrangements are set forth in section IV.
The risk-based guidelines apply to all state member banks on a
consolidated basis. They are to be used in the examination and
supervisory process as well as in the analysis of applications acted
upon by the Federal Reserve. Thus, in considering an application filed
by a state member bank, the Federal Reserve will take into account the
bank's risk-based capital ratio, the reasonableness of its capital
plans, and the degree of progress it has demonstrated toward meeting the
interim and final risk-based capital standards.
The risk-based capital ratio focuses principally on broad categories
of credit risk, although the framework for assigning assets and off-
balance-sheet items to risk categories does incorporate elements of
transfer risk, as well as limited instances of interest rate and market
risk. The framework incorporates risks arising from traditional banking
activities as well as risks arising from nontraditional activities. The
risk-based
[[Page 268]]
ratio does not, however, incorporate other factors that can affect an
institution's financial condition. These factors include overall
interest-rate exposure; liquidity, funding and market risks; the quality
and level of earnings; investment, loan portfolio, and other
concentrations of credit; certain risks arising from nontraditional
activities; the quality of loans and investments; the effectiveness of
loan and investment policies; and management's overall ability to
monitor and control financial and operating risks, including the risks
presented by concentrations of credit and nontraditional activities.
In addition to evaluating capital ratios, an overall assessment of
capital adequacy must take account of those factors, including, in
particular, the level and severity of problem and classified assets as
well as a bank's exposure to declines in the economic value of its
capital due to changes in interest rates. For this reason, the final
supervisory judgment on a bank's capital adequacy may differ
significantly from conclusions that might be drawn solely from the level
of its risk-based capital ratio.
The risk-based capital guidelines establish minimum ratios of
capital to weighted risk assets. In light of the considerations just
discussed, banks generally are expected to operate well above the
minimum risk-based ratios. In particular, banks contemplating
significant expansion proposals are expected to maintain strong capital
levels substantially above the minimum ratios and should not allow
significant diminution of financial strength below these strong levels
to fund their expansion plans. Institutions with high or inordinate
levels of risk are also expected to operate well above minimum capital
standards. In all cases, institutions should hold capital commensurate
with the level and nature of the risks to which they are exposed. Banks
that do not meet the minimum risk-based standard, or that are otherwise
considered to be inadequately capitalized, are expected to develop and
implement plans acceptable to the Federal Reserve for achieving adequate
levels of capital within a reasonable period of time.
The Federal Reserve may determine that the regulatory capital
treatment for a bank's exposure or other relationship to an entity not
consolidated on the bank's balance sheet is not commensurate with the
actual risk relationship of the bank to the entity. In making this
determination, the Federal Reserve may require the bank to treat the
entity as if it were consolidated onto the balance sheet of the bank for
risk-based capital purposes and calculate the appropriate risk-based
capital ratios accordingly, all as specified by the Federal Reserve.
The Board will monitor the implementation and effect of these
guidelines in relation to domestic and international developments in the
banking industry. When necessary and appropriate, the Board will
consider the need to modify the guidelines in light of any significant
changes in the economy, financial markets, banking practices, or other
relevant factors.
II. Definition of Qualifying Capital for the Risk-Based Capital Ratio
A bank's qualifying total capital consists of two types of capital
components: ``core capital elements'' (comprising tier 1 capital) and
``supplementary capital elements'' (comprising tier 2 capital). These
capital elements and the various limits, restrictions, and deductions to
which they are subject, are discussed below and are set forth in
Attachment II.
The Federal Reserve will, on a case-by-case basis, determine whether
and, if so, how much of any instrument that does not fit wholly within
the terms of one of the capital categories set forth below or that does
not have an ability to absorb losses commensurate with the capital
treatment otherwise specified below will be counted as an element of
tier 1 or tier 2 capital. In making such a determination, the Federal
Reserve will consider the similarity of the instrument to instruments
explicitly treated in the guidelines, the ability of the instrument to
absorb losses while the bank operates as a going concern, the maturity
and redemption features of the instrument, and other relevant terms and
factors. To qualify as an element of tier 1 or tier 2 capital, a capital
instrument may not contain or be covered by any covenants, terms, or
restrictions that are inconsistent with safe and sound banking
practices.
Redemptions of permanent equity or other capital instruments before
stated maturity could have a significant impact on a bank's overall
capital structure. Consequently, a bank considering such a step should
consult with the Federal Reserve before redeeming any equity or debt
capital instrument (prior to maturity) if such redemption could have a
material effect on the level or composition of the institution's capital
base. \4\
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\4\ Consultation would not ordinarily be necessary if an instrument
were redeemed with the proceeds of, or replaced by, a like amount of a
similar or higher quality capital instrument and the organization's
capital position is considered fully adequate by the Federal Reserve.
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A. The Components of Qualifying Capital
1. Core capital elements (tier 1 capital). The tier 1 component of a
bank's qualifying capital must represent at least 50 percent of
qualifying total capital and may consist of the following items that are
defined as core capital elements:
(i) Common stockholders' equity;
[[Page 269]]
(ii) Qualifying noncumulative perpetual preferred stock (including
related surplus); and
(iii) Minority interest in the equity accounts of consolidated
subsidiaries.
Tier 1 capital is generally defined as the sum of core capital
elements \5\ less any amounts of goodwill, other intangible assets,
interest-only strips receivables and nonfinancial equity investments
that are required to be deducted in accordance with section II.B. of
this appendix A.
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\5\ [Reserved]
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a. Common stockholders' equity. For purposes of calculating the
risk-based capital ratio, common stockholders' equity is limited to
common stock; related surplus; and retained earnings, including capital
reserves and adjustments for the cumulative effect of foreign currency
translation, net of any treasury stock; less net unrealized holding
losses on available-for-sale equity securities with readily determinable
fair values. For this purpose, net unrealized holding gains on such
equity securities and net unrealized holding gains (losses) on
available-for-sale debt securities are not included in common
stockholders' equity.
b. Perpetual preferred stock. Perpetual preferred stock is defined
as preferred stock that does not have a maturity date, that cannot be
redeemed at the option of the holder of the instrument, and that has no
other provisions that will require future redemption of the issue.
Consistent with these provisions, any perpetual preferred stock with a
feature permitting redemption at the option of the issuer may qualify as
capital only if the redemption is subject to prior approval of the
Federal Reserve. In general, preferred stock will qualify for inclusion
in capital only if it can absorb losses while the issuer operates as a
going concern (a fundamental characteristic of equity capital) and only
if the issuer has the ability and legal right to defer or eliminate
preferred dividends.
The only form of perpetual preferred stock that state member banks
may consider as an element of Tier 1 capital is noncumulative perpetual
preferred. While the guidelines allow for the inclusion of noncumulative
perpetual preferred stock in Tier 1, it is desirable from a supervisory
standpoint that voting common stockholders' equity remain the dominant
form of Tier 1 capital. Thus, state member banks should avoid
overreliance on preferred stock or non-voting equity elements within
Tier 1.
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\6\ [Reserved]
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Perpetual preferred stock in which the dividend is reset
periodically based, in whole or in part, upon the bank's current credit
standing (that is, auction rate perpetual preferred stock, including so-
called Dutch auction, money market, and remarketable preferred) will not
qualify for inclusion in Tier 1 capital. \7\ Such instruments, however,
qualify for inclusion in Tier 2 capital.
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\7\ Adjustable rate noncumulative perpetual preferred stock (that
is, perpetual preferred stock in which the dividend rate is not affected
by the issuer's credit standing or financial condition but is adjusted
periodically according to a formula based solely on general market
interest rates) may be included in Tier 1.
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c. Minority interest in equity accounts of consolidated
subsidiaries. This element is included in tier 1 capital because, as a
general rule, it represents equity that is freely available to absorb
losses in operating subsidiaries whose assets are included in a bank's
risk-weighted asset base. While not subject to an explicit sublimit
within tier 1, banks are expected to avoid using minority interest in
the equity accounts of consolidated subsidiaries as an avenue for
introducing into their capital structures elements that might not
otherwise qualify as tier 1 capital or that would, in effect, result in
an excessive reliance on preferred stock within tier 1. Minority
interests in small business investment companies, investment funds that
hold nonfinancial equity investments (as defined in section II.B.5.b. of
this appendix A), and subsidiaries engaged in nonfinancial activities,
are not included in the bank's tier 1 or total capital base if the
bank's interest in the company or fund is held under one of the legal
authorities listed in section II.B.5.b.
2. Supplementary capital elements (tier 2 capital). The tier 2
component of a bank's qualifying capital may consist of the following
items that are defined as supplementary capital elements:
(i) Allowance for loan and lease losses (subject to limitations
discussed below);
(ii) Perpetual preferred stock and related surplus (subject to
conditions discussed below);
(iii) Hybrid capital instruments (as defined below), and mandatory
convertible debt securities;
(iv) Term subordinated debt and intermediate-term preferred stock,
including related surplus (subject to limitations discussed below);
(v) Unrealized holding gains on equity securities (subject to
limitations discussed in section II.A.2.e. of this appendix).
The maximum amount of tier 2 capital that may be included in a
bank's qualifying total capital is limited to 100 percent of tier 1
capital (net of goodwill, other intangible assets, interest-only strips
receivables and nonfinancial equity investments that are required to be
deducted in accordance with section II.B. of this appendix A).
[[Page 270]]
The elements of supplementary capital are discussed in greater
detail below.
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\8\ [Reserved]
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a. Allowance for loan and lease losses. Allowances for loan and
lease losses are reserves that have been established through a charge
against earnings to absorb future losses on loans or lease financing
receivables. Allowances for loan and lease losses exclude ``allocated
transfer risk reserves,'' \9\ and reserves created against identified
losses.
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\9\ Allocated transfer risk reserves are reserves that have been
established in accordance with Section 905(a) of the International
Lending Supervision Act of 1983, 12 U.S.C. 3904(a), against certain
assets whose value U.S. supervisory authorities have found to be
significantly impaired by protracted transfer risk problems.
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During the transition period, the risk-based capital guidelines
provide for reducing the amount of this allowance that may be included
in an institution's total capital. Initially, it is unlimited. However,
by year-end 1990, the amount of the allowance for loan and lease losses
that will qualify as capital will be limited to 1.5 percent of an
institution's weighted risk assets. By the end of the transition period,
the amount of the allowance qualifying for inclusion in Tier 2 capital
may not exceed 1.25 percent of weighted risk assets. \10\
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\10\ The amount of the allowance for loan and lease losses that may
be included in Tier 2 capital is based on a percentage of gross weighted
risk assets. A bank may deduct reserves for loan and lease losses in
excess of the amount permitted to be included in Tier 2 capital, as well
as allocated transfer risk reserves, from the sum of gross weighted risk
assets and use the resulting net sum of weighted risk assets in
computing the denominator of the risk-based capital ratio.
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b. Perpetual preferred stock. Perpetual preferred stock, as noted
above, is defined as preferred stock that has no maturity date, that
cannot be redeemed at the option of the holder, and that has no other
provisions that will require future redemption of the issue. Such
instruments are eligible for inclusion in Tier 2 capital without limit.
\11\
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\11\ Long-term preferred stock with an original maturity of 20 years
or more (including related surplus) will also qualify in this category
as an element of Tier 2. If the holder of such an instrument has a right
to require the issuer to redeem, repay, or repurchase the instrument
prior to the original stated maturity, maturity would be defined, for
risk-based capital purposes, as the earliest possible date on which the
holder can put the instrument back to the issuing bank.
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c. Hybrid capital instruments and mandatory convertible debt
securities. Hybrid capital instruments include instruments that are
essentially permanent in nature and that have certain characteristics of
both equity and debt. Such instruments may be included in Tier 2 without
limit. The general criteria hybrid capital instruments must meet in
order to qualify for inclusion in Tier 2 capital are listed below:
(1) The instrument must be unsecured; fully paid-up; and
subordinated to general creditors and must also be subordinated to
claims of depositors.
(2) The instrument must not be redeemable at the option of the
holder prior to maturity, except with the prior approval of the Federal
Reserve. (Consistent with the Board's criteria for perpetual debt and
mandatory convertible securities, this requirement implies that holders
of such instruments may not accelerate the payment of principal except
in the event of bankruptcy, insolvency, or reorganization.)
(3) The instrument must be available to participate in losses while
the issuer is operating as a going concern. (Term subordinated debt
would not meet this requirement.) To satisfy this requirement, the
instrument must convert to common or perpetual preferred stock in the
event that the accumulated losses exceed the sum of the retained
earnings and capital surplus accounts of the issuer.
(4) The instrument must provide the option for the issuer to defer
interest payments if: (a) The issuer does not report a profit in the
preceding annual period (defined as combined profits for the most recent
four quarters), and (b) the issuer eliminates cash dividends on common
and preferred stock.
Mandatory convertible debt securities in the form of equity contract
notes that meet the criteria set forth in 12 CFR part 225, appendix B,
also qualify as unlimited elements of Tier 2 capital. In accordance with
that appendix, equity commitment notes issued prior to May 15, 1985 also
qualify for inclusion in Tier 2.
d. Subordinated debt and intermediate term preferred stock. (i) The
aggregate amount of term subordinated debt (excluding mandatory
convertible debt) and intermediate-term preferred stock that may be
treated as supplementary capital is limited to 50 percent of Tier 1
capital (net of goodwill and other intangible assets required to be
deducted in accordance with section II.B.1.b. of this appendix). Amounts
in excess of these limits may be issued and, while not included in the
ratio calculation, will be taken into account in the overall assessment
of a bank's funding and financial condition.
(ii) Subordinated debt and intermediate-term preferred stock must
have an original weighted average maturity of at least five years to
qualify as supplementary capital. (If the holder has the option to
require the issuer to redeem, repay, or repurchase the
[[Page 271]]
instrument prior to the original stated maturity, maturity would be
defined, for risk-based capital purposes, as the earliest possible date
on which the holder can put the instrument back to the issuing bank.)
\12\ In the case of subordinated debt, the instrument must be unsecured
and must clearly state on its face that it is not a deposit and is not
insured by a Federal agency. To qualify as capital in banks, debt must
be subordinated to general creditors and claims of depositors.
Consistent with current regulatory requirements, if a state member bank
wishes to redeem subordinated debt before the stated maturity, it must
receive prior approval of the Federal Reserve.
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\12\ As a limited-life capital instrument approaches maturity it
begins to take on characteristics of a short-term obligation. For this
reason, the outstanding amount of term subordinated debt and limited-
life preferred stock eligible for inclusion in Tier 2 is reduced, or
discounted, as these instruments approach maturity: one-fifth of the
original amount (less redemptions) is excluded each year during the
instrument's last five years before maturity. When the remaining
maturity is less than one year, the instrument is excluded from Tier 2
capital.
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e. Unrealized gains on equity securities and unrealized gains
(losses) on other assets. Up to 45 percent of pretax net unrealized
holding gains (that is, the excess, if any, of the fair value over
historical cost) on available-for-sale equity securities with readily
determinable fair values may be included in supplementary capital.
However, the Federal Reserve may exclude all or a portion of these
unrealized gains from Tier 2 capital if the Federal Reserve determines
that the equity securities are not prudently valued. Unrealized gains
(losses) on other types of assets, such as bank premises and available-
for-sale debt securities, are not included in supplementary capital, but
the Federal Reserve may take these unrealized gains (losses) into
account as additional factors when assessing a bank's overall capital
adequacy.
f. Revaluation reserves. i. Such reserves reflect the formal balance
sheet restatement or revaluation for capital purposes of asset carrying
values to reflect current market values. The federal banking agencies
generally have not included unrealized asset appreciation in capital
ratio calculations, although they have long taken such values into
account as a separate factor in assessing the overall financial strength
of a bank.
ii. Consistent with long-standing supervisory practice, the excess
of market values over book values for assets held by state member banks
will generally not be recognized in supplementary capital or in the
calculation of the risk-based capital ratio. However, all banks are
encouraged to disclose their equivalent of premises (building) and
security revaluation reserves. The Federal Reserve will consider any
appreciation, as well as any depreciation, in specific asset values as
additional considerations in assessing overall capital strength and
financial condition.
B. Deductions from Capital and Other Adjustments
Certain assets are deducted from a bank's capital for the purpose of
calculating the risk-based capital ratio. \13\ These assets include:
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\13\ Any assets deducted from capital in computing the numerator of
the ratio are not included in weighted risk assets in computing the
denominator of the ratio.
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(i)(a) Goodwill--deducted from the sum of core capital elements.
(b) Certain identifiable intangible assets, that is, intangible
assets other than goodwill--deducted from the sum of core capital
elements in accordance with section II.B.1.b. of this appendix.
(c) Certain credit-enhancing interest-only strips receivables--
deducted from the sum of core capital elements in accordance with
sections II.B.1.c. through e. of this appendix.
(ii) Investments in banking and finance subsidiaries that are not
consolidated for accounting or supervisory purposes and, on a case-by-
case basis, investments in other designated subsidiaries or associated
companies at the discretion of the Federal Reserve--deducted from total
capital components.
(iii) Reciprocal holdings of capital instruments of banking
organizations--deducted from total capital components.
(iv) Deferred tax assets--portions are deducted from the sum of core
capital elements in accordance with section II.B.4. of this Appendix A.
(v) Nonfinancial equity investments-portions are deducted from the
sum of core capital elements in accordance with section II.B.5 of this
appendix.
1. Goodwill and other intangible assets--a. Goodwill. Goodwill 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.
b. Other intangible assets. i. All servicing assets, including
servicing assets on assets other than mortgages (i.e., nonmortgage
servicing assets), are included in this appendix as identifiable
intangible assets. The only types of identifiable intangible assets that
may be included in, that is, not deducted from, a bank's capital are
readily marketable mortgage servicing assets, nonmortgage servicing
assets, and purchased
[[Page 272]]
credit card relationships. The total amount of these assets that may be
included in capital is subject to the limitations described below in
sections II.B.1.d. and e. of this appendix.
ii. The treatment of identifiable intangible assets set forth in
this section generally will be used in the calculation of a bank's
capital ratios for supervisory and applications purposes. However, in
making an overall assessment of a bank's capital adequacy for
applications purposes, the Board may, if it deems appropriate, take into
account the quality and composition of a bank's capital, together with
the quality and value of its tangible and intangible assets.
c. Credit-enhancing interest-only strips receivables (I/Os). i.
Credit-enhancing I/Os are on-balance sheet assets that, in form or in
substance, represent the contractual right to receive some or all of the
interest due on transferred assets and expose the bank to credit risk
directly or indirectly associated with transferred assets that exceeds a
pro rata share of the bank's claim on the assets, whether through
subordination provisions or other credit enhancement techniques. Such I/
Os, whether purchased or retained, including other similar ``spread''
assets, may be included in, that is, not deducted from, a bank's capital
subject to the limitations described below in sections II.B.1.d. and e.
of this appendix.
ii. Both purchased and retained credit-enhancing I/Os, on a non-tax
adjusted basis, are included in the total amount that is used for
purposes of determining whether a bank exceeds the tier 1 limitation
described below in this section. In determining whether an I/O or other
types of spread assets serve as a credit enhancement, the Federal
Reserve will look to the economic substance of the transaction.
d. Fair value limitation. The amount of mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card relationships
that a bank may include in capital shall be the lesser of 90 percent of
their fair value, as determined in accordance with section II.B.1.f. of
this appendix, or 100 percent of their book value, as adjusted for
capital purposes in accordance with the instructions in the commercial
bank Consolidated Reports of Condition and Income (Call Reports). The
amount of I/Os that a bank may include in capital shall be its fair
value. If both the application of the limits on mortgage servicing
assets, nonmortgage servicing assets, and purchased credit card
relationships and the adjustment of the balance sheet amount for these
assets would result in an amount being deducted from capital, the bank
would deduct only the greater of the two amounts from its core capital
elements in determining tier 1 capital.
e. Tier 1 capital limitation. i. The total amount of mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships that may be included in capital, in the aggregate,
cannot exceed 100 percent of tier 1 capital. The aggregate of
nonmortgage servicing assets and purchased credit card relationships are
subject to a separate sublimit of 25 percent of tier 1 capital. In
addition, the total amount of credit-enhancing I/Os (both purchased and
retained) that may be included in capital cannot exceed 25 percent of
tier 1 capital. \14\
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\14\ Amounts of servicing assets, purchased credit card
relationships, and credit-enhancing I/Os (both retained and purchased)
in excess of these limitations, as well as all other identifiable
intangible assets, including core deposit intangibles and favorable
leaseholds, are to be deducted from a bank's core capital elements in
determining tier 1 capital. However, identifiable intangible assets
(other than mortgage servicing assets and purchased credit card
relationships) acquired on or before February 19, 1992, generally will
not be deducted from capital for supervisory purposes, although they
will continue to be deducted for applications purposes.
---------------------------------------------------------------------------
ii. For purposes of calculating these limitations on mortgage
servicing assets, nonmortgage servicing assets, purchased credit card
relationships, and credit-enhancing I/Os, tier 1 capital is defined as
the sum of core capital elements, net of goodwill, and net of all
identifiable intangible assets other than mortgage servicing assets,
nonmortgage servicing assets, and purchased credit card relationships,
but prior to the deduction of any disallowed mortgage servicing assets,
any disallowed nonmortgage servicing assets, any disallowed purchased
credit card relationships, any disallowed credit-enhancing I/Os (both
purchased and retained), any disallowed deferred tax assets, and any
nonfinancial equity investments.
iii. Banks may elect to deduct 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. Banks 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
[[Page 273]]
assumptions, including changes in prepayment estimates or account
attrition rates. Examiners will review both the book value and the fair
value assigned to these assets, together with supporting documentation,
during the examination process. In addition, the Federal Reserve may
require, on a case-by-case basis, an independent valuation of a bank's
goodwill, other intangible assets, or credit-enhancing I/Os.
g. Growing organizations. Consistent with long-standing Board
policy, banks experiencing substantial growth, whether internally or by
acquisition, are expected to maintain strong capital positions
substantially above minimum supervisory levels, without significant
reliance on intangible assets or credit-enhancing I/Os.
2. Investments in certain subsidiaries. The aggregate amount of
investments in banking or finance subsidiaries \15\ whose financial
statements are not consolidated for accounting or bank regulatory
reporting purposes will be deducted from a bank's total capital
components. \16\ Generally, investments for this purpose are defined as
equity and debt capital investments and any other instruments that are
deemed to be capital in the particular subsidiary.
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\15\ For this purpose, a banking and finance subsidiary generally is
defined as any company engaged in banking or finance in which the parent
institution holds directly or indirectly more than 50 percent of the
outstanding voting stock, or which is otherwise controlled or capable of
being controlled by the parent institution.
\16\ An exception to this deduction would be made in the case of
shares acquired in the regular course of securing or collecting a debt
previously contracted in good faith. The requirements for consolidation
are spelled out in the instructions to the Call Report.
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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 a
bank's capital. Rather, such advances generally will be included in the
bank's consolidated assets and be assigned to the 100 percent risk
category, unless such obligations are backed by recognized collateral or
guarantees, in which case they will be assigned to the risk category
appropriate to such collateral or guarantees. These advances may,
however, also be deducted from the bank's capital if, in the judgment of
the Federal Reserve, the risks stemming from such advances are
comparable to the risks associated with capital investments or if the
advances involve other risk factors that warrant such an adjustment to
capital for supervisory purposes. These other factors could include, for
example, the absence of collateral support.
Inasmuch as the assets of unconsolidated banking and finance
subsidiaries are not fully reflected in a bank's consolidated total
assets, such assets may be viewed as the equivalent of off-balance sheet
exposures since the operations of an unconsolidated subsidiary could
expose the bank to considerable risk. For this reason, it is generally
appropriate to view the capital resources invested in these
unconsolidated entities as primarily supporting the risks inherent in
these off-balance sheet assets, and not generally available to support
risks or absorb losses elsewhere in the bank.
The Federal Reserve may, on a case-by-case basis, also deduct from a
bank's capital, investments in certain other subsidiaries in order to
determine if the consolidated bank meets minimum supervisory capital
requirements without reliance on the resources invested in such
subsidiaries.
The Federal Reserve will not automatically deduct investments in
other consolidated subsidiaries or investments in joint ventures and
associated companies. \17\ Nonetheless, the resources invested in these
entities, like investments in unconsolidated banking and finance
subsidiaries, support assets not consolidated with the rest of the
bank's activities and, therefore, may not be generally available to
support additional leverage or absorb losses elsewhere in the bank.
Moreover, experience has shown that banks stand behind the losses of
affiliated institutions, such as joint ventures and associated
companies, in order to protect the reputation of the organization as a
whole. In some cases, this has led to losses that have exceeded the
investments in such organizations.
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\17\ The definition of such entities is contained in the
instructions to the commercial bank Call Report. Under regulatory
reporting procedures, associated companies and joint ventures generally
are defined as companies in which the bank owns 20 to 50 percent of the
voting stock.
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For this reason, the Federal Reserve will monitor the level and
nature of such investments for individual banks and, on a case-by-case
basis may, for risk-based capital purposes, deduct such investments from
total capital components, apply an appropriate risk-weighted capital
charge against the bank's proportionate share of the assets of its
associated companies, require a line-by-line consolidation of the entity
(in the event that the bank's control over the entity makes it the
functional equivalent of a subsidiary), or otherwise require the bank to
operate with a risk-based capital ratio above the minimum.
In considering the appropriateness of such adjustments or actions,
the Federal Reserve will generally take into account whether:
[[Page 274]]
(1) The bank has significant influence over the financial or
managerial policies or operations of the subsidiary, joint venture, or
associated company;
(2) The bank is the largest investor in the affiliated company; or
(3) Other circumstances prevail that appear to closely tie the
activities of the affiliated company to the bank.
3. Reciprocal holdings of banking organizations' capital
instruments. Reciprocal holdings of banking organizations' capital
instruments (that is, instruments that qualify as Tier 1 or Tier 2
capital) \18\ will be deducted from a bank's total capital components
for the purpose of determining the numerator of the risk-based capital
ratio.
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\18\ See 12 CFR part 225, appendix A for instruments that qualify as
Tier 1 and Tier 2 capital for bank holding companies.
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Reciprocal holdings are cross-holdings resulting from formal or
informal arrangements in which two or more banking organizations swap,
exchange, or otherwise agree to hold each other's capital instruments.
Generally, deductions will be limited to intentional cross-holdings. At
present, the Board does not intend to require banks to deduct non-
reciprocal holdings of such capital instruments. \19\
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\19\ Deductions of holdings of capital securities also would not be
made in the case of interstate ``stake out'' investments that comply
with the Board's Policy Statement on Nonvoting Equity Investments, 12
CFR 225.143 (Federal Reserve Regulatory Service 4-172.1; 68 Federal
Reserve Bulletin 413 (1982)). In addition, holdings of capital
instruments issued by other banking organizations but taken in
satisfaction of debts previously contracted would be exempt from any
deduction from capital. The Board intends to monitor nonreciprocal
holdings of other banking organizations' capital instruments and to
provide information on such holdings to the Basle Supervisors' Committee
as called for under the Basle capital framework.
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4. Deferred-tax assets. a. The amount of deferred-tax assets that is
dependent upon future taxable income, net of the valuation allowance for
deferred-tax assets, that may be included in, that is, not deducted
from, a bank's capital may not exceed the lesser of:
i. The amount of these deferred-tax assets that the bank is expected
to realize within one year of the calendar quarter-end date, based on
its projections of future taxable income for that year, \20\ or
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\20\ To determine the amount of expected deferred-tax assets
realizable in the next 12 months, an institution should assume that all
existing temporary differences fully reverse as of the report date.
Projected future taxable income should not include net operating loss
carry-forwards to be used during that year or the amount of existing
temporary differences a bank expects to reverse within the year. Such
projections should include the estimated effect of tax-planning
strategies that the organization expects to implement to realize net
operating losses or tax-credit carry-forwards that would otherwise
expire during the year. Institutions do not have to prepare a new 12-
month projection each quarter. Rather, on interim report dates,
institutions may use the future-taxable income projections for their
current fiscal year, adjusted for any significant changes that have
occurred or are expected to occur.
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ii. 10 percent of tier 1 capital.
b. The reported amount of deferred-tax assets, net of any valuation
allowance for deferred-tax assets, in excess of the lesser of these two
amounts is to be deducted from a bank's core capital elements in
determining tier 1 capital. For purposes of calculating the 10 percent
limitation, tier 1 capital is defined as the sum of core capital
elements, net of goodwill and net of all identifiable intangible assets
other than mortgage servicing assets, nonmortgage servicing assets, and
purchased credit card relationships, but prior to the deduction of any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit-enhancing I/Os, any disallowed deferred-tax
assets, and any nonfinancial equity investments. There generally is no
limit in tier 1 capital on the amount of deferred-tax assets that can be
realized from taxes paid in prior carry-back years or from future
reversals of existing taxable temporary differences.
5. Nonfinancial equity investments--a. General. A bank must deduct
from its core capital elements the sum of the appropriate percentages
(as determined below) of the adjusted carrying value of all nonfinancial
equity investments held by the bank or by its direct or indirect
subsidiaries. For purposes of this section II.B.5, investments held by a
bank include all investments held directly or indirectly by the bank or
any of its subsidiaries.
b. Scope of nonfinancial equity investments. A nonfinancial equity
investment means any equity investment held by the bank in a
nonfinancial company: through a small business investment company (SBIC)
under section 302(b) of the Small Business Investment Act of 1958 (15
U.S.C. 682(b)); \21\ or under the portfolio investment provisions of the
Board's
[[Page 275]]
Regulation K (12 CFR 211.8(c)(3)). A nonfinancial company is an entity
that engages in any activity that has not been determined to be
permissible for the bank to conduct directly, or to be financial in
nature or incidental to financial activities under section 4(k) of the
Bank Holding Company Act (12 U.S.C. 1843(k)).
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\21\ An equity investment made under section 302(b) of the Small
Business Investment Act of 1958 in an SBIC that is not consolidated with
the bank is treated as a nonfinancial equity investment.
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c. Amount of deduction from core capital. i. The bank must deduct
from its core capital elements the sum of the appropriate percentages,
as set forth in Table 1, of the adjusted carrying value of all
nonfinancial equity investments held by the bank. The amount of the
percentage deduction increases as the aggregate amount of nonfinancial
equity investments held by the bank increases as a percentage of the
bank's Tier 1 capital.
Table 1--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of
all nonfinancial equity investments Deduction from Core Capital
held directly or indirectly by the bank Elements (as a percentage of
(as a percentage of the Tier 1 capital the adjusted carrying value of
of the bank) \1\ the investment)
------------------------------------------------------------------------
Less than 15 percent................... 8 percent.
15 percent to 24.99 percent............ 12 percent.
25 percent and above................... 25 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of core capital elements net of
goodwill and net of all identifiable intangible assets other than
mortgage servicing assets, nonmortgage servicing assets and purchased
credit card relationships, but prior to the deduction for any
disallowed mortgage servicing assets, any disallowed nonmortgage
servicing assets, any disallowed purchased credit card relationships,
any disallowed credit enhancing I/Os (both purchased and retained),
any disallowed deferred tax assets, and any nonfinancial equity
investments.
ii. These deductions are applied on a marginal basis to the portions
of the adjusted carrying value of nonfinancial equity investments that
fall within the specified ranges of the parent bank's Tier 1 capital.
For example, if the adjusted carrying value of all nonfinancial equity
investments held by a bank equals 20 percent of the Tier 1 capital of
the bank, then the amount of the deduction would be 8 percent of the
adjusted carrying value of all investments up to 15 percent of the
bank's Tier 1 capital, and 12 percent of the adjusted carrying value of
all investments in excess of 15 percent of the bank's Tier 1 capital.
iii. The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under this paragraph is excluded
from the bank's risk-weighted assets for purposes of computing the
denominator of the bank's risk-based capital ratio. \22\
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\22\ For example, if 8 percent of the adjusted carrying value of a
nonfinancial equity investment is deducted from Tier 1 capital, the
entire adjusted carrying value of the investment will be excluded from
risk-weighted assets in calculating the denominator for the risk-based
capital ratio.
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iv. As noted in section I, this appendix establishes minimum risk-
based capital ratios and banks are at all times expected to maintain
capital commensurate with the level and nature of the risks to which
they are exposed. The risk to a bank from nonfinancial equity
investments increases with its concentration in such investments and
strong capital levels above the minimum requirements are particularly
important when a bank has a high degree of concentration in nonfinancial
equity investments (e.g., in excess of 50 percent of Tier 1 capital).
The Federal Reserve intends to monitor banks and apply heightened
supervision to equity investment activities as appropriate, including
where the bank has a high degree of concentration in nonfinancial equity
investments, to ensure that each bank maintains capital levels that are
appropriate in light of its equity investment activities. The Federal
Reserve also reserves authority to impose a higher capital charge in any
case where the circumstances, such as the level of risk of the
particular investment or portfolio of investments, the risk management
systems of the bank, or other information, indicate that a higher
minimum capital requirement is appropriate.
d. SBIC investments. i. No deduction is required for nonfinancial
equity investments that are held by a bank through one or more SBICs
that are consolidated with the bank or in one or more SBICs that are not
consolidated with the bank to the extent that all such investments, in
the aggregate, do not exceed 15 percent of the bank's Tier 1 capital.
Any nonfinancial equity investment that is held through or in an SBIC
and that is not required to be deducted from Tier 1 capital under this
section II.B.5.d. will be assigned a 100 percent risk-weight and
included in the bank's consolidated risk-weighted assets. \23\
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\23\ If a bank has an investment in an SBIC that is consolidated for
accounting purposes but that is not wholly owned by the bank, the
adjusted carrying value of the bank's nonfinancial equity investments
through the SBIC is equal to the bank's proportionate share of the
adjusted carrying value of the SBIC's equity investments in nonfinancial
companies. The remainder of the SBIC's adjusted carrying value (i.e.,
the minority interest holders' proportionate share) is excluded from the
risk-weighted assets of the bank. If a bank has an investment in an SBIC
that is not consolidated for accounting purposes and has current
information that identifies the percentage of the SBIC's assets that are
equity investments in nonfinancial companies, the bank may reduce the
adjusted carrying value of its investment in the SBIC proportionately to
reflect the percentage of the adjusted carrying value of the SBIC's
assets that are not equity investments in nonfinancial companies. If a
bank reduces the adjusted carrying value of its investment in a non-
consolidated SBIC to reflect financial investments of the SBIC, the
amount of the adjustment will be risk weighted at 100 percent and
included in the bank's risk-weighted assets.
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[[Page 276]]
ii. To the extent the adjusted carrying value of all nonfinancial
equity investments that a bank holds through one or more SBICs that are
consolidated with the bank or in one or more SBICs that are not
consolidated with the bank exceeds, in the aggregate, 15 percent of the
bank's Tier 1 capital, the appropriate percentage of such amounts (as
set forth in Table 1) must be deducted from the bank's core capital
elements. In addition, the aggregate adjusted carrying value of all
nonfinancial equity investments held through a consolidated SBIC and in
a non-consolidated SBIC (including any investments for which no
deduction is required) must be included in determining, for purposes of
Table 1, the total amount of nonfinancial equity investments held by the
bank in relation to its Tier 1 capital.
e. Transition provisions. No deduction under this section II.B.5 is
required to be made with respect to the adjusted carrying value of any
nonfinancial equity investment (or portion of such an investment) that
was made by the bank prior to March 13, 2000, or that was made by the
bank after such date pursuant to a binding written commitment \24\
entered into prior to March 13, 2000, provided that in either case the
bank has continuously held the investment since the relevant investment
date. \25\ For purposes of this section II.B.5.e., a nonfinancial equity
investment made prior to March 13, 2000, includes any shares or other
interests received by the bank through a stock split or stock dividend
on an investment made prior to March 13, 2000, provided the bank
provides no consideration for the shares or interests received and the
transaction does not materially increase the bank's proportional
interest in the company. The exercise on or after March 13, 2000, of
options or warrants acquired prior to March 13, 2000, is not considered
to be an investment made prior to March 13, 2000, if the bank provides
any consideration for the shares or interests received upon exercise of
the options or warrants. Any nonfinancial equity investment (or portion
thereof) that is not required to be deducted from Tier 1 capital under
this section II.B.5.e. must be included in determining the total amount
of nonfinancial equity investments held by the bank in relation to its
Tier 1 capital for purposes of Table 1. In addition, any nonfinancial
equity investment (or portion thereof) that is not required to be
deducted from Tier 1 capital under this section II.B.5.e. will be
assigned a 100-percent risk weight and included in the bank's
consolidated risk-weighted assets.
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\24\ A ``binding written commitment'' means a legally binding
written agreement that requires the bank to acquire shares or other
equity of the company, or make a capital contribution to the company,
under terms and conditions set forth in the agreement. Options,
warrants, and other agreements that give a bank the right to acquire
equity or make an investment, but do not require the bank to take such
actions, are not considered a binding written commitment for purposes of
this section II.B.5.
\25\ For example, if a bank made an equity investment in 100 shares
of a nonfinancial company prior to March 13, 2000, the adjusted carrying
value of that investment would not be subject to a deduction under this
section II.B.5. However, if the bank made any additional equity
investment in the company after March 13, 2000, such as by purchasing
additional shares of the company (including through the exercise of
options or warrants acquired before or after March 13, 2000) or by
making a capital contribution to the company and such investment was not
made pursuant to a binding written commitment entered into before March
13, 2000, the adjusted carrying value of the additional investment would
be subject to a deduction under this section II.B.5. In addition, if the
bank sold and repurchased, after March 13, 2000, 40 shares of the
company, the adjusted carrying value of those 40 shares would be subject
to a deduction under this section II.B.5.
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f. Adjusted carrying value. i. For purposes of this section II.B.5.,
the ``adjusted carrying value'' of investments is the aggregate value at
which the investments are carried on the balance sheet of the bank
reduced by any unrealized gains on those investments that are reflected
in such carrying value but excluded from the bank's Tier 1 capital and
associated deferred tax liabilities. For example, for investments held
as available-for-sale (AFS), the adjusted carrying value of the
investments would be the aggregate carrying value of the investments (as
reflected on the consolidated balance sheet of the bank) less any
unrealized gains on those investments that are included in other
comprehensive income and not reflected in Tier 1 capital, and associated
deferred tax liabilities. \26\
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\26\ Unrealized gains on AFS equity investments may be included in
supplementary capital to the extent permitted under section II.A.2.e. of
this appendix A. In addition, the unrealized losses on AFS equity
investments are deducted from Tier 1 capital in accordance with section
II.A.1.a. of this appendix A.
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[[Page 277]]
ii. As discussed above with respect to consolidated SBICs, some
equity investments may be in companies that are consolidated for
accounting purposes. For investments in a nonfinancial company that is
consolidated for accounting purposes under generally accepted accounting
principles, the bank's adjusted carrying value of the investment is
determined under the equity method of accounting (net of any intangibles
associated with the investment that are deducted from the bank's core
capital in accordance with section II.B.1. of this appendix A). Even
though the assets of the nonfinancial company are consolidated for
accounting purposes, these assets (as well as the credit equivalent
amounts of the company's off-balance sheet items) should be excluded
from the bank's risk-weighted assets for regulatory capital purposes.
g. Equity investments. For purposes of this section II.B.5., an
equity investment means any equity instrument (including common stock,
preferred stock, partnership interests, interests in limited liability
companies, trust certificates and warrants and call options that give
the holder the right to purchase an equity instrument), any equity
feature of a debt instrument (such as a warrant or call option), and any
debt instrument that is convertible into equity where the instrument or
feature is held under one of the legal authorities listed in section
II.B.5.b. of this appendix A. An investment in any other instrument
(including subordinated debt) may be treated as an equity investment if,
in the judgment of the Federal Reserve, the instrument is the functional
equivalent of equity or exposes the state member bank to essentially the
same risks as an equity instrument.
III. Procedures for Computing Weighted Risk Assets and Off-Balance Sheet
Items
A. Procedures
Assets and credit equivalent amounts of off-balance sheet items of
state member banks are assigned to one of several broad risk categories,
according to the obligor, or, if relevant, the guarantor or the nature
of the collateral. The aggregate dollar value of the amount in each
category is then multiplied by the risk weight associated with that
category. The resulting weighted values from each of the risk categories
are added together, and this sum is the bank's total weighted risk
assets that comprise the denominator of the risk-based capital ratio.
Attachment I provides a sample calculation.
Risk weights for all off-balance sheet items are determined by a
two-step process. First, the ``credit equivalent amount'' of off-balance
sheet items is determined, in most cases by multiplying the off-balance
sheet item by a credit conversion factor. Second, the credit equivalent
amount is treated like any balance sheet asset and generally is assigned
to the appropriate risk category according to the obligor, or, if
relevant, the guarantor or the nature of the collateral.
In general, if a particular item qualifies for placement in more
than one risk category, it is assigned to the category that has the
lowest risk weight. A holding of a U.S. municipal revenue bond that is
fully guaranteed by a U.S. bank, for example, would be assigned the 20
percent risk weight appropriate to claims guaranteed by U.S. banks,
rather than the 50 percent risk weight appropriate to U.S. municipal
revenue bonds. \27\
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\27\ An investment in shares of a fund whose portfolio consists
primarily of various securities or money market instruments that, if
held separately, would be assigned to different risk categories,
generally is assigned to the risk category appropriate to the highest
risk-weighted asset that the fund is permitted to hold in accordance
with the stated investment objectives set forth in its prospectus. A
bank may, at its option, assign a fund investment on a pro rata basis to
different risk categories according to the investment limits in the
fund's prospectus. In no case will an investment in shares in any fund
be assigned to a total risk weight less than 20 percent. If a bank
chooses to assign a fund investment on a pro rata basis, and the sum of
the investment limits of assets in the fund's prospectus exceeds 100
percent, the bank must assign risk weights in descending order. If, in
order to maintain a necessary degree of short-term liquidity, a fund is
permitted to hold an insignificant amount of its assets in short-term,
highly liquid securities of superior credit quality that do not qualify
for a preferential risk weight, such securities generally will be
disregarded when determining the risk category into which the bank's
holding in the overall fund should be assigned. The prudent use of
hedging instruments by a fund to reduce the risk of its assets also will
not increase the risk weighting of the fund investment. For example, the
use of hedging instruments by a fund to reduce the interest rate risk of
its government bond portfolio will not increase the risk weight of that
fund above the 20 percent category. Nonetheless, if a fund engages in
any activities that appear speculative in nature or has any other
characteristics that are inconsistent with the preferential risk
weighting assigned to the fund's assets, holdings in the fund will be
assigned to the 100 percent risk category.
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[[Page 278]]
The terms claims and securities used in the context of the
discussion of risk weights, unless otherwise specified, refer to loans
or debt obligations of the entity on whom the claim is held. Assets in
the form of stock or equity holdings in commercial or financial firms
are assigned to the 100 percent risk category, unless some other
treatment is explicitly permitted.
The Federal Reserve will, on a case-by-case basis, determine the
appropriate risk weight for any asset or credit equivalent amount of an
off-balance sheet item that does not fit wholly within one of the risk
weight categories set forth below or that imposes risks on a bank that
are incommensurate with the risk weight otherwise specified below for
the asset or off-balance sheet item. In addition, the Federal Reserve
will, on a case-by-case basis, determine the appropriate credit
conversion factor for any off-balance sheet item that does not fit
wholly within one of the credit conversion factors set forth below or
that imposes risks on a bank that are incommensurate with the credit
conversion factors otherwise specified below for the off-balance sheet
item. In making such a determination, the Federal Reserve will consider
the similarity of the asset or off-balance sheet item to assets or off-
balance sheet items explicitly treated in the guidelines, as well as
other relevant factors.
B. Collateral, Guarantees, and Other Considerations
1. Collateral. The only forms of collateral that are formally
recognized by the risk-based capital framework are: Cash on deposit in
the bank; securities issued or guaranteed by the central governments of
the OECD-based group of countries, \28\ U.S. Government 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.
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\28\ The OECD-based group of countries comprises all full members of
the Organization for Economic Cooperation and Development (OECD)
regardless of entry date, as well as countries that have concluded
special lending arrangements with the International Monetary Fund (IMF)
associated with the IMF's General Arrangements to Borrow, but excludes
any country that has rescheduled its external sovereign debt within the
previous five years. As of November 1995, the OECD included the
following countries: Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Portugal,
Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United
States; and Saudi Arabia had concluded special lending arrangements with
the IMF associated with the IMF's General Arrangements to Borrow. A
rescheduling of external sovereign debt generally would include any
renegotiation of terms arising from a country's inability or
unwillingness to meet its external debt service obligations, but
generally would not include renegotiations of debt in the normal course
of business, such as a renegotiation to allow the borrower to take
advantage of a decline in interest rates or other change in market
conditions.
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With regard to collateralized claims that may be assigned to the 20
percent risk-weight category, the extent to which qualifying securities
are recognized as collateral is determined by their current market
value. If such a claim is only partially secured, that is, the market
value of the pledged securities is less than the face amount of a
balance-sheet asset or an off-balance-sheet item, the portion that is
covered by the market value of the qualifying collateral is assigned to
the 20 percent risk category, and the portion of the claim that is not
covered by collateral in the form of cash or a qualifying security is
assigned to the risk category appropriate to the obligor or, if
relevant, the guarantor. For example, to the extent that a claim on a
private sector obligor is collateralized by the current market value of
U.S. Government securities, it would be placed in the 20 percent risk
category, and the balance would be assigned to the 100 percent risk
category.
2. Guarantees. Guarantees of the OECD and non-OECD central
governments, U.S. Government agencies, U.S. Government-sponsored
agencies, state and local governments of the OECD-based group of
countries, multilateral lending institutions and regional development
banks, U.S. depository institutions, and foreign banks are also
recognized. If a claim is partially guaranteed, that is, coverage of the
guarantee is less than the face amount of a balance sheet asset or an
off-balance sheet item, the portion that is not fully covered by the
guarantee is assigned to the risk category appropriate to the obligor
or, if relevant, to any collateral. The face amount of a claim covered
by two types of guarantees that have different risk weights, such as a
U.S. Government guarantee and a state guarantee, is to be apportioned
between the two risk categories appropriate to the guarantors.
The existence of other forms of collateral or guarantees that the
risk-based capital framework does not formally recognize may be taken
into consideration in evaluating
[[Page 279]]
the risks inherent in a bank's loan portfolio--which, in turn, would
affect the overall supervisory assessment of the bank's capital
adequacy.
3. Recourse obligations, direct credit substitutes, residual
interests, and asset- and mortgage-backed securities. Direct credit
substitutes, assets transferred with recourse, and securities issued in
connection with asset securitizations and structured financings are
treated as described below. The term ``asset securitizations'' or
``securitizations'' in this rule includes structured financings, as well
as asset securitization transactions.
a. Definitions--i. Credit derivative means a contract that allows
one party (the ``protection purchaser'') to transfer the credit risk of
an asset or off-balance sheet credit exposure to another party (the
``protection provider''). The value of a credit derivative is dependent,
at least in part, on the credit performance of the ``reference asset.''
ii. Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in connection
with a transfer of assets (including loan servicing assets) and that
obligate the bank to protect investors from losses arising from credit
risk in the assets transferred or the loans serviced. Credit-enhancing
representations and warranties include promises to protect a party from
losses resulting from the default or nonperformance of another party or
from an insufficiency in the value of the collateral. Credit-enhancing
representations and warranties do not include:
1. Early default clauses and similar warranties that permit the
return of, or premium refund clauses covering, 1-4 family residential
first mortgage loans that qualify for a 50 percent risk weight for a
period not to exceed 120 days from the date of transfer. These
warranties may cover only those loans that were originated within 1 year
of the date of transfer;
2. Premium refund clauses that cover assets guaranteed, in whole or
in part, by the U.S. Government, a U.S. Government agency or a
government-sponsored enterprise, provided the premium refund clauses are
for a period not to exceed 120 days from the date of transfer; or
3. Warranties that permit the return of assets in instances of
misrepresentation, fraud or incomplete documentation.
iii. Direct credit substitute means an arrangement in which a bank
assumes, in form or in substance, credit risk associated with an on- or
off-balance sheet credit exposure that was not previously owned by the
bank (third-party asset) and the risk assumed by the bank exceeds the
pro rata share of the bank's interest in the third-party asset. If the
bank has no claim on the third-party asset, then the bank's assumption
of any credit risk with respect to the third party asset is a direct
credit substitute. Direct credit substitutes include, but are not
limited to:
1. Financial standby letters of credit that support financial claims
on a third party that exceed a bank's pro rata share of losses in the
financial claim;
2. Guarantees, surety arrangements, credit derivatives, and similar
instruments backing financial claims that exceed a bank's pro rata share
in the financial claim;
3. Purchased subordinated interests or securities that absorb more
than their pro rata share of losses from the underlying assets;
4. Credit derivative contracts under which the bank assumes more
than its pro rata share of credit risk on a third party exposure;
5. Loans or lines of credit that provide credit enhancement for the
financial obligations of an account party;
6. Purchased loan servicing assets if the servicer is responsible
for credit losses or if the servicer makes or assumes credit-enhancing
representations and warranties with respect to the loans serviced.
Mortgage servicer cash advances that meet the conditions of section
III.B.3.a.viii. of this appendix are not direct credit substitutes;
7. Clean-up calls on third party assets. Clean-up calls that are 10
percent or less of the original pool balance that are exercisable at the
option of the bank are not direct credit substitutes; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
iv. Eligible ABCP liquidity facility means a liquidity facility
supporting ABCP, in form or in substance, that is subject to an asset
quality test at the time of draw that precludes funding against assets
that are 90 days or more past due or in default. In addition, if the
assets that an eligible ABCP liquidity facility is required to fund
against are externally rated assets or exposures at the inception of the
facility, the facility can be used to fund only those assets or
exposures that are externally rated investment grade at the time of
funding. Notwithstanding the eligibility requirements set forth in the
two preceding sentences, a liquidity facility will be considered an
eligible ABCP liquidity facility if the assets that are funded under the
liquidity facility and which do not meet the eligibility requirements
are guaranteed, either conditionally or unconditionally, by the U.S.
government or its agencies, or by the central government of an OECD
country.
v. Externally rated means that an instrument or obligation has
received a credit rating from a nationally recognized statistical rating
organization.
vi. Face amount means the notional principal, or face value, amount
of an off-balance sheet item; the amortized cost of an asset
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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, in form or in
substance, of any credit risk directly or indirectly associated with an
asset it has transferred and sold that exceeds a pro rata share of the
bank's claim on the asset. If a bank has no claim on a transferred
asset, then the retention of any risk of credit loss is recourse. A
recourse obligation typically arises when a bank transfers assets and
retains an explicit obligation to repurchase the assets or absorb losses
due to a default on the payment of principal or interest or any other
deficiency in the performance of the underlying obligor or some other
party. Recourse may also exist implicitly if a bank provides credit
enhancement beyond any contractual obligation to support assets it has
sold. The following are examples of recourse arrangements:
1. Credit-enhancing representations and warranties made on the
transferred assets;
2. Loan servicing assets retained pursuant to an agreement under
which the bank will be responsible for credit losses associated with the
loans being serviced. Mortgage servicer cash advances that meet the
conditions of section III.B.3.a.x. of this appendix are not recourse
arrangements;
3. Retained subordinated interests that absorb more than their pro
rata share of losses from the underlying assets;
4. Assets sold under an agreement to repurchase, if the assets are
not already included on the balance sheet;
5. Loan strips sold without contractual recourse where the maturity
of the transferred loan is shorter than the maturity of the commitment
under which the loan is drawn;
6. Credit derivatives issued that absorb more than the bank's pro
rata share of losses from the transferred assets;
7. Clean-up calls at inception that are greater than 10 percent of
the balance of the original pool of transferred loans. Clean-up calls
that are 10 percent or less of the original pool balance that are
exercisable at the option of the bank are not recourse arrangements; and
8. Liquidity facilities that provide liquidity support to ABCP
(other than eligible ABCP liquidity facilities).
xiii. Residual interest means any on-balance sheet asset that
represents an interest (including a beneficial interest) created by a
transfer that qualifies as a sale (in accordance with generally accepted
accounting principles) of financial assets, whether through a
securitization or otherwise, and that exposes the bank to credit risk
directly or indirectly associated with the transferred assets that
exceeds a pro rata share of the bank's claim on the assets, whether
through subordination provisions or other credit enhancement techniques.
Residual interests generally include credit-enhancing I/Os, spread
accounts, cash collateral accounts, retained subordinated interests,
other forms of over-collateralization, and similar assets that function
as a credit enhancement. Residual interests further include those
exposures that, in substance, cause the bank to retain the credit risk
of an asset or exposure that had qualified as a residual interest before
it was sold. Residual interests generally do not include interests
purchased from a third party, except that purchased credit-enhancing I/
Os are residual interests for purposes of this appendix.
xiv. Risk participation means a participation in which the
originating party remains liable to the beneficiary for the full amount
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of an obligation (e.g., a direct credit substitute) notwithstanding that
another party has acquired a participation in that obligation.
xv. Securitization means the pooling and repackaging by a special
purpose entity of assets or other credit exposures into securities that
can be sold to investors. Securitization includes transactions that
create stratified credit risk positions whose performance is dependent
upon an underlying pool of credit exposures, including loans and
commitments.
xvi. Sponsor means a bank that establishes an ABCP program; approves
the sellers permitted to participate in the program; approves the asset
pools to be purchased by the program; or administers the program by
monitoring the assets, arranging for debt placement, compiling monthly
reports, or ensuring compliance with the program documents and with the
program's credit and investment policy.
xvii. Structured finance program means a program where receivable
interests and asset-backed securities issued by multiple participants
are purchased by a special purpose entity that repackages those
exposures into securities that can be sold to investors. Structured
finance programs allocate credit risks, generally, between the
participants and credit enhancement provided to the program.
xviii. Traded position means a position that is externally rated and
is retained, assumed, or issued in connection with an asset
securitization, where there is a reasonable expectation that, in the
near future, the rating will be relied upon by unaffiliated investors to
purchase the position; or an unaffiliated third party to enter into a
transaction involving the position, such as a purchase, loan, or
repurchase agreement.
b. Credit equivalent amounts and risk weight of recourse obligations
and direct credit substitutes. i. Credit equivalent amount. Except as
otherwise provided in sections III.B.3.c. through f. and III.B.5. of
this appendix, the credit equivalent amount for a recourse obligation or
direct credit substitute is the full amount of the credit-enhanced
assets for which the bank directly or indirectly retains or assumes
credit risk multiplied by a 100 percent conversion factor.
ii. Risk-weight factor. To determine the bank's risk-weight factor
for off-balance sheet recourse obligations and direct credit
substitutes, the credit equivalent amount is assigned to the risk
category appropriate to the obligor in the underlying transaction, after
considering any associated guarantees or collateral. For a direct credit
substitute that is an on-balance sheet asset (e.g., a purchased
subordinated security), a bank must calculate risk-weighted assets using
the amount of the direct credit substitute and the full amount of the
assets it supports, i.e., all the more senior positions in the
structure. The treatment of direct credit substitutes that have been
syndicated or in which risk participations have been conveyed or
acquired is set forth in section III.D.1 of this appendix.
c. Externally-rated positions: credit equivalent amounts and risk
weights of recourse obligations, direct credit substitutes, residual
interests, and asset- and mortgage-backed securities (including asset-
backed commercial paper). i. Traded positions. With respect to a
recourse obligation, direct credit substitute, residual interest (other
than a credit-enhancing I/O strip) or asset- and mortgage-backed
security (including asset-backed commercial paper) that is a traded
position and that has received an external rating on a long-term
position that is one grade below investment grade or better or a short-
term rating that is investment grade, the bank may multiply the face
amount of the position by the appropriate risk weight, determined in
accordance with the tables below. Stripped mortgage-backed securities
and other similar instruments, such as interest-only or principal-only
strips that are not credit enhancements, must be assigned to the 100
percent risk category. If a traded position has received more than one
external rating, the lowest single rating will apply.
------------------------------------------------------------------------
Risk weight
Long-term rating category Examples (In
percent)
------------------------------------------------------------------------
Highest or second highest AAA, AA............... 20
investment grade.
Third highest investment grade..... A..................... 50
Lowest investment grade............ BBB................... 100
One category below investment grade BB.................... 200
------------------------------------------------------------------------
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
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substitute, or residual interest will be assigned.
d. Senior positions not externally rated. For a recourse obligation,
direct credit substitute, residual interest, or asset- or mortgage-
backed security that is not externally rated but is senior or preferred
in all features to a traded position (including collateralization and
maturity), a bank may apply a risk weight to the face amount of the
senior position in accordance with section III.B.3.c.i. of this
appendix, based on the traded position, subject to any current or
prospective supervisory guidance and the bank satisfying the Federal
Reserve that this treatment is appropriate. This section will apply only
if the traded subordinated position provides substantive credit support
to the unrated position until the unrated position matures.
e. Capital requirement for residual interests--i. Capital
requirement for credit-enhancing I/O strips. After applying the
concentration limit to credit-enhancing I/O strips (both purchased and
retained) in accordance with sections II.B.2.c. through e. of this
appendix, a bank must maintain risk-based capital for a credit-enhancing
I/O strip (both purchased and retained), regardless of the external
rating on that position, equal to the remaining amount of the credit-
enhancing I/O strip (net of any existing associated deferred tax
liability), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the
assets transferred. Transactions that, in substance, result in the
retention of credit risk associated with a transferred credit-enhancing
I/O strip will be treated as if the credit-enhancing I/O strip was
retained by the bank and not transferred.
ii. Capital requirement for other residual interests. 1. If a
residual interest does not meet the requirements of sections III.B.3.c.
or d. of this appendix, a bank must maintain risk-based capital equal to
the remaining amount of the residual interest that is retained on the
balance sheet (net of any existing associated deferred tax liability),
even if the amount of risk-based capital required to be maintained
exceeds the full risk-based capital requirement for the assets
transferred. Transactions that, in substance, result in the retention of
credit risk associated with a transferred residual interest will be
treated as if the residual interest was retained by the bank and not
transferred.
2. Where the aggregate capital requirement for residual interests
and other recourse obligation in connection with the same transfer of
assets exceed the full risk-based capital requirement for those assets,
a bank must maintain risk-based capital equal to the greater of the
risk-based capital requirement for the residual interest as calculated
under section III.B.3.e.ii.1 of this appendix or the full risk-based
capital requirement for the assets transferred.
f. Positions that are not rated by an NRSRO. A position (but not a
residual interest) maintained in connection with a securitization and
that is not rated by a NRSRO may be risk-weighted based on the bank's
determination of the credit rating of the position, as specified in the
table below, multiplied by the face amount of the position. In order to
obtain this treatment, the bank's system for determining the credit
rating of the position must meet one of the three alternative standards
set out in sections III.B.3.f.i. through III.B.3.f.iii. of this
appendix.
------------------------------------------------------------------------
Risk weight
Rating category Examples (In
percent)
------------------------------------------------------------------------
Highest or second highest AAA,AA................ 100
investment grade.
Third highet investment grade...... A..................... 100
Lowest investment grade............ BBB................... 100
One category below investment grade BB.................... 200
------------------------------------------------------------------------
i. Internal risk rating used for asset-backed programs. A direct
credit substitute (other than a purchased credit-enhancing I/O) is
assumed in connection with an asset-backed commercial paper program
sponsored by the bank and the bank is able to demonstrate to the
satisfaction of the Federal Reserve, prior to relying upon its use, that
the bank's internal credit risk rating system is adequate. Adequate
internal credit risk rating systems usually contain the following
criteria:
1. The internal credit risk system is an integral part of the bank's
risk management system, which explicitly incorporates the full range of
risks arising from a bank's participation in securitization activities;
2. Internal credit ratings are linked to measurable outcomes, such
as the probability that the position will experience any loss, the
position's expected loss given default, and the degree of variance in
losses given default on that position;
3. The bank's internal credit risk system must separately consider
the risk associated with the underlying loans or borrowers, and the risk
associated with the structure of a particular securitization
transaction;
4. The bank's internal credit risk system must identify gradations
of risk among ``pass'' assets and other risk positions;
5. The bank must have clear, explicit criteria that are used to
classify assets into each internal risk grade, including subjective
factors;
6. The bank must have independent credit risk management or loan
review personnel assigning or reviewing the credit risk ratings;
7. The bank must have an internal audit procedure that periodically
verifies that the internal credit risk ratings are assigned in
accordance with the established criteria;
8. The bank must monitor the performance of the internal credit risk
ratings assigned to
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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 may apply the rating category that corresponds to the bank's
position. In order to rely on a program rating, the bank must
demonstrate to the Federal Reserve's satisfaction that the credit risk
rating assigned to the program meets the same standards generally used
by NRSROs for rating traded positions. The bank must also demonstrate to
the Federal Reserve's satisfaction that the criteria underlying the
NRSRO's assignment of ratings for the program are satisfied for the
particular position. If a bank participates in a securitization
sponsored by another party, the Federal Reserve may authorize the bank
to use this approach based on a programmatic rating obtained by the
sponsor of the program.
iii. Computer Program. The bank is using an acceptable credit
assessment computer program to determine the rating of a direct credit
substitute or recourse obligation (but not residual interest) issued in
connection with a structured finance program. A NRSRO must have
developed the computer program, and the bank must demonstrate to the
Federal Reserve's satisfaction that ratings under the program correspond
credibly and reliably with the rating of traded positions.
g. Limitations on risk-based capital requirements--i. Low-level
exposure. If the maximum contractual exposure to loss retained or
assumed by a bank in connection with a recourse obligation or a direct
credit substitute is less than the effective risk-based capital
requirement for the enhanced assets, the risk-based capital requirement
is limited to the maximum contractual exposure, less any recourse
liability account established in accordance with generally accepted
accounting principles. This limitation does not apply when a bank
provides credit enhancement beyond any contractual obligation to support
assets it has sold.
ii. Mortgage-related securities or participation certificates
retained in a mortgage loan swap. If a bank holds a mortgage-related
security or a participation certificate as a result of a mortgage loan
swap with recourse, capital is required to support the recourse
obligation plus the percentage of the mortgage-related security or
participation certificate that is not covered by the recourse
obligation. The total amount of capital required for the on-balance
sheet asset and the recourse obligation, however, is limited to the
capital requirement for the underlying loans, calculated as if the bank
continued to hold these loans as on-balance sheet assets.
iii. Related on-balance sheet assets. If a recourse obligation or
direct credit substitute subject to section III.B.3. of this appendix
also appears as a balance sheet asset, the balance sheet asset is not
included in a bank's risk-weighted assets to the extent the value of the
balance sheet asset is already included in the off-balance sheet credit
equivalent amount for the recourse obligation or direct credit
substitute, except in the case of loan servicing assets and similar
arrangements with embedded recourse obligations or direct credit
substitutes. In that case, both the on-balance sheet assets and the
related recourse obligations and direct credit substitutes must be
separately risk-weighted and incorporated into the risk-based capital
calculation.
4. Maturity. Maturity is generally not a factor in assigning items
to risk categories with the exception of claims on non-OECD banks,
commitments, and interest rate and foreign exchange rate contracts.
Except for commitments, short-term is defined as one year or less
remaining maturity and long-term is defined as over one year remaining
maturity. In the case of commitments, short-term is defined as one year
or less original maturity and long-term is defined as over one year
original maturity.
5. Small Business Loans and Leases on Personal Property Transferred
with Recourse. a. Notwithstanding other provisions of this appendix A, a
qualifying bank that has transferred small business loans and leases on
personal property (small business obligations) with recourse shall
include in weighted-risk assets only the amount of retained recourse,
provided two conditions are met. First, the transaction must be treated
as a sale under GAAP and, second, the bank must establish pursuant to
GAAP a non-capital reserve sufficient to meet the bank's reasonably
estimated liability under the recourse arrangement. Only loans and
leases to businesses that meet the criteria for a small business concern
established by the Small Business Administration under section 3(a) of
the Small Business Act are eligible for this capital treatment.
b. For purposes of this appendix A, a bank is qualifying if it meets
the criteria set forth
[[Page 284]]
in the Board's prompt corrective action regulation (12 CFR 208.40) for
well capitalized or, by order of the Board, adequately capitalized. For
purposes of determining whether a bank meets the criteria, its capital
ratios must be calculated without regard to the preferential capital
treatment for transfers of small business obligations with recourse
specified in section III.B.5.a. of this appendix A. The total
outstanding amount of recourse retained by a qualifying bank on
transfers of small business obligations receiving the preferential
capital treatment cannot exceed 15 percent of the bank's total risk-
based capital. By order, the Board may approve a higher limit.
c. If a bank ceases to be qualifying or exceeds the 15 percent
capital limitation, the preferential capital treatment will continue to
apply to any transfers of small business obligations with recourse that
were consummated during the time that the bank was qualifying and did
not exceed the capital limit.
d. The risk-based capital ratios of the bank shall be calculated
without regard to the preferential capital treatment for transfers of
small business obligations with recourse specified in section III.B.5.a.
of this appendix A for purposes of:
(i) Determining whether a bank is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under prompt corrective action (12 CFR 208.43(b)(1));
and
(ii) Reclassifying a well capitalized bank to adequately capitalized
and requiring an adequately capitalized bank to comply with certain
mandatory or discretionary supervisory actions as if the bank were in
the next lower prompt corrective action capital category (12 CFR
208.43(c)).
6. Asset-backed commercial paper programs. a. An asset-backed
commercial paper (ABCP) program means a program that primarily issues
externally rated commercial paper backed by assets or other exposures
held in a bankruptcy-remote, special purpose entity.
b. If a bank has multiple overlapping exposures (such as a program-
wide credit enhancement and multiple pool-specific liquidity facilities)
to an ABCP program that is not consolidated for risk-based capital
purposes, the bank is not required to hold duplicative risk-based
capital under this appendix against the overlapping position. Instead,
the bank should apply to the overlapping position the applicable risk-
based capital treatment that results in the highest capital charge.
C. Risk Weights
Attachment III contains a listing of the risk categories, a summary
of the types of assets assigned to each category and the weight
associated with each category, that is, 0 percent, 20 percent, 50
percent, and 100 percent. A brief explanation of the components of each
category follows.
1. Category 1: zero percent. This category includes cash (domestic
and foreign) owned and held in all offices of the bank or in transit and
gold bullion held in the bank's own vaults or in another bank's vaults
on an allocated basis, to the extent it is offset by gold bullion
liabilities. \29\ The category also includes all direct claims
(including securities, loans, and leases) on, and the portions of claims
that are directly and unconditionally guaranteed by, the central
governments \30\ of the OECD countries and U.S. Government agencies,
\31\ as well as all direct local currency claims on, and the portions of
local currency claims that are directly and unconditionally guaranteed
by, the central governments of non-OECD countries, to the extent that
the bank has liabilities booked in that currency. A claim is not
considered to be unconditionally guaranteed by a central government if
the validity of the guarantee is dependent upon some affirmative action
by
[[Page 285]]
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.
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\29\ All other holdings of bullion are assigned to the 100 percent
risk category.
\30\ A central government is defined to include departments and
ministries, including the central bank, of the central government. The
U.S. central bank includes the 12 Federal Reserve Banks, and the stock
held in these banks as a condition of membership is assigned to the zero
percent risk category. The definition of central government does not
include state, provincial, or local governments; or commercial
enterprises owned by the central government. In addition, it does not
include local government entities or commercial enterprises whose
obligations are guaranteed by the central government, although any
claims on such entities guaranteed by central governments are placed in
the same general risk category as other claims guaranteed by central
governments. OECD central governments are defined as central governments
of the OECD-based group of countries; non-OECD central governments are
defined as central governments that do not belong to the OECD-based
group countries.
\31\ A U.S. Government agency is defined as an instrumentality of
the U.S. Government whose obligations are fully and explicitly
guaranteed as to the timely payment of principal and interest by the
full faith and credit of the U.S. Government. Such agencies include the
Government National Mortgage Association (GNMA), the Veterans
Administration (VA), the Federal Housing Administration (FHA), the
Export-Import Bank (Exim Bank), the Overseas Private Investment
Corporation (OPIC), the Commodity Credit Corporation (CCC), and the
Small Business Administration (SBA).
---------------------------------------------------------------------------
This category also includes claims collateralized by cash on deposit
in the bank or by securities issued or guaranteed by OECD central
governments or U.S. government agencies for which a positive margin of
collateral is maintained on a daily basis, fully taking into account any
change in the bank's exposure to the obligor or counterparty under a
claim in relation to the market value of the collateral held in support
of that claim.
This category also includes ABCP (i) purchased on or after September
19, 2008, by a bank 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 to a Federal Reserve Bank
to secure financing from the ABCP lending facility (AMLF) 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 guaranteed \32\ by, U.S. depository institutions \33\ and
foreign banks; \34\ and long-term claims on, and the portions of long-
term claims that are guaranteed by, U.S. depository institutions and
OECD banks. \35\
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\32\ Claims guaranteed by U.S. depository institutions and foreign
banks include risk participations in both bankers acceptances and
standby letters of credit, as well as participations in commitments,
that are conveyed to other U.S. depository institutions or foreign
banks.
\33\ U.S. depository institutions are defined to include branches
(foreign and domestic) of federally-insured banks and depository
institutions chartered and headquartered in the 50 states of the United
States, the District of Columbia, Puerto Rico, and U.S. territories and
possessions. The definition encompasses banks, mutual or stock savings
banks, savings or building and loan associations, cooperative banks,
credit unions, and international banking facilities of domestic banks.
U.S.-chartered depository institutions owned by foreigners are also
included in the definition. However, branches and agencies of foreign
banks located in the U.S., as well as all bank holding companies, are
excluded.
\34\ Foreign banks are distinguished as either OECD banks or non-
OECD banks. OECD banks include banks and their branches (foreign and
domestic) organized under the laws of countries (other than the U.S.)
that belong to the OECD-based group of countries. Non-OECD banks include
banks and their branches (foreign and domestic) organized under the laws
of countries that do not belong to the OECD-based group of countries.
For this purpose, a bank is defined as an institution that engages in
the business of banking; is recognized as a bank by the bank supervisory
or monetary authorities of the country of its organization or principal
banking operations; receives deposits to a substantial extent in the
regular course of business; and has the power to accept demand deposits.
\35\ Long-term claims on, or guaranteed by, non-OECD banks and all
claims on bank holding companies are assigned to the 100 percent risk
category, as are holdings of bank-issued securities that qualify as
capital of the issuing banks.
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b. This category also includes the portions of claims that are
conditionally guaranteed by OECD central governments and U.S. Government
agencies, as well as the portions of local currency claims that are
conditionally guaranteed by non-OECD central governments, to the extent
that the bank has liabilities booked in that currency. In addition, this
category also includes claims on, and the portions of claims that are
guaranteed by, U.S. government-sponsored \36\ agencies and claims on,
and the portions of claims guaranteed by, the International Bank for
Reconstruction and Development (World Bank), the International Finance
Corporation, the Interamerican Development Bank, the Asian Development
Bank, the African Development Bank, the European Investment Bank, the
European Bank for Reconstruction and Development, the Nordic Investment
Bank, and other multilateral lending institutions or regional
development banks in which the U.S. government is a shareholder or
contributing member. General obligation claims on, or portions of claims
guaranteed by the full faith and credit of, states or other political
subdivisions of
[[Page 286]]
the U.S. or other countries of the OECD-based group are also assigned to
this category. \37\
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\36\ For this purpose, U.S. government-sponsored agencies are
defined as agencies originally established or chartered by the Federal
government to serve public purposes specified by the U.S. Congress but
whose obligations are not explicitly guaranteed by the full faith and
credit of the U.S. government. These agencies include the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), the Farm Credit System, the Federal Home Loan Bank
System, and the Student Loan Marketing Association (SLMA). Claims on
U.S. government-sponsored agencies include capital stock in a Federal
Home Loan Bank that is held as a condition of membership in that Bank.
\37\ Claims on, or guaranteed by, states or other political
subdivisions of countries that do not belong to the OECD-based group of
countries are placed in the 100 percent risk category.
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c. This category also includes the portions of claims (including
repurchase transactions) collateralized by cash on deposit in the bank
or by securities issued or guaranteed by OECD central governments or
U.S. government agencies that do not qualify for the zero percent risk-
weight category; collateralized by securities issued or guaranteed by
U.S. government-sponsored agencies; or collateralized by securities
issued by multilateral lending institutions or regional development
banks in which the U.S. government is a shareholder or contributing
member.
d. This category also includes claims \38\ on, or guaranteed by, a
qualifying securities firm incorporated in the United States or other
member of the OECD-based group of countries \39\ provided that: The
qualifying securities firm has a long-term issuer credit rating, or a
rating on at least one issue of long-term debt, in one of the three
highest investment grade rating categories from a nationally recognized
statistical rating organization; or the claim is guaranteed by the
firm's parent company and the parent company has such a rating. If
ratings are available from more than one rating agency, the lowest
rating will be used to determine whether the rating requirement has been
met. This category also includes a collateralized claim on a qualifying
securities firm in such a country, without regard to satisfaction of the
rating standard, provided that the claim arises under a contract that:
(1) Is a reverse repurchase/repurchase agreement or securities
lending/borrowing transaction executed using standard industry
documentation;
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\38\ Claims on a qualifying securities firm that are instruments the
firm, or its parent company, uses to satisfy its applicable capital
requirements are not eligible for this risk weight.
\39\ With regard to securities firms incorporated in the United
States, qualifying securities firms are those securities firms that are
broker-dealers registered with the Securities and Exchange Commission
(SEC) and are in compliance with the SEC's net capital rule, 17 CFR
240.15c3-1. With regard to securities firms incorporated in any other
country in the OECD-based group of countries, qualifying securities
firms are those securities firms that a bank is able to demonstrate are
subject to consolidated supervision and regulation (covering their
direct and indirect subsidiaries, but not necessarily their parent
organizations) comparable to that imposed on banks in OECD countries.
Such regulation must include risk-based capital requirements comparable
to those applied to banks under the Accord on International Convergence
of Capital Measurement and Capital Standards (1988, as amended in 1998)
(Basel Accord).
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(2) Is collateralized by debt or equity securities that are liquid
and readily marketable;
(3) Is marked-to-market daily;
(4) Is subject to a daily margin maintenance requirement under the
standard industry documentation; and
(5) Can be liquidated, terminated, or accelerated immediately in
bankruptcy or similar proceeding, and the security or collateral
agreement will not be stayed or avoided, under applicable law of the
relevant jurisdiction. \40\
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\40\ For example, a claim is exempt from the automatic stay in
bankruptcy in the United States if it arises under a securities contract
or a repurchase agreement subject to section 555 or 559 of the
Bankruptcy Code, respectively (11 U.S.C. 555 or 559), a qualified
financial contract under section 11(e)(8) of the Federal Deposit
Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract between
financial institutions under sections 401-407 of the Federal Deposit
Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407), or
the Board's Regulation EE (12 CFR Part 231).
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3. Category 3: 50 percent. This category includes loans fully
secured by first liens \41\ on 1- to 4-family residential properties,
either owner-occupied or rented, or on multifamily residential
properties,\42\ that meet certain
[[Page 287]]
criteria.\43\ Loans included in this category must have been made in
accordance with prudent underwriting standards; \44\ be performing in
accordance with their original terms; and not be 90 days or more past
due or carried in nonaccrual status. For purposes of this 50 percent
risk weight category, a loan modified on a permanent or trial basis
solely pursuant to the U.S. Department of Treasury's Home Affordable
Mortgage Program will be considered to be performing in accordance with
its original terms. The following additional criteria must also be
applied to a loan secured by a multifamily residential property that is
included in this category: all principal and interest payments on the
loan must have been made on time for at least the year preceding
placement in this category, or in the case where the existing property
owner is refinancing a loan on that property, all principal and interest
payments on the loan being refinanced must have been made on time for at
least the year preceding placement in this category; amortization of the
principal and interest must occur over a period of not more than 30
years and the minimum original maturity for repayment of principal must
not be less than 7 years; and the annual net operating income (before
debt service) generated by the property during its most recent fiscal
year must not be less than 120 percent of the loan's current annual debt
service (115 percent if the loan is based on a floating interest rate)
or, in the case of a cooperative or other not-for-profit housing
project, the property must generate sufficient cash flow to provide
comparable protection to the institution. Also included in this category
are privately-issued mortgage-backed securities provided that:
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\41\ If a bank holds the first and junior lien(s) on a residential
property and no other party holds an intervening lien, the transaction
is treated as a single loan secured by a first lien for the purposes of
determining the loan-to-value ratio and assigning a risk weight.
\42\ Loans that qualify as loans secured by 1- to 4-family
residential properties or multifamily residential properties are listed
in the instructions to the commercial bank Call Report. In addition, for
risk-based capital purposes, loans secured by 1- to 4-family residential
properties include loans to builders with substantial project equity for
the construction of 1- to 4-family residences that have been presold
under firm contracts to purchasers who have obtained firm commitments
for permanent qualifying mortgage loans and have made substantial
earnest money deposits. Such loans to builders will be considered
prudently underwritten only if the bank has obtained sufficient
documentation that the buyer of the home intends to purchase the home
(i.e., has a legally binding written sales contract) and has the ability
to obtain a mortgage loan sufficient to purchase the home (i.e., has a
firm written commitment for permanent financing of the home upon
completion).
The instructions to the Call Report also discuss the treatment of
loans, including multifamily housing loans, that are sold subject to a
pro rata loss sharing arrangement. Such an arrangement should be treated
by the selling bank as sold (and excluded from balance sheet assets) to
the extent that the sales agreement provides for the purchaser of the
loan to share in any loss incurred on the loan on a pro rata basis with
the selling bank. In such a transaction, from the standpoint of the
selling bank, the portion of the loan that is treated as sold is not
subject to the risk-based capital standards. In connection with sales of
multifamily housing loans in which the purchaser of a loan shares in any
loss incurred on the loan with the selling institution on other than a
pro rata basis, these other loss sharing arrangements are taken into
account for purposes of determining the extent to which such loans are
treated by the selling bank as sold (and excluded from balance sheet
assets) under the risk-based capital framework in the same as prescribed
for reporting purposes in the instructions to the Call Report.
\43\ Residential property loans that do not meet all the specified
criteria or that are made for the purpose of speculative property
development are placed in the 100 percent risk category.
\44\ Prudent underwriting standards include a conservative ratio of
the current loan balance to the value of the property. In the case of a
loan secured by multifamily residential property, the loan-to-value
ratio is not conservative if it exceeds 80 percent (75 percent if the
loan is based on a floating interest rate). Prudent underwriting
standards also dictate that a loan-to-value ratio used in the case of
originating a loan to acquire a property would not be deemed
conservative unless the value is based on the lower of the acquisition
cost of the property or appraised (or if appropriate, evaluated) value.
Otherwise, the loan-to-value ratio generally would be based upon the
value of the property as determined by the most current appraisal, or if
appropriate, the most current evaluation. All appraisals must be made in
a manner consistent with the Federal banking agencies' real estate
appraisal regulations and guidelines and with the bank's own appraisal
guidelines.
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(1) The structure of the security meets the criteria described in
section III(B)(3) above;
(2) If the security is backed by a pool of conventional mortgages,
on 1- to 4-family residential or multifamily residential properties each
underlying mortgage meets the criteria described above in this section
for eligibility for the 50 percent risk category at the time the pool is
originated;
(3) If the security is backed by privately issued mortgage-backed
securities, each underlying security qualifies for the 50 percent risk
category; and
(4) If the security is backed by a pool of multifamily residential
mortgages, principal and interest payments on the security are not 30
days or more past due.
Privately-issued mortgage-backed securities that do not meet these
criteria or that do not qualify for a lower risk weight are generally
assigned to the 100 percent risk category.
Also assigned to this category are revenue (non-general obligation)
bonds or similar obligations, including loans and leases, that are
obligations of states or other political subdivisions of the U.S. (for
example, municipal revenue bonds) or other countries of the OECD-based
group, but for which the government entity is committed to repay the
debt with revenues from the specific projects financed, rather than from
general tax funds.
[[Page 288]]
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. Except as provided in section III.C.
4.e of this appendix, 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. \45\ This category includes all claims on foreign and domestic
private-sector obligors not included in the categories above (including
loans to nondepository financial institutions and bank holding
companies); claims on commercial firms owned by the public sector;
customer liabilities to the bank on acceptances outstanding involving
standard risk claims; \46\ investments in fixed assets, premises, and
other real estate owned; common and preferred stock of corporations,
including stock acquired for debts previously contracted; all stripped
mortgage-backed securities and similar instruments; and commercial and
consumer loans (except those assigned to lower risk categories due to
recognized guarantees or collateral and loans secured by residential
property that qualify for a lower risk weight). This category also
includes claims representing capital of a qualifying securities firm.
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\45\ Such assets include all nonlocal currency claims on, and the
portions of claims that are guaranteed by, non-OECD central governments
and those portions of local currency claims on, or guaranteed by, non-
OECD central governments that exceed the local currency liabilities held
by the bank.
\46\ Customer liabilities on acceptances outstanding involving
nonstandard risk claims, such as claims on U.S. depository institutions,
are assigned to the risk category appropriate to the identity of the
obligor or, if relevant, the nature of the collateral or guarantees
backing the claims. Portions of acceptances conveyed as risk
participations to U.S. depository institutions or foreign banks are
assigned to the 20 percent risk category appropriate to short-term
claims guaranteed by U.S. depository institutions and foreign banks.
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c. Also included in this category are industrial-development bonds
and similar obligations issued under the auspices of states or political
subdivisions of the OECD-based group of countries for the benefit of a
private party or enterprise where that party or enterprise, not the
government entity, is obligated to pay the principal and interest, and
all obligations of states or political subdivisions of countries that do
not belong to the OECD-based group.
d. The following assets also are assigned a risk weight of 100
percent if they have not been deducted from capital: investments in
unconsolidated companies, joint ventures, or associated companies;
instruments that qualify as capital issued by other banking
organizations; and any intangibles, including those that may have been
grandfathered into capital.
e. Subject to the requirements below, a bank may assign an asset not
included in the categories above to the risk weight category applicable
under the capital guidelines for bank holding companies (See 12 CFR part
225, appendix A), provided that all of the following conditions apply:
i. The bank is not authorized to hold the asset under applicable law
other than under debt previously contracted or other similar authority;
and
ii. The risks associated with the asset are substantially similar to
the risks of assets that are otherwise assigned to a risk weight
category of less than 100 percent under this appendix.
D. Off-Balance Sheet Items
The face amount of an off-balance sheet item is generally
incorporated into risk-weighted assets in two steps. The face amount is
first multiplied by a credit conversion factor, except for direct credit
substitutes and recourse obligations as discussed in section III.D.1. of
this appendix. The resultant credit equivalent amount is assigned to the
appropriate risk category according to the obligor or, if relevant, the
guarantor, the nature of any collateral, or external credit ratings.
\47\
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\47\ The sufficiency of collateral and guarantees for off-balance-
sheet items is determined by the market value of the collateral or the
amount of the guarantee in relation to the face amount of the item,
except for derivative contracts, for which this determination is
generally made in relation to the credit equivalent amount. Collateral
and guarantees are subject to the same provisions noted under section
III.B of this appendix A.
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1. Items with a 100-percent conversion factor. a. Except as
otherwise provided in section III.B.3. of this appendix, the full amount
of an asset or transaction supported, in whole or in part, by a direct
credit substitute or a recourse obligation. Direct credit substitutes
[[Page 289]]
and recourse obligations are defined in section III.B.3. of this
appendix.
b. Sale and repurchase agreements and forward agreements. Forward
agreements are legally binding contractual obligations to purchase
assets with certain drawdown at a specified future date. Such
obligations include forward purchases, forward forward deposits placed,
\48\ and partly-paid shares and securities; they do not include
commitments to make residential mortgage loans or forward foreign
exchange contracts.
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\48\ Forward forward deposits accepted are treated as interest rate
contracts.
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c. Securities lent by a bank are treated in one of two ways,
depending upon whether the lender is at risk of loss. If a bank, as
agent for a customer, lends the customer's securities and does not
indemnify the customer against loss, then the transaction is excluded
from the risk-based capital calculation. If, alternatively, a bank lends
its own securities or, acting as agent for a customer, lends the
customer's securities and indemnifies the customer against loss, the
transaction is converted at 100 percent and assigned to the risk weight
category appropriate to the obligor, or, if applicable, to any
collateral delivered to the lending bank, or the independent custodian
acting on the lending bank's behalf. Where a bank is acting as agent for
a customer in a transaction involving the lending or sale of securities
that is collateralized by cash delivered to the bank, the transaction is
deemed to be collateralized by cash on deposit in the bank for purposes
of determining the appropriate risk-weight category, provided that any
indemnification is limited to no more than the difference between the
market value of the securities and the cash collateral received and any
reinvestment risk associated with that cash collateral is borne by the
customer.
d. In the case of direct credit substitutes in which a risk
participation \49\ has been conveyed, the full amount of the assets that
are supported, in whole or in part, by the credit enhancement are
converted to a credit equivalent amount at 100 percent. However, the pro
rata share of the credit equivalent amount that has been conveyed
through a risk participation is assigned to whichever risk category is
lower: the risk category appropriate to the obligor, after considering
any relevant guarantees or collateral, or the risk category appropriate
to the institution acquiring the participation. \50\ Any remainder is
assigned to the risk category appropriate to the obligor, guarantor, or
collateral. For example, the pro rata share of the full amount of the
assets supported, in whole or in part, by a direct credit substitute
conveyed as a risk participation to a U.S. domestic depository
institution or foreign bank is assigned to the 20 percent risk category.
\51\
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\49\ That is, a participation in which the originating bank remains
liable to the beneficiary for the full amount of the direct credit
substitute if the party that has acquired the participation fails to pay
when the instrument is drawn.
\50\ A risk participation in bankers acceptances conveyed to other
institutions is also assigned to the risk category appropriate to the
institution acquiring the participation or, if relevant, the guarantor
or nature of the collateral.
\51\ Risk participations with a remaining maturity of over one year
that are conveyed to non-OECD banks are to be assigned to the 100
percent risk category, unless a lower risk category is appropriate to
the obligor, guarantor, or collateral.
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e. In the case of direct credit substitutes in which a risk
participation has been acquired, the acquiring bank's percentage share
of the direct credit substitute is multiplied by the full amount of the
assets that are supported, in whole or in part, by the credit
enhancement and converted to a credit equivalent amount at 100 percent.
The credit equivalent amount of an acquisition of a risk participation
in a direct credit substitute is assigned to the risk category
appropriate to the account party obligor or, if relevant, the nature of
the collateral or guarantees.
f. In the case of direct credit substitutes that take the form of a
syndication where each bank is obligated only for its pro rata share of
the risk and there is no recourse to the originating bank, each bank
will only include its pro rata share of the assets supported, in whole
or in part, by the direct credit substitute in its risk-based capital
calculation. \52\
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\52\ For example, if a bank has a 10 percent share of a $10
syndicated direct credit substitute that provides credit support to a
$100 loan, then the bank's $1 pro rata share in the enhancement means
that a $10 pro rata share of the loan is included in risk weighted
assets.
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2. Items with a 50 percent conversion factor. a. Transaction-related
contingencies are converted at 50 percent. Such contingencies include
bid bonds, performance bonds, warranties, standby letters of credit
related to particular transactions, and performance standby letters of
credit, as well as acquisitions of risk participations in performance
standby letters of credit. Performance standby letters of credit
represent obligations backing the performance of nonfinancial or
commercial contracts or undertakings. To the extent permitted by law or
regulation, performance
[[Page 290]]
standby letters of credit include arrangements backing, among other
things, subcontractors' and suppliers' performance, labor and materials
contracts, and construction bids.
b. The unused portion of commitments with an original maturity
exceeding one year, including underwriting commitments, and commercial
and consumer credit commitments also are converted at 50 percent.
Original maturity is defined as the length of time between the date the
commitment is issued and the earliest date on which: (1) The bank can,
at its option, unconditionally (without cause) cancel the commitment,
\53\ and (2) the bank is scheduled to (and as a normal practice actually
does) review the facility to determine whether or not it should be
extended. Such reviews must continue to be conducted at least annually
for such a facility to qualify as a short-term commitment.
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\53\ In the case of consumer home equity or mortgage lines of credit
secured by liens on 1-4 family residential properties, the bank is
deemed able to unconditionally cancel the commitment for the purpose of
this criterion if, at its option, it can prohibit additional extensions
of credit, reduce the credit line, and terminate the commitment to the
full extent permitted by relevant Federal law.
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c.i. Commitments are defined as any legally binding arrangements
that obligate a bank to extend credit in the form of loans or leases; to
purchase loans, securities, or other assets; or to participate in loans
and leases. They also include overdraft facilities, revolving credit,
home equity and mortgage lines of credit, eligible ABCP liquidity
facilities, and similar transactions. Normally, commitments involve a
written contract or agreement and a commitment fee, or some other form
of consideration. Commitments are included in weighted-risk assets
regardless of whether they contain ``material adverse change'' clauses
or other provisions that are intended to relieve the issuer of its
funding obligation under certain conditions. In the case of commitments
structured as syndications, where the bank is obligated solely for its
pro rata share, only the bank's proportional share of the syndicated
commitment is taken into account in calculating the risk-based capital
ratio.
ii Banks that are subject to the market risk rules are required to
convert the notional amount of eligible ABCP liquidity facilities, in
form or in substance, with an original maturity of over one year that
are carried in the trading account at 50 percent to determine the
appropriate credit equivalent amount even though those facilities are
structured or characterized as derivatives or other trading book assets.
Liquidity facilities that support ABCP, in form or in substance,
(including those positions to which the market risk rules may not be
applied as set forth in section 2(a) of appendix E to part 208) that are
not eligible ABCP liquidity facilities are to be considered recourse
obligations or direct credit substitutes, and assessed the appropriate
risk-based capital treatment in accordance with section III.B.3. of this
appendix.
d. Once a commitment has been converted at 50 percent, any portion
that has been conveyed to other U.S. depository institutions or OECD
banks as participations in which the originating bank retains the full
obligation to the borrower if the participating bank fails to pay when
the instrument is drawn, is assigned to the 20 percent risk category.
This treatment is analogous to that accorded to conveyances of risk
participations in standby letters of credit. The acquisition of a
participation in a commitment by a bank is converted at 50 percent and
assigned to the risk category appropriate to the account party obligor
or, if relevant, the nature of the collateral or guarantees.
e. Revolving underwriting facilities (RUFs), note issuance
facilities (NIFs), and other similar arrangements also are converted at
50 percent regardless of maturity. These are facilities under which a
borrower can issue on a revolving basis short-term paper in its own
name, but for which the underwriting banks have a legally binding
commitment either to purchase any notes the borrower is unable to sell
by the roll-over date or to advance funds to the borrower.
3. Items with a 20 percent conversion factor. Short-term, self-
liquidating trade-related contingencies which arise from the movement of
goods are converted at 20 percent. Such contingencies generally include
commercial letters of credit and other documentary letters of credit
collateralized by the underlying shipments.
4. Items with a 10 percent conversion factor. a. Unused portions of
eligible ABCP liquidity facilities with an original maturity of one year
or less are converted at 10 percent.
b. Banks that are subject to the market risk rules are required to
convert the notional amount of eligible ABCP liquidity facilities, in
form or in substance, with an original maturity of one year or less that
are carried in the trading account at 10 percent to determine the
appropriate credit equivalent amount even though those facilities are
structured or characterized as derivatives or other trading book assets.
Liquidity facilities that support ABCP, in form or in substance,
(including those positions to which the market risk rules may not be
applied as set forth in section 2(a) of appendix E of this
[[Page 291]]
part) that are not eligible ABCP liquidity facilities are to be
considered recourse obligations or direct credit substitutes and
assessed the appropriate risk-based capital requirement in accordance
with section III.B.3. of this appendix.
5. Items with a zero percent conversion factor. These include unused
portions of commitments (with the exception of eligible ABCP liquidity
facilities) with an original maturity of one year or less, \54\ or which
are unconditionally cancelable at any time, provided a separate credit
decision is made before each drawing under the facility. Unused portions
of lines of credit on retail credit cards and related plans are deemed
to be short-term commitments if the bank has the unconditional right to
cancel the line of credit at any time, in accordance with applicable
law.
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\54\ [Reserved]
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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. Banks should use, subject to examiner review, the
effective rather than the apparent or stated notional amount in this
calculation. The credit conversion factors are:
Conversion Factors
[In percent]
----------------------------------------------------------------------------------------------------------------
Commodity,
Interest Exchange excluding Precious
Remaining maturity rate rate and Equity precious metals,
gold metals except gold
----------------------------------------------------------------------------------------------------------------
One year or less............................... 0.0 1.0 6.0 10.0 7.0
Over one to five years......................... 0.5 5.0 8.0 12.0 7.0
Over five years................................ 1.5 7.5 10.0 15.0 8.0
----------------------------------------------------------------------------------------------------------------
[[Page 292]]
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 bank would have a claim to receive,
or obligation to pay, only the net amount of the sum of the positive and
negative mark-to-market values on included individual contracts in the
event that a counterparty, or a counterparty to whom the contract has
been validly assigned, fails to perform due to any of the following
events: default, insolvency, liquidation, or similar circumstances.
ii. The bank obtains a written and reasoned legal opinion(s)
representing that in the event of a legal challenge--including one
resulting from default, insolvency, liquidation, or similar
circumstances--the relevant court and administrative authorities would
find the bank's exposure to be the net amount under:
1. The law of the jurisdiction in which the counterparty is
chartered or the equivalent location in the case of noncorporate
entities, and if a branch of the counterparty is involved, then also
under the law of the jurisdiction in which the branch is located;
2. The law that governs the individual contracts covered by the
netting contract; and
3. The law that governs the netting contract.
iii. The bank establishes and maintains procedures to ensure that
the legal characteristics of netting contracts are kept under review in
the light of possible changes in relevant law.
iv. The bank maintains in its files documentation adequate to
support the netting of derivative contracts, including a copy of the
bilateral netting contract and necessary legal opinions.
b. A contract containing a walkaway clause is not eligible for
netting for purposes of calculating the credit equivalent amount. \55\
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\55\ A walkaway clause is a provision in a netting contract that
permits a non-defaulting counterparty to make lower payments than it
would make otherwise under the contract, or no payment at all, to a
defaulter or to the estate of a defaulter, even if the defaulter or the
estate of the defaulter is a net creditor under the contract.
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c. A bank netting individual contracts for the purpose of
calculating credit equivalent amounts of derivative contracts,
represents that it has met the requirements of this appendix A and all
the appropriate documents are in the bank's files and available for
inspection by the Federal Reserve. The Federal Reserve may determine
that a bank's files are inadequate or that a netting contract, or any of
its underlying individual contracts, may not be legally enforceable
under any one of the bodies of law described in section III.E.3.a.ii. of
this appendix A. If such a determination is made, the netting contract
may be disqualified from recognition for risk-based capital purposes or
underlying individual contracts may be treated as though they are not
subject to the netting contract.
d. The credit equivalent amount of contracts that are subject to a
qualifying bilateral netting contract is calculated by adding (i) the
current exposure of the netting contract (net current exposure) and (ii)
the sum of the estimates of potential future credit exposures on all
individual contracts subject to the netting contract (gross potential
future exposure) adjusted to reflect the effects of the netting
contract. \56\
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\56\ For purposes of calculating potential future credit exposure to
a netting counterparty for foreign exchange contracts and other similar
contracts in which notional principal is equivalent to cash flows, total
notional principal is defined as the net receipts falling due on each
value date in each currency.
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[[Page 293]]
e. The net current exposure is the sum of all positive and negative
mark-to-market values of the individual contracts included in the
netting contract. If the net sum of the mark-to-market values is
positive, then the net current exposure is equal to that sum. If the net
sum of the mark-to-market values is zero or negative, then the net
current exposure is zero. The Federal Reserve may determine that a
netting contract qualifies for risk-based capital netting treatment even
though certain individual contracts included under the netting contract
may not qualify. In such instances, the nonqualifying contracts should
be treated as individual contracts that are not subject to the netting
contract.
f. Gross potential future exposure, or Agross is
calculated by summing the estimates of potential future exposure
(determined in accordance with section III.E.2 of this appendix A) for
each individual contract subject to the qualifying bilateral netting
contract.
g. The effects of the bilateral netting contract on the gross
potential future exposure are recognized through the application of a
formula that results in an adjusted add-on amount (Anet). The
formula, which employs the ratio of net current exposure to gross
current exposure (NGR) is expressed as:
Anet = (0.4xAgross) +
0.6(NGRxAgross)
h. The NGR may be calculated in accordance with either the
counterparty-by-counterparty approach or the aggregate approach.
i. Under the counterparty-by-counterparty approach, the NGR is the
ratio of the net current exposure for a netting contract to the gross
current exposure of the netting contract. The gross current exposure is
the sum of the current exposures of all individual contracts subject to
the netting contract calculated in accordance with section III.E.2. of
this appendix A. Net negative mark-to-market values for individual
netting contracts with the same counterparty may not be used to offset
net positive mark-to-market values for other netting contracts with that
counterparty.
ii. Under the aggregate approach, the NGR is the ratio of the sum of
all of the net current exposures for qualifying bilateral netting
contracts to the sum of all of the gross current exposures for those
netting contracts (each gross current exposure is calculated in the same
manner as in section III.E.3.h.i. of this appendix A). Net negative
mark-to-market values for individual counterparties may not be used to
offset net positive mark-to-market values for other counterparties.
iii. A bank must consistently use either the counterparty-by-
counterparty approach or the aggregate approach to calculate the NGR.
Regardless of the approach used, the NGR should be applied individually
to each qualifying bilateral netting contract to determine the adjusted
add-on for that netting contract.
i. In the event a netting contract covers contracts that are
normally excluded from the risk-based ratio calculation--for example,
exchange rate contracts with an original maturity of fourteen or fewer
calendar days or instruments traded on exchanges that require daily
payment and receipt of cash variation margin--a bank may elect to either
include or exclude all mark-to-market values of such contracts when
determining net current exposure, provided the method chosen is applied
consistently.
4. Risk Weights. Once the credit equivalent amount for a derivative
contract, or a group of derivative contracts subject to a qualifying
bilateral netting contract, has been determined, that amount is assigned
to the risk category appropriate to the counterparty, or, if relevant,
the guarantor or the nature of any collateral. \57\ However, the maximum
risk weight applicable to the credit equivalent amount of such contracts
is 50 percent.
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\57\ For derivative contracts, sufficiency of collateral or
guarantees is generally determined by the market value of the collateral
or the amount of the guarantee in relation to the credit equivalent
amount. Collateral and guarantees are subject to the same provisions
noted under section III.B. of this appendix A.
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5. Avoidance of double counting. a. In certain cases, credit
exposures arising from the derivative contracts covered by section
III.E. of this appendix A may already be reflected, in part, on the
balance sheet. To avoid double counting such exposures in the assessment
of capital adequacy and, perhaps, assigning inappropriate risk weights,
counterparty credit exposures arising from the derivative instruments
covered by these guidelines may need to be excluded from balance sheet
assets in calculating a bank's risk-based capital ratios.
b. Examples of the calculation of credit equivalent amounts for
contracts covered under this section III.E. are contained in Attachment
V of this appendix A.
IV. Minimum Supervisory Ratios and Standards
The interim and final supervisory standards set forth below specify
minimum supervisory ratios based primarily on broad credit risk
considerations. As noted above, the risk-based ratio does not take
explicit account of the quality of individual asset portfolios or the
range of other types of risks to
[[Page 294]]
which banks may be exposed, such as interest rate, liquidity, market or
operational risks. For this reason, banks are generally expected to
operate with capital positions above the minimum ratios.
Institutions with high or inordinate levels of risk are expected to
operate well above minimum capital standards. Banks experiencing or
anticipating significant growth are also expected to maintain capital,
including tangible capital positions, well above the minimum levels. For
example, most such institutions generally have operated at capital
levels ranging from 100 to 200 basis points above the stated minimums.
Higher capital ratios could be required if warranted by the particular
circumstances or risk profiles of individual banks. In all cases, banks
should hold capital commensurate with the level and nature of all of the
risks, including the volume and severity of problem loans, to which they
are exposed.
Upon adoption of the risk-based framework, any bank that does not
meet the interim or final supervisory ratios, or whose capital is
otherwise considered inadequate, is expected to develop and implement a
plan acceptable to the Federal Reserve for achieving an adequate level
of capital consistent with the provisions of these guidelines or with
the special circumstances affecting the individual institution. In
addition, such banks should avoid any actions, including increased risk-
taking or unwarranted expansion, that would lower or further erode their
capital positions.
A. Minimum Risk-Based Ratio After Transition Period
As reflected in Attachment VI, by year-end 1992, all state member
banks should meet a minimum ratio of qualifying total capital to
weighted risk assets of 8 percent, of which at least 4.0 percentage
points should be in the form of Tier 1 capital. For purposes of section
IV.A., Tier 1 capital is defined as the sum of core capital elements
less goodwill and other intangible assets required to be deducted in
accordance with section II.B.1.b. of this appendix. The maximum amount
of supplementary capital elements that qualifies as Tier 2 capital is
limited to 100 percent of Tier 1 capital. In addition, the combined
maximum amount of subordinated debt and intermediate-term preferred
stock that qualifies as Tier 2 capital is limited to 50 percent of Tier
1 capital. The maximum amount of the allowance for loan and lease losses
that qualifies as Tier 2 capital is limited to 1.25 percent of gross
weighted risk assets. Allowances for loan and lease losses in excess of
this limit may, of course, be maintained, but would not be included in a
bank's total capital. The Federal Reserve will continue to require banks
to maintain reserves at levels fully sufficient to cover losses inherent
in their loan portfolios.
Qualifying total capital is calculated by adding Tier 1 capital and
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then
deducting from this sum certain investments in banking or finance
subsidiaries that are not consolidated for accounting or supervisory
purposes, reciprocal holdings of banking organization capital
securities, or other items at the direction of the Federal Reserve.
These deductions are discussed above in section II(B).
B. Transition Arrangements
The transition period for implementing the risk-based capital
standard ends on December 31, 1992. Initially, the risk-based capital
guidelines do not establish a minimum level of capital. However, by
year-end 1990, banks are expected to meet a minimum interim target ratio
for qualifying total capital to weighted risk assets of 7.25 percent, at
least one-half of which should be in the form of Tier 1 capital. For
purposes of meeting the 1990 interim target, the amount of loan loss
reserves that may be included in capital is limited to 1.5 percent of
weighted risk assets and up to 10 percent of a bank's Tier 1 capital may
consist of supplementary capital elements. Thus, the 7.25 percent
interim target ratio implies a minimum ratio of Tier 1 capital to
weighted risk assets of 3.6 percent (one-half of 7.25) and a minimum
ratio of core capital elements to weighted risk assets ratio of 3.25
percent (nine-tenths of the Tier 1 capital ratio).
Through year-end 1990, banks have the option of complying with the
minimum 7.25 percent year-end 1990 risk-based capital standard, in lieu
of the minimum 5.5 percent primary and 6 percent total capital to total
assets capital ratios set forth in appendix B to part 225 of the Federal
Reserve's Regulation Y. In addition, as more fully set forth in appendix
B to this part, banks are expected to maintain a minimum ratio of Tier 1
capital total assets during this transition period.
Attachment I--Sample Calculation of Risk-Based Capital Ratio for State
Member Banks
Example of a bank with $6,000 in total capital and the following assets
and off-balance sheet items:
Balance Sheet Assets:
Cash..................................................... $5,000
U.S. Treasuries.......................................... 20,000
Balances at domestic banks............................... 5,000
[[Page 295]]
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's total capital to total assets (leverage) ratio would be:
($6,000/$100,000)=6.00%
To compute the bank's weighted risk assets:
1. Compute the credit equivalent amount of each off-balance
sheet (``OBS'') item
----------------------------------------------------------------------------------------------------------------
Credit
OBS item Face Conversion equivalent
value 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 properties 5,000 x .50 = 2,500
100% Category:
Loans to private corporations.................................... 65,000
Credit equivalent amounts of long-term commitments to private 10,000
corporations....................................................
-----------
75,000 x 1.00 = 75,000
-----------
Total risk-weighted assets..................................... ......... .. .......... .. 80,500
This bank's ratio of total capital to weighted risk assets (risk-based capital ratio) would be: ($6,000/
$80,500)=7.45%
C. Optional Transition Provisions Related to the Implementation of
Consolidation Requirements Under FAS 167
This section IV.C. provides optional transition provisions for a
bank that is required for financial and regulatory reporting purposes,
as a result of its implementation of Statement of Financial Accounting
Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS
167), to consolidate certain variable interest entities (VIEs) as
defined under United States generally accepted accounting principles
(GAAP). These transition provisions apply through the end of the fourth
quarter following the date of a bank's implementation of FAS 167
(implementation date).
1. Exclusion Period
a. Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a bank may exclude from
risk-weighted assets:
i. Subject to the limitations in section IV.C.3, assets held by a
VIE, provided that the following conditions are met:
(1) The VIE existed prior to the implementation date,
(2) The bank did not consolidate the VIE on its balance sheet for
calendar quarter-end regulatory report dates prior to the implementation
date,
(3) The bank must consolidate the VIE on its balance sheet beginning
as of the implementation date as a result of its implementation of FAS
167, and
(4) The bank excludes all assets held by VIEs described in
paragraphs C.1.a.i.(1) through (3) of this section IV.C.1.a.i; and
[[Page 296]]
ii. Subject to the limitations in section IV.C.3, assets held by a
VIE that is a consolidated ABCP program, provided that the following
conditions are met:
(1) The bank is the sponsor of the ABCP program,
(2) Prior to the implementation date, the bank consolidated the VIE
onto its balance sheet under GAAP and excluded the VIE's assets from the
bank's risk-weighted assets, and
(3) The bank chooses to exclude all assets held by ABCP program VIEs
described in paragraphs (1) and (2) of this section IV.C.1.a.ii.
b. Risk-weighted assets during exclusion period. During the
exclusion period, including for the two-calendar quarter-end regulatory
report dates within the exclusion period, a bank adopting the optional
provisions in section IV.C.1.a must calculate risk-weighted assets for
its contractual exposures to the VIEs referenced in section IV.C.1.a on
the implementation date and include this calculated amount in its risk-
weighted assets. Such contractual exposures may include direct-credit
substitutes, recourse obligations, residual interests, liquidity
facilities, and loans.
c. Inclusion of allowance for loan and lease losses in tier 2
capital for the first and second quarters. During the exclusion period,
including for the two calendar quarter-end regulatory report dates
within the exclusion period, a bank that excludes VIE assets from risk-
weighted assets pursuant to section IV.C.1.a may include in tier 2
capital the full amount of the allowance for loan and lease losses
(ALLL) calculated as of the implementation date that is attributable to
the assets it excludes pursuant to section IV.C.1.a (inclusion amount).
The amount of ALLL includable in tier 2 capital in accordance with this
paragraph shall not be subject to the limitations set forth in section
II.A.2.a. of this Appendix.
2. Phase-In Period
a. Exclusion amount. For purposes of this section IV.C., exclusion
amount is defined as the amount of risk-weighted assets excluded in
section IV.C.1.a. as of the implementation date.
b. Risk-weighted assets for the third and fourth quarters. A bank
that excludes assets of consolidated VIEs from risk-weighted assets
pursuant to section IV.C.1.a. may, for the third and fourth quarters
after the implementation date (phase-in period), including for the two
calendar quarter-end regulatory report dates within those quarters,
exclude from risk-weighted assets 50 percent of the exclusion amount,
provided that the bank may not include in risk-weighted assets pursuant
to this paragraph an amount less than the aggregate risk-weighted assets
calculated pursuant to section IV.C.1.b.
c. Inclusion of ALLL in tier 2 capital for the third and fourth
quarters. A bank that excludes assets of consolidated VIEs from risk-
weighted assets pursuant to section IV.C.2.b. may, for the phase-in
period, include in tier 2 capital 50 percent of the inclusion amount it
included in tier 2 capital during the exclusion period, notwithstanding
the limit on including ALLL in tier 2 capital in section II.A.2.a. of
this Appendix.
3. Implicit recourse limitation. Notwithstanding any other provision
in this section IV.C., assets held by a VIE to which the bank has
provided recourse through credit enhancement beyond any contractual
obligation to support assets it has sold may not be excluded from risk-
weighted assets.
[54 FR 4198, Jan. 27, 1989]
Editorial Note: For Federal Register citations affecting appendix A
to part 208, see the List of CFR Sections Affected, which appears in the
Finding Aids section of the printed volume and at www.fdsys.gov.
Sec. Appendix B to Part 208--Capital Adequacy Guidelines for State
Member Banks: Tier 1 Leverage Measure
I. Overview
a. The Board of Governors of the Federal Reserve System has adopted
a minimum ratio of tier 1 capital to total assets to assist in the
assessment of the capital adequacy of state member banks. \1\ The
principal objective of this measure is to place a constraint on the
maximum degree to which a state member bank can leverage its equity
capital base. It is intended to be used as a supplement to the risk-
based capital measure.
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\1\ Supervisory risk-based capital ratios that related capital to
weighted-risk assets for state member banks are outlined in Appendix A
to this part.
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b. The guidelines apply to all state member banks on a consolidated
basis and are to be used in the examination and supervisory process as
well as in the analysis of applications acted upon by the Federal
Reserve. The Board will review the guidelines from time to time and will
consider the need for possible adjustments in light of any significant
changes in the economy, financial markets, and banking practices.
II. The Tier 1 Leverage Ratio
a. The minimum ratio of Tier 1 capital to total assets for strong
banking institutions (rated composite ``1'' under the UFIRS rating
system of banks) is 3.0 percent. For all other institutions, the minimum
ratio of Tier 1 capital to total assets is 4.0 percent.
[[Page 297]]
Banking institutions with supervisory, financial, operational, or
managerial weaknesses, as well as institutions that are anticipating or
experiencing significant growth, are expected to maintain capital ratios
well above the minimum levels. Moreover, higher capital ratios may be
required for any banking institution if warranted by its particular
circumstances or risk profile. In all cases, institutions should hold
capital commensurate with the level and nature of the risks, including
the volume and severity of problem loans, to which they are exposed.
b. A bank's tier 1 leverage ratio is calculated by dividing its tier
1 capital (the numerator of the ratio) by its average total consolidated
assets (the denominator of the ratio). The ratio will also be calculated
using period-end assets whenever necessary, on a case-by-case basis. For
the purpose of this leverage ratio, the definition of tier 1 capital as
set forth in the risk-based capital guidelines contained in appendix A
of this part will be used. \2\ As a general matter, average total
consolidated assets are defined as the quarterly average total assets
(defined net of the allowance for loan and lease losses) reported on the
bank's Reports of Condition and Income (Call Reports), less goodwill;
amounts of mortgage servicing assets, nonmortgage servicing assets, and
purchased credit card relationships that, in the aggregate, are in
excess of 100 percent of Tier 1 capital; amounts of nonmortgage
servicing assets and purchased credit card relationships that, in the
aggregate, are in excess of 25 percent of Tier 1 capital; amounts of
credit-enhancing interest-only strips that are in excess of 25 percent
of Tier 1 capital; all other identifiable intangible assets; any
investments in subsidiaries or associated companies that the Federal
Reserve determines should be deducted Tier 1 capital; deferred tax
assets that are dependent upon future taxable income, net of their
valuation allowance, in excess of the limitations set forth in section
II.B.4 of appendix A of this part; and the amount of the total adjusted
carrying value of nonfinancial equity investments that is subject to a
deduction from Tier 1 capital. \3\
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\2\ Tier 1 capital for state member banks includes common equity,
minority interest in the equity accounts of consolidated subsidiaries,
and qualifying noncumulative perpetual preferred stock. In addition, as
a general matter, Tier 1 capital excludes goodwill; amounts of mortgage
servicing assets, nonmortgage servicing assets, and purchased credit
card relationships that, in the aggregate, exceed 100 percent of Tier 1
capital; nonmortgage servicing assets and purchased credit card
relationships that, in the aggregate, exceed 25 percent of Tier 1
capital; amounts of credit enhancing interest-only strips in excess of
25 percent of Tier 1 capital; other identifiable intangible assets;
deferred tax assets that are dependent upon future taxable income, net
of their valuation allowance, in excess of certain limitations; and a
percentage of the bank's nonfinancial equity investments. The Federal
Reserve may exclude certain other investments in subsidiaries or
associated companies as appropriate.
\3\ Deductions from Tier 1 capital and other adjustments are
discussed more fully in section II.B in appendix A of this part.
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c. Notwithstanding other provisions of this appendix B, a qualifying
bank that has transferred small business loans and leases on personal
property (small business obligations) with recourse shall, for purposes
of calculating its tier 1 leverage ratio, exclude from its average total
consolidated assets the outstanding principal amount of the small
business loans and leases transferred with recourse, provided two
conditions are met. First, the transaction must be treated as a sale
under generally accepted accounting principles (GAAP) and, second, the
bank must establish pursuant to GAAP a non-capital reserve sufficient to
meet the bank's reasonably estimated liability under the recourse
arrangement. Only loans and leases to businesses that meet the criteria
for a small business concern established by the Small Business
Administration under section 3(a) of the Small Business Act are eligible
for this capital treatment.
d. For purposes of this appendix B, a bank is qualifying if it meets
the criteria set forth in the Board's prompt corrective action
regulation (12 CFR 208.40) for well capitalized or, by order of the
Board, adequately capitalized. For purposes of determining whether a
bank meets these criteria, its capital ratios must be calculated without
regard to the preferential capital treatment for transfers of small
business obligations with recourse specified in section II.c. of this
appendix B. The total outstanding amount of recourse retained by a
qualifying bank on transfers of small business obligations receiving the
preferential capital treatment cannot exceed 15 percent of the bank's
total risk-based capital. By order, the Board may approve a higher
limit.
e. If a bank ceases to be qualifying or exceeds the 15 percent
capital limitation, the preferential capital treatment will continue to
apply to any transfers of small business obligations with recourse that
were consummated during the time that the bank was qualifying and did
not exceed the capital limit.
f. The leverage capital ratio of the bank shall be calculated
without regard to the preferential capital treatment for transfers of
small business obligations with recourse
[[Page 298]]
specified in section II of this appendix B for purposes of:
(i) Determining whether a bank is adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized under prompt corrective action (12 CFR 208.43(b)(1));
and
(ii) Reclassifying a well capitalized bank to adequately capitalized
and requiring an adequately capitalized bank to comply with certain
mandatory or discretionary supervisory actions as if the bank were in
the next lower prompt corrective action capital category (12 CFR
208.43(c)).
g. Whenever appropriate, including when a bank is undertaking
expansion, seeking to engage in new activities or otherwise facing
unusual or abnormal risks, the Board will continue to consider the level
of an individual bank's tangible tier 1 leverage ratio (after deducting
all intangibles) in making an overall assessment of capital adequacy.
This is consistent with the Federal Reserve's risk-based capital
guidelines and long-standing Board policy and practice with regard to
leverage guidelines. Banks experiencing growth, whether internally or by
acquisition, are expected to maintain strong capital position
substantially above minimum supervisory levels, without significant
reliance on intangible assets.
h. Notwithstanding anything in this appendix to the contrary, a bank
may deduct from its average total consolidated assets the amount of any
asset-backed commercial paper (i) purchased by the bank on or after
September 19, 2008, 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 to a Federal Reserve Bank
to secure financing from the ABCP lending facility (AMLF) established by
the Board on September 19, 2008.
[Reg. H, 59 FR 65925, Dec. 22, 1994, as amended at 60 FR 39230, Aug. 1,
1995; 60 FR 45615, Aug. 31, 1995; 63 FR 42675, Aug. 10, 1998; 63 FR
58621, Nov. 2, 1998; 64 FR 10200, Mar. 2, 1999; 66 FR 59643, Nov. 29,
2001; 67 FR 3800, Jan. 25, 2002; 73 FR 55707, Sept. 26, 2008; 74 FR
6224, Feb. 6, 2009]
Sec. Appendix C to Part 208--Interagency Guidelines for Real Estate
Lending Policies
The agencies' regulations require that each insured depository
institution adopt and maintain a written policy that establishes
appropriate limits and standards for all extensions of credit that are
secured by liens on or interests in real estate or made for the purpose
of financing the construction of a building or other improvements. \1\
These guidelines are intended to assist institutions in the formulation
and maintenance of a real estate lending policy that is appropriate to
the size of the institution and the nature and scope of its individual
operations, as well as satisfies the requirements of the regulation.
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\1\ The agencies have adopted a uniform rule on real estate lending.
See 12 CFR part 365 (FDIC); 12 CFR part 208, subpart E (FRB); 12 CFR
part 34, subpart D (OCC); and 12 CFR 563.100-101 (OTS).
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Each institution's policies must be comprehensive, and consistent
with safe and sound lending practices, and must ensure that the
institution operates within limits and according to standards that are
reviewed and approved at least annually by the board of directors. Real
estate lending is an integral part of many institutions' business plans
and, when undertaken in a prudent manner, will not be subject to
examiner criticism.
Loan Portfolio Management Considerations
The lending policy should contain a general outline of the scope and
distribution of the institution's credit facilities and the manner in
which real estate loans are made, serviced, and collected. In
particular, the institution's policies on real estate lending should:
Identify the geographic areas in which the
institution will consider lending.
Establish a loan portfolio diversification policy
and set limits for real estate loans by type and geographic market
(e.g., limits on higher risk loans).
Identify appropriate terms and conditions by type
of real estate loan.
Establish loan origination and approval
procedures, both generally and by size and type of loan.
Establish prudent underwriting standards that are
clear and measurable, including loan-to-value limits, that are
consistent with these supervisory guidelines.
Establish review and approval procedures for
exception loans, including loans with loan-to-value percentages in
excess of supervisory limits.
Establish loan administration procedures,
including documentation, disbursement, collateral inspection,
collection, and loan review.
Establish real estate appraisal and evaluation
programs.
Require that management monitor the loan
portfolio and provide timely and adequate reports to the board of
directors.
The institution should consider both internal and external factors
in the formulation
[[Page 299]]
of its loan policies and strategic plan. Factors that should be
considered include:
The size and financial condition of the
institution.
The expertise and size of the lending staff.
The need to avoid undue concentrations of risk.
Compliance with all real estate related laws and
regulations, including the Community Reinvestment Act, anti-
discrimination laws, and for savings associations, the Qualified Thrift
Lender test.
Market conditions.
The institution should monitor conditions in the real estate markets
in its lending area so that it can react quickly to changes in market
conditions that are relevant to its lending decisions. Market supply and
demand factors that should be considered include:
Demographic indicators, including population and
employment trends.
Zoning requirements.
Current and projected vacancy, construction, and
absorption rates.
Current and projected lease terms, rental rates,
and sales prices, including concessions.
Current and projected operating expenses for
different types of projects.
Economic indicators, including trends and
diversification of the lending area.
Valuation trends, including discount and direct
capitalization rates.
Underwriting Standards
Prudently underwritten real estate loans should reflect all relevant
credit factors, including:
The capacity of the borrower, or income from the
underlying property, to adequately service the debt.
The value of the mortgaged property.
The overall creditworthiness of the borrower.
The level of equity invested in the property.
Any secondary sources of repayment.
Any additional collateral or credit enhancements
(such as guarantees, mortgage insurance or takeout commitments).
The lending policies should reflect the level of risk that is
acceptable to the board of directors and provide clear and measurable
underwriting standards that enable the institution's lending staff to
evaluate these credit factors. The underwriting standards should
address:
The maximum loan amount by type of property.
Maximum loan maturities by type of property.
Amortization schedules.
Pricing structure for different types of real
estate loans.
Loan-to-value limits by type of property.
For development and construction projects, and completed commercial
properties, the policy should also establish, commensurate with the size
and type of the project or property:
Requirements for feasibility studies and
sensitivity and risk analyses (e.g., sensitivity of income projections
to changes in economic variables such as interest rates, vacancy rates,
or operating expenses).
Minimum requirements for initial investment and
maintenance of hard equity by the borrower (e.g., cash or unencumbered
investment in the underlying property).
Minimum standards for net worth, cash flow, and
debt service coverage of the borrower or underlying property.
Standards for the acceptability of and limits on
non-amortizing loans.
Standards for the acceptability of and limits on
the use of interest reserves.
Pre-leasing and pre-sale requirements for income-
producing property.
Pre-sale and minimum unit release requirements
for non-income-producing property loans.
Limits on partial recourse or nonrecourse loans
and requirements for guarantor support.
Requirements for takeout commitments.
Minimum covenants for loan agreements.
Loan Administration
The institution should also establish loan administration procedures
for its real estate portfolio that address: